Northland Power Inc

TSX:NPI

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Demetria and I'll be your conference operator today. At this time, I would like to welcome everyone to the Northland Power Q1 2019 Conference Call. [Operator Instructions] I will now turn the call over to Mr. Mike Crawley, president and CEO. You may begin.

[Mike Crawley, CEO & President]

Thank you, Demetria, and good morning, everyone. Thank you for joining us today. This morning, we will review our 2019 first quarter results. We're off to a good start in 2019 with healthy financial results and strong operational performance across all segments of our business. Looking first at our financial results, I will provide you an overview of the highlights while Paul will take a more detailed look into the numbers shortly. During the first quarter of 2019, we delivered strong, consistent results continuing our momentum gained in 2018. We delivered adjusted EBITDA of $294 million in free cash flow of $142 million or $0.79 per share. Overall, our operating assets continue to perform well, and more importantly, safely over the quarter, achieving an overall average of 98% availability across all our facilities. Excellence in operations is a key focus for Northland for the capability of the performance of our operating assets enables us to both comfortably pay our dividend to shareholders and provide funds for our growth activities. Turning to Construction. Progress on Deutsche Bucht remains on track with all 31 monopile foundations in place, fabrication and installation of the offshore substation [ bleat ] as well as separation of the substation factor. Looking ahead into the second half of 2019, we will begin the inter array cables installation followed by the installation to start up of the turbine. Construction activity at Deutsche Bucht are expected to be complete by the end of 2019. Deutsche Bucht will begin contributing to Northland financial results through all of 2020 adding 269 megawatts of offshore wind power to our portfolio. We are also excited to have announced the final investment decision for our 130-megawatt La Lucha solar project in Mexico. Northland owns 100% of the project and will advance the project to construction with completion expected in the second half of 2020. La Lucha represents an exciting step in the evolution of Northland generation business, being our first project with commercial and industrial PPAs. The project is a first step towards -- moving closer to the end customer in select markets to drive more accretive growth going forward. And we look forward to providing updates on the project as construction develops and progresses. We also shared some exciting news in the quarter regarding our Hai Long offshore wind project in Taiwan. Northland announced in late February that a 20-year power purchase agreement was signed for Hai Long based on a 300-megawatt feed-in tariff allocation. This is a significant milestone for the project. With this milestone under our belt, we are actively engaged on completing PPA contracts for the remaining 744-megawatt allocations and anticipating having all 3 PPAs signed in 2019. We will finalize project economics, financing details and turbine in construction contracts further along in the process. Once complete, Hai Long along with our offshore wind projects will nearly double Northland's offshore wind operating capacity to approximately 2,250 megawatts by 2026. We've developed strong expertise and capabilities in austral wind with 3 large projects in Europe and our Hai Long project in Taiwan. Lastly, we remain focused on delivering on our promise to our shareholders and our stakeholders while building a more sustainable future for all. On that note, I'd like to turn it over to Paul.

[Paul J. Bradley, Chief Financial Officer]

Thank you, Mike and good morning, everyone. Last night, Northland Power released its 2019 first quarter results. Overall, we delivered solid quarterly results that were in line with our expectations and build on the success achieved last year. Northland generated first quarter adjusted EBITDA of $294 million, which was an increase of 1% compared to the $290 million recorded in the same period in 2018. The increase in adjusted EBITDA year-over-year was primarily driven by higher overall solar and wind resources from our onshore renewable facilities that generated $3 million increased earnings. With respect to free cash flow, Northland generated a total of $142 million in the first quarter. This represents a decline of 4% from the $148 million generated in the first quarter of 2018. On a per share basis, free cash flow of $0.79 in the first quarter was 6% lower than the $0.84 recorded in the first quarter of 2018. While we have higher cash flow from the increased production, we also benefited from a decrease in our net interest expense due to lower interest costs from scheduled principal repayments on facility level loans, lower outstanding balance on our corporate credit facilities and the redemption of the convertible debentures in December 2018. These upsides were offset by a scheduled $16 million increase in principal repayments primarily attributed to our Nordsee One debt due to it being the first full year scheduled debt repayments at Nordsee One, whereby principal repayments will amount to EUR 72 million compared to EUR 49 million in 2018. For the rolling 4 quarters ended March 31st, 2019, the free cash flow gross payout ratio calculated on a total dividend basis was 65% compared to last year's payout ratio of 53%. The increase in the payout ratio year-over-year was due to the higher scheduled Nordsee One principal repayment mentioned earlier combined with a higher number of shares following the redemption of the convertible debentures in December 2018. GAAP net income was $204 million in the first quarter, an increase of 15% from $178 million in the first quarter of 2018. This increase was largely the result of an increase in gross profit as well as a mark-to-market gain on noncash derivative contracts. Turning to our 2019 adjusted EBITDA and free cash flow per share guidance, we continue to expect the full year adjusted EBITDA in 2019 to be in the range of $290 million to just over $1 billion incorporating the incremental pre-completion earnings from Deutsche Bucht. Free cash flow per share expectations remain in a range of $1.65 to $1.95 per share and incorporate the higher scheduled debt repayments at Nordsee One as well as higher costs related to the timing of and the expected scope of Northlands international development activities. Lastly, we would like to reiterate the expected 2020 adjusted EBITDA guidance for our Deutsche Bucht project -- offshore wind project, which we estimate will be in the range of EUR 165 million to EUR 185 million. As Mike mentioned earlier, Deutsche Bucht construction is expected to be completed by the end of 2019 with the project contributing to our 2020 financial results. I'll now turn the call back to Mike for concluding remarks.

[Mike Crawley, CEO & President]

Thank you, Paul. At this early point in the year, we are pleased with the progress we're making and feel very positive about the outlook for the rest of the year. We've made excellent progress on Deutsche Bucht construction in Germany and achieved an important milestone in Taiwan with the announcement of the first PPA for the project in February, as I mentioned. We expanded our global footprint with our 130-megawatt La Lucha solar project, our first investment in Mexico. And lastly, we remain well positioned with a great team that have the right skills and capabilities to execute on our future objectives and goals for 2019 and beyond. These are exciting times for Northland, and we look forward to keeping you apprised of our progress in the coming year. In the meantime, we thank you for your continued confidence and interest in Northland. We would now be happy to take your questions. Operator?

[Operator]

[Operator Instructions] And your first question comes from the line of Sean Steuart.

[Sean Steuart, Research Analyst]

Two questions on La Lucha. Wondering if you can give us some insight on, I suppose, the number of contracts you're looking to set up with commercial industrial partners and how you envision the average length of those contracts unfolding as you set up that asset?

[Mike Crawley, CEO & President]

Yes, I mean, I think we're still in the process of talking to load through a qualified supplier and directly. So I would say you're probably going to see average contract life somewhere around 10 years but that's still going to be determined based on the final discussions with load and there's a wide range in terms of size of off takers so that will determine how many we have depending on whether we end up signing with a couple of large load or whether we sign with a number of smaller power consumers. So that's still to be determined, but it is in active discussion and negotiation right now.

[Sean Steuart, Research Analyst]

And Mike, any guidance you can give on expected capacity factor and how the returns you're anticipating for this project would stock up versus larger scale offshore wind? How do you think about the return parameters for the project?

[Mike Crawley, CEO & President]

I think we would certainly be seeing -- we kind of given general guidance on some of the offshore wind projects that we've pursued around double digits -- finding our way into double-digit returns. So I think you would see similar returns on this project. So and then in terms of -- what was your other question, Sean?

[Sean Steuart, Research Analyst]

Capacity factor.

[Mike Crawley, CEO & President]

Yes, we'll release all the details once project comes closer to COD. But you can rest assured that there's a very strong solar resource where this project is located.

[Paul J. Bradley, Chief Financial Officer]

And Mike, maybe for context, we should set it now because it might answer some of the future questions that the contracting strategy at La Lucha, as we mentioned, we expect to have the project contracted at some point during the time of construction and shortly after construction. But it's a bit of a chicken and egg where the contracting is very difficult if the market doesn't see your project under construction and build. There's too many projects that have been promised that haven't been delivered and so it's -- you've got to get under construction and show the market that you're real before you can contract. The second dynamic that's important is that the length of the contract and the price of the contract will be related. The longer we want to contract, probably the more of a discount we'll have to offer and so there will be some -- I would say a little bit of art, a little bit of science to designing the contract portfolio or contract ladder. And that, of course, will end up speaking to the ultimate returns on the project as much as anything else, always being mindful that we are not in this project to take solely a position on the market in Mexico, but there is a market element to it that will inform us on this most strategic way to ladder our contracts. So hopefully that's some context for questions that I'm sure will come up.

[Sean Steuart, Research Analyst]

That's great, Paul. Just one follow-up question, then I'll get back in the queue. Can you speak to -- on offshore winds where you're prospecting dollars are going right now? Should we think of this predominantly as still other countries in Asia? Or are you still putting some development prospecting dollars into -- Europe and elsewhere?

[Mike Crawley, CEO & President]

So offshore wind, our focus is on what we call emerging markets for offshore wind, not emerging markets by like some other measure but emerging markets for offshore wind. So that would be Korea, Japan. It would be a place like Poland. Markets where the policies and regulations are just now coming into place to encourage the sector in where there's a number of projects at a relatively early stage of development. That's where we're focused.

[Operator]

Next question comes from the line of Nelson Ng with RBC Capital Markets.

[Nelson Ng, Analyst]

My first question relates to offshore wind. In terms of the Q1 production, it was similar to last year, so would you say that the production you saw this quarter was generally consistent with, like, on a seasonal basis to what you generally expect going forward for Q1?

[Mike Crawley, CEO & President]

No, I wouldn't take a look at 2 quarters and assume that, that's representative of the long-term average for it. Not at all.

[Nelson Ng, Analyst]

Okay. And then my second question relates to Nordsee One. In terms of the Senvion insolvency, like I presume it's business as usual for them and they're still kind of meeting their obligations and performing the various, I guess, operations maintenance responsibilities. But has there been any like warranty issues or any issues with the turbines that they had to fix or repair like over the last -- like since the facility was commissioned 1.5 year ago?

[Paul J. Bradley, Chief Financial Officer]

Nelson, it's Paul. As you know, I sit on the board of Nordsee One, so I'm probably bit closer to it. I guess I'll make a couple of comments about Senvion. Number one is the team was anticipating this event of their insolvency for a fair bit of time. It was kind of the writing was on the wall just based on what was going on and they're a larger business and we had begun to take a defensive posture on a number of items that relate to the Senvion contract. To answer directly to your question, we've had minor warranty items but they're not items that took necessarily anything that only Senvion could fix. Going forward, we have 2 relationships with Senvion. Generally, one being any outstanding warranty claims and then the other would be what we call our SMA or that's what we call a long-term service agreement and that it is basically relating to spare parts, repairs and it's really what falls under availability guarantee. We have begun the process of -- and let me back up a moment. As you know, insolvency is a very complex beast and we don't know yet whether Senvion will be rescued, whether it would be liquidated. As we sit here today, they're performing most of the services under contract that they need to perform. There are a few things because of nonpayment that falls through the cracks that we have contracted for directly and we're just taken out of our payment to Senvion and they're not things that are very difficult to undertake ourselves. Longer run, we expect that someone will probably take over this contract that we have with Senvion. We do pay a premium price to have the range that we have with Senvion, so in a insolvency scenario, that contract is likely to be in the money for the company and we see someone stepping into shoes. In the meantime, we feel that we're in a very good defensive posture to be able to perform our summer maintenance campaign that is ongoing by hiring some of the people directly contracting with third parties and taking it out of the payment that we pay to Senvion. So little bit of business as usual. The long-term risk would be that if nobody takes over that part of Senvion and we have some kind of a serial defect or major component failure, that's where you could probably see a little bit of smoke coming, but that's probably more long-tail risk. In the short run, we feel like it's a bit of business as usual.

[Nelson Ng, Analyst]

Okay. And then just to clarify, so it was your option to take out some of the, I guess, works to get other parties to do rather than Senvion? Or were they just not responsive to those items?

[Paul J. Bradley, Chief Financial Officer]

Well, as we sit here today, they are operating through their contract. They have rescue financing and the government is -- I guess, there's something in Germany where the government pays the wages of the workers but there are a few services that they have had that have probably ceased operating because of nonpayment issues that we contracted for directly. So -- and we're allowed to do that under our contract but the base contract is still in force. So there's no -- as I said, these things get fairly complicated but what I can tell you is we were ahead of the situation before it happened.

[Mike Crawley, CEO & President]

And I think, Paul, this is one of the advantages that we're seeing in having set up Northland Power Europe with the office just outside of Hamburg and with all of the personnel under Northland that we're able to respond very quickly but also be very much on top of what's transpiring and be able to fill gaps that -- that emerge quite quickly.

[Nelson Ng, Analyst]

Okay. And then just moving onto -- to Mexico. In terms of La Lucha, is this generally the structure? Like if you were to do more projects in Mexico whether it's like gas, wind or solar, would it be a similar situation where you would probably have to start construction prior to finalizing any offtake contracts?

[Mike Crawley, CEO & President]

Certainly, for the first project that, that you're -- that loan is not going to be willing to contract until [ they see ], as Paul said, ground broken on the first project. But going forward, I think there would be a similar situation where they'd want to have line of sight to a COD or a first delivery of energy and capacity. So I think you'd see a similar situation, but we may have a bit more forgiveness going forward after we've got the first project up and running. But I would say it would be similar to this.

[Nelson Ng, Analyst]

Okay. And then just one last quick question. IFRS 16, I know a lot of other companies have been kind of highlighting the impact. It doesn't look like it's very material here. Is that the case from an EBITDA perspective?

[Paul J. Bradley, Chief Financial Officer]

Yes, it's pretty immaterial, Nelson. I mean we had a debate internally whether we should have our adjusted EBITDA reflect the old standard to the new standard and bottom line is it didn't really matter, but we will be adjusting in our free cash flow. We will be following the cash still.

[Operator]

Your next question comes from the line of Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

So the first question for Mike. Wondering if you could give us more color on the Mexican energy market and the politics in Mexico? It seems there are some changes under way there. And how do you view the risk in Mexico today?

[Mike Crawley, CEO & President]

Sure, so -- I mean we've been in Mexico for a number of years developing this project and other projects. What we like about Mexico, at a macro level, which is independent of whichever government or administration is in power, is they have shown consistently strong growth in demand for electricity. And in general, if there's -- there's valleys and there's hills and valleys along the way. But in general, the long-term trend is towards the growing manufacturing sector, which leads to a growing middle class, which both lead to long-term growth and electricity demand. So that is fundamentally what we like about the market. Number two, we like the liberalized electricity sector that's been set up over the last few years. Very liquid market, easy to contract. And so that -- from a generator standpoint, it's very attractive. And then with respect to the current administration, I mean we have paid close attention to whatever pronouncements they've said on the electricity sector and on the energy sector in general. There's nothing that has been said specifically about the electricity sector that causes us any concern. Arguably, some of the moves that the government has made are favorable to a project like La Lucha going forward towards the economics of approach like La Lucha. So overall, we're comfortable with the investment. I think if a new government in Mexico so I think you can expect a few bumps along the way as the government figures out what its priorities are going to be but we remain confident that Mexico will need more power supply going forward and in particular will need more clean power supply going forward. So I think that's favorable to IPPs like Northland -- strictly IPPs like Northland that have their own projects under development.

[Rupert M. Merer, Managing Director and Research Analyst]

And I suppose if you're contracting directly with the end customer, you feel that, that could insulate you broadly from political risk?

[Mike Crawley, CEO & President]

Correct.

[Rupert M. Merer, Managing Director and Research Analyst]

All right, great. And then quickly, you mentioned -- of course, you're looking at South Korea and Japan as future markets. Wondering if you have any updates on developments in those 2 markets?

[Mike Crawley, CEO & President]

Nothing specific. I think you're starting to see the regulatory framework in Japan form and get finalized. Over the last 6 months, the government has made a series of announcements that give greater clarity in terms of how procurement for offshore wind will work. So I think it's likely at the first round would be sometime in Q1 of 2020. It seems like that's where it's trending towards. So we remain actively talking to a number of developers trying to decide whether - what the best way is to participate in that market. I think it's going to be a strong market for a decade going forward, so we kind of see it as there's a first round which will be a bit of a scramble for everybody to participate in and be prepared for and then there's a medium term. It'll be 2 or 3 subsequent rounds over the next several years. And then there will a back end too, so we haven't yet decided whether we're going to play in all 3 of those tranches or 1 or 2. Certainly, at the back end, I think you're probably looking at the market moving more towards floating with the first round and most of the kind of second tranche that I refer to being more fixed bottom foundations. But I think going forward there will be lots of opportunity and we do have the flexibility to determine which -- what the best timing is for us to participate.

[Operator]

[Operator Instructions] Your next question comes from the line of Mark Jarvi with CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just wanted to go back to your comment about recent government moves to make La Lucha economics better. Can you elaborate on that?

[Mike Crawley, CEO & President]

The only one that I'd point out is that the cancellation of the auctions in Mexico, which we had already made a decision we were not going to participate in since we generally didn't see the economics of them being favorable to the types of projects we look to invest in. So that the cancellation of the options for renewables will delay the deployment of other renewables in Mexico since a lot of developers were developing explicitly for those auctions and the location of an auction of a solar projects, for example, for an auction bid versus for CNI offtake strategy are -- could be quite different, right? And so one may favor the best resource, the other would favor the best node in terms of location. So anyway, in that context, we looked at that and said that may actually be favorable to our project going forward. We'll see whether that decision is revisited in the future, but it certainly does delay the deployment of some renewables going forward.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then would you be expected to do more beyond La Lucha under the solar Mexico? And would you have potentially multiple projects on the go anytime in the next year or 2?

[Mike Crawley, CEO & President]

Well, we're certainly developing other sites, both solar and gas fired projects in Mexico. The overall objective is to have a portfolio of generation that we would be contracting directly to load and be able to provide all 3 products, energy, capacity and cells or renewable attributes to load. So that is where we would like to see it go. But as you know with Northland, we take one step at a time and make sure that we can execute properly and the first step is La Lucha.

[Paul J. Bradley, Chief Financial Officer]

And I think, Mark, this kind of goes more -- you talked before about our singles and doubles part of the baseball game as opposed to the home runs that we have with the offshore wind and it's probably healthy for us to have that peace returned to our fold. And we're conscious that, that's been asked for by a number of investors and even analysts. So I don't know that we necessarily expect a mega project to come out of Mexico. But as Mike said, it'll build, sort of, it'll appear to be slowly -- but it will be nice infills between the bigger bites that we take in other areas.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Right, okay. And then speaking about singles and doubles, I mean you expressed some interest in doing some branching out into transmission and talked about opportunities in Latin America. Are there still active development opportunities sort of in the fold right now?

[Mike Crawley, CEO & President]

We're certainly still tracking transmission procurements in -- specifically in Latin America. We have not made a decision to participate in another procurement yet, but we're certainly tracking what's -- what's expected to come in the next year or 2.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And maybe just pivot to another sort of emerging offshore market. I know you guys have been a bit skeptical on the U.S. Northeast for offshore wind but there's some, I guess, some developments happening in California as well. You guys have been listed as showing some interest in that. Where do you guys see that evolving? And do you still see the same challenges in the supply chain on the West Coast as you do on the East Coast?

[Mike Crawley, CEO & President]

So there's -- certainly the challenge in the supply chain on the East Coast is the maturity that supply chain relative to the economics that we're seeing on the projects, right? In other words, the price at which those projects are being bid. And so it's not to say the supply chain in of itself is -- would prohibit us from participating in that market, it's more of the relation between the 2. So if you look towards the West Coast, the West Coast is likely going to be -- it's not exclusively largely floating. So that's a much longer gestation period for those projects. So we've been less concerned about the maturity of the supply chain and also we would be looking at getting -- and if we did participate, they're getting in earlier at an earlier stage than would be available in the northeast right now.

[Operator]

Your next question from the line of Jeremy Rosenfield with Industrial Alliance Security.

[Jeremy Rosenfield, Equity Research Analyst]

Just missed, I think, in the beginning there's a little bit of interference. Just on Deutsche Bucht, did you mention that there was a time frame for pre-completion revenue or did I mishear or misunderstand?

[Mike Crawley, CEO & President]

Yes, we expect pre-completion revenues to begin sometime in the fourth quarter, possible little bit earlier, but as you know they ramp up slowly. Turbine #1 goes in and they've a tiny, tiny bit. And by the end of -- the last day in December we should have full production on pre-completion revenues. So we definitely are going into a bit of a ramp-up there. I believe in the past, we've put out a range of $55 million to $75 million on the EBITDA part of pre-completion revenues for 2019. And, of course, that will not be falling to free cash flow until we get the project fully complete, probably or hopefully first quarter 2020. That what you need, Jeremy?

[Jeremy Rosenfield, Equity Research Analyst]

Yes, perfect. That covers it. And then just turning back to Nordsee One and on the Senvion issue just with -- from a credit perspective in terms of covenants or anything like that, are there any restrictions in terms of cash flow distributions as a result of the Senvion issue?

[Paul J. Bradley, Chief Financial Officer]

Yes -- so I mean, big picture is that there could be but it all depends on what services are being performed or not being performed. As I mentioned, as we sit here today, the contract is in full force and the services are being performed. The lenders are, obviously, on notice that this has occurred and we do have to come back to lenders with a plan to back up the services which -- we see that as something that's fairly achievable. But as I said, these are always very tough situations in the sense that there's a lot of moving parts to it and a lot of chess playing. But as I mentioned earlier, we feel like we're in a really good position and the fact we got ahead of it and we now have capabilities to be able to self-help and contract out the various parts. And we do have a pot of money to pay for all that, including roughly EUR 80 million of security that Senvion has posted for us as an ultimate pot to dip out off should we need it. So we're not -- the situation sounds probably a lot worse than it is, save and except for in the future if there's some kind of a catastrophic defect, then that's where you probably could argue there's some risk that's emerged from this. But that, quite frankly, doesn't keep us up at night at this point. I'll point out that a lot of the subcomponents in the turbines are readily available products on the market. We have the ability to access the systems inside the turbines and software and as well we actually own the moulds. We negotiated that in our contract because we did have concerns back when we're in the middle of construction with Senvion knowing some of the issues that they had internally. We had the second mould acquired in order to speed up blade production and we put as part of our contract that we had the ownership of that mould. So it is ours. It's sitting in warehouses in Portugal, and so we have the ability if we need to, to fabricate blades. So it's -- as I said, we've sort of been backing ourselves up for quite some time in the event that this did occur. So it's just one of those -- there's some long-tail risk, but you could argue there always is.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. And then just finally turning back to Mexico for a second. Mike, just wondering if there are opportunities to accelerate, sort of, the market entry with sort of strategic M&A either by acquiring operating assets or maybe more interestingly, a portfolio that has development associated with it or development options associated with it. And I'm wondering if that's something that you're keeping your eye out on at this point as well?

[Mike Crawley, CEO & President]

Yes, it would have been probably more the latter if we did anything in terms of the development pipeline there. There's -- as I said earlier, I mean there are a lot of solar projects under development in Mexico. The question is which ones are located in the right nodes for a CNI offtake approach, right? As opposed to bidding into a centralized auction or it doesn't really matter where you are. In fact, you want to be just where the best resource is. So we're aware of some of the projects that are out there and sorting through seeing which ones are better located than others. Same time, we have our own portfolio of projects as well. So we'll -- we're wise to it but we haven't made any decisions to expand our development pipeline at all yet.

[Operator]

And your next question comes from Ben Pham with BMO.

[Benjamin Pham, Analyst]

I'm just wondering, you guys have a pretty broad focus globally and I'm curious, what are your thoughts around where the industry is going in terms of average contracts going forward? And I only bring that up because do you see a time where you sign a 20-year contract, you get a pretty good return in it? It seems like now you had a frac-stat contract to maybe achieve the same return. So maybe your thoughts on that. And then how do you guys think up your own contract length, 13 years or so and Taiwan's going to opt it, but does that also allow you to maybe book the shorter data contracts just with the Taiwan developments?

[Mike Crawley, CEO & President]

Good question, Ben. If you dialed back 10 years, you could say that what was really of value in the market is those that had the equity to invest in projects and the ability to organize the best financing but because of the whole capital stack and then be able to oversee and execute on the construction of the projects. And that's where there's a lot of value. I would say looking at where the market is now going forward, in a lot of cases where the value is, is in having proprietary projects or controlling project pipeline from either inception of the project but certainly at an early stage, either by developing those projects yourself or by partnering with developers at an early stage and getting control of those projects. There's no question there's going to be a lot of renewables built over the next decade. But as you know, there's a lot of capital coming in the later stages to invest in those projects. So either you compete against that capital by coming in late and accept low returns or you come in earlier and make -- take advantage of how capital is coming in at a later stage to perhaps sell down a portion of your project and optimize your returns that way. So for Northland -- it's one aspect that's important now in my view and going forward. And the second is indeed getting closer to end customers, similar to what we're doing with La Lucha in Mexico. So that's why we set up energy trading and our marketing group here at Northland last year to augment our skills set and knowledge in that area and it's why we've undertaken the La Lucha project. So I think going forward, that's the 2 skill sets that will be important in a lot of markets around the world. One of them, the former, in terms of kind of conceiving of projects and developing them from an early stage, is core to Northland DNA, like it's how this company started this quarter. A lot of people down there; it's where I came from as well, so that said, that's a skill set that we have and that we're leveraging now. The second in terms of getting closer to the customer and understanding how to market your power directly to end users is something that we're ramping up quickly on and see that as a key strategic strength to be developed going forward. So with respect to kind of the 20-year government-backed take-or-pay contract, we see the -- one of the vestiges or one of the areas we still see that is in offshore wind, particularly in new markets where they're trying to attract supply chain and the developers to come there. So that's why we're folks in those markets and trying to secure opportunities like Taiwan which will extend our average contract life and look at that as the foundation going forward. So if we can get more of those opportunities and extend our average contract life, that, that's one priority. And the second is to be able to play in what is kind of the new emerging market for onshore renewables, which is what we're doing in Mexico and which we're seeing in other markets, too, and starting to pursue such opportunities in other markets. So that's kind of how we see it breaking out. So we'd hope that we can both pursue these new CNI contracts and more direct marketing to end customers. At the same time, chasing where there is still long-term contracts to extend our average contract life.

[Paul J. Bradley, Chief Financial Officer]

Yes. I think just to add quickly to that, that if I saw the only trend being that we're having government or government-like -- utility-like contracts for 20 years, that was the only product and all the pension funds have now entered into the business and crushing returns down to the point where it's below our cost of capital, that in itself would be concerning. The fact that the world is going to the point where there are multiple contracts coming off of a single project from commercial and industrial customers and that market is developing, the skill sets are developing within these industrial and commercial customers, actually gives us more avenues to sell power in the long run. The offset to that is that we, as Mike mentioned, have to build our energy marketing capabilities and we did embark on that a little over a year ago and we're going to be continuing to ramp that up. But in typical Northland fashion, we're doing it one step at a time. We want to crawl before we walk, before we run. But we have been tooling -- retooling ourselves internally to be able to take advantage of that side of the market as well as the long-term contracts that Mike was referring to, but those probably won't be in markets that are more mature.

[Benjamin Pham, Analyst]

Sound like some interesting times right as this cost of capital shoot up. Did you -- Paul, did you talk about the energy marketing EBITDA bump? I mean it was just a couple of million. Sorry, I just got on call a bit late but was that just -- just selling the gas arb, is that what that was?

[Mike Crawley, CEO & President]

Generally, that's where we started and this is -- we're starting to go through a little bit of migration to reclassify how we talk about that because before, that would be probably voted as a variance on something like Iroquois Falls or Kingston where would say when gas prices were high, we'd just not produce power with it and divert the gas into the market and they would say that was a variance on the power plant operations. Now that we are migrating into the energy marketing part of the business that we're looking at and we're still determining how much of that really is an operating, I guess, upside versus how much of that is coming from a new business unit that we're going to be rolling out when we're ready that is going to have the capability to start to make a bit of money on this, on the margins based on where our physical assets trade. What I think we want to be very clear about is that we're not going to turn the key tomorrow morning and become the biggest electricity trader, gas trader in North America. I mean we're certainly not going to do that. We're initially going to be looking at optimizing the physical assets that we have, including setting up that type of talent in some of the markets that we're operating in outside of North America. And then as time progresses, if it makes sense, if we get controls in place and approvals, et cetera, that you might see that business unit become more and more meaningful over the course of time, but it's very early days.

[Operator]

And there are no further questions at this time.

[Mike Crawley, CEO & President]

Well, thank you for everyone for joining us today. We will hold our next call following the release of our second quarter results in August.

[Operator]

Thank you all for your participation. This concludes today's conference. You may now disconnect.