U.S. Markets closed

Edited Transcript of NPI.TO earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Northland Power Inc Earnings Call

TORONTO Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Northland Power Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mike Crawley

Northland Power Inc. - CEO & President

* Paul J. Bradley

Northland Power Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Benjamin Pham

BMO Capital Markets Equity Research - Analyst

* David Quezada

Raymond James Ltd., Research Division - Equity Analyst

* Mark Thomas Jarvi

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Nelson Ng

RBC Capital Markets, LLC, Research Division - Analyst

* Rupert M. Merer

National Bank Financial, Inc., Research Division - MD and Research Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the Northland Power conference call to discuss the 2019 second quarter results. (Operator Instructions) As a reminder, this conference is being recorded Thursday, August 8, 2019, at 10 a.m.

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 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, Northland Power Inc. - CEO & President [2]

--------------------------------------------------------------------------------

Well, thank you, operator, and good morning to everyone. Thanks for joining us today. This morning, we will review our 2019 second quarter results. Our second quarter was certainly a very busy one from a construction perspective. We made significant progress on our Deutsche Bucht offshore wind project and commenced construction at our new La Lucha solar project in Mexico. I'll have more to say on these shortly.

Looking first at our financial results, I will provide an overview of the highlights from the quarter and then turn the call over to Paul, who will take a detailed look into the financial numbers.

Overall, our second quarter results were consistent with the results from a year ago, posting slightly better adjusted EBITDA and a slight decline in free cash flow, largely due to a planned increase in scheduled principal repayments for Nordsee One. For the second quarter of 2019, Northland delivered adjusted EBITDA of $194 million, an increase of 6% from the second quarter of 2018. And free cash flow of $0.20 per share, representing a decline of 5% or $0.01 from the same period last year.

Turning to our construction activities. I will start with an update on our newest project, the 130-megawatt La Lucha solar project in Mexico. Construction commenced following our announcement in early May with the hiring of personnel, site preparation work as well as engineering and procurement. Work will continue through the rest of the year, with project completion expected in the second half of 2020. Northland owns 100% of La Lucha, which represents an exciting step in the evolution of Northland's power generation business, being our first project in Latin America and our first project underpinned by commercial and industrial offtake.

At Deutsche Bucht, our third offshore wind project, we achieved some very important milestones. In June, the offshore substation was commissioned. The inter array cables installed, and the turbine installation kicked off with the first turbine being installed in early June, with the project subsequently generating the first megawatt of power in late July. Currently, 25 turbines have been installed to date, and work continues on the installation of the remaining turbines. The project remains on track for completion by the end of 2019. Once complete, Deutsche Bucht will add 269 megawatts of offshore wind power to our portfolio, helping meet the power needs of approximately 328,000 households. The project generated the first megawatt of power in late July, as I said.

At our Hai Long project in Taiwan, we are continuing to work on securing final permits and power purchase agreements for the remaining 744 megawatt allocation and anticipate having PPAs for the full project signed in 2019. Efforts are also underway to ensure that we deliver our local content plan by the end of the year and move the project further along the development path.

Now before I turn the call over to Paul for a review of our financial results, I want to take a moment to acknowledge Paul and his contribution to Northland's growth and success over the past 9 years. As you are aware, and a lot of you know Paul quite well, we announced Paul's intention to retire as Northland's Chief Financial Officer on July 22, and are currently in the process of recruiting a successor. Paul has been, as you know, a significant contributor to the growth of the business, providing insightful guidance and leadership to the organization. Paul will remain as CFO through the coming months in order to facilitate a smooth transition to his successor.

And with that introduction, I will now turn the call over to Paul to walk us through our financial results.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Mike. Last night, Northland Power released its 2019 second quarter results. Our results were generally in line with our expectations and speak to Northland's ability to deliver solid, predictable financial results.

Northland generated second quarter adjusted EBITDA of $194 million, which is an increase of 6% or $11 million compared to the $183 million recorded in the same period last year. The increase in adjusted EBITDA year-over-year was primarily due to higher contributions from our thermal facilities as well as Gemini compared to the second quarter of 2018.

Also contributing to the higher adjusted EBITDA were lower corporate general and administrative costs in the second quarter of 2019 due to timing of project development activities compared to last year. Offsetting these gains were the effects of negative market prices at Nordsee One and lower production at our solar facilities from unfavorable weather in the quarter. Negative power prices arise from factors outside of our control under the German Energy Act. If negative power prices are sustained for more than 6 consecutive hours, Nordsee One, as well as other offshore wind farms, lose the tariff for that period.

With respect to free cash flow, Northland generated a total of $35 million in the second quarter. This represents a decline of 5% from the $37 million generated in the second quarter of 2018. On a per share basis, free cash flow of $0.20 in the quarter was 5% lower than the $0.21 recorded in the second quarter of 2018. The primary drivers behind the year-over-year change in cash flow was a planned $17 million increase in scheduled principal repayments for Nordsee One debt, offset by a lower interest expense and higher overall earnings.

As mentioned on previous calls, 2019 represents the first full year of scheduled debt repayments at Nordsee One, whereby principal repayments will amount to EUR 72 million compared to EUR 49 million in 2018.

For the rolling 4 quarters ended June 30, 2019, the free cash flow payout ratio, calculated on a total dividend basis, was 65% compared to the 67% payout ratio last year. GAAP net income of $76 million in the second quarter increased by $7 million or 10% from $69 million in the second quarter of 2018. This increase in net income year-over-year was primarily due to higher gross profit and lower finance costs.

Turning to financing activities. In the second quarter, Northland extended the maturity date of its $1 million corporate debt facility by a year, with a new expiry date of June 22, 2024. The credit facility is with a syndicate of financial institutions and is used to fund development opportunities and acquisitions, provide letters of credit to secure obligations that would otherwise be funded in cash and for general corporate purposes, including working capital.

I will now take a moment to highlight our 2019 adjusted EBITDA and free cash flow per share guidance. We continue to expect the full year adjusted EBITDA in 2019 to be in the range of $920 million to just over $1 billion, incorporating pre-completion revenues from Deutsche Bucht. Free cash flow per share expectations remain in a range of $1.65 to $1.95 per share and incorporate the higher scheduled debt repayments at Nordsee One, as well as higher costs related to the timing and the expanded scope of Northland's international development activities.

Lastly, as we get closer to completion on our Deutsche Bucht project, we want to reiterate the expected 2020 adjusted EBITDA guidance increment for the project. We estimate the adjusted EBITDA contribution from Deutsche Bucht in 2020 will be in the range of EUR 165 million to EUR 185 million.

As Mike mentioned earlier, Deutsche Bucht construction is expected to complete by the end of 2019, with the project contributing to our 2020 financial results.

I'll now turn the call back to Mike for concluding remarks.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [4]

--------------------------------------------------------------------------------

Thank you, Paul. As we pass the halfway mark on the year, Northland remains well positioned to achieve its 2019 goals and objectives. Our construction activities at Deutsche Bucht and La Lucha are progressing as planned with the projects achieving significant milestones in the quarter, as I outlined earlier. We continue to deliver solid results from all perspectives, financial, operational and as related to our growth initiatives. As the energy landscape changes, we continue to position ourselves to capitalize on the opportunities that will allow us to grow our business.

In keeping with these changes, we announced last week the addition of a new member to our executive team, David Povall as Executive Vice President, Development, effective October 16 of this year. David will be based out of our Toronto office and will be responsible for leading the company's development initiatives in our target markets around the globe. He brings an extensive background in the international power generation industry with over 20 years of experience, working in a variety of power projects, including greenfield project developments, spanning multiple jurisdictions and across a range of different technologies throughout the U.K., Australia, China, Singapore and parts of Southeast Asia. Most recently, David was the CEO of a Japan-based renewable power development company.

I'm excited to welcome David to the Northland team, and I'm confident that he will be a key driver of the next chapter of our growth.

That concludes my prepared remarks. We look forward to providing further updates throughout the year. In the meantime, we thank you for your continued confidence and interest in Northland. We'd now be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question is from Rupert Merer from National Bank.

--------------------------------------------------------------------------------

Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [2]

--------------------------------------------------------------------------------

Let me start by congratulating Paul, and we wish you all the best for the future.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Rupert. I'm sure I'll be seeing you quite a bit.

--------------------------------------------------------------------------------

Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [4]

--------------------------------------------------------------------------------

So if I could start with Taiwan. Mike, you mentioned, you need to have your local content plan ready by this year. Can you give us some color on how the supply chain there is developing? How it may or may not be tracking to your initial expectations?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [5]

--------------------------------------------------------------------------------

For sure. So we, as you know, are at later stage feed-in tariff projects. So we've got just over a gigawatt growth, of which 300 megawatts has a local content obligation. So that 300 megawatts has a interconnection data, I guess, or CO date of 2024, which could be extended out to 2025.

There are a number of projects moving forward in Taiwan with local content obligations, albeit slightly different local content obligations for 2021 and 2023. So we're looking for those projects to kind of be the pioneers in terms of pushing forward now on the establishment of a local supply chain, and that is occurring as these projects are going to be going to construction -- those projects are going to construction soon. So that -- we're seeing the local supply chain for those projects develop largely as we would have expected. And we're also, obviously, directly engaged with the -- an EPCI contractor to work through the local supply chain on the balance of plant requirements for the project, but also engaged with turbine vendors on that element of the project as well, as they work through the local supply chain.

So by and large, it's going as expected. It obviously is a substantial requirement and one that we're taking very seriously.

--------------------------------------------------------------------------------

Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [6]

--------------------------------------------------------------------------------

Okay, great. And then secondly, looking at the performance of thermal in the quarter, had quite a good quarter, and you mentioned the North Battleford saw a capacity increase. Just wondering if you could give a little more color on performance in the segment and on that capacity increase? And is that performance representative of a run rate expectation for thermal?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [7]

--------------------------------------------------------------------------------

I think it's a bit of a mix bag, Rupert. The increase in the capacity in North Battleford was something we invested in last year, and then we negotiated that contract with -- or a contract amendment, I should say, with SaskPower that allowed for some of that -- or really, all of that investment to be recouped over the remainder of the PPA life. So you saw a bit of an uptick there.

Some of the other performance differentials have to do with -- although we have a fairly stable EBITDA margin, but there is a dispatch element to all of those plants. And last year was just a little bit weaker on the dispatch, a little bit stronger this year. But collectively across the fleet, it sort of added up a bit. So really, it was no one significant chunk there that we can really point to.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [8]

--------------------------------------------------------------------------------

And specific to North Battleford the capacity increase will obviously continue going forward.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [9]

--------------------------------------------------------------------------------

Well, I think, it just points out that, as you know -- and I'm sure you'll ask me in a moment about Nordsee One. It just goes to show that it's a beauty having diversity in the fleet because it just -- there are variances. And the more you have to offset and smooth it out, the better.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question is from Nelson Ng, RBC Capital Markets.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [11]

--------------------------------------------------------------------------------

So by default, I'll ask about Nordsee One, given that you're expecting it. So in terms of the curtailment, could you just give a bit more color as to -- I think the impact was $4 million. But going forward, like, given that there are more offshore wind facilities being developed, do you expect that $4 million to increase over time? And then also, has the Nordsee One facility been curtailed? And -- or has it had uncompensated curtailment prior to Q2?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [12]

--------------------------------------------------------------------------------

Yes. So your last question's answer is yes. We saw a little bit of that late last year and then, of course, coming into this year. And this is a bit of a new syndrome that's coming across to everybody. I don't know if anybody picked up Orsted's results, they sort of made a lot of references to it in their release yesterday.

This has to do with -- initially, in the wintertime, you see it right around the holidays where just demand is really low, and you've got pretty good wind resource, and there's just too much power that can't get evacuated out. And if you get 6 hours of negative pricing from the day ahead market, then we're -- everybody's curtailed. And that's just kind of one of those things where -- the newer part of this syndrome has clipped us in the Q2 is where we've got solar. As you know, in Europe, they're a little farther north --- well, I guess they're probably where we are in Canada from a northern exposure, get a lot of solar production in the summer. And oddly, we had a fairly decent wind resource in July -- or sorry, in June of this year. And so combined, they caused, again, a lot of renewable energy to come on to the market.

So it is sort of an emerging issue. It's not a very tasteful one for us. It's impossible to predict. Would it ever happen again? Would it happen a lot? Would it impact Deutsche Bucht? I mean those are all questions that, we, ourselves, are trying to figure out, but it does appear that it's going to be something that's here for the next little while. I mean there are a number of transmission projects planned, et cetera, that can eventually alleviate some of this. But certainly, all of the new projects coming online are not going to be necessarily helpful for this issue.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [13]

--------------------------------------------------------------------------------

Okay. So just to clarify on that. So over the -- so you'd expect curtailments during this summer and over the winter holidays, is your current expectation?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [14]

--------------------------------------------------------------------------------

That's what we've seen.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [15]

--------------------------------------------------------------------------------

Yes. And it's only -- again, it's only where you have more than 6 hours or more of curtailment. So it's a day ahead, there's a signal if there's going to be 6 hours or more of negative pricing, then we get a signal to curtail from our marketer that -- the next day. So it's not in all instance of negative pricing. It's where it extends for 6 hours or more. But as Paul says, in -- through '21 and '22, there's 2 sets of transmission upgrades that are planned in Germany that would alleviate some of the congestion issues.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Okay. Great. And then just moving on to Gemini in terms of the cable and other repairs. Could you give a bit more color there in terms of -- it seems pretty early that you're doing repairs. I was just wondering if that was expected, whether it was -- whether that cost was covered by the cable supplier or the EPC contractor. And lastly, did the repairs get completed in Q2 and will it impact Q3?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [17]

--------------------------------------------------------------------------------

Yes. So generally, what's going on there, was there is a point at which the cable cost is one of the major dikes in the Netherlands. Probably, I think, they're the largest dike. And we were noticing on our SCADA systems that there was a hotspot in the cable, and it was located right there where it was crossing the dike. There was an issue with the way the cable was put in and the type of materials that were covering the cable. And so this is more of a preventative maintenance for us, so we fixed it before something went wrong because we did detect it. It's something that was kind of an unknown for everybody. So it was not necessarily in the contractor's scope.

The -- probably the more painful part of it was in Q2, and I think a little bit of it bled to Q3, but it's not going to be material, was lost production. Fortunately, we did it in a period where the production wasn't all that significant, and that was a little bit by plan. And so the problem should be fixed. It was just one of those glitches that we -- you're going to inevitably have those in a project, but you won't see -- the plan is that we won't see that repeating. We basically have fixed the issue.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. Got it. And then just one clarification on Rupert's question on North Battleford. So how much capacity increase was added last year? And what's the EBITDA impact or benefit from that?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [19]

--------------------------------------------------------------------------------

I think Paul, it was roughly 13 or 14, still being determined in terms of incremental capacity megawatts on the plant. And then Paul?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [20]

--------------------------------------------------------------------------------

Yes. And I think it really depends a little bit on the dispatch element of it.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [21]

--------------------------------------------------------------------------------

I think it's roughly $2 million though. Roughly $2 million on the EBITDA.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [22]

--------------------------------------------------------------------------------

Yes, roughly $2 million to $3 million a year, it could be up to that level. So it's a nice little of add. But I mean in the ground picture for us, it's not -- yes. I did -- we look for these opportunities to add a little bit here and there, and that was a good opportunity, a win-win so...

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Your next question, from Sean Steuart with TD Securities.

--------------------------------------------------------------------------------

Sean Steuart, TD Securities Equity Research - Research Analyst [24]

--------------------------------------------------------------------------------

A couple of questions. Mexico, to start with. It seems like the country's intent on proceeding with private auction framework for future power development. Any updated thoughts on how that affects La Lucha contracting prospects with C&I partners? Has it changed your thinking? Or was this anticipated from the get-go?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [25]

--------------------------------------------------------------------------------

So our decision to move away from the -- so we decided 1.5 years ago to move away from the public auctions, so the government-run auctions for new generating capacity or renewable generating capacity, just because we didn't think of the risk-return in those auctions in terms of where the price is -- clearing price was coming out was attractive. And we saw a better opportunity to market our power directly to end users to commercial and industrial customers.

So that decision was made about 1.5 years ago. It was made before the change of administration. This current administration came out. And one of the initial decisions was to cancel the renewable power auctions, right, which the impact to that directly on us was -- I mean, I guess, initially, was nothing because we'd already decided that we weren't going to compete in those auctions. But in terms of the impact on power prices in Mexico going forward, we saw that as neutral to positive in so far as it would delay more renewable generating capacity coming online, which would be -- probably tilt towards the positive in terms of our view on power prices in Mexico going forward. Does that answer your question?

--------------------------------------------------------------------------------

Sean Steuart, TD Securities Equity Research - Research Analyst [26]

--------------------------------------------------------------------------------

Yes, it does. I just -- we've been reading more and more about the private auction setup that's been proposed. And I take it as this was already on account when you guys were talking about this last quarter. I just wasn't clear if this is a new development or was already part of the plan for the contracting for La Lucha.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [27]

--------------------------------------------------------------------------------

No. I mean we're -- I mean we're on track. We're looking at 2 different paths forward. One is to create our own power marketing arm, our own qualified suppliers, either by setting it up ourselves or by partnering with a group that has a license already. And I think we're probably tilting more towards the latter, but we're keeping both options open over the next couple of months. And the fallback or the alternate strategy would be to simply market our power through a third-party marketer, which, I guess, in some ways, is similar to what we're doing in Europe with our offshore wind projects. But our preference is to see if we can figure out how to create our own qualified supplier and be able to retain some of the rents or some of the margin ourselves by marketing the power directly to end users through our own marketing arm.

--------------------------------------------------------------------------------

Sean Steuart, TD Securities Equity Research - Research Analyst [28]

--------------------------------------------------------------------------------

Okay. I understand. A question on Ontario. I was seeing some consolidation activity in the gas-fired power market recently. The ISO's no longer proceeding with the capacity market. Do these developments inform your thinking on your Ontario gas portfolio?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [29]

--------------------------------------------------------------------------------

It adjusts the dialogue that we would be having with the ISO on a regular basis, which we always have had on our Ontario assets, particularly our thermal assets in the province. So -- yes, so with the incremental capacity auction now looking like it will either not happen or be deferred, it does change the discussion that we have with the ISO around our thermal assets going forward, and particularly, obviously, around Iroquois Falls as it approaches the end of its contract life.

--------------------------------------------------------------------------------

Sean Steuart, TD Securities Equity Research - Research Analyst [30]

--------------------------------------------------------------------------------

Got it. And congratulations and good luck, Paul.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [31]

--------------------------------------------------------------------------------

Thank you, Sean.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Your next question is from Mark Jarvi, CIBC Capital Markets.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [33]

--------------------------------------------------------------------------------

I just wanted to revisit the Nordsee One and just clarify a couple of things. Not trying to beat a dead horse here, but when you talk about curtailments, are you actually shutting down power? Or you just receive no tariff and you sell essentially into that negative power price market?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [34]

--------------------------------------------------------------------------------

No. We switch the turbines in the off position. We ought -- to conserve the wear and tear.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [35]

--------------------------------------------------------------------------------

And then how does that flow through to the grant? Or do you guys get the adder? I guess you would forego that on lost generation?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [36]

--------------------------------------------------------------------------------

Yes. Basically, we get it. It's kind of a wasting commodity. If we don't produce a kilowatt hour, we don't get the tariff.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [37]

--------------------------------------------------------------------------------

Okay. Understood. And then maybe this question is for Mike. But with the new hire, and was experienced in Japan, just maybe how that maybe changes how you guys think about partnering or strategy in the market as you prepare for opportunities in offshore. Any incremental views on what you guys need to do to align yourself with someone for next year's potential FIT program.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [38]

--------------------------------------------------------------------------------

Yes. So there's some greater clarity now emerging from Japan on how the offshore wind FIT program or procurement program is going to work. They have announced where the initial promotional zones are, which is where they're going to issue allocation or contracts for offshore wind projects. So that's been clarified.

So from our standpoint, we're looking both at developers that will be able to participate in that first round. But we're also looking at developers that would be aligning themselves up for the second and third round, as well in areas where the -- that are not identified for this first round. So they're both options. Obviously, you could imagine that you may be able to get better value in terms of partnering up with a project that is at an earlier stage that is preparing for the second or third round versus some of the more advanced projects that are lining up for that first round. But we're looking at both.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [39]

--------------------------------------------------------------------------------

And does David bring in any new relationships or unlocking opportunities that maybe you guys wouldn't have had beforehand?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [40]

--------------------------------------------------------------------------------

For sure. So I mean David's been active the last several years in Asia Pacific, in general, as the Head of Development for RES Asia Pacific. RES is a major global renewable power developer and construction company. And more recently, RES had sold their Japanese business to Macquarie, and they created Acacia Renewables, and David was the CEO of that for the last several years, based out of Tokyo. So he has been developing the portfolio for onshore wind projects. And I assume he has been also looking at offshore as well on behalf of his previous employers. So he would have some good relationships in Japan. And also, he would have some good knowledge of the market. And in a broader sense, he has a strong knowledge of Asia Pacific as well from his experience over the last several years developing projects in that area.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [41]

--------------------------------------------------------------------------------

Okay. And then maybe switching back to DeBu with good progress, 25 turbines installed. Any incremental thoughts on expectations for pre-completion revenue? I think you guys guided to $55 million to $75 million. Does -- that still feels like a very achievable range?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [42]

--------------------------------------------------------------------------------

Yes, Mark. I wouldn't vary from it now. I think we're probably more comfortable that it's achievable, whether we -- I don't think we'd be in the mood to change the range right now. We're slightly ahead of schedule. But it's -- Mother Nature has more to do with it than any human beings do. And you're -- just kind of one of those, it's not over until it's over type of thing. But we're pretty confident we'll be able to thread the needle where we've got it. If we can do a little better, great, but we'll know that closer to the end of the year.

--------------------------------------------------------------------------------

Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [43]

--------------------------------------------------------------------------------

Okay. That's good to hear. And I'll affix in my congratulations to you as well, Paul.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [44]

--------------------------------------------------------------------------------

Yes. Thanks, Mark.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Your next questions is from David Quezada with Raymond James.

--------------------------------------------------------------------------------

David Quezada, Raymond James Ltd., Research Division - Equity Analyst [46]

--------------------------------------------------------------------------------

My first question here, maybe just a very broad industry question. I know it's been about a year now since you set up some of your development offices globally. I'm wondering if you have any comments on how -- any surprises or experiences that you'd share in your key regions? Anything that's surprised you so far in that process?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [47]

--------------------------------------------------------------------------------

No big surprises. I think what we're seeing -- I mean, number one, we're happy to see the teams really gelling in each one of the markets, particularly the Toronto, Houston, London offices. The Asian team is still coming together, but I'll talk about that in a second. But in terms of Europe, what we're starting to see, which is maybe a bit of a surprise of what the team is starting to focus on is onshore renewables, which we, probably, a year or 2 ago, would have not been -- would not have been a priority. So there's some larger-scale onshore renewable opportunities that are of interest in Europe, and we're currently diligent in seeing some of those opportunities. Obviously, we'll have more to say if we decide to proceed with any of them.

In terms of the -- Latin America, you're well apprised in terms of what our broader plan is in Mexico, which is initially with the La Lucha project. But looking at a -- building out of broader portfolio of gas-fired and renewable power assets over time that we would market directly to commercial industrial customers through a qualified supplier and perhaps one that we actually own and manage. And then -- but there are some other opportunities popping up through Latin America that are of interest. And as you know, we've been on a transmission auction before. So we're still continuing to look at transmission opportunities in Latin America. But also looking for other sources of, I guess, high-quality or higher quality revenue as well as cash flows.

And then moving to the Toronto group, I think they're continuing to look for Canadian opportunities, which -- it's obviously not as robust a market for new renewables as it would have been 5 or 6 years ago in Canada, but they're still looking for opportunities in Canada. But their focus recently has been more on U.S. opportunities. And I think there are some interesting areas of interest in the U.S. It's a very competitive market for renewables, as you know. And with returns in a lot of markets and the risk profile, a lot of projects in a lot of the markets in the U.S. being tough for us to kind of wrap our brains around, but we have started to see some markets where we can see some attractive economics. So we'll see where that goes. And that's about it.

Our focus in Asia has been primarily on staffing up the offices. We've got a new person in the Seoul office, a senior former investment banker, but he has done a lot of work throughout Korea, a Korean national, and also has some experience in the rest of the region. And we're looking forward soon to opening up a sister office in Tokyo to the Seoul office.

--------------------------------------------------------------------------------

David Quezada, Raymond James Ltd., Research Division - Equity Analyst [48]

--------------------------------------------------------------------------------

That's great color. And then maybe just a follow-up question on Korea. I see -- well, at least one of the initial projects looks like a floating turbine project. Is that a technology that you might look at today? Or is that maybe still a little bit too early stage?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [49]

--------------------------------------------------------------------------------

No, no. It's a technology that we're looking at, certainly, in both Japan and Korea and trying to determine how quickly the market will move towards floating. And as you point out correctly, there is a proposed floating project in Korea already. It is also -- there's a lot of activity along -- in California around proposed floating projects, so we're tracking that closely. So yes, I think it is something that we'll certainly develop. It's just a question of how quickly it will develop, but our -- certainly our North American and our growing Asian team is very focused on it.

--------------------------------------------------------------------------------

David Quezada, Raymond James Ltd., Research Division - Equity Analyst [50]

--------------------------------------------------------------------------------

Great. Appreciate it. And all the best in your future endeavors, Paul.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [51]

--------------------------------------------------------------------------------

Thanks, David.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question is from Ben Pham with BMO.

--------------------------------------------------------------------------------

Benjamin Pham, BMO Capital Markets Equity Research - Analyst [53]

--------------------------------------------------------------------------------

On Taiwan, can you give us an update on where the -- how the market is developing from an offshore financing perspective? Look at Orsted, it has been tapping in the market. How do you think with the port access and everything that's needed to get to your connection date in the mid-part of the next decade?

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [54]

--------------------------------------------------------------------------------

Yes. Maybe on the financing, Paul, yes.

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [55]

--------------------------------------------------------------------------------

Yes. I mean we've been sort of tracking what's going on. But again, our financing is out a number of years. So whatever is true today could be very different in a couple of years. I think we're encouraged generally to see the nonrecourse financing coming into the market and being in sufficient quantities to fund the projects that are being built. And we don't necessarily see anything that would thwart that. As a matter of fact, if trends continue, then the market should become a little more liquid and sort of more well worn if you will. So I mean we remain optimistic that that's coming according to plan.

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [56]

--------------------------------------------------------------------------------

Yes. And then I mean the -- it's not a significant concern around ports and harbors around the supply chain. The local content plan or the obligations under it are, I think, less prescriptive than we had initially assumed in terms of having full and complete contracts in place. So we're trying, obviously, to allow ourselves as much flexibility to continue to take advantage of any cost declines as we move towards what will not -- will be a financial close in some time in 2022. So we do -- we're trying to avoid locking ourselves into prices now to the extent that, we believe, there'll be some decline in cost curve going forward.

--------------------------------------------------------------------------------

Benjamin Pham, BMO Capital Markets Equity Research - Analyst [57]

--------------------------------------------------------------------------------

Okay. And maybe on the balance sheet. As you guys are endorsed this DeBu wind and service, and a pretty steep amortization schedule on these offshore wind projects, which makes a lot of sense. But each year that passes by, you got massive deleveraging that's occurring. So is there a point in time where your debt is just so low relative to your useful life that there's some sort of recapitalization that you can look at?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [58]

--------------------------------------------------------------------------------

Well, I think, generally, we size the debt so that -- and the amortization schedule to maintain the minimum coverage ratio as required by the project finance lenders which is probably a long-winded answer to saying, probably not any kind of recap during your initial term.

Now with that said, all of our projects have the type of debt that is refinanceable. And to the extent that things such as spreads or terms and conditions or other elements of the financing change, we either can go back to the current lender group or, I guess, in a more robust case, look at some type of a new financing on the project. We're always looking at that as really a cost-benefit type of discussion that we have ongoing.

One of the things that you notice we did with Deutsche Bucht and -- I'm sorry, with Gemini and Nordsee One, was as we had term conversion, we also did a bit of repricing and restructuring of the loans into our favor just because of the nature of having a completed project over one that's about to go into construction. We'd expected that there'd probably a similar path for that for Deutsche Bucht as well. But longer term, there's probably some value that could be had from looking at different financing options, but they all come with them a certain amount of expense to chase it to close it. And obviously, some risk of markets as you do that. So all that has to go into a mix.

Where you might see something interesting coming in and is to the extent we've got useful life beyond the original financing and the contracts on the project is if we recontract, and we may be able to pull some cash out by doing a recap from refinancing on those projects. But that's sort of later down the timeline for us.

--------------------------------------------------------------------------------

Benjamin Pham, BMO Capital Markets Equity Research - Analyst [59]

--------------------------------------------------------------------------------

Okay. Well, that's a bit beyond your time at Northland. Maybe just on the -- lastly, on the FX side of things, a bit of a weakness in the euro. Could you remind us, I know you guys -- I think you said about a $5 million hit to EBITDA, but I think you have some hedges in place. I mean did you get a free cash flow impact from currency moves?

--------------------------------------------------------------------------------

Paul J. Bradley, Northland Power Inc. - CFO [60]

--------------------------------------------------------------------------------

Very little. I mean we generally hedge the free cash flow out. Obviously, we don't want to do it to the highest level of production because being over hedged can hurt you as much as being under hedged. But we generally hedge out where we expect to come out on production times the revenue minus your local currency costs.

EBITDA is just farther up on the income statement or a non-GAAP income statement. But you don't obviously hedge the EBITDA, so the EBITDA is going to wear the full swing on the currency. But your free cash flow, which is really what matters, is generally pretty stable.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mike Crawley, Northland Power Inc. - CEO & President [62]

--------------------------------------------------------------------------------

Okay. Well, thanks to everybody for joining us today. We're going to hold our next call following the release of our third quarter results in November. Thank you.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

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