Northland Power Inc

TSX:NPI

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to this Northland Power Conference Call to Discuss the 2021 Third Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, November 11, 2021, at 10:00 a.m. Conducting this call for Northland Power are: Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Executive 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 represented and responses to questions may contain forward-looking statements that include assumptions that 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 content and 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, Norma, and good morning, everyone. Thanks for joining us today. This morning, we will review our third quarter 2021 financial and operating results. Following our opening remarks, we will take questions from analysts and look forward to addressing those questions. To kick things off, as we always do, I want to reiterate that the health and safety of our employees and stakeholders always comes first. We pride ourselves in the rigorous adherence to health protocols during this pandemic, ensuring the safety of our employees while allowing us to maintain high levels of facility availability. So first, looking at the financial results for the third quarter. We reported adjusted EBITDA of $211 million compared to $254 million a year ago, representing a decrease year-over-year of 17%. For free cash flow, we reported $11 million in the quarter or $0.05 per share. This compares to $61 million or $0.30 per share reported in the third quarter of 2020. This year, our financial performance has been challenged in large part due to the wind conditions in the North Sea. This low level resource has affected the contributions from our 3 offshore wind farms, which have seen historically low levels of wind production so far in 2021. I will note that we have seen this abnormally low level of wind resource, not only in the North Sea, but across much of Western Europe with generation in that whole area, trending well below what our long-term averages. However, as we start the fourth quarter, which is typically one of the stronger quarters for offshore wind, we are seeing improved conditions with October production coming in very strong. In fact, October has turned out to be the second strongest production month in the year so far at well above P50 levels. As we noted in our press release yesterday, and Pauline, will touch on it later in the call, despite the lower performance in our offshore wind segment, we remain on track to achieve the low end of our 2021 guidance range for both adjusted EBITDA and free cash flow. This is possible due to the increasing diversification in our portfolio where our results benefited from stronger performance in our onshore operating segments, including assets like EBSA and the recently acquired solar and wind assets in Spain. Both of these sets of assets are performing well, and in fact, the Spanish assets are benefiting from the higher pool prices across much of Europe this year. On our growth initiatives, we are making good progress executing on a couple of opportunities to advance and grow our portfolio. So starting in Colombia. We are focused on growing our platform there following the acquisition of EBSA in early 2020. If you recall, one of EBSA's key attributes was its grandfathered rights that allow it to participate in all aspects of the Columbian electricity sector. This has allowed us to grow our platform, first with our 16-megawatt Helios solar project, which achieved financial close in the second quarter. And we followed this up with 2 solar projects with a combined capacity of 130 megawatts. In partnership with EDF Renewables, we successfully bid these projects into the most recent renewables auction to secure offtake for these projects. Northland will have a 50% ownership in both of these projects, which will benefit from a 15-year power purchase agreement with multiple high-quality Colombian energy distribution and commercialization offtakers that are required to secure a minimum amount of green power by 2023. The projects are expected to be in commercial operations in the second half of 2023. Moving to Germany, along with our partners, RWE, we exercised our step-in rights for Nordsee Two expansion project on our current Nordsee One project. This allows us to retain the lease. With the successful conclusion of the auction in late September, the winning bid was a 0 bid for Nordsee Two, and we had the right to match that bid in order to retain the lease for Nordsee Two. We will now move forward with the development of that project, and we'll look forward to secure long-term offtake contracts with commercial and/or utility customers for the project. We also have the same step-in rights for Nordsee Three, which comes to auction in 2023. And similar to Nordsee Two, we expect to exercise those rights to retain the lease should we not be successful bidding ourselves into the auction. Together, these two projects have the potential for up to 900 megawatts of capacity and can help to meet the growing demand for renewable power in Europe among both utilities and also corporates. Northland has an 85% interest in each of these leases. In Spain, we successfully closed the acquisition of the wind and solar portfolio on August 11 that we spoke about earlier this year, adding 550 megawatts of operating capacity to Northland's portfolio. Our near-term focus will be integrating the assets into our portfolio, and we also look to position ourselves for further growth in the region. We are adding key personnel to the team to help build out this platform in Spain. The assets have seen a significant increase in the merchant pool prices since the announcement of the transaction in April of this year. We are now seeing prices north of EUR 100 per megawatt hour, which will certainly have a positive impact on our near-term cash flows from the portfolio under the regulated tariff scheme. The portfolio aligns well with our priorities and helps to further diversify our asset base through adding high-quality, long-term regulated cash flow. Now turning to our other development and construction projects, I want to provide a brief update on the various projects that we have underway. In Japan, in September, the government designated 4 new sea areas as promising development zones for offshore wind development under its round 3 process for offshore wind procurement. These areas included Izumi City, in Chiba Prefecture, where Northland is progressing with the development of its Chiba offshore wind project, along with our partners. In addition, the catagami area in Akita protector where Northland is exploring up to a 400-megawatt opportunity through a consortium with Mitsui Osaka Gas was also designated on this promising development area list. The designation as promising areas is a key milestone in the development process for these 2 early stage development projects, which could have a total production capacity of up to 900 megawatts once completed. In New York state, construction of our 2 onshore wind projects, Bluestone and Ball Hill are -- is progressing well, and the projects remain on track for commercial operations in late 2022. Our third 100-megawatt New York onshore wind project hybrids continues to be under active development. At Valuta, efforts to achieve energization of the facilities continues with Northland working with Mexican authorities and other private power producers experiencing similar issues to try and expedite the process with time lines still remaining somewhat uncertain. Efforts to secure commercial offtake in project financing are expected to be finalized after commercial operations. Now finally, at North Sea One, we've accelerated our bearing replacement campaign and we're able to replace 10 rotor shafts assemblies by the end of September, more than we had initially planned. This is an important outcome as it allows us to minimize the downtime of the wind turbines during the fourth quarter when wind resource tends to be stronger. The project had a very high availability during October as a result. The 10 assemblies were replaced at a cost of EUR 13 million or CAD 16 million at Northland share. We were able to achieve some cost savings on the total expected replacement costs for all 54 assemblies, the cost is now expected to be slightly lower than estimated last quarter and within the range of EUR 50 million to EUR 60 million or CAD 65 million to CAD 75 million at Northland's share. The costs are now expected to be almost fully covered by the warranty bond settlement achieved -- received in 2020 relating to the outstanding warranty obligations of North Sea One's original turbine manufacturer upon its insolvency. We will resume with the replacement campaign in the second quarter of 2022 and expect to complete the replacement of all remaining 44 assemblies in 2022 and 2023.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 third quarter of 2021. In the quarter, we generated adjusted EBITDA of $211 million which was a decrease of $44 million or 17% from the $254 million we generated in the third quarter of 2020. The main factor resulting in the year-over-year decrease in EBITDA was the lower wind reseat the offshore facilities as highlighted by Mike in his remarks. Partially offsetting this was a $19 million contribution from the Spanish portfolio. With respect to free cash flow, Northland generated approximately $11 million in the quarter. This was a decrease of approximately $50 million or 82% compared to the same quarter last year. Similar to adjusted EBITDA, the largest driver of the year-over-year decrease in free cash flow was the lower offshore wind resource in the quarter. This was partially offset by about $8 million of lower taxes at the offshore wind facilities and about a $3 million contribution in the quarter from the Spain portfolio. For adjusted free cash flow, we generated $34 million in the quarter compared to $76 million in the same period a year ago. The factors leading to the $42 million decrease were the same factors impacting free cash flow, except lower growth expenditures in 2021, which do not impact adjusted free cash flow. Just to remind everyone, Northland's adjusted free cash flow excludes growth-related expenditures from free cash flow. We believe that 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 our ability to generate cash flow after ongoing obligations to reinvest in growth and to fund our dividend. On a per share basis, these figures translated into free cash flow of $0.05 in the quarter compared to $0.30 last year, and adjusted free cash flow of $0.15 in the quarter compared to $0.38 per share last year. Free cash flow and adjusted free cash flow payout ratio calculated on a cash dividend basis for the rolling 4 quarters ended September 30 were 81% and 60%, respectively. This compares to 65% and 61% for the same period ending September 30 of last year. The increase in both net payout ratios was primarily due to lower free cash flow and adjusted free cash flow and the effect of the shares issued from the common equity issue in April of this year. Turning to our balance sheet and liquidity. Northland remains in a very strong position with ample liquidity to help fund our identified development initiatives. In the quarter, we executed on a number of initiatives that will further enhance our balance sheet and improve our corporate liquidity while also advancing our ESG objectives. We successfully renewed and extended our $1 billion revolving credit facility with a syndicate of both Canadian and global financial institutions by 2 years to 2026 from 2024 and executed several amendments to increase liquidity available under the facility to fund growth. Concurrently, we also implemented a sustainability-linked loan, or SLL, overlay. The implementation of the SLL is an important outcome and aligns with our ESG initiatives and the green financing framework we introduced in February of this past year. The SLL is based on achieving defined targets around both increasing our renewable generating capacity and reducing carbon emissions intensity. The SLL is expected to provide Northland with cost savings when the targets are met and is an important step in integrating our ESG performance with our financing objectives. All margin savings are expected to be used to fund our global sustainability initiatives. Also in the quarter, we successfully restructured and upsized the senior debt on a number of our Canadian solar facilities resulting in a onetime cash distribution to Northland totaling of $40 million or approximately $0.18 per share. This refinancing constitutes a green project financing in support of our ESG initiatives. To date, in 2021, Northland has received cash distributions amounting to $113 million or $0.50 per share from optimizing and upsizing product finance and other debt structures to further enhance our liquidity and to fund growth. I will note that these cash distributions are not included in free cash flow or adjusted free cash flow as they are not scheduled financing, but they very much do contribute to our ability to fund growth. Lastly, Northland received the second investment grade corporate credit rating of BBB stable from Fitch. This rating will add to the current rating of BBB stable from S&P, which was reaffirmed in March of this year. The additional rating reaffirms Northland's creditworthiness and financial stability and could support future debt raises in specific markets. In terms of our liquidity, as at September 30, 2021, Northland had access to $824 million of cash and liquidity and comprised of $784 million of proceeds under our syndicated revolver facility and $40 million of corporate cash on hand. We continue to look at opportunities to support our growth initiatives by raising capital from existing assets and executing on cost-effective financial optimizations that provide increased liquidity for the company. As part of this initiative, we are currently working on refinancing efforts for EBSA to extend and upsize the refinancing and also to complete some optimizations to position us for success in refinancing this asset on a reoccurring basis. We expect to complete the refinancing in the fourth quarter, which is expected to generate additional cash flow to Northland. In regards to our financial outlook for 2021, we remain on track to achieve the low end of guidance for both adjusted EBITDA and free cash flow per share. For adjusted free cash flow, we expect to achieve the range that was revised in the second quarter of this year. For adjusted EBITDA, the current guidance range is $1.1 billion to $1.2 billion. While for free cash flow, the range is $1.30 to $1.50, which is expected for 2021. For adjusted free cash flow per share, the expected range is $1.60 to $1.70 per share. To reiterate, given the lower offshore wind performance thus far in the year, which negatively impacted our financial performance, we believe achieving the lower end of guidance is a very good outcome. The performance from our Canadian portfolio and EBSA speaks to the value of our diversified portfolio and providing offsetting support to the short-term weakness in the offshore wind segment. This diversification will be further enhanced with the addition of the recently acquired Spanish portfolio, which is performing well. Before I turn the call back over to Mike, I wanted to speak to our Iroquois Falls 120-megawatt efficient natural gas facility. Iroquois Falls has contributed significantly to Northland's financial performance over the course of its 25-year PPA, which is set to expire at the end of this year. This expire will impact the contribution from Iroquois Falls to our 2022 financial projections. Currently, Iroquois Falls contributes approximately $75 million annually in adjusted EBITDA and this contribution is expected to reduce by approximately 90% in 2022. Given the current forecasted Ontario market capacity needs, Northland anticipates participating in the Ontario market through capacity options as a generation resource offering capacity for the summer and weather commitment period. In addition, management intends to seek other offtake opportunities. In closing, we are satisfied with our progress in 2021 given the challenges that we have faced due to the various shortfalls experienced in offshore wind. Despite these unusual market conditions, we continue to execute on our business objectives and secure new opportunities for future growth and diversification and to offset lower cash flows from our expiring PPA contracts. Our teams are working hard to ensure that our facilities deliver strong performance, and we continue to enhance our financial position through the execution of key financing initiatives that will allow us to advance our growth objectives. With that, I will now turn the call back over to Mike for his concluding remarks.

[Mike Crawley, CEO & President]

Thank you, Pauline. So looking ahead, we continue to see a lot of growth opportunities within the renewable energy space as the global trend towards decoration continues to gain momentum. Through our global presence, Northland aims to be at the forefront of this movement, and our strategy continues to be on making the investments necessary to position ourselves to capitalize on these opportunities. Our growth strategy centers on developing our pipeline of offshore wind projects in Europe and Asia, which will provide significant in growth in the mid- to latter half of this decade. While in the near term, our efforts will focus on supplementing our cash flow profile through targeted onshore renewable opportunities in key markets through both development and strategic M&A. This concludes our prepared remarks. We'd now be happy to take your questions. Norma, please open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from David Quezada with Raymond James.

[David Quezada, Vice President & Equity Research Analyst]

My first question here, and maybe just starting with the Japanese offshore wind projects. Wondering if there's any additional color or context you can provide on, I guess, how much this improves the likelihood of those projects going forward? How expected was it that these would be designated promising areas and maybe just what the next hurdles are with those projects?

[Mike Crawley, CEO & President]

For sure. I mean, it is the first key step in moving towards having a procurement run on that area. So for us, it is a key milestone on those 2 projects, for those 2 projects. The next step will be for it to be formally established as a designated zone, which signals that there will be an option run within that area for an offtake and for the interconnection as well. So that's the next step. So between now and then, our team will continue to work with the local community to ensure their support for the project, which has already been confirmed to a certain level, which is why it was designated as a promising zone, but that has to be further confirmed. And then once that happens, it would be a signal to run a procurement in that area.

[David Quezada, Vice President & Equity Research Analyst]

Excellent. And then maybe one on the potential for Nordsee Three coming up. I'm just curious if the elevated power price environment in Europe stays in place, could you see any change to the way bidding happens there, like potentially a non-zero subsidy bid? Or would you still expect that to be a pretty competitive process?

[Mike Crawley, CEO & President]

It's still expect it to be competitive, whether it's 0 subsea bid or not will be determined. I think what's clear to us is that certainly, in the near term, and I can't forecast beyond that. But in the near term, power prices should remain higher than they have been historically in Germany or Northern Europe. But the biggest driver, I would say, for those projects will be the increasing corporate demand for renewables. And then as you get further out towards the latter part of the decade, we think the emergence of demand of green electrons for hydrogen projects as well in Northern Europe. So -- and as you know, the European Union, the various state governments are being quite proactive on hydrogen. So I think that's what really has us excited about the Nordsee Two and Three projects is that demand for green electrons. If you look at all of the net-zero commitments for most large corporates, the easiest commitment in the low-hanging fruit is around the procurement of renewable power. And for some, it's to start looking at opportunities to -- on a pilot basis initially, but to introduce hydrogen and some of their industrial processes. So we need green electronics for that, too. So I think those projects are well positioned.

[David Quezada, Vice President & Equity Research Analyst]

Excellent. Excellent. And then maybe just one last one, if I could, quickly. On the benefit from higher prices across the Spain portfolio. I'm just curious, under the regulated system there, do you have to give some of that back via a downward adjustment in future periods?

[Mike Crawley, CEO & President]

We do. So I mean there's 3-year periods where you have effectively a set tariff. There's 3 components in our revenue streams as the market revenue we get, there's a capacity type payment and then there's almost like an energy-type supplement payment that you get. The last 2 components are set every 3 years. So there will be a reset at the beginning of 2023. And the system is generally trying to solve to that low 7% return level, right, on the assets. So yes, so basically, it effectively moves cash flow up earlier. And there may be some modest time value benefit, but I don't think it's anything we would say it's going to be significant on returns for the projects overall. So it's more a benefit in terms of moving up cash flow earlier, which is certainly good from our standpoint given the back-ended cash flow that we get from the offshore wind development projects that we have.Pauline, anything else you'd add to that?

[Pauline Alimchandani, Chief Financial Officer]

The only other thing is we're working through revenue recognition. We're obviously an unprecedented territory with everyone here with respect to where power prices are. I think all else equal, you are looking at higher cash flows over the 3- and 6-year period even if there is a downward adjustment. So within this window of time, the cash flows, as Mike said, would be higher, and we're just determining now how to recognize that.

[Operator]

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

[Sean Steuart, Research Analyst]

Just following up on North Sea Two, we saw Orsted today, secured 25-year contract with the ASF. And as you -- Mike, is about securing corporate offtake, can you give us a sense of how that progresses? Do you leave any merchant exposure as you move ahead here, ideally, how much would you look to secure through corporate offtake out of the gate for that project as you move it ahead?

[Mike Crawley, CEO & President]

We would expect to look to secure commercial offtake or utility offtake as well. But for the vast majority of the output, there will likely be a portion that is left as merchant just to ensure that we can meet the delivery commitments under the core PPA. But of course, that will come down to the terms of that corporate PPA as well.

[Sean Steuart, Research Analyst]

Okay. And with respect to the 130 megawatts in Colombia, you're moving ahead with EDF on. Any background you can give us there? It seems relatively small scale, why partner at all for those opportunities, can you give us some context there?

[Mike Crawley, CEO & President]

Yes, for sure. So the original developer of the project is EDF. So they were seeking a partner. And a partner that had a presence in Colombia and knew the market well. And so that's how it really came about. And I think probably they knew that we were already building a solar project in Colombia, Helios as well. So I'm not sure whether that helped or not, but they were seeking a partner.

[Sean Steuart, Research Analyst]

And do you have buy it rights down the road for those developments? How does that work?

[Mike Crawley, CEO & President]

No. No, we're 50-50 partners all the way through on those projects.

[Operator]

And our next question comes from the line of Rupert Merer from National Bank.

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

I'd like to follow up on Nordsee Two again. It sounds like the outlook for corporate PPAs is pretty good. Can you talk about sort of terms you can get there? And would they be able to support project finance on the asset?

[Mike Crawley, CEO & President]

We would expect to be able to layer in project financing. I can turn it over to Pauline as well on it. So prior to exercising our step-in rights on Nordsee Two, we did a robust market sounding both on the corporate offtake, anticipating that it could be a 0 subsidy that we'd be stepping into. And with that, we also explored kind of what types of terms we would be able to get with -- to add some leverage to that. So I think we've got a pretty clear view in the current market of where that would be. But of course, it will be a few more years before we go out to actually secure that. But with the financial close for Nordsee Two anticipated in '23 or '24.

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

Okay. Great. What else is required before you can move to financial close. And with this project, are you're contemplating sell-downs as you discussed in your Investor Day? And I imagine sell-downs could go to a corporate offtaker as well. Maybe if you could give some color on your thoughts there, please?

[Mike Crawley, CEO & President]

Yes. You've certainly seen that in some instances where the offtaker also wants to invest in the asset. I think in most cases that I've seen they haven't, but that I've seen a few cases where they have. We would -- I think we've been clear that we'd be open to looking at sell-downs on all of our larger offshore wind projects. It doesn't mean we'll necessarily move forward on every one of them, but we certainly would be -- we would be open to that. And I mean, there's a lot of capital looking to invest in offshore wind projects, but there's a limited number of projects and a limited number of developers who have the capacity to advance and get those projects to FID.

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

And what are the other hurdles to get to FID?

[Mike Crawley, CEO & President]

They just complete the final permitting of the projects to complete the procurement, which is just now starting. Processes around the project. Obviously, final design, which is related to both of the project, but those are the main next steps. We don't really see any significant hurdles getting to FID just a lot of work.

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

Maybe -- sorry.

[Mike Crawley, CEO & President]

Sorry, go ahead, Rupert. Sorry.

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

One final question on Nordsee Two. So you've had some curtailment issues at Nordsee One. Looking out a couple of years when Nordsee Two, Nordsee Three could be online, do you anticipate we could see the end of those curtailments?

[Mike Crawley, CEO & President]

That's been our forecast all along is that as more coal gets retired and there's a schedule to get coal of the coal fire generation in Germany retired over the next decade roughly. And as some additional transmission capacity is added between the north and south of Germany, that should relieve and address some of the congestion issues that we're creating the curtailment periods of low demand and high production in the North Sea.

[Operator]

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

[Nelson Ng, Analyst]

First question just relates to project cost escalation. I know it's been pretty topical in many sectors. You've talked about it in the past, but can you just remind us on kind of where you are in terms of what portion of costs have been locked in? And where -- and what are the key risks remaining for your New York projects and also for your Taiwan project?

[Mike Crawley, CEO & President]

Yes. So for -- Nelson, for both of the New York projects that are under construction, all of the costs are locked in. So we've reached financial close. All of the supply contracts have been finalized and signed. So the projects are proceeding as expected through construction. So all of that is locked down. On Hai Long, as we've described earlier, we have preferred supply agreements on the -- both on the balance plant and as well as on the turbine procurement as well. And so with those, we get good visibility through all of the sub-suppliers of those contractors at different iterations over the year. And so -- we've got pretty good visibility into what's happening on -- with pricing from their subcontractors. We're watching it closely. There's nothing certainly a particular concern related to inflationary pressures at this point versus what our assumptions had been going in. We're obviously keeping a close eye on steel prices, but we're not looking to closing the financing and therefore, locking down any commitments to suppliers until second or even third quarter of 2022. So there's still some time to go on that.

[Nelson Ng, Analyst]

And then just to clarify on your third New York project, that's still in advanced development. So things are still kind of moving there. Are any of those costs locked in yet?

[Mike Crawley, CEO & President]

Yes. I mean I'd say, we're in discussions on it. Some of the costs are locked in on that project. So -- but we haven't yet reached FID. So I think we'll probably have more to say on that in the fourth quarter.

[Nelson Ng, Analyst]

Okay. And then just on Hai Long, so costs are kind of moving around, you're watching it closely. Is there an ability to push the financial close data a little bit later? Like what's the latest take you think that's -- where you can still complete the project in 2024 and '25?

[Mike Crawley, CEO & President]

Yes. I mean, there's issues with weather windows in construction in Hai Long. So we wouldn't want to see financial close drift past Q3 likely, roughly speaking and without some change in schedule, right? So in order to adhere to the current schedule that we have, we would probably be kind of where we'd be looking Q2, Q3 for financial close. The -- yes, I'd leave it at that, I think, on Hai Long. I mean what I would say is that there is -- we continue to see lots of interest in general for renewable power in Taiwan, both from the government but also from corporates.

[Nelson Ng, Analyst]

Okay. And then just one last question before I get back in the queue. In terms of La Lucha, it's like obviously that the completed and I presume it's just sitting idle right now. So it is mainly like the government just, I guess, not wanting to connect like due to political reasons? Is that how you see it? Are other renewable facilities getting connected? And -- or have they just put a pause on everything?

[Mike Crawley, CEO & President]

So there's 2 things that have gone on. One is related to COVID, which is just the impact of the pandemic on Mexico. Mexico was probably harder hit than a lot of other countries. And so we saw long periods of time when certain government offices that we required permits from we were actually shut down because of outbreaks within that office. And even when they were opened up, they were operating at reduced capacity and doing turnarounds on requests or permits much slower than would be typical. So that's the one impact. The other impact is probably a little bit more speculative. It's certainly clear and public that the administration has been trying to make changes to the energy reforms that were embedded into the constitution by the previous administration to encourage renewable power and to encourage private investment in the electricity sector. So far, they've been unsuccessful both in trying to make regulatory changes that were overturned or stopped, I guess, effectively by the courts. And they also had announced some legislative changes that they were going to try and bring through this fall, which we understand have been now pulled back. It didn't appear that they had support, and they may be introduced later next year, but that's the best information that we have on that. I think it certainly could -- you could conclude that because of all of that, that's been going on, it does create an environment of uncertainty with the government agencies that need to test, connect and do the final kind of approvals on any new power facility. And this is what we've heard from other Canadian, American and European IPPs active in Mexico, and we talk to them regularly on that. Having said that, it's not like everything is completely frozen. So there is activity and progress being made on a number of different projects. We do know of one project that was connected last month after a very long delay and very drawn out process. And so I think that's that the way that I can characterize it.

[Operator]

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

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I want to come back to Japan. Maybe you can clarify how big is your position in the second consortium? And then the other question would be, you talked about moving from promised areas to designated areas. What's sort of the time line for that? And when do you think you'd be move towards contracting?

[Mike Crawley, CEO & President]

Yes. I think over the next 12 months, you would see projects get moved from being a promising zone to a designated zone, which would signal then within a year following that, that there would be a procurement. And that is -- I mean -- and again, it's not a foregone conclusion that every promising zone will be moved over to be a designated zone. All of our Japanese projects, our positions in all our Japanese projects is a minority position. I don't think we've yet on all of them disclosed what our exact position is, but that is typical for how these offshore wind projects are moving forward in Japan, usually with a couple of strong domestic partners and one strategic like Northland that has the expertise in offshore wind, and that's what we've been obviously pushing forward with and looking to promote to our team in Tokyo.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And Mike, is there -- are there further opportunities to join other consortiums over the next year or 2?

[Mike Crawley, CEO & President]

There could be, for sure. There certainly could be. So there's -- what we announced today would be for the Round 3 process. There is a Round 1 process and a Round 2 process that is -- that are both obviously underway already for procurement. And then for Round 4. Following that, it is probably also the opportunity to do more greenfield development, which is something that we certainly would be looking at.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

So just to clarify, Mike, were you say that in the Round 1 or 2, you still -- you could come in as a late partner to one of those? Or you'd be more focused on Round 3 and 4?

[Mike Crawley, CEO & President]

I'd say we'd be -- so the 2 projects that we talked about today, if they move forward to being designated zones would be for Round 3. We believe we -- there's enough timeline for us to actually possibly do greenfield development of sites for Round 4, but we have not announced or moved forward with any sites yet, but that certainly would be an opportunity for our team in Japan. And then for Round 1 and Round 2, there are consortiums that have already informed in various designated areas, and -- but we've got nothing at this point to disclose on any of those consortiums.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Got it. Okay. And then going back to Nordsee Two, it sounds like assuming thing kind of on a similar way that you stepped in on Nordsee Two and Three. Can Nordsee Two and Three be built in COD at the same time? And does that influence how you go about contracting? Or do you kind of treat them with 2 separate projects when you're looking for offtake?

[Mike Crawley, CEO & President]

So they'd be built effectively in series, right? So the financial close of Nordsee Two would be '23, '24. Nordsee Three would be around '26, '27 roughly speaking. And so we would look to -- certainly, as we went about project design, procurement and offtake, we'd be looking at trying to leverage the scale advantage of the 2 projects combined, but they would be staggered in terms of how they would come online eventually.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then the last question for me is just Nordsee One has the shortest contract that your existing projects kind of rolls off from the 2027 time frame when or 3 might be coming online. Like how does that come in the fold in terms of trying to think about contracts and maximizing sort of the afterlife of that project after the foundational PPA rolls of?

[Mike Crawley, CEO & President]

It's a good question, Mark, because it does kind of align well with Nordsee Two and Three. So you've got Nordsee One, which is obviously operating coming off of its contract -- later this date right around the time when we would be securing offtake for Nordsee Two and Three. So there is an opportunity to look at it as one large block. And we have the same partner on Nordsee One, Two and Three as well RWE 15%.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And how soon do you start to think about what to do with Nordsee one? Is that stuff you're actively engaging right now thinking about fall up contracts or still a couple of years away?

[Mike Crawley, CEO & President]

It is probably -- it's a couple of years away on the offtake side in terms of looking at how we rightsize and optimize operating costs for post-op period. That is something that the team is engaged in right now.

[Operator]

Our next question comes from Ben Pham with BMO Capital Markets.

[Benjamin Pham, Analyst]

You had a comment around the diversification of your assets, how it's helped you generally maintain your guidance, and it's clear that it's helping out that diversification. So my question is -- has the diversification thought process, like when you rank order projects you deploy capital, has that moved up the priority for you as you look to deploy capital? And then two, like are you -- do you think you hit what you want to be in terms of the business mix today and diversification? And as things change and you'll relook at it in the future?

[Mike Crawley, CEO & President]

We've certainly got a much better position today than we would have 2 years ago in terms of diversification, as you point out, right? And we're starting to see the benefits of that. The next major move in terms of diversification, of course, would be building out a long and hopefully other projects, offshore wind projects in Asia, which out not just our overall portfolio but also specifically our offshore portfolio [Audio Gap]is Eastern Europe, it's like markets in Eastern Europe. So we think that will also further help diversify our cash flow and strengthen the business overall.

[Pauline Alimchandani, Chief Financial Officer]

Yes. I think it's about building a balance, too, in terms of cash flow profile because everything we're talking about now with respect to Asia and Europe are all longer-dated cash flows. And so it's really about building a good balance with onshore and other opportunities like the Columbia project, for example, which will deliver cash flow in the next couple of years. So it's -- I wouldn't say that we are there today, but we're certainly making good progress in terms of building out a more diversified portfolio that gives us cash flows sort of balanced near term and long term?

[Benjamin Pham, Analyst]

And do you find your observation because you've been looking at offshore for some time that there is geographical diversification benefits like geographies kind of move in different ways on wind resource. Is that a correct statement?

[Mike Crawley, CEO & President]

Yes, for sure. I mean, diverse. So even between the Baltic and the North Sea in Northern Europe, you see some differences quarter-to-quarter in terms of wind production. But certainly, between different parts of the globe, between Asia and the North Sea, you'd see very different quarter-by-quarter and year-over-year production. So you could have in Asia and Hai Long. We could have a 30-year. And in the North Sea, we could have a [ 70 ] or like this year, what looks like it will probably come in at around 90% or slightly worse year. So it will definitely balance out the portfolio in the long run. But Pauline's point is an important one in terms of the priorities for the business right now, which is not just looking at geographic diversification, but looking at spreading out cash flow and the new cash flow that comes on from our development activities through the decade. So it's not all back-ended.

[Benjamin Pham, Analyst]

Okay. I'd love an update, too, around the spread between your cost of capital and offloading it to lower cost of capital players? Is it still in that 300 basis point spread, even though your -- the group has been under pressure? Or has it widened?

[Pauline Alimchandani, Chief Financial Officer]

No, I think that 300 basis points is probably still accurate. On some projects, it may be higher and other projects that will be lower than that. But I think right now, we've done some work on this, and I think we feel pretty comfortable on that spread holding.

[Operator]

And our next question comes from the line of Justin Strong with Scotiabank.

[Justin Strong, Associate Analyst]

Just quickly on the sustainability linked loan overlay. You've indicated that if you hit certain targets, there'll be some cost savings. Do you think you could kind of just give a little bit more color, quantify some of those target time lines? And what those -- the kind of scale of those cost savings?

[Pauline Alimchandani, Chief Financial Officer]

Yes, sure. I mean they're not large. I mean right now, their structured generally is to be plus or minus 5 basis points. So it's not today. I mean, I think the SLL is sort of a great initiative for companies to be undertaking because it ties nicely in terms of bringing together our KPIs and making them more formal in the sense that they're tracked and they're reported on, they are audited and sort of held to account, but there's also some benefit from them, but I wouldn't say it would be a large benefit where I think we could position ourselves going forward is being able to apply the SLL to more sort of corporate pieces of debt that we have in our portfolio. and potentially to do other types of Link KPI loans in the future.

[Justin Strong, Associate Analyst]

Great. And then maybe just quickly at North Sea One with the replacement of those RSAs. What's -- you kind of indicate that you might be curtailing the capacity in order to protect them in the interim, just looking to see what the kind of -- is that a little bit? Is it 5%? Or is it more than that?

[Mike Crawley, CEO & President]

Yes. I mean there are a couple of things on that. So the really positive news this year about how quickly the team in Hamburg, our team a Hamburg was able to mobilize is that by the time the wins picked up in October, right, that we were able to get all of the back online. So we were able to replace the rotor sat assemblies on all of the turbines that have seen the most secure degradation and that were either severely curtailed or taken offline completely. So that was from our standpoint, very positive and it allowed us to get, as I said in the opening remarks, a very high level of availability on North Sea One during October. There are a very limited number of turbines that are operating at a lower capacity level. So I think it is from down to 4 megawatts each turbine from 6.3. And I think it's in the range of kind of 10 or so, 10 or 11 turbines that are operating at that level. And that's really just to ensure that we extend their operating capacity, so they hopefully do not have to get shut down through the winter, and then those would be the first turbine in the 2022 campaign to get the rotor shaft assembly replaced. So Overall, I think our team in Hamburg has done a very good job of being foot forward on that and doing it in a very cost-effective way at the same time.

[Operator]

And our next question comes from Naji Baydoun with IA Capital.

[Naji Baydoun, Senior Equity Research Analyst]

I just want to go back to Ben's question on diversification. I'm reading a bit between the lines, what you're saying and then thinking about your strategic priorities from Investor Day. There's no real urgency to acquire another utility platform and grow that part of the portfolio?

[Mike Crawley, CEO & President]

I think our interest -- put it this way, I think we remain interested in other utility platforms, certainly within Colombia in order to leverage some synergies with EBSA. EBSA when we acquired, I think we announced at the time was, in our view, one of the better-run utilities in Colombia, had an excellent operating track record. And so it was a good utility for Northland to step into as our first investment in that asset class. But we would be certainly interested in looking at other utilities that either may get privatized by the government in Colombia or private only -- privately-owned utilities that may come to market, particularly if we see some synergies with EBSA. But I'd say it's more specific to Colombia and then, again, continuing to leverage our EBSA or EBSA expanded maybe with -- if we're able to do that to build out a renewable platform in Colombia.

[Naji Baydoun, Senior Equity Research Analyst]

Okay. Got it. That's very clear. The other question I had is related to the 2 new Columbia projects in solar projects in Colombia. Is this -- do you think this is another path for you going forward, like trying to find corporate partnerships but other developers to work with? And maybe that's something you can repeat in the U.S. market?

[Mike Crawley, CEO & President]

We're always open to partnering. And in 2 of the 3 offshore wind projects we have in Europe are with partners, Hai Long we have partners on as well. So -- yes, we definitely would be would be open to that. I mean our view is that over the next decade, the world is going to need a huge volume of additional green electrons. And so we want to be part of enabling as many projects as we can to assist with that. And some of that we can do on our own. Some of that we will need to do with partners. And some of that, at some point, even if we're doing it on our own, as we said earlier, we would bring in partners to help continue to advance those projects as they mature.

[Naji Baydoun, Senior Equity Research Analyst]

I guess just to take it a step further. My question is really around that 1 gigawatt target for onshore renewables in the U.S. Do you think that that's going to be more similar to the New York wind projects where it's 100% ownership, you're developing everything on your own? Or do you think more of that could come from working with other developers?

[Mike Crawley, CEO & President]

Both. Both. I think you'll see both.

[Operator]

Our next question comes from the line of Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

I guess the question is for Mike. And it's really the evolution of the offshore market, and it's sort of funny saying that because in the grand scheme of things, there's not a whole lot of capacity globally at this stage, but a lot in the future. But when you think about the parallels that we saw in the onshore market, where it started off with heavy government subsidies and contracts and then largely wound up being corporate PPAs for many and then some merchant. Where do you think we are in that evolution on the offshore because we're seeing an increasing number of corporate deals being announced dedicated for a longer duration on offshore?

[Mike Crawley, CEO & President]

I think I don't know if it roughly can't a decade behind maybe in that kind of order magnitude in terms of the lag on it. But certainly, what you continue to see is in markets like Japan, Taiwan, Poland, where long-term contracts are being offered up to attract the developers, attract the supply chain. And given the long development period for these projects and a significant upfront that certainly is needed to do necessary in a new market to get that market going. So that's what we like, and that's what we're trying to obviously take advantage of our leverage. But yes, you'll see over time both because as the market matures, like you're saying like you pointed out in Germany, you'll see more corporate PPAs, fewer government-backed PPAs. But it's also -- what's new probably in the last 2 or 3 years is just the increasing demand from corporates where they actually want to have access in a market to renewable power. And in a market like Taiwan is a good example where it's really difficult to get access to green electrons. And a lot of these corporates need green electrons in order to meet their ESG commitments or to satisfy the ESG commitments of their customers above them, right? So that's the other kind of push that you're seeing. So you're seeing kind of -- you'll gradually, as you point out, start seeing the as that market matures in government PPAs may be pulled back. But you're going to -- you're also starting to see these corporates push in because they want to get the control of these green electrons for their net-zero commitments as well.

[Andrew M. Kuske]

I appreciate the color. And then maybe just following up on that with corporates desire a greater number of green electrons. Does that give you another lever for financial flexibility on whether it be farm downs or securitizing the cash flow stream? How do you sort of think about that? And maybe it's a question for Pauline also.

[Mike Crawley, CEO & President]

Yes, I'll let Pauline start on that. I mean the -- there's certainly -- if I understand your question correctly. So if -- I think in terms of farm downs, I may have misunderstood your question. I think in terms of farm downs and sell-downs, there would be -- we think there'll be equal interest, whether you have a government-backed PPA, more a high credit quality corporate PPA. So I don't think that really changes.

[Pauline Alimchandani, Chief Financial Officer]

I think it's more of a bankability really is your lenders like we're all project financed. We don't corporate finance. So we've got to ensure that the corporate contracts have strong terms, conditions, guarantees, all those things that lenders would feel comfortable with. But so far, I mean, as we've engaged lenders on the North Sea projects, everything is favorable to positive, I would say, relative to government contracts. It's just about structuring them properly, and it's a bit of pioneering right now in terms of how you're structuring these corporate PPAs because every single entity that's structuring them is necessarily financing the same way.

[Operator]

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

[Mike Crawley, CEO & President]

Okay. Well, thanks for everyone -- to everyone for joining us today. We're going to hold our next call following the release of our fourth quarter and full year 2021 results in February. In the meantime, I want to thank you for your continued confidence and support.

[Operator]

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. Have a pleasant day.