Northland Power Inc

TSX:NPI

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to this Northland Power Conference Call to discuss the 2021 Second Quarter results. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 12, 2021 at 10:00 a.m. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Financial Officer; and Wassem 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 contents in making investment decisions or recommendations. The release is available at www.northlandpower.com.I will now turn the call over to Mike Crawley. Please go ahead.

[Mike Crawley, CEO & President]

Thank you, operator, and good morning, everyone. Thanks for joining us today. This morning, we will review our second quarter 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 the health and safety of our employees and our stakeholders comes first. Through diligent planning and rigorous adherence to health protocols, we've maintained high levels of facility availability, delivering essential supply of energy to consumers, businesses in Europe, Canada and Colombia.First, looking at our financial results for the second quarter, we reported adjusted EBITDA of $203 million compared to $227 million in 2020, representing a 10% decrease. Our free cash flow of $6 million was 68% lower compared to $17 million 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 had 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 mobilize 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 551 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 in the Baltic offshore wind project, which was awarded a 25-year Contract for Difference offtake agreement with the Polish government at a rate of 3.9 -- 319.6 per megawatt hour or about EUR 70 per megawatt hour. Baltic Power provides Northland with a 49% interest in a mid-stage offshore wind project with the potential for up to 1,200 megawatts of capacity, which will be 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 second quarter, 2 of the projects, Ball Hill and Bluestone, successfully achieved financial close. Both projects have secured Green Financing in the form of a non-recourse project loans, tax equity bridge, and letters of credit with the consortium of lenders totaling USD381 million 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 third 100-megawatt New York onshore wind project, which has embedded battery storage, High Bridge is under active development. Subsequent to the quarter, Northland's 16-megawatt Helios solar 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 first quarter of 2022. Helios represents Northland's first development project in Colombia, which capitalizes on EPSA's grandfathered rights, allowing EPSA to expand into energy generation in Colombia. Helios will serve the power needs of non-regulated municipal, commercial and industrial customers.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 legs. 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 commitment to local supply chain and procurement 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 2022. The Hai Long team continues to make progress towards securing corporate offtake power purchase agreements for the remaining 744 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-19, the energization and testing have been delayed. Efforts to achieve energization continue 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.

[Pauline Alimchandani, Chief Financial Officer]

Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the second quarter of 2021.In the quarter, we generated adjusted EBITDA of approximately $203 million, which was a decrease of $24 million or 10% from the $227 million we generated in the second quarter of 2020. The main factors leading in the year-over-year decrease was a 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 million in the quarter. This was a decrease of approximately $12 million or 68% compared to the prior year. Similar to adjusted EBITDA, the larger 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 a decline of approximately $14 million. While the second quarter is typically a weaker quarter for offshore wind resource, the results for this quarter across all 3 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 million 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 million in the quarter compared to $38 million in the same period a year ago. The factors leading to the $16 million decrease were the same factors impacting free cash flow, with the difference being lower growth, expense -- growth expenditures in 2021 of approximately $4 million. 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 a 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 dividends.On a per share basis, these figures translated into free cash flow to $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 calculated on a cash dividend basis were 70% and 56%, respectively. This compares to ratios of 62% and 54% for the respective prior year periods. The increase in both net payout ratios was due 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 2021, namely the bearing issues at Nordsee One and our decision to unwind the APX hedges at Gemini.First, the Nordsee One, 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 million. We continue to assess the potential impacts from this issue in 2022 and 2023, and we'll provide updates as we issue guidance for next year.The total estimated capital cost for replacing all of the turbines is EUR 65 million. The majority of this cost will be covered by the remaining EUR 54 million warranty bond received in 2020 as part of the settlement relating to the outstanding warranty obligations of Nordsee One's turbine manufacturer. The impact to Northland will be at its 85% proportionate interest.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 second quarter of 2020. These hedges were intended to protect against a continued decline in the APX price below the EUR 44 per megawatt contracted price that was experienced due to COVID-19 demand factors. Given the strengthening in the APX price earlier this year as economic activity rebounded and to limit loss SDE subsidy revenue due to the higher APX price, in the second quarter of this year, we entered into offsetting derivative contracts, essentially crystallizing the losses.As a result, Northland incurred costs amounting to $25 million for the second half of 2021, $19 million for 2022, and $9 million for 2023. There will be no further losses beyond these amounts related to the hedges.In order to minimize further fluctuations in market revenue and Gemini, subsequent to year-end, we purchased APX put contracts against the majority of our exposure for the remaining of 2021 and 2022 to protect our cash flows, should the APX price fall below the SDE floor price. These put options were entered into with a strike price of approximately equal to the SDE floor and only became commercially viable in 2021 as the APX increased substantially above the SDE floor. The total cost of the puts was approximately EUR 2 million. These puts were at a relatively low-cost given the wide spreads between the current APX price of approximately EUR 100 and the SDE floor price. 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 $1.4 billion of cash and liquidity, comprised of $838 million of proceeds under our syndicated revolving facility and $607 million of corporate cash on hand following the completion of the share offering executed in mid-April. On August 11, $522 million of 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 provide increased liquidity for the company at an attractive cost. Subsequent to June 30, we restructured and upsized the senior debt to some of our Canadian solar facilities that resulted in a one-time distribution of $29 million and a reduction of the weighted average all-in rate from 5.4% to 4.4%. Year-to-date, we have raised over $100 million of liquidity through 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 initiative is to support climate change mitigation efforts by developing and investing in renewable energy infrastructure assets that increase green energy production.This quarter, we successfully executed our 2 first Green Financings with onshore wind projects in New York state and the Helios solar project in Colombia, the latter being one of the first renewable project financings in the country. Both projects secured green 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 Nordsee One this year due to the rotor shaft assembly replacements.This updated expectation assumes an offshore wind resource in the second half of '21 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 million to advanced development projects, including $30 million expensed through the P&L and $107 million of DevEx capitalized through the balance sheet, the latter of which relates to Baltic Power, Hai Long, New York wind and Helios. 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.

[Mike Crawley, CEO & President]

Thank you, Pauline. 2021, thus far has presented some challenges, but is also, as 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 and 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.

[Operator]

[Operator Instructions] Our first question comes from the line of Matt Taylor of Tudor, Pickering, Holt.

[Matthew Taylor, Director of Midstream Research]

I just wanted to throw it 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?

[Mike Crawley, CEO & President]

Yes. I mean 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've 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 P50 basis, but 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 a weak first quarter. But we don't see anything, as you say -- as you're asking that is structural in terms of the energy or the wind resource in the North Sea.

[Matthew Taylor, Director of Midstream Research]

Great. Thanks, Mike. And then maybe a question for you, Pauline. On the bearings issue, just looking at the numbers from your impact for the first 8 bearings at $11 million or so. Is it fair to use that as a rough estimate for the remaining 46 or are there some significant differences in the bearings, the types of turbines, distance or other things that we should be thinking about how that revenue impact could be different?

[Pauline Alimchandani, Chief Financial Officer]

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 -- a better estimate of future, but even then, it will be subject to conditions.

[Mike Crawley, CEO & President]

I'd say -- the only thing I'd add to that is, I mean, what our team in Hamburg has done, and in my view, a very good job, 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 their 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 effective turbines this year, which in terms of procurement activities and securing vessels from an offshore wind standpoint and -- is 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.

[Matthew Taylor, Director of Midstream Research]

Great. Thanks. Thanks for that color. And then last one, if I may, Mike, now it's being closed. Has your view on timing changed at all in finding new onshore growth where you're seeing unexpected headwinds 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 you're timing on finding bolt-ons in Spain or doing other acquisitions on the onshore front?

[Mike Crawley, CEO & President]

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&A opportunities in each of those 3 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.

[Operator]

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

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

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?

[Mike Crawley, CEO & President]

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 or 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 Senvion 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. A small portion was left within the project as well. So the majority of the cost to replace the main bearing assemblies over the next, call it, 1.5 years, will be covered by the proceeds of this bond that we've received and those funds are with Northland now. Maybe I'll turn to Pauline to describe how it works its way through our financial statement.

[Pauline Alimchandani, Chief Financial Officer]

Yes. So we will capitalize the new parts at their estimated long-term useful life, and we will accelerate amortization of 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 and P&L. And then we -- within free cash flow, as Mike discussed, which mirrors the actual cash is that the EUR 65 million replacement costs will be offset mostly by the $54 million warranty bonds, but there will be an EUR 11 million 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.

[Mike Crawley, CEO & President]

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 was 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 be 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 the weather windows in 2022 to get any replacements done as quickly as possible. And the final piece was being very proactive in B rating 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.

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

Okay. That's great color. 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?

[Mike Crawley, CEO & President]

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, reduce 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. And 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 of 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.

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

Okay. And on that turbine, can you give us an update on what you might be seeing with inflation and construction costs since you last had an update?

[Mike Crawley, CEO & President]

So we -- I mean, you're speaking to commodity price or steel costs?

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

Yes. We're hearing some turbine manufacturers talking about cost pressure? Are you starting to see that now?

[Mike Crawley, CEO & President]

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, will receive new updates on pricing and then 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 and trajectory remarks, is not until the second half of 2022. What we are seeing is forecast indicating that the expectation is that steel prices for most sector observers will decline and that you've seen 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.

[Operator]

Our next question comes from the line of David Quezada with Raymond James.

[David Quezada, Vice President & Equity Research Analyst]

My first question just on Nordsee Two. 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?

[Mike Crawley, CEO & President]

I mean what we're indicating in this quarter is that we intend to 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 fit, 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 to step into what other bid may have been successful in that procurement.

[David Quezada, Vice President & Equity Research Analyst]

Okay. Great. That's helpful. Thank you. And then maybe just one other one for me on the outlook in Colombia for generation. I believe there's an RFP upcoming there in October. I'm just curious if you have any thoughts on whether or not you may participate in that?

[Mike Crawley, CEO & President]

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 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[Audio Gap]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.

[Operator]

Our next question comes from the line of Nelson Ng from RBC Capital Markets.

[Nelson Ng, Analyst]

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 3 facilities are roughly in the same area, right?

[Mike Crawley, CEO & President]

Yes. The -- they're all in close proximity to each other. They have the same wind regime. With respect to DeBu, I'll just turn it over to Wassem, who's wired. He's got the details on that.

[Wassem Khalil, Senior Director of Investor Relations & Strategy]

Nelson, yes. So if you recall, Q2 last year, there were some unscheduled grid outages at that Deutsche Bucht, which we are not seeing this year. So hence, you're seeing a higher level year-over-year at Deutsche Bucht because of that grid outage. But otherwise, everything else is the same across all 3 facilities.

[Nelson Ng, Analyst]

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?

[Mike Crawley, CEO & President]

Yes, they certainly would have been expected to last at least for 10 years. So it is certainly a fabrication or design error. The -- there's 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 abundantly 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 to replace them. But certainly, they should not have failed as early in the process. 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 sand dune turbines that have been in production much, much longer without any sign of degradation.

[Nelson Ng, Analyst]

Okay. So just to clarify, this is more than just the bearings, right? It's the whole -- like it's a bigger part of the structure? Or when you say replacing bearings...

[Mike Crawley, CEO & President]

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 is occurring.

[Nelson Ng, Analyst]

Okay. Got it. And then just moving on to my next question. In Mexico, you talked about the administrative delay and how the completion of the project might get pushed into next year. So 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 while the facility is completed but not COD-ed?

[Mike Crawley, CEO & President]

You certainly could -- I mean, in theory, 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.

[Nelson Ng, Analyst]

Okay. And so I am not that close to the politics in Mexico, but I guess, is this simply an administrative delay or is politics involved? And 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?

[Mike Crawley, CEO & President]

Most of it is related to COVID-19 in so far as everything has been moving very slowly through both onland fan, I mean, without going into the detail on -- just a number of permits required to get the project into 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 or 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 dots are added 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. They are the 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 than it should, but that's the way it is.

[Nelson Ng, Analyst]

Okay. And then just one last question before I get back in the queue. In terms of the New York wind projects, 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?

[Pauline Alimchandani, Chief Financial Officer]

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 takeout on those projects. So matching tender to term a financing.

[Operator]

Our next question comes from the line of Sean Steuart with TD Securities.

[Sean Steuart, Research Analyst]

Pauline, a question on refinancing opportunities. You touched on the progress for the solar facilities and plans for EPSA. Do you have any other plans or opportunities across other parts of your portfolio? And I looked at some of the legacy Canadian wind assets that look like they have higher cost debt. Are there more opportunities across the portfolio for refinancing?

[Pauline Alimchandani, Chief Financial Officer]

Yes. There are other opportunities for refinancing. I think it's still a bit early, but we would hope that 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.

[Sean Steuart, Research Analyst]

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&A factor into that target at all? Any detail you can give us on that longer term objective?

[Mike Crawley, CEO & President]

Yes. It's broader than New York. I mean, listen, we like New York a lot, there's going to be a lot of growth in the next few 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've got a nice good long-term 20-year contracts, which is, Pauline just mentioned, would support a bond financing. And I say 2 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 be New England, certain areas of PJM, we have looked at California before. So generally, markets where we believe we can secure long-term contracts are either government-backed or with utilities, in some cases, C&I, but generally looking for markets where we can secure long-term contracts to underpin our investments. But those would be the main markets that we'd be looking at. Principally development, but some M&A is certainly possible.

[Operator]

Our next question comes from the line of Ben Pham with BMO.

[Benjamin Pham, Analyst]

On your package, you've referenced Romania here, in your earnings release. And I'm not sure you've mentioned this earlier, Mike, in your remarks, but can you remind us what your positioning is in that region?

[Mike Crawley, CEO & President]

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, in renewable development going forward. But that's really all we've talked about.

[Benjamin Pham, Analyst]

Okay. So you actually have some development sites there versus you saying that's somewhere you want to get into?

[Mike Crawley, CEO & President]

Yes. I mean, any -- certainly, aside from Baltic Power, of course, any onshore development would be at a relatively early stage that we'd be looking at participating in those markets. And we referred to, certainly in our disclosure, to looking at remaining opportunities, but I'd say those would be at an early stage.

[Benjamin Pham, Analyst]

Yes. Okay. The Baltic offshore wind in the quarter, certainly, you've been in renewal business for a long time. You look through of it and the investors should look through it. When you think about your exposure there, 60%, does it make 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?

[Mike Crawley, CEO & President]

If you could -- I've got to apologize, if you could repeat the -- I've not gotten a very good sound this whole call on my ear set. Could you repeat the question again?

[Benjamin Pham, Analyst]

Yes. No problem. I was curious to hear your thoughts on the sources of your cash flows and your willingness to maybe accelerate diversification in the context of your exposure to offshore wind in the North Sea and the Baltic that we saw this quarter?

[Mike Crawley, CEO & President]

Oh yes, for sure. I mean, some -- what you've seen, and we've talked about this on previous calls is, I mean we've been making the deliberate steps to diversify ourselves, this is your question, I think. To diversify ourselves away from the concentration that we have in offshore wind in the North Sea. So the EPSA investment in Colombia was -- that was one of the benefits of that transaction. It 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 and significantly diversify ourselves away or at least lessen 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's obviously in the North Sea. So we would be moving to less than that.

[Benjamin Pham, Analyst]

Okay. Makes sense. And maybe a detailed question on North Sea and the accounting. The -- when you got the warranty settlement you had -- I think you started to amortize some of the benefits from that to offset the higher OpEx cost. So my question now is, are you changing the accounting policy on your accelerated benefit? And is this warrant a revisit of your OpEx on maintenance for North Sea since you're doing it yourself now?

[Pauline Alimchandani, Chief Financial Officer]

So I'll answer the first question. So it's not a change in policy. It's more a change in estimate. So it's a prospective view. We would have thought we would have amortized that bond's proceeds over 9 years, and now we're amortizing it over a shorter period. And on the OpEx?

[Mike Crawley, CEO & President]

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 One. We were thankfully moved quickly to hire all of the Senvion techs, and were 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 respond quickly and it will minimize significantly any revenue impact from this failure.

[Benjamin Pham, Analyst]

Okay. Great. And Pauline, to clarify, the acceleration, that benefit to free cash flow, is that in your new guidance?

[Pauline Alimchandani, Chief Financial Officer]

Yes.

[Operator]

Our next question comes from the line of Mark Jarvi with CIBC.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I want to come back to the long-term average number you 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 have been operating the longest, compared in terms of average production versus maybe the P50 forecast you had at the time of COD?

[Mike Crawley, CEO & President]

Yes. So what we do on all of our facilities, and 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 anemometer 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 all together with again, an independent -- an IE, independent engineer to pull it all together. 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 One, and we will do that at year 3 on Deutsche Bucht. What we've seen is on both Gemini and Nordsee One, as I 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 One, 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 Orsted and other disclosures that the -- just the science and the methodology behind energy yield assessment on offshore wind facilities has continued to improve as more facilities have been deployed principally in the North Sea and around U.K., obviously, that's where the first deployment of offshore wind has been over the last 15 years, but the methodology has improved significantly. 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 the short story. Is that our view on the -- our ability to accurately predict the -- and forecast the production from the 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 2 facilities have adjustment with a modest downward adjustment on the energy yield. There have been other enhancements on the facilities, including refinancings and other 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.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Got it, Mike. And then just coming back to the Nordsee Two, and you said you will bid and you'll see where other bidders show up. If there was like a 0 subsidy bid, could you have any feel now of where the corporate PPA market is for broadly just longer-term hedges, if you wanted to contract out, which would be -- if you stepped in on a 0 subsidy bid? Just maybe updated these in terms of alternatives, either you win or if you don't, what the other alternatives are now for Nordsee Two?

[Mike Crawley, CEO & President]

Yes. Certainly, we are actively 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 a partner in those projects, RWE. So yes, we've assessed all options. And there is a robust market, corporate offtake markets for renewable energy in Europe, which has only improved over the last year.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then my last question, just if you did secure Nordsee Two, you've kind of got the CFE for Baltic Power. When you go to financial close in Taiwan at the end of next year, will you be able to put through a commitment to Siemens Gamesa River on all of those projects to try to get improved pricing? Or would that not quite line up in terms of the ability to come in on turbines?

[Mike Crawley, CEO & President]

Say that again? Put through a commitment. I missed what you said.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Yes. I imagine that if you had multiple sites, you might get better pricing from Siemens Gamesa. Would you be in a position at that point to maybe be able to procure turbines for Taiwan, Nordsee Two and Baltic Power?

[Mike Crawley, CEO & President]

I'd put it this way. I mean, we obviously have different partners on each project, and they have different timelines. So I'll put it this way. The -- 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 -- that our pipeline will be converted into actual operating projects. So every large project that gets added on enhances our competitive position with the 3 main offshore wind turbine vendors.

[Operator]

Our next question comes from the line of Naji Baydoun with IA Capital.

[Naji Baydoun, Equity Research Analyst]

Just wanted to follow-up on a question about Nordsee Two. 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 merchant?

[Mike Crawley, CEO & President]

Yes. I mean our intention would be to, in some form, to contract the energy from that facility. So it's a 0 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 a corporate offtaker. So in some form, we would look to contract the energy in order to underpin that investment.

[Naji Baydoun, Equity Research Analyst]

Okay. And just on Poland, can you talk about maybe the next steps for that project there for the approvals of the contracts? And then more broadly, thinking about the 2025 auctions, how early do you need to start thinking about that, assuming you do want to participate in that auction?

[Mike Crawley, CEO & President]

Well, so on Baltic Power itself, the kind of 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 to 24 months away. So there's -- project of that scale, there's a lot of activity, as you can imagine, going on right now with the team that we've assembled to deliver that project. On the future procurements, like the 2025 year -- the 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.

[Naji Baydoun, Equity Research Analyst]

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?

[Mike Crawley, CEO & President]

I think -- yes, I mean, if you go back to what I said earlier is that, in general, we would see a significant build-out of renewables in Eastern Europe. Eastern Europe overall has generally lagged Western Europe in deploying renewables, particularly Northwestern Europe. So we think there's going to be a significant deployment of new renewables, both offshore wind and onshore renewables. So it's an area of interest for Northland.

[Operator]

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

[Mike Crawley, CEO & President]

Okay. Thanks to everybody for joining us today. We're going to hold our next call following the release of our third quarter 2021 results in November. In the meantime, we thank you for your continued confidence and support.

[Operator]

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