Aug 12, 2021
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Northland Power Conference Call to discuss the 2021 Second Quarter Results.
During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.
[Operator Instructions] As a reminder, this conference is being recorded Thursday, August 12, 2021, at 10:00 a.m. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Financial Officer; and Wassem Khalil, Senior Director of Investor Relations and Strategy.
Before we begin, Northland's management has asked me to remind listeners that all figures presented are in Canadian dollars and to caution that certain information presented and responses to questions may contain forward-looking statements. That includes 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 @www.northlandpower.com. I will now turn the call over to Mike Crawley.
Please go ahead.
Mike Crawley
Thank you, operator, and good morning, everyone. Thanks for joining us today.
This morning, we will review our second quarter 2021 financial and operating results. Following our prepared remarks, we will look forward to taking questions from analysts.
So to kick things off, we want to reiterate that the health and safety of our employees and our stakeholders comes first to diligent planning and rigorous adherence to health protocols, we have maintained high levels of facility availability, delivering essential supply of energy to consumers and businesses in Europe, Canada, and Colombia. First, looking at our financial results for the second quarter, we reported adjusted EBITDA CAD 203 million, compared to CAD 227 million in 2020, representing a 10% decrease.
Our free cash flow of CAD 6 million was 68% lower, compared to CAD 17 million in 2020. On a per share basis, free cash flow was CAD 0.03 quarter compared to CAD 0.09 in 2020.
Our financial results in the quarter were impacted by the weakness in the wind resources at our offshore wind facilities. Year-to-date, we have seen consistently low wind resource with generation trending well below long-term averages.
In fact, this has been one of the weakest periods on record for offshore wind in the North Sea. In addition to a lesser extent, performance in the quarter was impacted by lower production and cash flow at our Nordsee One facility, due to the bearing issue we had previously identified.
This issue is also expected to impact our full year 2021 financial performance. A component design issue has been identified on a number of wind turbines, leading to premature failure of the rotor shaft bearings, thus requiring replacement.
As a result, we've reduced the output on a small number of turbines at Nordsee One where our teams mobilized to replace the rotor shaft assembly on those turbines requiring the most immediate attention. Northland will undertake a broader replacement campaign starting in 2022 and extending into 2023 to replace the rotor shaft assembly on all 54 turbines.
Pauline will provide a bit more detail on the financial numbers later in the call. Despite these issues impacting our near-term financial results, they do not deter from our long-term objectives.
As reported in our press release yesterday, we continue to execute on the key priorities to further enhance our development portfolio. And position ourselves to achieve our long-term growth and diversification objectives.
Northland has a growing global footprint, positioning as in key renewable markets around the world. Execution on our growth objectives in each of these key markets will ensure we remain in a strong competitive position, enabling us to be a major player in the accelerating global build out of renewables.
As announced yesterday, we are pleased to have closed the acquisition of the Spanish onshore renewables portfolio, which adds 551 megawatts of operating capacity to Northland portfolio, bringing it to over two 3.2 gigawatts per hours. This portfolio aligns well with our priorities and helps to diversify our asset base by adding high quality, regulated cash flow to our business.
Furthermore, the acquisition expands our presence in Europe, and establishes Northland as a top 10 renewables operator in Spain. In Poland, we progressed with our partner in the Baltic offshore wind project, which was awarded a 25 year contract for difference offtake agreement with the Polish government at a rate of 3.9 -- 3.9 -- PLN319.6 per megawatt hour or about €70 per megawatt hour.
Baltic power provides Northland with a 49% interest in a mid-stage offshore wind project, with the potential for up to 1,200 megawatts of capacity which we built in the Polish Baltic Sea, in the middle part of this decade. We expect to reach financial close for Baltic power in 2023, with commercial operations in 2026, which fits nicely with our other offshore wind projects major.
Turning to our other development and construction projects, I want to provide a brief update on the various projects we have underway. First, touching on our New York wind onshore projects in the, second quarter two of the projects Ball Hill and Bluestone successfully achieved financial close.
Both projects have secured green financing in the form of a non recourse protect loans, tax equity bridge letters of credit with a consortium of lenders totally US$381 million, or about CAD476 million. We expect to secure permanent tax equity investments for the two projects in 2022.
Construction is underway with commercial operations for the two projects expected by late-2022. Our third, 100 megawatt New York onshore wind project, which has embedded battery storage, hybrid is under active development.
Subsequent to the quarter Northlands 16 megawatt Helios solar project in Colombia also achieved financial close. The project secured a non-recourse green loan and with construction underway commercial operations are expected in the first quarter of 2022.
Helios represents Northlands first development project in Colombia, which capitalizes on Epsa's grandfathered rights allowing Epsa to expand into energy generation in Colombia. Helios will serve the power needs of non-regulated municipal, commercial and industrial customers.
In July, the Hai Long offshore wind project, received an amendment to the project's environmental impact assessment from Taiwan's Environmental Protection Agency to accommodate a larger 14 megawatt turbine with longer blade length. This amendment allows Hai Long to complete further field work to improve wind generation yields for a more efficient and productive layout over and above the benefit of this larger turbine.
The amendment is a further step forward, following the confirmation of the Industrial Relevance Plan, or IRP, that the project received in April, which sets out Northlands commitment to local supply chain and procurement, making the achievement of a significant -- making this an achievement of a significant milestone for the project. These milestones further advance the project closer to financial close, which we expect to occur in the second half of 2022.
The Hai Long team continues to make progress towards securing corporate offtake power purchase agreements for the remaining 744-megawatts allocation secured under the option process. At La Lucha, the physical construction of the solar facility is complete.
However, activities relating to the energization of the project continues to be delayed. In order to achieve commercial operations, the facility requires energization followed by testing, but due to administrative backlogs, resulting primarily from COVID-19, the energization and testing have been delayed.
Efforts to achieve energization continue with Northland working with Mexican authorities and other private power producers who are experiencing similar issues. While timelines remain uncertain, Northland expects commercial operations at La Lucha to commence in early 2022.
Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations. So, all-in-all, a very busy quarter, particularly from a growth perspective.
These activities further enhance our competitive positioning moving forward. I will now turn the call over to Pauline for a more detailed review of our financial results.
Pauline Alimchandani
Thank you, Mike, and good morning, everyone. Last night Northland Power release operating and financial results for the second quarter of 2021.
In the quarter, we generated adjusted EBITDA of approximately $203 million, which is a decrease of $24 million, or 10% from the $227 million we generated in the second quarter of 2020. The main factors leading in the year-over-year decrease was a lower wind resource at the offshore facilities and lower contribution from our efficient natural gas facilities due to a planned maintenance outage at North Battleford.
With respect to free cash flow, Northland generated approximately AUD 6 million in the quarter. This was a decrease of approximately AUD 12 million, or 68% compared to the prior year.
Similar to adjusted EBITDA, the larger drivers of the year-over-year decrease in free cash flow was the lower offshore wind resource in the quarter, and the planned maintenance, as previously discussed, which together resulted in a decline of approximately AUD 14 million While the second quarter is typically a weaker quarter for offshore wind resource, the results for this quarter across all three facilities was below the prior year and well below the long term average, resulting in lower financial performance across all our reported metrics. These items were offset by approximately AUD 10 million of contribution resulting from lower net financing costs due to lower interest costs on our loan facilities.
For adjusted free cash flow, we generated AUD 22 million in the quarter, compared to AUD 30 million in the same period a year ago. The factors leading to AUD 16 million decrease were the same factors impacting free cash flow, with the difference being lower growth expense -- growth expenditures in 2021 of approximately AUD 4 million.
Just to remind everyone, Northland’s adjusted free cash flow excludes growth related expenditures from free cash flow. Management believes adjusted free cash flow provides the relevant presentation of cash flow generated from the business before investment related decisions, as an -- and as a meaningful measure of Northlands ability to generate cash flow after ongoing obligations to reinvest in growth and fund our dividends.
On a per share basis, these figures translated into free cash flow to $0.03 in the quarter compared to $0.09 last year and adjusted free cash flow of $0.10 in the quarter compared to $0.19 last year. Our rolling fourth quarter free cash flow and adjusted free cash flow payout ratios calculated on the cash dividend basis were 70% and 56%, respectively.
This compares to ratios of 62% and 54% for the respective prior year periods. The increase in both net payout ratios was due -- primarily due to lower free cash flow and adjusted free cash flow and the effects of new common shares issued in the quarter, partially offset by proceeds from the dividend reinvestment program, which was reinstated in September of last year.
I want to take a moment to discuss a couple of items that affected our financial results in the quarter and will also impact results for the second half of 2021, namely the bearing issues at Nordsee One and our decision to unwind the APX hedges at Gemini. First on Nordsee One, as Mike outlined in his comments, Northland is proceeding with a campaign to replace the rotor shaft bearings on all turbines, which has already started and expected to continue in phases through to 2023.
As a result of this replacement campaign, there may be instances where turbines may need to be curtailed, potentially leading to loss revenues during those periods. Based on current estimates and projections, the potential loss in revenue in 2021 is currently expected to be approximately $11 million.
We continue to assess the potential impacts from this issue in 2022 and 2023, and will provide updates as we issue guidance for next year. The total estimated capital costs are replacing all of the turbines is €55 million.
The majority of this costs will be covered by the remaining €54 million warranty bond proceeds in 2020. As part of the settlement relating to the outstanding warranty obligations of Nordsee One turbine manufacturer, the impact to Northland will be at 85% proportionate interest.
Turning to Gemini and our APX hedges. As communicated last quarter, we elected to unwind the hedges we have in place for Gemini that were originally put in place during the second quarter of 2020.
These hedges were intended to protect against the continued decline in the APX price below the €44 per megawatt contracted price that was experienced due to COVID-19 demand factors. Given the strengthening in the APX price earlier this year, as economic activity rebounded and to limit loss SDE subsidy revenue due to the higher APX price, in the second quarter of this year, we entered into offsetting derivative contracts essentially crystallising the losses.
As a result, Northland incurred costs amounting to $25 million for the second half of 2021, $19 million for 2022 and $9 million for 2023. There will be no further losses beyond these amounts related to the hedges.
In order to minimize further fluctuations in market revenue and Gemini, subsequent to year end, we purchased APX put contracts against the majority of our exposure for the remaining of 2021 and 2022 to protect our cash flows should the APX fall below the SDE floor price. These put options were entered into with a strike price of approximately equal to the SDE floor and only became commercially viable in 2021 as the APX increase substantially above the SDE floor.
The total cost of the puts was approximately €2 million. These puts were at a relatively low cost given the widespread between the current APX price of approximately €100 and the SDE floor price.
We intend to enter into further puts contracts as appropriate for future years in accordance with our risk management policy. Turning to our balance sheet and liquidity, Northland remains in a very strong position with ample liquidity to help fund our identified development initiatives.
At the end of the quarter, we had access to $1.4 billion of cash and liquidity to prize of $830 million of proceeds under a syndicated revolving facility and $607 million of corporate cash on hand following the completion of the share offering executed in mid-April. On August 11th, $522 million of cash was used to fund the purchase price consideration for the Spanish portfolio.
We continue to look at opportunities to support our growth initiatives by raising capital from existing assets and have executed on a number of financial optimizations that have provided increased liquidity for the company at an attractive cost. Subsequent to June 30th, we restructured and upsize the senior debt so ever Canadian solar facilities that resulted in a one-time distribution of $29 million and the reduction of the weighted average all in rate from 5.4% to 4.4%.
Year-to-date, we have raised over $100 million of liquidity through financing optimizations of existing assets to fund our growth. We are currently working on refinancing efforts for EBSA to extend an upside for refinancing and also to restructure the financing to help manage our foreign exchange exposure.
We expect to complete the financing this year. In February, we announced our green financing framework to allow the company and our subsidiaries to issue green bonds, corporate and project level loans, and other financing instruments for eligible green projects.
The focus of the green financing initiatives is to support climate change mitigation efforts by developing investing in renewable energy infrastructure assets that increased green energy production. This quarter we successfully executed our two first green financings with onshore wind projects in New York State and the Elio solar project in Colombia, the latter being one of the first renewable project financing in the country.
Both projects secured green construction financing, which have been designated as such by their respective lenders. In regards to our financial outlook for 2021, we expect to achieve the low end of the guidance issued in February for both adjusted EBITDA and free cash flow per share.
For adjusted free cash flow, the expected range has been revised. This is primarily as a result of the historically low wind resource experienced at the offshore wind facilities during the first half of the year and the estimate of lost revenue at North Sea this year due to the rotor shaft assembly replacements.
This updated expectation assumes an offshore wind resource in the second half of 2021 that is closer to long-term averages and also reflects a higher level of development costs being capitalized on projects that have met our capitalization criteria. Consequently, the capitalization of these development costs has resulted in lower expense growth expenditures this year compared to your original expectations.
The expectation for adjusted free cash flow per share for 2021 is now in the range of $1.60 to $1.70 per share. This is a change from the original guidance range of $1.80 to $2 per share issued in February as a result of the same factors impacting free cash flow with the exception of changes in expense growth expenditures as previously discussed.
Year-to-date, we have spent a total of $137 million to advance development projects, including $30 million expense through the P&L and $107 million of debits capitalized through the balance sheet, the latter of which relates to Baltic Power, Hai Long, New York Wind and Helios. These projects position as well for strong feature growth in long-term cash flow sustainability and diversification.
With that, I will now turn the call back over to Mike for his concluding remarks.
Mike Crawley
Thank you, Pauline. 2021 thus far has presented some challenges, but it also has presented a large number of opportunities to grow our portfolio, enhance our development pipeline, and our competitive positioning.
We continue to work tirelessly to ensure, we position ourselves as a strong competitor securing positions in key markets to support our future growth within offshore wind, but also establishing and growing our presence in onshore renewables with our span acquisition, and US onshore wind projects achieving financial close this past quarter. This concludes our prepared remarks.
We'd now be prepared to happy to take questions from our analysts. Please open the line for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Matt Taylor of Tudor, Pickering, Holt.
Please proceed with your question.
Matt Taylor
Hey, thanks for taking my questions here. I just wanted to throw off on offshore.
Mike, you mentioned North Sea conditions are at historic lows. Can you provide some color on what gives you confidence?
These conditions are more short-term versus structural. Given I mean, we're starting to see extreme weather patterns, right and such a warmer weather which can reduce capacity factors going forward?
Mike Crawley
Yes, I mean, if we dial the clock back this time last year, we were coming off a really strong first half of the year and a particularly strong first quarter last year, which I think was one of the strongest that we've ever had in terms of North Sea production from our North Sea facilities. So I think it's just the normal fluctuations in wind.
We get guidance and budget on a P-50 basis. But there's obviously P-90 years and there's a P-10 years as well and P-90 quarters and P-10 quarters.
So I think we've seen a certainly a weak first half, particularly weak first quarter. But we don't see anything as you say that's as you're asking that is structural in terms of the energy or the wind resource in the North Sea.
Matt Taylor
Straight . Thanks, Mike.
And then maybe a question for you, Pauline. On the bearings issue, just looking at the numbers from your impact for the first eight bearings at 11 million or so.
Is it fair to use that as a rough estimate for the remaining 46, or are there some significant differences in the bearings, the types of turbine distance or other things that we should be thinking about how that revenue impact could be different?
Pauline Alimchandani
Yes, the biggest unknown variable is weather. And that's what makes it hard to provide an estimate.
Today, I think, we'll have better ranges as meaning for and with the current replacements to have a better replacement, better estimate of, you know, future, but even then, it will be subject to two conditions.
Mike Crawley
Let’s say, the only thing I'd add to that is in what our team in Hamburg has done, in my view, a very good job of is -- is getting on this very quickly. So both in terms of derating the turbines that that showed the initial impact of the issue with the main bearings.
And so that allowed us to, I think, expand their production and their performance longer and make sure that they were able to operate through the winter, the highest productive quarter. And they've also moved quickly to replace the most effected turbines, the main bearing assemblies and the most effective turbines this year, which in terms of kind of procurement activities and securing vessels from an offshore wind standpoint and is very rapid.
So they've been able to, I think, mitigate the negative impacts of this very well. And they're already well ahead of the game in terms of procurement activities and planning for the 2022 campaign.
Matt Taylor
Great. Thanks.
Thanks for that color. And then last one, if I may, with – Mike, net now has been closed.
Has your view on timing changed at all in finding new onshore growth, where you're seeing unexpected headwinds here in your offshore business over the next two years? And obviously, there's a long term delay from EBITDA on your development backlog.
I'm just wondering, if you're timing on finding built-ons in Spain or doing other acquisitions on the onshore front?
Mike Crawley
No, I mean, we're moving along, both in kind of our target markets in the Northeast of the US, in Spain. We previously disclosed that we've got an interest in onshore renewables in select Eastern European markets as well.
So we're actively pursuing opportunities, both development and potentially M&A opportunities in each of those – each of those three areas right now, as well as in Columbia, too. And we referenced the first project that we've brought to construction in Colombia, the Helios project.
Matt Taylor
Great. Thanks for taking my question.
Pauline Alimchandani
Thank you.
Operator
Our next question comes from the line of Rupert Merer with National Bank. Please proceed with your question.
Rupert Merer
Good morning, everyone.
Mike Crawley
Good morning, Rupert.
Rupert Merer
Coming back to the bearing repairs at Nordsee, can you explain the warranty situation there and how the cost of the repairs will flow through the balance sheet at Northland following your warranty settlement?
Mike Crawley
Yeah. Let me start and then, I'll hand it off to Pauline.
So when Senvion went insolvent, I guess about a year and a half ago, but – they – we had already – have only dialed back even further. When we entered into the turbine supply agreement, and the service contract with Senvion originally for the Nordsee One project the team that negotiated that made sure that there was a bond put in place to backstop Senvion’s warranty and Senvion’s service commitments under the service contract that went with the turbine sales.
So that's, I think was looking back was a prudent move. When Senvion went insolvent, we were able to secure the funds from that bond, and they were repatriated to ourselves and repatriated to our 15% partner on the project RWE, small portion was left within the project as well.
So the majority of the costs to replace main bearing assemblies over the next, call it year and a half will be covered by the proceeds of this bond that we've -- that we've received and that those funds are with Northland now. Maybe turn to Pauline to describe how it works its way through our financial state.
Pauline Alimchandani
Yes. So, we will -- we will capitalize the new parts at their estimated long-term useful life, and we will accelerate amortization the old parts between whichever useful life now of approximately zero to two years.
So that's how they will be treated on balance sheet on P&L. And then, we -- within free cash flow, as Mike discussed, which mirrors the actual cash is that the €65 million replacement costs will be offset mostly by the €54 million warranty bonds, but there will be an €11 million shortfall to our free cash flow from now until 2023 with the proceeds are not sufficient to cover the full replacement amount.
Over and above that, there will be loss revenues in the periods as they are replaced.
Mike Crawley
And Rupert -- and that's the key to how we've responded to this situation is to make sure that we got ahead of it as much as possible in order to minimize the loss revenue, because that's obviously what's not going to be covered by the bond proceeds. So by moving forward and replacing eight of the most effective turbines this year to ensure that they can then go back to normal operations before the end of this year and be before the end of September was important, so that we can capture all of the higher wind resources through the last quarter of this year.
And then secondly, as I said earlier to Matt, moving forward, with the procurement for 2022 as quickly as we could and also securing vessels so that we can optimize the use of the weather windows in 2022 to get any replacements done as quickly as possible. And the final piece was being very proactive in B rating, turbines that are showing any significant impact, so that we can extend their life until we have the weather window to actually do the replacement.
Rupert Merer
Okay. That's great color.
Thank you. Secondly, looking at Hai Long, so you're going to move to larger turbines there.
Can you give us some color on the impact that could have on the yield and the economics of the project?
Mike Crawley
Well, it certainly enhances the project overall. You need, obviously, fewer locations.
It doesn't necessarily increase the overall capacity, in fact if you can make by a small amount reduce the capacity just in terms of how you work out the design. But it in the long run, I think, reduces the risk on construction.
So you have a much smaller number of locations where we have to construct, so that helps with again, on construction with weather windows. It just reduces your risk and construction having fewer jackets to install and fewer turbines to install and the same holds true for operations moving forward on the facility.
It's significantly reduces your risk of downtime to the extent that you only have to go out to roughly 60% of the turbines that you would have had to go out to otherwise. So, those are the two key benefits.
In terms of the economics of the project, I mean, we obviously have been planning to move forward with this larger turbine for some time, but we've been working with through the EIA process, the environmental assessment process in Taiwan to get the formal confirmation on that. So our -- in terms of how we've been modeling the projects, we've been modeling the project with this larger turbine for some time.
Rupert Merer
Okay. And on that turbine, can you gave us an update on when you might be seeing inflation and construction costs, since we last had an update?
Mike Crawley
So -- are you speaking to commodity price, or steel costs?
Rupert Merer
Yeah, of course -- some turbine manufacturers talking about cost pressure, are you starting to see that now?
Mike Crawley
So I mean, we get regular updates, we have a preferred supplier agreement with Siemens, Gamesa on the project. So we've got an iterative process, almost like an open book process, where we at certain milestones will receive new updates on pricing, and then we'll continue to work with them to optimize the procurement through their supply chain in Taiwan.
We have certainly seen some impacts in terms of increased steel prices, but we are not locking in steel prices until financial close, which as we said in the introduction, introductory remarks is not till the second half of 2022. What we are seeing is forecasts indicating that the expectations of steel prices for most sector observers will decline and that you've seen somewhat short term increase in steel prices, as demand recovered quickly in a number of markets post-COVID lockdowns, but the capacity was not able to keep up with that sudden increase in demand.
But now you're seeing more capacity come online. So we would expect to see prices returned to more typical levels over the next six to 12 months.
And as I say, we're not looking to close financing for another year.
Rupert Merer
Thank you. I'll leave it there.
Operator
Our next question comes from the line of David Quezada with Raymond James. Please proceed with your question.
David Quezada
Thanks. Good morning, everyone.
My first question just on Nordsee Two. I'm curious if there's just any update there, I realize that the auction hasn't happened yet.
But I believe you hired consultants to optimize the layout, I think I read that somewhere. Just curious if there haven’t been any changes to that project as you approach the RFP?
Mike Crawley
Don't -- I mean, what we're -- what we're indicating in this quarter is that we intend to exercise our step-in right, to exercise our step-in rights; we need to get into the procurement. So that's why you're reading, obviously, that we're taking all necessary steps to put together a solid, fitness solid submission into the procurement.
So either our submission will be successful in that procurement, or we will exercise our step-in rights, which will allow us to step into what other bid may have been successful in that procurement.
David Quezada
Okay, great. That's helpful.
Thank you. And then maybe just one other one for me, on the outlook in Colombia for generation, I believe there's an RFP upcoming there in October.
And just curious, if you have any thoughts on whether or not you may participate in that?
Mike Crawley
We're certainly tracking what's going on in Colombia. I mean, it's an exciting market for renewables, not just over the next two or three months, but over the next five or 10 years.
It's the one market in Latin America, where there really hasn't been a significant build out of wind and solar. But that as you point out is -- and there's procurements being put in place.
And there's also demand for renewables from corporate, and customers and municipal customers as well. So we're looking at a number of opportunities, but we don't have anything to indicate about that particular procurement at this point.
David Quezada
Okay guys, thanks a lot. Mike, I’ll get back in the queue.
Operator
Our next question comes from the line of Nelson Ng from RBC Capital Markets. Please proceed with your question.
Nelson Ng
Great, thanks. Good morning, everyone.
My first question is relates to the wind resource. So obviously, it was a weak first half.
But when I was looking at the Q2 production, it seems like Gemini and Nordsee One were below average, but DeBu was about 8% above the long term average. So was there something specific going on at DeBu or like all three facilities are roughly in the same area?
Mike Crawley
Yeah, they're all in close proximity to each other at the same wind regime. With respect to DeBu, I'll just turn it over to Wassem who's wired.
He's got the details on that.
Wassem Khalil
Hey, Nelson. Yeah.
So if you recall Q2 last year, there were some unscheduled grid outages at La Lucha [ph], which we are not seeing this year. So hence, you're seeing the higher level year-over-year at La Lucha because of that grid outage, but otherwise, everything else is the same across all three facilities.
Nelson Ng
Okay, got it. And then just a quick one on the bearings replacement at Nordsee One.
So, I guess, big picture, how long do bearings typically lasts? Like, was this something that would have been replaced like in a major maintenance, maybe like 10 years down the road?
But they have to be replaced now, or could you just give a bit more color in terms of what was expected versus what was actual?
Wassem Khalil
Yeah, they certainly would have been expected to last at least for 10 years. So, it is certainly a fabrication or design error.
The -- there's a -- we’re pursuing a detailed root cause analysis. But as I said earlier, we've mobilized prior to getting all the detail and all the information from that root cause analysis.
It's abundantly clear to us already, that the -- that there's a defect across all of them. And the key to responding to this analysis is to make sure that we minimize the loss revenue.
In terms of the capital costs of the replacement as Pauline said, the majority of that will be covered by the bond proceeds. The key is to minimize the loss revenue, and that's why we've moved so quickly to replace it, but certainly, they should not have failed this early in the process.
Nelson Ng
Okay.
Wassem Khalil
And then that one point to that, without going into a lot of detail on it, we do have high degree of confidence on the replacement design based on what we've -- that we've seen this design used on other turbines, other Senvion turbines that had been in production much longer without any sign of degradation.
Nelson Ng
Okay. So, just to clarify, this is more than just the bearings right?
It's the whole -- it’s a bigger part of the structure or when you say replacing bearings?
Wassem Khalil
You have to take out the whole assembly and replace the whole assembly that houses -- the bearings, but the defect is in the coating on the bearing and which is where the degradation is occurring.
Nelson Ng
Okay, got it. And then, just moving on to my next question.
In Mexico, you talk about the administrative delay and how the completion of the project might get pushed into next year. So given that the facility is like physically completed, could you actually produce power and sell it behind the fence, or is there anything you can do like, while the facility is completed, but not COD?
Mike Crawley
We certainly could, in theory, you could produce power behind the meter, in other words, a non-grid connected energy, which if we felt that there was a much longer delay is probably something that we would look at. But given our view that we should be able to get the facility connected by early 2022, at this point, and delivering energy to the grid, that is the best course of action in terms of getting revenue from the facility and having the facility get an attractive return on investment.
Nelson Ng
Okay, and so I'm not that close to the politics in Mexico. But is this simply a administrative delay or is it is politics involved?
And like, I know, there's – like there's a view that the government is not that favorable towards renewables. So is this there – is this like a delay tactic or is this just purely admin delay?
Mike Crawley
Most of it is related to COVID-19 and so far as everything has been moving very slowly, through both on land firm. We’re not going into the detail on just the number of permits required to get the project into service.
Everything has moved slowly because a number of government offices would shut down for extended periods of time. And we were delayed for a significant amount of time getting some of those permits, through.
I think we're close on one of the final permits that we need, but it will still take a bit longer to get that through the whole process. So most of it is related to just the machinery of government slowing down due to COVID shutdowns, I think you're – part – you're certainly picking up some of the pronouncements from the governments about renewables or from, particularly from the administration or the President of Renewables.
I would say what that does is it slows down the machinery of government a bit more in terms of the bureaucrats, in terms of making sure that all T's are crossed, all dimes are audit on any permit. But it's nothing in our view more than that.
There's about 30 other projects that are in the same sort of situation as we are. And we know a lot of these developers that they're Canadian, US developers that we know and funds that we're familiar with, they're going through the same sort of – same sort of process.
So a number of them have come out the other end of it too. So just – it's just a matter of it takes longer than it should.
But that's the way it is.
Nelson Ng
Okay. And then just one last question, before I get back in the queue.
In terms of the New York wind projects, like after some attractive bridge debt in place, will there be any longer-term project level debt after the project is completed, or will it just be tax equity?
Pauline Alimchandani
No, we are looking at once the Sea plus two, we've got plus the two year tail on the construction financing, we'd be looking to do right now the plan is to do a 20 year bond takeout on those projects to matching tenor to determine financing.
Nelson Ng
Okay, got it. Thanks a lot.
I’ll leave it there.
Mike Crawley
Thanks.
Operator
Our next question comes from the line of Sean Steuart with TD Securities. Please proceed with your question.
Sean Steuart
Thanks. Good morning.
Pauline, question on refinancing opportunities. You touched on the progress for the solar facilities and plans for EBSA.
Do you have any other plans or opportunities across other parts of your portfolio? And I look at some of the legacy Canadian wind assets that look like they have higher costs that -- are there more opportunities across the portfolio for refinancing?
Pauline Alimchandani
Yes, there. There are other opportunities for refinancing.
I think it's still a bit early. But we would --we would hope by the end of this year early next year to have a good better position on where there would be potential to optimize.
Generally, I would say, market conditions have improved quite significantly for offshore wind. Some of the Ts and Cs that we would have negotiated a few years ago have now materially improved.
So I think there are opportunities for us but probably a bit too early to say that today.
Sean Steuart
Okay, thanks for that. And the broader 1gigawatt target for US capacity might give us some context.
Does that all come from additional perspective projects in New York, give broader growth aspirations beyond that states? Does M&A factor into that target at all?
Any detail you can give us on that longer term objective?
Mike Crawley
Yes it is – it's broader than New York and -- we like New York a lot. There's going to be a lot of growth the next few years, I think -- going to be procuring somewhere in the order of 3 gigawatts a year for the next several years.
And they got like good long-term 20 year contracts, which is Pauline just mentioned, will support a bond financing to a 20 year bond financing. So from our standpoint, it's those are those are good -- good projects good investments for Northland.
But beyond that, the other markets that we'd be looking at would be New England, certain areas of PJM. We have looked at California before.
So generally markets where we believe, we can secure long-term contracts are either government backed or with utility, some cases C&I. But generally looking for markets where we can secure long-term contracts to underpin our investments, but those would be the main markets that we'd look -- we'd be looking at.
Principally development, but some M&A is certainly possible.
Sean Steuart
Understood. Okay.
That's all I have for now. Thank you.
Thank you.
Pauline Alimchandani
Thank you.
Operator
Our next question comes from the line of Ben Pham with BMO. Please proceed with your question.
Ben Pham
Hi, thanks. Good morning.
On your package you've referenced Romania. In here, you're only three weeks and then I'm not sure if I mentioned this earlier my remarks.
But can you remind us what your position is in that region?
Mike Crawley
Yeah, you what we what we've disclosed before in some of these calls, is that we are interested in Eastern Europe for renewables overall. So we moved forward with offshore -- offshore wind project and Poland as you know while Paris which we talked about today, and that we also have interest in certain in onshore renewables in certain markets in Eastern Europe.
And it is not all that -- is simply that -- those are the markets in Europe that are slowest or the latest to decarbonize. And so we think there will be some good opportunities, particularly in EU countries for renewable investment going forward in renewable development going forward.
That's really all we've talked about.
Ben Pham
Okay. So you say you actually had some development sites there versus is this more saying, that’s somewhere you do want to get into?
Mike Crawley
Yes, I mean, any -- certainly, aside from Baltic Power, of course, any onshore development would be at a relatively early stage that we'd be looking at, participating in those markets and -- we refer to, certainly, in the in our disclosure to looking at Romanian opportunities. But I'd say, those are geared at an early stage.
Ben Pham
Yes. Okay.
The Baltic power offshore wind in the quarter is certainly – you’ve been in renewable business for a long time. You look through all of this, investors should look through it.
When you think about, your exposure there is 60%, does it make you rethink about your sources of cash flow, your diversification strategy, or is this more -- I mean, this is part of the business, that will normalize all of this and nothing's changed from that perspective?
Mike Crawley
If you could -- I got to apologize. If you could repeat the -- I don’t have very good sound this whole call on my ears.
Could you repeat the question again?
Ben Pham
Yes. No problem.
I'm curious on your thoughts on the sources of your cash flows and your willingness to maybe it always [ph] diversification in the context of your exposure to offshore wind in the North Sea and the Baltic we saw this quarter.
Mike Crawley
Yes, for sure. I mean, so what we've seen and what we've talked about this on previous calls is, we've been making the deliberate steps to diversify ourselves, if this is your question, I think, to diversify ourselves away from the concentration that we have in offshore wind in the North Sea.
So we have the investment in Colombia, was -- that was one of the benefits of that transaction, that helped to diversify ourselves away or lessen our concentration. And then, of course, come 2025, we would be seeing Hai Long begin to deliver cash flow.
And so, that will further significantly diversifies ourselves away or at least lessen the concentration. And the same thing while we're developing in New York State as well, both wind and also doing some early stage solar development.
So, no, the overall, in terms of our development focus is to diversify ourselves globally and minimize any concentration risk, which right now our concentration so -- where our concentration is obviously in the North Sea. So we will be moving to less than that.
Ben Pham
Okay. It makes sense.
And maybe a deeper question on Nordsee and the accounting. The -- when you got the Nordsee set in mind, you have -- I think, you have started to amortize some of the benefits from that to offset the higher OpEx cost.
So my question now is, are you changing accounting policy now that you’re accelerating that benefit? And is this worth a revisit of your off-back on maintenance for Nordsee, since you're doing it yourself now?
Pauline Alimchandani
So I'll answer the first question. So it's not a change in policy, it's more a change in estimate.
So it's a perspective view. We would have thought we would have amortized that launch, the proceeds over nine years and now we're amortizing it over a shorter period.
And on the OpEx?
Mike Crawley
Well, on the OpEx, I mean, this is -- I mean, listen, it was not a strategy, as you know, to self perform the turbine maintenance on Nordsee One. We were thankfully moved quickly to hire all of the Senvion techs, and we're able to take over the turbine maintenance very quickly with the insolvency of Senvion.
And we've actually had higher availability than I think we had with Senvion and prior to that until this issue with the main bearing assembly surfaced. But we would I don't think we would have been able to actually respond as quickly as we have to the issue and had such visibility, if we weren't self performing on the turbine maintenance.
It's not to say, we'd be looking to do that as a strategy going forward. But I'm just saying it's one of the benefits of a circumstance that we didn't think we'd find ourselves in too, but I think it's served as well in terms of being able to respond quickly and it will minimize significantly any revenue impact from this failure.
Ben Pham
Okay. Great.
And Pauline wanted to clarify the celebration, that's benefit the free cash flow, is that in your new guidance?
Pauline Alimchandani
Yes.
Ben Pham
Okay. Got it.
Okay. Thank you.
Pauline Alimchandani
Thank you.
Operator
Our next question comes from the line of Mark Jarvi with CIBC. Please proceed with your question.
Mark Jarvi
Thanks. Want to come to the long-term average numbers you have disclosed for offshore wind, can you just more of the trailing performance since inception, so maybe not quite okay and where we think about it.
How have those assets like Gemini, Nordsee One, which have been operating the longest compared in terms of average production versus at the peak and forecasts you had at the time of COD?
Mike Crawley
Yes. What we do on all of our facilities is a renewable facility certainly is at year three, we take all of the operating data that we have, and including any wind resource data that we have that we would have from the anemometers that are attached to the turbines themselves.
And combine that with an update of the long-term data that you have from a reference that we would have from the reference net masked out in the Nordsee One North Sea. Pull that all together with an independent -- an IE, independent engineer to pull it all together.
And then we recast the energy yield estimates for the facilities moving forward. So we've done that adjustment on Gemini.
We've done it on Nordsee One, and we will do that at year three on Deutsche Bucht. What we've seen is on both Gemini and Nordsee One is closed for a modest reduction in the long term energy yield estimate for each of the facilities And but the one thing to note is that that from Gemini to Nordsee One, that whatever that modest reduction was, it was even less on Nordsee One and we expect it will be even less than we'll see if it is any -- if there's any adjustment on Deutsche Bucht, which points to the fact that you would have picked up some of this from our set and others disclosures that the just the science and the methodology behind energy of assessments on offshore wind facilities has continued to improve as more facilities have been deployed, principally in the North Sea and around UK, obviously, as for the first deployment of offshore wind has been over the last 15 years.
But the methodology is improved significantly, exactly the same thing that happened with onshore wind about 10 years earlier, just given when most onshore facilities started getting coming online. So that's the short story is that, our view on the -- our ability to accurately predict the end forecasts to the production facilities improves significantly after that three year adjustment is made, and on the kind of the investment in each one of those facilities, while that -- on those two facilities that adjustment with it was a modest downward adjustment on the energy yield.
There have been other enhancements on the facilities, including refinancing and others enhancements that we've been able to do with facilities and service. And we've been renegotiation of service contracts, for example, that have enhanced the value of those investments.
So, there's been put and takes.
Mark Jarvi
Got it. And then coming back to the Nordsee Two and you said you look there, and you were other bidders show up.
If there wasn't like a zero subsidy bid, do we feel now of where the corporate PPA market is or for broadly just longer term hedges, if you wanted to contract, which would be you know, if you step down on as zero subsidy bid, they're just name your tendencies in terms of alternatives. Either you win, or if you don't, what the other alternatives are now for Nordsee Two?
Mike Crawley
Yeah, certainly, we are actively looking at all possible outcomes, given the fact that we certainly know what their economics will be on our bid. But we're looking given that we've indicated that we intend to step in, we all make have come to that decision after analyzing all possible outcomes, including as you say a zero subsidy bid where we would be marketing energy ourselves, along with a partner on those projects are RWE.
So yeah, we've assessed all options. And there is a robust market, corporate offtake market for renewable energy and in Europe which has only improved over the last year.
Mark Jarvi
Okay. And then my last question, just if you did secure Nordsee Two you've kind of got feel about Baltic power.
When you go to financial close in Taiwan in the end of next year, will you be able to put through a commitment to Siemens rates or whoever, on all of those projects to try to get improved pricing, or would that not quite line up in terms of the ability to comment on turbines?
Mike Crawley
Say that again, flip through a commitment, can you just say that…
Mark Jarvi
Yes, I did. I imagine that if you had multiple sites, you might get better pricing from Siemens and…
Mike Crawley
Yes…
Mark Jarvi
Would we be in a position at that point to maybe be able to procure turbines for Taiwan, Nordsee Two and multipower?
Mike Crawley
I put it this way. I mean, we obviously have different partners on each project and in different timelines.
So, I put it this way, the -- our position in negotiations with turbine vendors and our ability to get attention from turbine vendors is significantly enhanced by the volume of our offshore wind pipeline and the certainty of our that our pipeline will be converted into actual operating projects. So, every large project that gets added on enhances our competitive position with the three main net offshore wind turbine vendors.
Mark Jarvi
Got it. That's all the questions I had.
Thanks, Mike.
Operator
Our next question comes from the line of Naji Baydoun with iA Capital. Please proceed with your question.
Naji Baydoun
Hi, good morning. Just one follow up on a question about Nordsee Two, let's say it doesn't have been zero subsidy bid, but what's an acceptable level of motion merchant exposure, if any for you for that?
Mike Crawley
Yeah, I mean our intention would be to, in some form to contract the energy from that – from that facility. So its zero subsidy bit in the – there is not any revenue coming from the German State or the German Regulator, then we would look to secure an off-take agreement of some form with an industrial or corporate off-taker.
So in some form, we would look to contract the energy in order to underpin that investment.
Naji Baydoun
Okay. And just on Poland, can you tell – maybe the next steps so that Baltic declare for the approvals of the contracts.
And then, more broadly thinking about the 2025 auctions, like how early do you need to start thinking about that? Assuming you do want to participate in that auction.
Mike Crawley
So on Baltic Power itself, the kind of 1.2 or up to 1.2 gigawatt project itself, that project is actively working through permits, procurement moving towards financial close in 2023, which is really not all that – all that far away. So call it 18 months to 24 months away.
So there's – kind of approaching to that scale. There's a lot of activities you can imagine going on right now with the team that we've assembled to deliver that project.
On the future procurements like the 2025 year, 2025 auctions that have been announced for further offshore wind capacity in Poland. We haven't made any decisions or any disclosures on what we'll do around that yet.
Naji Baydoun
Okay. And just last question on Poland, I guess, too soon to I think about more offshore wind, is it also too soon to think about more onshore renewables?
Mike Crawley
I think, yeah, maybe I'd go back to what I said earlier is that in general, we would see a significant build out of renewables in Eastern Europe. Eastern Europe, overall, has generally lagged Western Europe in deploying renewables, particularly Northwestern Europe.
So we think there's going to be a significant deployment of new renewables both offshore wind and an onshore renewables. So it's an area of interest for Northland.
Naji Baydoun
Okay. Thank you.
Operator
Mr. Khalil, there are no further questions at this time.
I will now turn the call back to you.
Wassem Khalil
Okay. Thanks to everybody for joining us today.
We are going to hold our next call following the release of our third quarter 2021 results in November. In the meantime, we thank you for your continued confidence and support.
Operator
Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating and have a pleasant day.