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Welcome to the Northland Power Conference Call to discuss the 2019 Third Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, November 7, 2019 at 10 a.m. Eastern Time.Conducting this call for Northland Power, are Mike Crawley, President and Chief Executive Officer, Paul Bradley, Chief Financial Officer and Wassem Khalil, Senior Director for Investor Relations and Strategy.Before we begin, Northland's Management has asked we remind you, 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.
Thank you, operator, and good morning everyone. Thanks for joining us today. This morning we will review our 2019 third quarter financial results and our development and construction progress. I'm also very pleased to be joined today by our new Executive Vice President for Development, David Povall. We had another productive quarter, continuing to make progress towards achieving our 2019 growth and financial objectives. First, looking at our financial results in the quarter, we achieved healthy growth in our adjusted EBITDA and free cash flow. We recorded a 14% increase in our adjusted EBITDA to a total of $224 million compared to $197 million the same quarter last year. Our free cash flow per share also increased by 14% to $0.41 compared to $0.36 for the same quarter in 2018.Now Paul will provide a more detailed look into the financial numbers later in the call. On the acquisition front, the quarter was highlighted by our announcement of the purchase of the regulated utility, Empresa de Energia de Boyaca, or EBSA for short, for approximately $1 billion Canadian dollars. EBSA is a mid-sized regulated distribution utility in Colombia, market in Latin America that we think is particularly attractive from an economic, political and infrastructure investment perspective. As you may recall, from our 2018 Investor Day, we identified Latin America as a key development market for Northland and earlier this year we announced our first project in Latin America the 130 megawatt La Lucha solar project in Mexico.With the EBSA acquisition, we are further developing our commitment and our platform in Latin America. The acquisition of EBSA is very exciting for us as it provides us with a high quality business with perpetual and stable cash flow and which operates under a stable regulatory framework. We see this as complimentary to our growing portfolio of contracted generating assets and it offers some important diversification. Furthermore, and perhaps more importantly, the EBSA acquisition provides a platform for additional development of new infrastructure in Colombia. We are very excited about the prospects that Colombia has to offer and how these prospects will help continue to deliver strong shareholder returns while progressing our evolution as a global player in the power infrastructure sector.As communicated previously, the closing of the acquisition is dependent on the receipt of final approval of EBSA's 2019 to 2023 rate tariff by the Colombian Energy and Utility regulator, for simplicity we refer to it as CREG. Northland expects receipt of the tariff approval by CREG in the coming weeks and closing of the acquisition would follow shortly thereafter.Turning to our construction activities, I'm happy to report that we made significant progress on our Deutsche Bucht Offshore Wind Project. The 31 monopile foundations were installed by the end of 20 -- end of August 2019, ahead of schedule, and were generating power by the end of September. Work continues on the installation of the remaining two monobucket foundation turbines which are expected to be installed by the end of fourth quarter 2019; this year.This installation could, however, extend into the first quarter of 2020 due to delays in fabrication caused by supplier disruptions and the potential for adverse weather in the fourth quarter of this year. These delays are not expected to have a material impact on the financial contributions from Deutsche Bucht in 2020, which Paul will touch upon shortly.Once fully complete, Deutsche Bucht will add 269 megawatts of offshore wind power to our portfolio; helping meet the power needs of approximately 328,000 households. At La Lucha, construction activities continue as scheduled and the project remains on budget. Northland owns 100% of La Lucha, our first project to be underpinned by commercial and industrial customer off-tick. Project completion is expected in the second half of 2020.With Hai Long project in Taiwan, we are moving into the procurement phase as we have line of sight to finalizing the permits for the 744 megawatt auction allocation portion. In this regard, we recently announced a preferred supplier agreement on the balance of plant with a joint venture between an experienced European offshore wind contract at [indiscernible] and a Taiwanese shipbuilder, CSBC. The projects will also be submitting its localization plan later this month. We still should be in a position to sign PPA's on the 744 megawatt allocation in Q4 this year, however, there is now a possibility that we may elect to defer signing until a new version of the PPA becomes available in Q1 2020.With the final quarter of 2019 well underway, we are pleased with the progress that we have made this year; being able to deliver solid financial results while laying the foundation for sustained growth. Balancing near-term financial performance with long-term investments in growth is fundamental to our business. I will now turn the call over to Paul for a more detailed review of our financial results.
Thank you, Mike, and good morning everyone. Last night, Northland Power released its 2019 third quarter results. As we have done throughout the year, Northland continued to deliver solid, predictable, financial results as evidenced by our third quarter results. In the quarter, Northland delivered adjusted EBITDA of $224 million which was an increase of 14% or nearly $28 million compared to the $197 million recorded in the same period last year.The increase in adjusted EBITDA year-over-year resulted from a contribution of $16 million of pre-completion revenues from our Deutsche Bucht project which, as Mike alluded to earlier, had installed and powered 31 turbines ahead of schedule. Also contributing to the higher adjusted EBITDA were increased operating results at our two offshore wind projects; Gemini and Nordsee One due to higher production year-over-year resulting in a combined $12 million increase to adjusted EBITDA.Offsetting these gains, were the effects of higher corporate expenses relating to the timing of expenditures on project development activities. With respect to free cash flow, Northland generated a total of $74 million in the third quarter. This represents an increase of 16% or a $10 million increase from the $64 million generated in the third quarter of 2018. On a per share basis, free cash flow increased 14% year-over-year to $0.41 in the third quarter of 2019 compared to $0.36 recorded in the third quarter of 2018. The drivers behind the year-over-year change in cash flow was a $15 million increase in overall earnings primarily due to higher production at our offshore wind projects mentioned earlier.Also contributing to the higher cash flow was an $8 million decrease in our net interest expense resulting from lower interest costs due to scheduled principal repayments on facility level loans; lower outstanding balance on corporate credit facilities and redemption of the convertible debentures in December 2018. Offsetting this higher cash flow was a $7 million increase in current taxes related to the offshore wind facilities and a $4 million increase in corporate G&A expenses due to the timing of expenditures related to development activities.This level of cash flow resulted in a rolling fourth quarter free cash flow payout ratio calculated on a total dividend basis ended September 30, 2019 equal to 63%, compared to the 65% payout ratio last year. GAAP net income of $111 million in the third quarter increased by $17 million or 19% from $93 million in the third quarter of 2018. This increase in net income year-over-year was primarily due to higher gross profit and lower finance costs mentioned earlier; offset by higher tax expense and higher expenses due to the timing of development expenditures.Turning to financing activities, in connection with the acquisition of EBSA, Northland completed a public offering of 14,289,000 subscription receipts in the quarter resulting in gross proceeds of $347 million. These subscription receipts will convert to an equivalent number of common shares upon closing of the acquisition. Initially the acquisition of EBSA will be supported by a fully committed 12-month $1.1 billion bridge loan and longer term the financing strategy will be funded with the proceeds from the subscription receipts non-recourse project level debt and use of our corporate credit facilities.I will now take a moment to highlight our 2019 adjusted EBITDA and free cash flow per share guidance. As we get closer to the end of the year, we are now able to narrow the guidance range reflecting nine months of actual results achieved. For the full year 2019 adjusted EBITDA, we expect the range to be between $950 million and $1 billion compared to the previous range of $920 million and $1.1 billion. Free cash flow per share expectations have also been narrowed to a range of $1.65 to a $1.80 per share from the previous range of $1.65 to $1.95 per share.The narrowed range reflects Northlands year-to-date results ending September 30, 2019 and incorporates the effects of lower than forecast offshore wind production as well as unpaid curtailment at Nordsee One for the first nine months of the year due to both negative pricing and grid repairs. The new adjusted EBITDA range also takes into account the same factors but also includes higher than forecast pre-completion revenues from Deutsche Bucht. However, noting that pre-completion revenues are not included in the free cash flow figures.Lastly, with 31 of the 33 turbines installed and operational on our Deutsche Bucht project, we want to take a moment to provide an update to the expected 2020 adjusted EBITDA guidance for the project. Following the experience at Nordsee One in 2019 and the expectation that the industry in Germany will continue to experience unpaid curtailments in 2020, management has revised Deutsche Bucht's contribution to adjusted EBITDA in 2020 to be between ?155 million to ?175 million down from the previous range of ?165 million to ?185 million.I'll now turn the call back to Mike for concluding remarks.
Thank you, Paul. Since our inception over 30 years ago, Northland has evolved from an ambitious Canadian-focused developer to an international player in the power infrastructure space. We continued this journey with our entry into Colombia in the quarter following our EBSA acquisition. EBSA not only puts it in the new country but also diversifies our portfolio by adding a new asset class to compliment our existing assets. While we've grown significantly in size and capabilities, what hasn't changed is our focus on delivering robust returns providing steady sustainable growth and effectively manage the inherent risks in the activities we undertake. Our business strategy remains focused on enabling us to meet our commitment to our investors. This commitment is clear and unwavering. Our plan going forward will see us continue to grow our global presence to our current projects under construction and development but also through the continued identification and assessment of power generation and related infrastructure opportunities that fit our investment objectives and help sustain our growth trajectory. That concludes my prepared remarks. We look forward to providing further updates for the fourth quarter and year-end 2019 results in February. In the meantime, we want to thank you for your continued confidence and support and now we'd be happy to take your questions. Operator, please open the queue for questions.
[Operator Instructions] Our first question comes from the line of Sean Steuart with TD securities.
Thanks, good morning everyone. Couple of questions to start. Last week we saw Orsted revised the capacity factor assumptions for their European offshore wind platform due to blockage and [wake effect] assumptions. How do you guys think about that with respect to your portfolio? Does that inform any of your outlook long-term for your European assets?
So, what we do with any of our assets is we wait a couple of years after COD usually, roughly, and we'll do an assessment of the production and see if any of our -- the assumptions that our investment thesis have changed. So, we have not yet done that on Nordsee One. We did do that, as you may recall, on Gemini and made some adjustments but at present the only adjustment that we're making in terms of our view on Nordsee One is related to negative pricing which we've referenced already but beyond that, there's no adjustment that we'd be making at this point and, point out, that in terms of Orsted, or any other developer and owner of offshore wind assets, they would have had their own assumptions that would have underpinned their investment thesis and I wouldn't assume that we would have been using the same assumptions that they use necessarily.
Got it. And then following on that, Paul talked about the lower 2020 EBITDA expectations at the view related to curtailment. I guess just a bit more detail there. Is the revision just based on what you've seen at Nordsee One this year or are you forecasting that much more congestion and basing your forecast on that; just maybe a little more context on what's driving the modest reduction there?
Yeah, hi Sean, good morning. It's one of those things that is a little bit tough to get your arms around because there's really two underlying drivers to it. One is the congestion and that's probably the lions share of it. There's also a growing component where, as we saw at the very, very end of last year during the holidays when demand was extremely low; and actually that's when you've got your most productive wind, we had a number of curtailments from the six hour negative pricing syndrome and that was a little bit of a nibble out of the revenue kind of last minute and we believe with more renewable generation online in 2020, that you'll probably see a few more of those incidents.Those may be sort of longer-term but it really depends what happens with some of the other generation in Germany and whether it's turned down, turned off, retired or decarbonized or what have you. As far as the congestion goes, there are certainly plans in place on the German grid to reinforce transmission capabilities between the North Sea where you're generating all this offshore wind and the southern part where there's usually a much higher demand. So that part we -- our thesis is that that will slowly decrease after it peaks probably next year but for some of the -- very end of year, low demand high production periods, we may see that persist. But kind of impossible to get it much narrower than that.
That's helpful, thanks guys. I'll get back in the queue.
Your next question comes from the line of Rupert Merer with National Bank.
Good morning. Sticking with DeBu, can you talk about the timing to start the contract there? I assume you choose when you want to start the contract and you probably want to hold off until you've installed the two turbines or the monobuckets. But there's got to be a tradeoff here to the time value of money. So, how are you thinking about the date you turn on DeBu?
Yes, so Rupert, you may recall with Nordsee One that the contracts actually are kind of based on the individual turbines. So we are actually earning our pre-completion revenues at the contracted rate, as soon as we take over turbine, the contract for that turbine kicks in. So there is no differential between -- there's not a waiting to the point where we invoke the contract. That was true with Gemini because the whole farm had to be completed or a certain percentage of it had to be completed but in Germany its turbine by turbine.But what you're seeing is the delay in the corporation to free cash flow; the revenue is being generated by those turbines. We typically do not include that until we have gone through our term conversion process with our banks simply because the cash flow is locked up until that point, even though it is building up in the distribution account. But, of course, that has to be settled against any unspent contingency or overspent contingency as well as the certain threshold of pre-completion revenues which, at this point, we'll [handly] beat. So if all goes according to plan here, in the first quarter of next year, you'll see us reach that term conversion, there will be a settlement with the bank as far as what we draw on the loan and what we can disperse into the distribution to shareholders and then you'll see some of the -- you'll see a bit of the early spike from the pre-completion revenues hit our free cash flow in Q1 and then from Q2 onward it should be a fairly normalized operation.
Okay, great. Thanks for the color. And since we have David on the call, I'm wondering if you can give us an update on the opportunities in South Korea and maybe in Japan?
Yes, good morning, Rupert, certainly can. So we progressed with the activities, which I think have been referenced before in terms of what we're looking at in those key markets of Japan and South Korea. We are recruiting new people out -- in the market there, so that's obviously boosting our position to pursue those opportunities. And we remain very positive about the opportunities in the -- particularly in the offshore arena in those two areas. So, more on that forward as I get settled into my role.
So you have a partner for the South Korean market, are you targeting partnership in the Japanese market as well?
Yeah, I mean, of course the model I think you've seen us adopt around the world is one where partnerships are important. So we will continue to pursue that and report back as we find the right type of partner to work with.
And to be clear, Rupert, I wouldn't view KEPCO E&C, the announcement around KEPCO E&C, as signaling that KEPCO E&C is our Seoul partner in Korea. We continue to look for other partners which we may work on projects with KEPCO E&C, or we may work independently. So, KEPCO E&C is an important relationship, obviously in South Korea, but it's not by any means going to be the only relationship that we have in that market.
Okay, maybe just one final question on those markets. How long do you think it will be before you could have visibility on project opportunities?
I think, well partly, personally for myself, I have to get up to speed. I've only been here for two or three weeks so I spent a good period of last couple of -- my first three weeks in the business out there so I'm not going to put a timing on it but in the near -- in the near term, in the near future you'll hear something about our progress in that market.
I think what you're seeing Rupert is that the Japanese market, at this point, for offshore wind is now progressing probably ahead of South Korea just by virtue of the regulatory framework and the procurement process, program, that is started in Japan and will extend, we think, for the next decade. So, that is certainly causing us to focus probably a bit more on Japan. But we continue to look at Korea where it's a different process but we think we'll eventually generate a lot of development and construction of offshore wind in the near to medium term in Korea but it's a, I'd say at this point, a bit less clear process than it is in Japan.
Yeah, and I think it would be fair to say that most of our Asia propositions here, Rupert, are sort of in our medium to longer term free cash flow EBITDA buckets, you know, by design, and by knowledge including Taiwan which is, even though we've got better visibility on it, it's still going to be sort of mid decade before we are really seeing the fruits of that labor.
Very good, thanks for the color.
Your next question comes from the line of Bryan Fast with Raymond James.
Yeah, thanks. Good morning guys. Just on EBSA, could you comment on your early experience there and if you're starting to see incremental opportunities on the generation side?
For sure. I think our near-term focus after EBSA closes, in terms of growth opportunities in Colombia, will likely be more on transmission than on generation and I think that's where, as you may recall, Bryan, we were a participant in a procurement for high voltage transmission lines about a year and a half ago, we were unsuccessful on that but that is an area that we're interested in and an area where there are planned procurements over the next 18 to 24 months in Colombia. So, I would not be surprised if we participated in those procurements going forward; and that probably would be the first priority for us.
Okay, good. Thanks. And then just on La Lucha, just where are you in terms of contracting the assets at this point?
Yeah, so we remain committed to having contracts in place for a portion of the output of La Lucha by COD. We are engaged in discussions with a number of potential off-takers but we'll also -- what we're also doing is determining right now the best path to market. So to be more clear, that's either by contracting through an existing qualified supplier or [power] marketer, but they're refer to as power qualified suppliers in Mexico in order to contract with an end customer. Or, by creating our own or establishing an interest in an existing qualified supplier so that we actually can control that contracting process.So that's what we're currently working our way through right now.
Perfect, thanks.
Our next question comes from the line of [ Lewis Baker ], a private investor.
Yes, good morning. A couple of questions, in connection with the higher tax expense of $8 million, was this unexpected or is this part of your recurring [matter] or any explanation on that?
You know, the tax expenses are basically a result of operations. So as we get higher income, obviously we're going to have higher tax expense. And sometimes based on various accounting principles, the way we treat it for books and the way we treat it is cash flow are two different items. So I wouldn't read too much into that. It's basically largely a non-cash item for the most part but, we're still enjoying a fairly high degree of tax pools that we have from our CCA allowances and we are not in a very high paying cash tax position at this point.
So it's something that you expected, it wasn't a surprise?
No, no, it wasn't a big surprise. As we see our income go up, of course our tax expense is going to go up.
All right, the other is a $6 million increase in G&A, is much of that regarding the expansion of satellite offices in the Pacific?
Some of that is but a fair bit of it is also what we would call our development expenditures which some would classify as more of the investment than an expense. From our accounting policy we are fairly conservative in the way we treat those expenses and that we typically expense them until the project gets to a certain level of maturity. So, it isn't all necessarily overhead but some of that -- there may be less than a third of that would be for expansion of offices and the rest would probably be development expenses.
And quarter-by-quarter it's the question of timing too in terms of when these expenses end up occurring too.
Yes.
It would be part of the original budget then, or anticipated?
Yeah, for the large part, yes.
As you...
The narrative here is quarter-over-quarter as opposed to -- versus budget on this call.
All right then. The last question I have in regards to the Asian expansion. Are you anticipating satellite offices?
So we -- yeah.
Sorry, go ahead.
Pardon?
So, sorry. The -- in terms of satellite offices in Asia, we have a small office in Seoul Korea where we have two professionals working out of that office. We anticipate having a small office in Tokyo established very soon and we recently hired a country manager for Japan who will work out of that office. And as you know, we also have a project office focused on the Hai Long projects that we share with our partner in Taipei. So those are the two offices we have currently and the one office in Tokyo that will be open shortly but the offices in Seoul and Tokyo, to be clear, are small offices and they're purely development offices at this point.
Yeah, no, that's what I was expecting in that area. Thank you for your answers.
Your next question is from [ Donald Watt ], a private investor.
Good morning. In the -- in Europe, or Germany I guess in particular, are they giving any consideration to slow battery storage on their grids to try and mitigate some of the variations in the wind farm? It seems they're ashamed to let good power go down the road when there's a way of doing it?
That's a good question, Donald. The -- so there's a number of kind of initiatives, I guess, going on in Germany related to some of these congestion related issues and mismatch of supply demand, just temporal mismatch of supply and demand. So, Number 1, at a kind of more traditional level, there is transmission expansions that are being planned and developed to allow more of the power to move essentially from the north to the south but also to remove -- south where there's more load, but also to remove some of the congestion in the north and south as well and to allow power to move around there. So that's one thing that's going on already which is -- which we're obviously tracking closely because we have an interest in that being resolved.Secondly, to your point, there is some initiatives going on looking at battery storage but also looking at hydrogen as well, which is a growing focus in Europe to use hydrogen essentially as a storage method for excess generation at certain times. So we're also tracking that closely as well.
Yeah, and I'd say it's probably around the world. The Holy Grail is we try to find some type of cost-effective and operationally effective storage that does balance this renewable energy equation with kind of our historical demand patterns. I think we'll see more and more of that but it's -- it is a long R&D effort and it's going to take some time before some of these things that we would really like to see now, but it's going to take quite a number of years to become operational. So let's hope that our respective authorities continue to encourage R&D and other investments in these technologies.
So you've seen our -- and the adjustment on the guidance for Deutsche Bucht, I mean, I think we're being realistic and to a certain extent conservative on that but in the medium to long-term we do have some optimism that any congestion issues will get addressed through one of the means that are referred to.
Well, we'll continue this discussion in the spring then.
Exactly, exactly. Take care. Thanks for your question, thanks for your interest in Northland.
Right.
Your next question is from the line of Jeremy Rosenfield, Industrial Alliance.
Yeah, thanks. A few questions here. Just on Taiwan if we can go back to that for a second. Can you explain the options that are open to Northland with regard to signing those last two PPA's?
Yeah, for sure. So, there's -- there is -- without going into too much detail, there is an existing PPA available to be assigned with [Tai] Power, the off-taker that we could sign as soon as our final permit is secured on the two projects that were bid into the auction to add up to a total of 744 megawatts. We expect those final permits or that final permit to be secured by the end of the year putting us in a position to be able to sign that PPA. What the project team is currently evaluating is whether we want to sign that particular PPA or whether we would want to wait and sign a new PPA that's being drafted and developed which will have some additional provisions that we probably would prefer to have in the off-take agreement that will be available at some point in Q1 2020, hopefully early 2020.So, it's just a determination as to whether or not we could sign that first PPA and easily exit and transition to the other PPA or whether if there's any fraction there, or any difficulty doing that then maybe we would wait to sign the other PPA in Q1 2020. So the team has -- to be fair again, the team is right now just working through that and we'll come to a decision shortly.
If you, just to clarify, if you choose not to immediately sign the 2019 version, does that window close for you once the 2020 version is released?
No. So, there's nothing -- if we choose to wait till Q1 2020, having secured our permits in 2019, it doesn't put us in any worse position in terms of securing the off-take for those two projects.
Right, it's a different situation than we had with the first Hai Long project where we had a [feed-in] tariff and getting the PPA in 2017, or sorry, 2018, was the big goal because there was an expectation the tariff would drop. Unfortunately nobody in the industry got their PPA's in 2018 and were all deferred in 2019 and everybody suffered a bit of a haircut in the tariff price. Here in the 744 megawatts that Mike referenced, we bid those in and we have the price locked in so it's really just a matter of arbitraging the various contract provisions. If you're super conservative and want to just lock it in and -- you know, you can do that pretty quickly here once we get the establishment permit but the Taiwan market is developing and there are emerging, potentially, some options to have more flexibility in those PPA's which may be worth waiting. But we don't see that as a big legal risk if we let it defer to 2020.Different situation than we had last year, a year ago.
Yep, okay. Thank you. And then just a couple of other questions. With regard, to I guess, the timing for introducing 2020 free cash flow guidance, would you think about providing a little bit more detail on that as we move into the beginning of 2020; so with Q4 results?
Yeah, traditionally we have released our 2020 guidance with our Q4 results and I suppose there's an ability to do it a tad earlier but at some point, we just will follow our tradition and in all likelihood, for 2020 guidance.
Would it be safe to say that the board will be considering an update to the dividend policy around the same timeline?
Well, as we've been mentioning all along, Jeremy, that the board will be looking a the dividend and it's always matched against what kind of capital requirements we have ahead of us, and to the extent that we've got generous capital investments in front of us, then that sort of puts a little bit of question mark on the prudency of raising the dividend. So we'll have to balance that when the time comes.
Great, okay, thank you.
Your next question comes from the line of Ben Pham with BMO.
Okay, thanks. Good morning. I just want to go back to DeBu to -- just a bit of adjustment to the 2020 guidance and maybe that goes in your favor in 2021 and beyond; we'll see what happens. And I know it's when you look at the reduction overall, Northland consolidate, not really material, but I guess when you run the math on just DeBu, I mean, high -- you lever it up. I mean, the IRR's on that could drop 200 basis points or so, I guess that's somewhat material on a project level. Is there anything you guys can do on a free cash flow level like lower interest expense, O&M that might potentially offset some of that EBITDA pressure?
Yeah, I mean if you follow the historical precedence on Gemini and Nordsee One, when we did the term conversions we also did a sort of recasting. We didn't refinance them but we did effectively restructured the financing as get quite a bit of lower pricing on there. So that's always an upside. With these offshore wind projects they're just going to be, you know, a bit of uncertainty in them and this one has really nothing to do with the wind resource or the turbine performance. This one has to do with, let's call it, a man-made syndrome which is this negative price in curtailment. So, you know, it's -- it's something that we cannot avoid and so we're trying to be at least adjust the numbers for 2020 that we think we'll see but as, you've been following some of the other questions, we've been discussing how we see some relief on this coming in the future but some of it may be there for some time.And so -- but for the 2020 view, we want to be, you know, with our usual degree of conservatism and say, just given what we've seen this year, and what we see coming next year, probably best to just put the one year with the ?10 million down on both up and down side of the guidance. So, is that going to affect a long-term IRR, Ben, you know, that's -- you can run your numbers on that.
Okay. And maybe some commentary with Sean early on Orsted comments and I guess with you guys -- you guys have been probably a little bit more diligent with returns than them, so actually you're probably in a better spot if [validation] comes down. But can you remind me how is that utilization calculate don your project? Are you -- it is engineers going in looking at the last few years, I mean, maybe just an update on that.
How would we do the reevaluation of a project after a couple of years of operations?
No, how do you get your long-term production assumptions? Because I mean, I guess I'm unsure when the criticism there is -- in the beginning it was quite elevated, robust and there's been downward adjustments and so I guess there's a bit of a fear now that offshore winds on that same path, maybe not but we'll see.
Well, to be clear for our Deutsche Bucht guidance that we've [adjusted] -- this has nothing to do with wind studies or forecasts or anything of that nature. It's a manmade provision in the contracts that has to do with the supply and demand in certain congestion equations on the grid. So, just to make sure before Mike talks about how it's done, it will say if we had a brand new project today just want to be clear that we're not talking about what we've just released for the Deutsche Bucht guidance.
So any -- exactly, so any post-operational true-up or adjustment, Ben, such as we did on Gemini, we would take a look at kind of how the wind has been at the site versus the long-term reference [indiscernible], which is same thing that you do on an onshore wind project. We take a look at our operating costs, for example, see if there's anything different then what was in our investment case once we get into operations and are operating for a year or two and it's those sort of things that would factor into a post-operations evaluation of the project. So it's, at this point, all we know is that we experience, as Paul said, some negative pricing and the impact to that in terms of curtailment, unpaid curtailment on Nordsee One and it's reasonable to assume that that may be a risk on Deutsche Bucht so we've made a realistic/conservative adjustment in the guidance on that basis, but that's all that we're doing at this point and, like I said, the Orsted, we don't know what underpinned their investment thesis on any of their assets in the North Sea, we know what underpinned our investment thesis and at this point, we're not changing anything other than accounting for near-term negative pricing.
All right, that's very helpful. Thank you.
Okay, operator, I think we're out of questions here.
Yes, sir, that is correct. I will now turn it back to you for closing remarks.
Okay, well thanks everybody for joining us today. We are going to hold our next call following the release of our fourth quarter and full year 2019 results in February. We look forward to talking to you then.
Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating and have a pleasant day.