Northland Power Inc. (NPIFF) Q1 2023 Earnings Call Transcript

Northland Power Inc. (OTCPK:NPIFF) Q1 2023 Earnings Conference Call May 10, 2023 10:00 AM ET

Company Participants

Wassem Khalil - Investor Relations

Mike Crawley - President and Chief Executive Officer

Pauline Alimchandani - Chief Financial Officer

Conference Call Participants

Sean Steuart - TD securities

Nelson Ng - RBC Capital Markets

Rupert Merer - National Bank

Nicholas Boychuk - Cormark Securities

Ben Pham - BMO

Mark Jarvi - CIBC

Naji Baydoun - iA Capital Markets

David Quezada - Raymond James

Operator

Welcome to the Northland Power Conference Call to discuss the 2023 First Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 10, 2023 at 10 a.m.

Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Financial Officer; and Wassem Khalil, Senior Director of Investor Relations and strategy.

Before we begin, Northland’s management has asked me to remind listeners that all figures presented are in Canadian dollars and to caution that certain information presented and responses to questions may contain forward-looking statements that include assumptions and are subject to various risks. Actual results may differ materially from management’s expected or forecasted results. Please read the forward-looking statements section in yesterday’s news release announcing Northland Power’s results and be guided by its contents and making investment decisions or recommendations. The release is available at www.northlandpower.com.

I will now turn the call over to Mike Crawley.

Mike Crawley

Good morning, everyone. Apologies for my voice. I think it hopefully will clear up as we move through the call. Thank you for joining us today for our first quarter earnings call in 2023. We are going to start with reviewing our financial and operating results for the quarter with our prepared remarks and look forward to addressing questions from analysts following that.

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. Our rigorous adherence to our health and safety protocols ensures the safety of our employees, while also allowing us to maintain high levels of availability at our facilities. To further strengthen our commitment, we brought on a new global Head of Health and Safety, Jakob Nielsen in the last month. Jakob has over 20 years experience in renewable power, health and safety and is currently the Volunteer Chair of G2, a global offshore wind safety organization.

So, we are off to a good start this year with first quarter performance that was consistent with our expectations. We saw good performance across our facility and in particular at our offshore wind facilities, which tend to have stronger performance in first quarter anyway. We have also made good progress on our strategy, including securing new projects in our home market of Canada.

Now, looking at the headline numbers in the quarter, we delivered adjusted EBITDA of $352 million in the first quarter along with adjusted free cash flow per share and free cash flow per share of $0.72 and $0.62 respectively. Compared to the same period in 2022, our financial results were lower primarily due to the non-recurrence of the unprecedented spike in market prices realized in the first quarter of 2022 at Gemini and with the Spanish renewables portfolio. That aside, we generated good results this quarter and as noted in our press release yesterday, we are reaffirming our full year 2023 financial guidance. Pauline will provide a more detailed look into the financial numbers later in the call.

Reflecting on the quarter, I am very proud of the efforts and results that our teams delivered to continue to position Northland at the forefront of the global energy transition. The global emphasis on energy security and the need to accelerate the move from fossil fuels to renewable energy sources will be a big driver for our business. A substantial build-out of renewable energy will be needed over the next decade to facilitate these objectives. Positioning ourselves in the right markets has been one of the key drivers for our growth. We are already in some most attractive markets for offshore wind, both mature markets like Germany but also emerging offshore wind markets like Poland.

With onshore renewables, we are focusing our efforts to select key markets with ambitious renewable energy targets and robust dynamics and support growth. This includes markets like Spain, Colombia, Poland, United States, and Canada. Now, speaking of Canada, we have brought more focus to our home market acquiring our first utility scale battery storage project in Ontario, named Oneida and it positions ourselves in the battery storage market going forward, which is expected to grow significantly. At 250 megawatts, it will be the largest battery storage project in Canada and among the largest in North America. In the quarter, the project has successfully executed a 20-year energy storage facility agreement, a revenue contract with the independent electricity system operator here in Ontario. The agreement will provide fixed monthly capacity payments for the majority of the project’s revenue with the remainder of revenue coming from the wholesale market.

Along with our partners, we signed a credit agreement with an external lender to allow the project access to approximately $700 million of senior and unsubordinated debt as the project advances towards achieving financial close. While we expect this to happen within the second quarter, which we expect to happen, it’s in the second quarter and full operations are expected in 2025. We also secured a 1.6 gigawatt solar portfolio and development team in Alberta, the most active renewable power market in Canada. The portfolio provides us with a significant position in the province and an experienced team on the ground to complete the development of those assets and more going forward across Canada.

Turning to our existing development portfolio of Hai Long, early construction work and fabrication activities continue. The project received its major construction permit as planned, which allowed us to commence within water construction activities in April. We continue to advance the project financing, moving towards financial closings here. The final credit approval process was launched in March to secure the necessary funding commitments from local and international lenders and export credit agencies.

Furthermore, in the quarter, we successfully executed an amendment to the corporate power purchase agreement that we signed last year for Hai Long 2B and 3 that results in the expansion of the CPPA tenure by 2 years from 20 to 22 years. At our Baltic Power offshore wind project in Poland, the project is progressing well towards financial close also expected in 2023. We are in the process of finalizing contracts with suppliers for key components for the facility. As mentioned previously, the currency for the project CfD has been changed from polish Zloty to euros and the indexation based here was moved up 1 year to 2022, which provides economic benefits to the project. The continued inflationary price environment that we have seen over the past year is expected to result in the total cost for the project, just exceeding the upper end of our previous guidance of $5 billion to $6 billion. However, the increase in project costs is expected to be almost fully funded by non-recourse debt and the CfD indexation act economic value. As a result, Northland’s equity funding expectations and returns remain in line with prior disclosures.

In Scotland, following a competitive process in 2022, we signed a definitive agreement with ESB, a leading energy company in Ireland for 24.5% interest in our 2.3 gigawatt Scott wind offshore wind project. Partnering with ESB provides an opportunity to bring in a long-term partner that is very experienced and complementary to Northland to help build on the development progress, we have already made. ESB were selected primarily because of their extensive experience in the offshore wind sector with investments in to energy and Inchcape both in Scotland, as well as Galloper in England and the 5 estuaries early development stage project. Northland will continue to lead the development of the project working with ESB, who will bring the benefit of their experience in Scottish Offshore Wind Development, permitting and construction.

Now, moving to South Korea, a major emerging offshore wind market we have been awarded electricity business license or EBLs for the entire one gigawatt Dado ocean project, and work continues on securing the final 200 megawatts of licenses for the 600 megawatt Bobae project. Turning to our construction activities, our La Lucha solar project as well as in New York Onshore Wind projects are progressing towards commercial operations this year. At La Lucha, the project was connected to the Mexican grid and energize. We are now coordinating with the relevant authorities on the final procedures to achieve full commercial operations.

Now lastly, at our Thorold natural gas facility in Ontario, Canada as part of north times strategy to optimize existing operating facilities to impact – adds value and performance. We plan to carry out an upgrade of the 265 megawatt facility. The optimization will result in an increase to the electricity generating capacity of the facility by 23 megawatts, and will help support the Ontario government’s energy transition and security policies. As part of our optimization facility in Northland was awarded a 5-year extension of the PPA for Thorold by the IESO from 2030 to 2035, which will provide an additional fixed contracted revenue stream for Northland. The upgrade is expected to be in service by the end of 2024.

Now with that, I am going to turn the call over to Pauline for a more detailed review of our financial results.

Pauline Alimchandani

Thank you, Mike and good morning everyone. Last night, Northland Power released operating and financial results for the first quarter of 2023. We delivered good financial performance in the quarter generating results that were relatively in line with their expectations and positioning us to reaffirm our full year financial guidance.

In the quarter, we generated adjusted EBITDA of approximately $352 million, representing a decrease of 16% or $68 million compared to the same period last year. Year-over-year, results were lower, primarily due to the non-recurrence to the unprecedented spike in market prices realized in the first quarter of 2022 at the Gemini facility and the Spanish portfolio. Realized adjusted EBITDA from Gemini in the first quarter of 2022 was approximately $31 million higher compared to the first quarter of 2023 largely because of higher market price. Similarly, adjusted EBITDA in the Spanish portfolio was $11 million higher in the first quarter of 2022 compared to 2023. With respect to our free cash flow and adjusted free cash flow, Northland generated approximately $155 million and $180 million in the quarter respectively. This compares to $174 million and $192 million in the same period a year ago.

Similar to adjusted EBITDA, the significant factor contributing to the year-over-year decline was due to the non-recurrence of the unprecedented spike in market prices realized in the previous year. This was partially offset by gains from foreign exchange had settlements and lower finance costs resulting from the principal repayments of facility level loans that we executed in the fourth quarter of 2022. On a per share basis, we generated adjusted free cash flow $0.72 and free cash flow $0.62 in the quarter, compared to $0.84 and $0.77 respectively for the same period in 2022.

I want to take a moment to discuss the revenue mechanism for Spain portfolio. For a given year, both merchant revenue and the corresponding band adjustments are recognized in our adjusted EBITDA, adjusted free cash flow and free cash flow measured. For 2023, the regulators posted price increase to €208 per megawatt hour from €122 per megawatt hour in 2022. However, during the first quarter of 2023, full prices were trending lower than the posted price, averaging €98 per megawatt hour, resulting in favorable band adjustments, which only partially offset the lower than expected merchant revenue. For 2023, we have reforecasts our expected pool prices using the actual pool prices realized in the first quarter and the forward curve for the remainder of the year. Including the expected band adjustments in 2023, which will compensate for only a portion of the lower revenues, we are now expecting adjusted EBITDA from the Spain portfolio to be $16 million lower and free cash flow to be $23 million lower relative to our original expectations, when we set guidance. In spite of these changes, we are reaffirming our full year 2023 financial guidance that was provided in early February.

As of March 31, 2023, Northland had access to over $580 million of available liquidity, comprising $74 million of cash on hand and $506 million of capacity in our revolver to help fund our committed projects. The decrease in our position from the prior quarter is a resulted capital investments into our Hai Long in Baltic Power offshore wind projects, as both projects are being kept on schedule in order to proceed to financial flows. We continue to prudently manage our balance sheet taking proactive actions to further enhance our cash flow, bolster our corporate liquidity and ensure that Northland remains in a good position to fund our committed projects. We intend to utilize non-recourse project level financing as the primary sources of our funding with our equity requirements expected to be supported by cash on hand, proceeds from sell downs, asset sales ease the corporate hybrid threat and to a lesser extent equity issuances.

During the first quarter, we took a more moderated approach to our ATM program. In aggregate, we issued approximately 1.2 million common shares under the ATM program for gross proceeds of $42 million. We also completed the extension of the maturity for asses non-recourse credit facility from December of 2024 to March of 2026 at effectively the same interest rate. The asset facilities denominated in Canadian dollars, and Northland has hedged the principal amount 100% against the Colombian Peso. As part of the expansion, the company realized the hedge settlement gain of $22 million, which offset a weaker Colombian Pesos since the loan was originally restructured in December of 2021. The cash gain will be equally recognized in Northlands adjusted free cash flow and free cash flow over the four quarters of 2023 and it was already included within our 2023 financial climate.

Lastly, concurrent with the extension of the PPA for our Thorold natural gas facility, we completed a restructuring of Thorold’s project debt resulted in an additional financing of $26 million to finance the plan to upgrade. The restructuring also resulted in a decrease in the all-in interest rate to 6.4% from 6.7% and a reduction of certain LC requirements. This transaction was a creative to our financial metrics.

Turning to 2023 financial guidance as discuss within our results last night. We are reaffirming our full year financial guidance. For adjusted EBITDA, we expect to generate between $1.2 billion to $1.3 billion this year. For free cash flow per share, we expect the range should to be between $1.30 to $1.50 well, for adjusted free cash flow, we expect to generate $1.70 to $1.90 per share. As a growth, company with a significant pipeline of development projects, Northland is committed to unlocking value by deploying early stage investments or [indiscernible] to advance their projects. As such in 2023, we still expect to deploy development expenditures of approximately $100 million or around $0.40 per share, to fund expenditures to advance secured projects. This would include expenditures on our Scotland offshore wind projects; the Korean projects the recently acquired Alberta solar portfolio, in addition to other Canadian-U.S. opportunities.

I would like to point out that our 2023 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell down proceeds and as such net proceeds and sell downs will increase their reported free cash flow in the event, may occur in 2023.

Before I turn things back over to Mike, I want to take a moment to speak to our ongoing finance activities underway. The project finance projects for each of the three projects that are currently expected to achieve financial close this year in Hai Long, Baltic Power and Oneida are currently progressing and in aggregate estimated to match your requirements for $12.5 billion of project finance debt this year. All three processes are an active work streams at various stages with resources and efforts focused on securing all necessary milestones and conditions president to achieve financial close. Oneida is nearing the right features to achieve financial close will Hai Long the final credit approval process was launched in March to secure the necessary funding. The Baltic Power, we are working through the due diligence and documentation process to begin to secure the necessary credit approval.

With respect to interest rates and foreign exchange exposures in-line with both our risk management strategy and our expected project finance terms, we expect to hedge your interest rate exposure prior to or shortly after achieving financial close on each project. In addition, any construction costs not met with a funding currency will be hedged by financial close. Collectively, the project finance processes are being supported by a diverse group of Northland project partner, lenders including global financial institutions, local lenders, export credit agencies, government infrastructure lenders and multilateral agencies. We are encouraged by the diversity of the financial institutions globally, participating in the financing processes to support both Northland as a sponsor and our projects.

I will now turn the call back over to Mike for his concluding remarks.

Mike Crawley

Thank you, Pauline. As Pauline mentioned, we had a very good start to the year and looking ahead. We have some big milestones this year to further accelerate our growth. Our teams continue to work hard to achieve these milestones, and we look forward to updating you on our achievements that will set us up for another strong year in 2023. As I stated before, we have a large development pipeline in one of the benefits of this, is that we can be selective and disciplined in which projects we advance.

This concludes our prepared remarks. We would now be happy to take your questions. Shawn, please open the line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Sean Steuart with TD securities. Please proceed with your question.

Sean Steuart

Thank you. Good morning, everyone. First question on Baltic Power, I think the wording you used in the prepared remarks is the revised budget will be just higher than the guidance you gave earlier this year. Can you give us an order of magnitude of what you expect there? And presumably, when you reset the budget earlier this year, there were some contingencies built in any specific details on what is driving the increase, and if you can give us some context and how much that might be?

Mike Crawley

So in the process of converting the preferred supplier agreements or select supplier agreements that locked in the terms and the commitments in the fabrication slots with each of the suppliers, which were signed last year as we converted them over the last 3 months into full contracts, there has been a combination of some clarifications on scope and some identification of cost increases due to inflation over the last year by some of the suppliers. So we have been negotiating to what we view as an acceptable resolution on that. And that takes us to, as I said, in my remarks, just over the guidance that we gave on $5 billion to $6 billion in total capital costs. But as I said, based on the changes in the CfD and the amount of capacity in the project financing, our equity returns will remain as we have got at the markets.

Sean Steuart

Okay. So 5% increase is that I don’t know you don’t want to put a number on it necessarily, but if you are saying just it’s single-digit, I presume in terms of the budget increase?

Mike Crawley

It’s a small increase above the threshold, that’s why I said just.

Pauline Alimchandani

I mean, the most important – the most important thing is that we are in active processes with the lenders and we have the level of interest and the liquidity to support the cost increase through project finance that which is the most important element of things as we continue to manage the negotiation.

Sean Steuart

Got it. Okay. Thanks for that. And then, Pauline, with respect to the funding position, so you exited the quarter with $580 million. You have funded $929 million towards Baltic Power and Hai Long. I think last quarter you suggested that the total equity contribution for the two offshore projects in Oneida was $2.2 billion of equity. Is that number still in the ballpark? And then if we are looking at a, I guess, $500 million to $700 million funding need, can you speak to hybrid debt markets, which are a part of the funding plan? How that’s evolved over the last quarter and any indications on the scale that you might want to raise in that market?

Pauline Alimchandani

Yes. So I mean, so far our equity – our equity needs have not materially changed from what we would have disclosed that Adam yesterday and corporate bonds are a part of the funding solution there. And we as we have advanced along that process, we still believe its part of the funding solution and something that we will be able to execute this on this year.

Sean Steuart

Okay. Okay, that’s all I have for now. Thanks, guys.

Pauline Alimchandani

Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Nelson Ng with RBC Capital Markets. Please proceed with your question.

Nelson Ng

Great, thanks. Just a follow-up on Sean’s question on in terms of funding, so, on the ATM I know that you only issued like $1.2 million shares year-to-date and the average price was about $34 per share. I guess, big picture, is there a – is there a price where you kind of turn off the taps in terms of utilizing your ATM?

Pauline Alimchandani

So, I think big picture where we are looking to get to financial flows in our projects this year. We have closed out the large majority of the funding needs to position us and the teams to stay focused on achieving financial flows. I think as we noted in our disclosures, we have other sources of funding before equity. Although equity, I am not going to say is not part of the plan, but it is to a lesser extent. So we are obviously working on other initiatives through other cell downs, hybrids, after-sales, other avenues and I think for what we have said before, I don’t think anything has materially changed.

Nelson Ng

Okay. Got it. Thanks, Pauline. And then another question is about the ScotWind sell down. So can you guys give any color on whether you received any proceeds? Whether you got some of your deposit back? Or like how the development costs are being allocated going forward?

Mike Crawley

Let me – do things on the ScotWind fell down relevant to your last question is further evidence of us, looking at other funding sources for our projects beyond equity issuance. So as you know we did sell down on Hai Long last year, and now we’re moving forward with a second sell down. And its obviously part of our strategy going forward to fund projects at the asset level. With respect to the proceeds from the sale, unfortunately, under the terms of the agreement with the Crown Estate fallen, we can’t give any more detail than what we’ve given already, certainly not at this point.

Nelson Ng

Okay, alright. Thanks, Mike. I’ll leave it there and get back into queue.

Operator

[Operator Instructions] And our next question comes from a line of Rupert Merer with National Bank. Please proceed with your question.

Rupert Merer

Thanks. Good morning, everyone. So looking at your financial results for the quarter on the offshore wind, do you recognize the lower net average price, then your average contract price. Can you discuss the dynamic around regulatory adjustments who may have seen in the quarter and how much of a headwind that was to result?

Pauline Alimchandani

Yes, so in April of every year, the Dutch authority publishes the P&I factor. So up until December calendar year financial results, it is an estimate. So usually, that estimate has come in fairly close with what we’ve recorded in our financial statements. However, this year due to the unprecedented spike in market prices, we were effectively earning market prices and not the FTE. So the – when they did the revision to that the P&I factor ended up having a more material results this year than it has in prior years, which will also not be reoccurring, because it was unprecedented what it occurred. So in the quarter, there was an adjustment for approximately $10 million for free cash flow, that came through in the Gemini results.

Rupert Merer

Okay, great. Thank you.

Pauline Alimchandani

So that would be like we just that’s the price that you’re seeing. Yes, but it’s non-recurring.

Rupert Merer

Okay. The Hai Long contractive increase that 2 years. Does that mean that when you’re looking at debt financing on the Hai Long that you will look for an amortization, that’s 2 years longer as well?

Mike Crawley

It supports the amortization that we have in the debt financing. So that was one of the drivers for moving forward with it. It also offers a modest increase in the equity return.

Rupert Merer

And when you look at that project, one of the remaining hurdles to getting to financial close, and if we were to compare it to the cost increases, and what you’ve done to lock in costs in Baltic. How does Hai Long look? How much certainty you have in your cost there now?

Mike Crawley

Hai Long would be further advance in Baltic and other in so far as all of the preferred supplier agreements have been already converted into full contracts. So further ahead in that respect. The remaining milestones towards financial clothes really are just going through the credit approval processes, which is underway with the international banks and local banks, and the approval processes with the ECA. So that’s well underway, as we said in our opening remarks, it was launched in the middle of March.

Pauline Alimchandani

Right, that the major variables that are – last are financing costs and hedging, which we’re looking to lock down fairly soon.

Rupert Merer

Okay, very good. I’ll leave it there. Thank you.

Operator

[Operator Instructions] And our next question comes from a line of Nicholas Boychuk with Cormark Securities.

Nicholas Boychuk

Thanks. Good morning. Coming back to Rupert question on the installation of Baltic Power, I am wondering if you can expand a little bit on some of the components or items you saw that and elaborate on whether or not there’s any other read throughs we should be looking into for other projects, onshore or offshore. Just trying to figure out if the inflationary curve has already rolled over if that was a year-over-year adjustment?

Mike Crawley

It would have been across a few of the packages. So, I wouldn’t get into kind of naming the different packages, particularly since we are – this is an active commercial discussion right now. So, but it would have been across a few of the packages that there would have been scope changes as well. So, it’s not just inflationary impact. With respect to a read-through on the sector, in general, I would think a read-through is that there have been certainly inflationary pressures over the last year. I don’t think they have completely gone away yet.

Nicholas Boychuk

Okay. That makes sense. And then shifting to Oneida, can you kind of remind us what the impact of the capacity payment is, like, does that alone get you to your base case return, or are you reliant on that smaller merchant component, which I think was previously communicated at around a quarter of the sort of revenue generation for that profile. And second part does NPI maintain the ability to operate the discharge of that facility, are you basically handing over the controls to the grid in order to manage the battery when they need it?

Mike Crawley

We manage the dispatch and discharge of the facility. The returns that we look at on the project include both merchant revenue assumptions and the underlying capacity payment, which is a significant majority of the cash flows under the – with the project. And may think at a later stage, we will be able to give a bit more detail on the makeup of the different revenue streams on the project, but we are not in a position to do that quite yet.

Nicholas Boychuk

Okay. Understood. Thanks Mike.

Operator

[Operator Instructions] And our next question comes from a line of Ben Pham with BMO.

Ben Pham

Hi. Thanks. Good morning. I wanted to make a stroke on Baltic Power, I know you have answered it, so far in terms of the direction of cost increase? Can I clarify, I mean when you announced the revision earlier this year, you mentioned some offsets as the currency and inflation to offset that initial increase. And then now it looks like there is potentially awkward swing. Is there an additional offset there that I may have missed, or is this more to returns are the same, but there is still something lower than where you thought it was early in the year?

Mike Crawley

No. So, we have – you are right that Euro the ability to make the CfD in euros, instead as Lottie was discussed, announced earlier. What we knew is that would have a positive impact on the project financing. We didn’t quite know exactly how that would shake out in terms of the project financing. So, that was a bit of a dynamic that we have been tracking and understanding better. Secondly, we knew that the reference date on the indexation was moving back 1 year. And we – so we knew that was going to be a benefit. What we have been working through is just calculating the scale of that benefit to the project. And we understand it much better now. So, based on our current model, as I have said, we were just above the guidance that we gave on the capital costs, but we are in line with the guidance that we gave on project returns. So, we are deploying from where we were at originally on the project, we are deploying more capital. But we believe securing still the same equity returns.

Ben Pham

Okay. It makes sense. And can you talk about maybe the returns or target returns you are seeing in an area such as Alberta or even Ontario solar versus some of the returns that you are seeing in offshore?

Mike Crawley

Sorry, I think we would still expect to see, on average better returns on offshore wind than you would see an onshore solar. But you have to get a risk adjust that return as well to some extent with the amount of capital is tied up on those projects over a period of time, the execution risk. So, if you look at the portfolio on a portfolio basis look at all of our development in assets, we would see some assets getting a lower return, but having a lower risk profile, which would be solar still being materially accretive and then look at offshore wind getting a larger return and more meaningful capital deployment. But obviously with the more and more execution risks that we have to properly manage.

Ben Pham

And do you may just – and my last one is, I know you are seeing most of the friction on CapEx in offshore and that’s what you are seeing today. But do you think there is potential with whether it’s new turbines or inflation using that maybe you could actually be in a money, they made their money or maybe CapEx is going to trend lower, just start to actually put these projects in service…?

Mike Crawley

I think it was in – will the CapEx be lower once we put them in service, our CapEx is maybe I have misunderstood. But our CapEx is obviously, as you of course know locked in at financial close, when we lock all of the elements of the project down. So, the capital costs won’t benefit or the project won’t benefit from any increased or enhancements in turbine technology coming up over the next few years. As you have probably seen that there is I mean we are deploying a 15 megawatt turbine on Baltic Power, there is now 16 megawatt, 17 megawatt and 18 megawatt, even 20 megawatt turbines under development. All of that bodes well for offshore wind over the next decade. And that’s why we think over the next decade, offshore wind will continue to be a really interesting sector with more demand and there are projects available around the world. And more projects to build than there are talent to build them. So, we think the talent that we have is a strategic advantage. And the knowledge that we have internally is a strategic advantage in terms of bringing those projects forward. So, I would say that’s the kind of longer term view. And if you look at projects like Scotwind and what we are doing in Korea, that’s why we are very bullish on those projects. And I think they are very important parts of our portfolio over the next 2 years. So, our view is that you got to be very, very careful and very cautious, because it’s not just inflation, it’s also supply chain constraints within offshore wind, which I think will get resolved, but they don’t get resolved overnight. So, I think you got to be very, very cautious.

Ben Pham

Okay. Alright. Thank you.

Operator

[Operator Instructions] And our next question comes from the line of Mark Jarvi with CIBC.

Mark Jarvi

Thanks. Good morning everyone. I just wanted to come back to the Baltic Power one more time here and just in terms of get offset. So, Mike, you brought up going back 1 year on the indexation move to Euro. Also do you get indexation on Polish CPI instead of the Euro Zone and is that favorable and maybe just kind of quantify what these positive offsets are to the ultimate contract price and expectation for revenues at CPI is?

Mike Crawley

So, the indexation moving back a year is obviously very positive given what’s going on in the last 2 years with inflation. Euro, zloty to euros brings in more liquidity and more on the project financing. So, all of that is positive for the project. On the CPI, the CPI, it’s fairly clear that it is on a Polish indexation. Going forward, certainly a lot of our – we still have costs in in Polish zloty in terms of some O&M costs going forward. So, I think that’s probably the rationale for that. So, all of that together puts us in a place where our returns remain impact.

Pauline Alimchandani

Yes. The one thing I would say too is, just whatever we use is an assumption. I mean as you go through the PF process, as you can imagine with the number of global lenders that we have plus multilateral that goes through a much more rigorous process, we all align on the assumptions and how it’s going to be structured in the financing itself. So, we are more advanced on that now as well. So, can be a bit more certain with what assumptions we are using.

Mark Jarvi

Would you be able to call them in terms of where the pricing adjustment would be today, relative to where you thought it might be two quarters ago?

Mike Crawley

We wouldn’t disclose that at this point.

Mark Jarvi

Okay. And the common terms, Pauline about the hybrids and sell downs and asset sales? You commented on asset sales, are you more open to the idea of selling operating assets today than maybe you were a few months ago, or a couple quarters ago?

Pauline Alimchandani

Selectively and if it’s – as it’s in line with our strategy. They are not moving on our strategic objectives, but definitely I think we are always evaluating whether the whole decision didn’t make sense for where our portfolio has grown in the last couple of years.

Mark Jarvi

Okay. And then lots of headlines around the Nordsee cluster with the partnership with RWE around starting to work on supply agreements because of updated use in terms of timing of like when you start to get close to enough idea, I suspect that’s dependent on getting a corporate PPA just sort of updated use on whether or not you see that coming to fruition in terms of ITT in the next couple quarters and how the returns are shaping up on that Nordsee cluster project?

Mike Crawley

Yes. I mean financial flows on Nordsee cluster first phase is in late 2024. Second phase is late 2026. The procurement is well advanced on the first phase now. In other words, preferred supplier agreements are being negotiated and finalize the ITT process and we go out and run your first round, second round, baffle round is all completed, was wrapped up in January, February. So, our view on and the understanding of the capital costs in the project is now crystallizing. And we also have improving view on what the revenue contracts are what the revenue contract to be secured out in the market currently as well. So, our understanding of the project economics given all that’s going on in the 1.5 years in offshore wind in the world with macro-economic swings, as is now firming up on the Nordsee cluster.

Mark Jarvi

And would you say it’s gotten more positive or as expected…?

Mike Crawley

I think we are – it’s crystallizing. I didn’t say it is crystallized. So, more to come.

Mark Jarvi

And when do you think you would have some clarity on contracting? Is that something can be done in the next couple of quarters?

Mike Crawley

Yes, easily.

Mark Jarvi

Okay. Alright. I will leave it there. Thanks.

Operator

[Operator Instructions] And our next question comes from the line of Naji Baydoun of iA Capital Markets.

Naji Baydoun

Hi, good morning. I just want to start off on unfold, and I think in the past, you have noted, sort of maybe a reluctance to invest in new thermal. So just wondering, what makes this project different would be the extension that you just got in Ontario?

Mike Crawley

Yes. I mean we have been very I think consistent and clear that we are not going to invest in any new gas fired, or any thermal generating facilities moving forward or deploy new capital in any new facilities. With respect to this, this is an upgrade of the facility, which is something that we always look at is whether there is an opportunity to upgrade or to enhance the value in any facility that we have. It is responding to unexpressed need in Ontario from the system operator for additional capacity. And that additional capacity is needed to better optimize the renewable fleet as well as provide the backup energy for the system, when the renewable fleet is not operating. So, I mean it’s consistent with what we tell our facility operators all the time is, always look for more value, how can you create more value in the facilities that we have. That is the most efficient capital to deploy.

Naji Baydoun

Okay. That’s very clear. And just on that Scotwind, can you give us a little more details about the partnership, understanding and disclose a lot of details about the agreement for now, but just on the sort of the partnership going forward, who is going to be responsible for what, does it change your contracting at all for those projects

Mike Crawley

Yes. You broke up a bit. This is Scotwind, right?

Naji Baydoun

Yes.

Mike Crawley

Yes. Okay. Thanks Naji. So, I mean we are really excited about this partnership. ESB, obviously a solid partner from the balance sheet standpoint, given their position in the Irish electricity sector. But they have got lots of experience doing onshore renewables in Scotland, and doing offshore renewables in Scotland, including currently with the interstate project, which is at an advanced stage of development, energy, that narrow girth, which is in the final stages of construction. So, they have been through everything with all the regulators, all of the permitting agencies, communities on the other coast that filled with Scottish communities. So, we think they bring a lot of understanding of how to move these projects forward and then what some of the risks and some of the things that we should be aware of. So, in our view, number one, it brings on a have a partner with a solid balance sheet for the projects and 2.5 gigawatts of projects, including the floating one. Secondly, it brings on a partner that really understands development in Scotland. We know we developed, and we operate assets in Europe, but Scotland is still a new market, every market has its unique characteristics. So, bringing on somebody that knows that market is really important. And we also, the teams worked really well together. So, I mean that it was a long process with multiple bidders, formal process that we ran to select a partner. So, we spent a lot of time with the team at ESP. And we worked very well together. So, that’s an important piece as well, because it’s going to be a long-term relationship, of course over 25 years to 30 years on these projects with them. So, all of that is why we are excited about it. And then one last thing is that they also were recently awarded a floating sight of their own in Scotland. So, they are going to be learning on their own as well about floating. So, I think that, again, gives us a bit more scale when we look at our floating project, they will have one as well. So, it’s I think we will – it definitely de-risks the execution of the project. And it’s going to make these projects even more successful, I think.

Naji Baydoun

It sounds like it’s quite similar to the when you expanded the partnership with RW in Germany kind of enhances the potential values on those developments. Maybe just one last quick question on the sell downs. Scotwind is completed, I think you were mentioning earlier that there is another process that you might be looking to pursue this year. Any updates on that?

Pauline Alimchandani

So, I mean maybe I will talk a little bit about how we have set ourselves up internally. So, we have sort of created one overall transactions team now that supports the globe and the business unit. And so at all times, they are looking at supporting sell downs in each of the business unit potential for asset sales and capturing value from where we have extracted value from our projects. And overall, I think still looking at opportunities for us to grow through M&A. So, that whole transactions team is active on, I would say a number of different files right now, so which would include meltdowns, but it also includes other things. So, I think we are sort of making sure that we are proactive and working on things that are not necessarily 12 months out, that could be 24 months or 36 months out and starting to work on them now.

Naji Baydoun

Okay. Understood. Thank you.

Operator

[Operator Instructions] And our next question comes from the line of David Quezada with Raymond James.

David Quezada

Thanks. Good morning everyone. Just one quick one for me. And it’s on the theme of I guess inflation, especially for offshore wind turbines. I am just curious, like, if you have any color on conversations you have had with turbine suppliers, obviously, they have been losing money, and they are trying of put through price increases, give a sense of how far along those price increases. They – how far along is that process of them trying to right size pricing with their costs?

Mike Crawley

I think I mean we are in close as you have correctly assumed in close contact with certainly two of the three major turbine vendors. I think they are well advanced in terms of kind of better understanding their input costs. I think they are – as I have said earlier, I don’t think we are out of the woods completely on inflation. But I do think there is a better understanding of input costs on the part of the turbine vendors and better understanding of from their standpoint of what, from their shareholder standpoint, what reasonable and acceptable margins are going to be moving forward. So, I think the situation is beginning to stabilize, but as I said earlier, I mean we are going to be cautious over the next few years. I think we have kind of found ourselves to a good place on Baltic power. And it’s better sales to an acceptable place on [indiscernible]. But over the next few years, I think we will be very careful just to make sure that we understand the input costs on offshore wind supply chain and the risk profile of that supply chain as well just given some of the constraints across all elements of the supply chain in offshore wind. Beyond that period, like I have said, I think with the volume of megawatts needed, gigawatts needed, renewable gigawatts needed in Europe and Asia, offshore wind has to be a big, big part of the solution, which is why you saw the declaration in Belgium, two weeks ago from all European leaders got together. They don’t get together for nothing. They all got together to declare a target of 120 gigawatts in the North Sea by 2030. And then 300 gigawatts, excuse me, by 2050. Similarly, I think the Federal – the Prime Minister, Trudeau from Canada’s is going to South Korea in the next week for a visit and a big part of our strategy is being able to provide renewable energy to industry in Korea, which again, helps them maintain their access to markets around the world, particularly as carbon border adjustment markets measures start come into place in markets like the EU. So long-term, we are very bullish on offshore wind, but short-term, I think we will be quite cautious.

David Quezada

Appreciate those comments. Thanks, Mike. That’s all I had.

Mike Crawley

Okay.

Operator

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

Mike Crawley

Okay. Thank you Shawn and thanks to everybody for joining us today. We are going to hold our next call following the release of our second quarter 2023 results in August and I am going to get some lemon tea down my throat to make my voice better. Thank you everybody.

Operator

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