Northland Power Inc. (OTCPK:NPIFF) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET
Company Participants
Mike Crawley – President & Chief Executive Officer
Pauline Alimchandani – Chief Financial Officer
David Povall – Executive Vice President of Development
Conference Call Participants
David Quezada – Raymond James
Rupert Merer – National Bank
Ben Pham – BMO
Sean Steuart – TD Securities
Nelson Ng – RBC Capital Markets
Mark Jarvi – CIBC
Andrew Kuske – Crédit Suisse
Naji Baydoun – IA Capital Markets
Brett Castelli – Morningstar
Matt Taylor – TPH
Operator
Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2022 Second Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded, Friday, August 12, 2022 at 10 A.M. Conducting the 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 content in making investment decisions or recommendations. The release is available at www.northlandpower.com.
I will now turn the call over to Mike Crawley. Please go ahead.
Mike Crawley
Thank you very much and good morning, everyone. Thanks for joining us today. Also joining us on the call today is David Povall, Executive Vice President of Development, to answer any questions on our development activities. This morning, we will review our financial and operating results for the second quarter of 2022. Following our prepared remarks, we’ll take questions from analysts and look forward to addressing all of your questions.
To kick things off, as we always do, I want to reiterate that the health and safety of our employees and stakeholders always comes first. Our rigorous adherence to our health and safety protocols ensures the safety of our employees while allowing us to maintain high levels of availability at our facilities. We delivered strong results in the quarter supported by high power prices in Europe that benefited our offshore wind facilities in the North Sea and our onshore facilities in Spain. This, coupled with solid operational performance across the rest of our portfolio, resulted in financial results ahead of expectations.
Looking at the headline numbers in the quarter. We delivered adjusted EBITDA of $335 million which was an increase of 65% or $132 million compared to the same period last year. Similarly, for adjusted free cash flow per share and free cash flow per share, we achieved $0.70 and $0.63, respectively, in the quarter compared to $0.10 and $0.03 in the same period one year ago. As we noted in our press release yesterday and Pauline will also touch on in the call later, such performance in the quarter generated much stronger year-to-date results compared to expectations which allows us to revise our 2022 financial guidance.
A key driver behind our results has been the increased power prices in Europe that benefited our offshore wind facilities as well as our onshore facilities in Spain. As well with the events in Europe and the continued strength in power prices, we are seeing a focus on energy security and the need to accelerate the move from reliance on fossil fuels on to renewable energy sources, in particular, in Europe. Indeed, energy security is now a top priority and we are pleased to be part of the solution given our operating and development portfolios in Europe.
In addition to the 1.2 gigawatts of gross operating offshore wind in the North Sea, we are also advancing our 1.2-gigawatt Baltic Power development project along with our partners, PKN Orlen. Earlier this year, we announced the formation of the 1.3-gigawatt North Sea Offshore Wind cluster. And in the quarter, we added another 225-megawatt project, Godewind, to that cluster, so increasing the total capacity of the North Sea cluster to over 1.5 gigawatts now.
Through execution of our strategic plan, we continue to explore other innovative ways to create additional renewable power capacity in Europe. Our regional development efforts will further bolster our position and contribute to the European energy ambitions and needs.
Speaking of the execution of our strategic plan, construction activities at our New York onshore wind projects are progressing well. Our Bluestone project celebrated a significant milestone in July with the installation of the first turbine. Our second project, Ball Hill, is expected to receive its first turbine in September. The 2 projects will have a combined operating capacity of 220 megawatts and are expected to complete construction activities and commence commercial operations by the end of 2022. The total capital cost of 2 projects is expected to be US$600 million. As a reminder, the 2 projects benefit from 20-year index renewable energy certificate agreements with NYSERDA.
Turning to our 1,044-megawatt Hai Long project in Taiwan, we continue moving the project towards financial close. I want to take a moment to address the geopolitical situation in Taiwan and the implications for Northland. We acknowledge that tensions increased immediately following the recent visit by House Speaker Nancy Pelosi to Taiwan. We always monitor this situation and all other geopolitical dynamics in our various markets around the world but I do want to reiterate that there is no change in Northland’s commitment to Taiwan or through our Hai Long project. We remain very committed to our work in Taiwan and to our larger vision to help transform Asia’s energy sector to a more sustainable future.
Subsequent to quarter end, the Hai Long project achieved a significant milestone with the signing of a corporate power purchase agreement and the commencement of bank launch to secure long-term financing for the project. The corporate PPA is with an investment-grade counterparty, covering 100% of the power generated from Hai Long 2B and Hai Long 3 and is for a 20-year period at a fixed price. The contracted price under the corporate PPA is more favorable than the fixed auction rate originally awarded in 2018 and is a key accomplishment as Hai Long progresses towards financial close.
I would note that the underlying PPA with Taipower is not affected by the signing of the corporate PPA. And in fact, it provides a backstop to the corporate PPA, a very important feature to the benefit of the project and an enabler of the project financing.
In Colombia, we continue to progress with the 130-megawatt Suba solar projects, signing agreements and contracts as the projects move towards financial close. The solar project will benefit from 15-year offtake agreements with multiple energy distribution and commercial entities.
Now coming back to the North Sea cluster. As I mentioned earlier, Northland and our partners, RWE, agreed to include a fourth project, Godewind, in the cluster, increasing the size of the cluster to over 1.5 gigawatts. The enhanced size and scale of the cluster is expected to realize additional synergies in the project. The transaction is subject to closing and the combined cluster is expected to achieve commercial operations between 2026 and 2028.
To conclude, we continue to execute on our strategic plan, achieving key project milestones and bolstering both our near- and long-term growth prospects. We are prepared for the changes that are rising as a result of higher power prices and the European push for energy security. Northland wants to be a partner in the achievement of this energy security and our development teams are working hard to identify additional opportunities to help accelerate the build-out of renewable energy projects.
With that, I will now turn the call over to Pauline for a more detailed overview of our financial results.
Pauline Alimchandani
Thank you, Mike and good morning, everyone. Last night, Northland Power released operating and financial results for the second quarter of 2022. Our financial performance in the quarter was solid where we generated healthy results for adjusted EBITDA, adjusted free cash flow and free cash flow. These results were supported by strong performance across our operating portfolio, coupled with higher market prices in Europe which benefited our offshore wind facilities as well as our onshore facilities in Spain.
Our financial results also benefited from onetime items recorded in the quarter, including management fee income resulting from the refinancing and optimization activities at our Kirkland Lake facility and net proceeds from the sale of 2 of our efficient natural gas assets which closed in the quarter. Only the refinancing proceeds from Kirkland Lake were forecasted at the time we released our 2022 guidance and was incorporated accordingly.
Looking at our financial results. In the quarter, we generated adjusted EBITDA of approximately $335 million, representing an increase of 65% or $132 million compared to the same period last year. The key factors that contributed to the higher EBITDA year-over-year included: a $65 million contribution from the Spain portfolio; included $22 million resulting from the regulatory changes announced by the Spanish government. These changes were retrospected to Jan 1, 2022. I will have more to say on the Spain regulation changes shortly. A $42 million increase resulting from the management fee and operating optimizations at our Kirkland Lake facility; a $26 million increase in operating results from our offshore wind segment, resulting from a higher wind resource and increased APX market pricing that benefited results at Gemini. The continued strength in energy prices across Europe resulted in the annual average APX exceeding the SDE for Gemini. This result has allowed the recognition of $56 million in higher revenues and $32 million of EBITDA in our year-to-date financial results.
We also generated a $10 million increase in operating results, primarily due to rate escalations at EBSA and higher wind resource at our Canadian renewable facilities. This strength was slightly tempered by a $17 million decrease in operating results due to the loss in contribution from the expiry of the PPA and subsequent sale of Iroquois Falls in April of 2022.
With respect to our free cash flow and adjusted free cash flow, Northland generated approximately $146 million and $162 million in the quarter, respectively. This compares to $6 million and $22 million in the same period a year ago. As a reminder, our definition of adjusted free cash flow excludes early-stage growth-related expenditures and we believe this provides a better representation of our long-term run rate for free cash flow before investment.
Overall, the higher cash flow in the quarter resulted from: a $33 million contribution from the Spanish portfolio which includes $22 million resulting from the regulatory changes mentioned earlier. Results also benefited from a $33 million contribution from the management fee and other operating optimizations from our Kirkland Lake facility and a $31 million increase from other facilities, primarily due to better operating results. These increases were primarily offset by a $19 million increase in current taxes at our offshore wind facilities resulting from better operating performance year-over-year.
On a per share basis, these figures translated into free cash flow of $0.63 and adjusted free cash flow of $0.70 in the quarter compared to free cash flow of $0.03 and adjusted free cash flow of $0.10 per share at the same time last year. These results generated a rolling 4 quarter adjusted free cash flow and free cash flow net payout ratios of 39% and 48%, respectively, calculated on the basis of cash dividends paid compared to 56% and 70% for the same period ending June 30, 2021.
With respect to our balance sheet, Northland remains well positioned to fund our development initiatives. As at August 11, Northland had access to approximately $1 billion of cash and liquidity, comprising $800 million of liquidity available on our revolving facility and $200 million of corporate cash on hand to help us fund our growth initiatives.
In addition to free cash flow generated, Northland generates additional sources of liquidity to fund growth and capital investments, including proceeds from strategic debt refinancing and debt optimization as well as our ATM program. Year-to-date, we have been successful in generating approximately $400 million of additional liquidity to support upcoming financial close requirements of our projects.
To the extent there is excess cash flow generated through financial and operational outperformance through the balance of the year, these additional cash flows will be used to fund capitalized growth projects, thereby reducing the need for corporate debt or equity funding.
Turning to the 2022 financial guidance. As noted in our press release, we revised financial guidance upwards for 2022 to account for the stronger results we have achieved year-to-date and in the quarter. For adjusted EBITDA, we now expect to generate between $1.25 billion and $1.35 billion this year, up from the previous range of $1.15 billion to $1.25 billion. For free cash flow per share, we increased the range to be $1.40 to $1.60, up from $1.20 to $1.40 previously. This range now includes the gains from the sale of the 2 efficient natural gas facilities completed in the quarter and also factors in higher expected debt repayments on certain European facilities pending successful completion of refinancings that are currently in progress targeted to be completed later in 2022.
For adjusted free cash flow, we now expect to generate $1.85 to $2.05, up from the previous range of $1.65 to $1.85. I would like to point out that our 2022 guidance ranges for free cash flow and adjusted free cash flow do not incorporate any sell-down proceeds. And as such, net proceeds from sell-downs would increase our reported free cash flow in the event they occur this year.
The revised guidance ranges may be subject to further upside should power prices in Europe continue to trade at elevated levels for the remainder of 2022, particularly as it relates to Northland’s offshore wind facilities. However, given this is difficult to predict and there are a number of factors that impact our results, we do not incorporate this potential upside for Q3 or Q4 in our guidance. As a reminder, our offshore wind PPAs have a market price component with the individual subsidy mechanisms providing a top-up to the contracted price under each PPA. With current market prices trending above these set prices, each of our wind farms could potentially earn higher revenues based on the prevailing market prices.
For Gemini, the actual amount will depend on the expected full year average APX price subject to an annual profit and imbalance factor in capture rate. The final APX income realized for 2022 will depend on the average APX levels over the course of the year. And as at June 30, this was estimated at €266 per megawatt hour and our year-to-date results capture this rate. For the second half of 2022, we continue to assume the SDE rate of €211 per megawatt hour for our guidance.
For Nordsee One and Deutsche Bucht, the amount — actual amounts will depend on the average monthly prices through to the balance of the year subject to capture rates which are estimated at between 80% to 90% of the market price to the extent they are above the subsidy price. Based on the current market and forward prices in Europe, Northland’s financial results for 2022 could realize significant upside should be realized these higher prices.
Northland’s adjusted free cash flow finances, growth development expenditures, corporate costs that support growth and new initiatives with a focus on preserving our BBB stable credit rating from S&P and Fitch, we prefer to employ low-cost corporate credit to fund investments in our capitalized growth projects, most of which are targeted for financial close in either 2022 or 2023.
Lastly, I want to provide an update on the recent regulatory announcements in Spain. In response to this unprecedented high energy prices for consumers in 2022 earlier this year, the Spanish authorities announced the approval of an exceptional update to the regulatory framework for calendar year 2022 to mitigate the effects of the higher energy prices. The changes in the regulatory framework will impact the 2022 calendar year and the 2023 to 2025 period. These regulatory amendments are pending government approval and are effective retrospectively from Jan 1 of 2022. These changes are expected to result in higher merchant revenue for 2022 as a result of an increase in the assumed pool price from €49 per megawatt hour to €122 per megawatt hour, thus allowing generation facilities in Spain to recognize higher revenues in the current year. For Northland, this higher pool price means we expect to generate $215 million of EBITDA and $95 million of free cash flow in 2022 relative to $150 million of EBITDA and $35 million of free cash flow as our prior expectations.
In addition, there will also be changes to the band adjustments for 2022 that will also permit the recognition of deferred revenue for 2020 and 2021 in 2022 which is earlier than the original regulation allowed for. However, these increases will be partially offset by a reduction in regulated revenue from return on investment and return on OpEx going forward.
Under the Spanish framework, the majority of Northland Spanish facilities are entitled to receive a guaranteed rate of return over the regulatory life of the asset. Although these changes to the framework are intended to result in the same regulated long-term returns before such changes, the amendments could result in greater merchant price exposure within the Spanish portfolio in the long run compared to our original expectations. For clarity, we expect to have these forecasts and projections as we prepare for 2023.
In conclusion, we delivered very strong results in the quarter and through the first half of the year. This strong performance has resulted in our full year financial guidance being revised upward. Combined with ample liquidity and a solid balance sheet position, we believe we are in good shape to fund financial close of our projects. We continue to track market prices closely and we’ll provide progress updates on our upcoming quarterly conference calls.
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 quarter and a strong first half of 2022, allowing for the upward revision to our financial guidance for the year. We have several projects in construction and under development, nearing key milestones over the coming months that will further strengthen our growth portfolio. And our teams continue to actively source new growth opportunities to accelerate the build-out of renewable power projects and further grow our global position as a leading renewable energy producer.
This concludes our prepared remarks and we’d now be happy to take your questions. Please open the line.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of David Quezada with Raymond James.
David Quezada
Maybe I’ll just start with the upside on higher power prices in Europe and specifically at the offshore wind facilities. I know you mentioned the €266 per megawatt hour was forecasted as of the end of June. I’m just curious if you’re able to comment on how power prices or, I guess, the futures curve has trended since you made that forecast, assuming there’s some upside there. And I believe there are some generation thresholds for the full year, at least at Gemini, where you can get more upside to power prices. Just wondering if you could walk us through that.
Mike Crawley
So the — in terms of where the forwards are trending, we keep an eye on them certainly. They have been trending upwards recently and you can certainly see the same directly yourself. I’m sorry, the second question?
David Quezada
Just in terms of the generation threshold and if there’s any further upside there based on how full year generation unfolds.
Mike Crawley
Well, I mean it’ll depend on — you’re right. So it’ll depend on how the production is principally as we get into October, November. Stronger production will mean that you’ll start capturing more merchant revenue earlier. So you fill up your bucket on the SDE, as you know, David and then you’ll be benefiting more from higher merchant prices.
David Quezada
Okay, great. And then maybe on the Godewind project, just curious if it also has a step in right and how that opportunity came about and how the timing of that project could differ from maybe some of the other projects in the cluster.
Mike Crawley
I want to say a few words. Then I’ll turn it to David. So the step-in right has already been exercised on Godewind by RWE and we’ve had discussions with RWE on an ongoing basis about that project and the opportunity to include it in the cluster. And we’re very happy that we were able to come to an agreement to include it in the cluster to get more scale and indeed, more scale at a time when Europe is looking for more renewable energy as quickly as possible. But anything else to add to that, David?
David Povall
So I think, David, the — given that the RWE and ourselves look at that, it provides synergies. It’s working on the same time line as N2. So both the synergies as we develop the projects and then, of course, as you move them into construction. So there’s value that can be captured through developing the 2 projects together and obviously, more megawatts optimize the delivery of the project. So…
Mike Crawley
A good point on the timing. So originally, the cluster was kind of one project would go forward first and then the second phase would be Delta and then N3. So now it balances it off with 2 projects in the first phase, 2 projects in the second phase, so giving more scale to that first phase.
Operator
Our next question comes from the line of Rupert Merer with National Bank.
Rupert Merer
First question for Pauline. On guidance, you mentioned that the updated guidance basically is just including the strong results for the quarter. Although you’ve talked about potential to see higher returns in Spain, it doesn’t seem like any of that’s baked into guidance yet. Is that right?
Pauline Alimchandani
For Spain, we are recognizing the pool price of €122 per megawatt hour. So we don’t expect any further upside for Spain through to the balance of the year because that’s the posted rate from the regulator. And there’s no subjectivity around that. We book exactly what is posted.
Rupert Merer
Okay, very good. And then in your German assets, with a monthly settlement, is it fair to assume that you’ve already booked some upside given the higher power prices to start Q3?
Pauline Alimchandani
Very little. Not too — I mean year-to-date results, we’ve booked very little. Hopefully…
Mike Crawley
Which is common on our Q3 [ph].
Pauline Alimchandani
But I think we’ve provided enough information for you to calculate it.
Rupert Merer
Sounds great. And then maybe secondly, if we can talk about the German cluster. There have been some regulatory changes in Germany that I think impact the bidding process for new offshore wind projects. Can you walk us through what those changes are and any impacts it could have on your step-in rights or what your contracts could look like in the future?
Mike Crawley
Yes. I’ll turn it to David. He is quite close to that.
David Povall
Rupert, you like this, the German government has been looking at this for some time and so we’re getting some clarity on the way they’re planning to do this. It’s primarily relating to the step-in rights which I think we’ve talked about on — as for the previous question on how we secure the rights to — as we get through to N2 and then obviously Godewind and the same would apply for N3 and Delta. At the moment, the –a change in the rules, by the way, the step-in could work. Primarily, they’re looking at CfD bidding structure as opposed to the previous structure that was used for N2. So we’re in dialogue with the German government in terms of working with them to make sure that we preserve the value that we’ve got in those projects through our step-in rights.
Mike Crawley
It doesn’t affect the step-in right. In fact, it has a potential to affect at what value we have to step in and whether it’s at a 0 subsidy value or whether it’s had basically a bid price for the lease or for the interconnection. So that’s what we and others are currently in discussions with the government having seen the proposals.
Operator
Our next question comes from the line of Ben Pham with BMO.
Ben Pham
I want to go back to the Spain regulations. And can you clarify the clawback mechanism? I think when it was first discussed, you were exempt from that, I think and there’s been some changes to the regulations since then. I’m just curious where the clawback mechanism is at.
Pauline Alimchandani
Yes. I mean I think things are still being reviewed. At this time, we don’t expect to be part of the clawback mechanism.
Mike Crawley
No.
Ben Pham
Okay. Okay. Got it. Okay. And then can you maybe comment on the cluster benefit? You mentioned early in your call synergies and I had asked this question on the last call. I’m just more curious is, I mean, each cluster you add, are you seeing more synergies each time? Is there a point where it starts to taper off? And then is there any other opportunity for clusters outside of Nordsee and some of the other geographies?
Mike Crawley
One of the biggest values of these large projects or projects with scale is how we engage with the OEMs with the turbine vendors and the rest of the supply chain. So I mean, again, on last quarter’s call, we talked a bit about some of the constraints in the supply chain. And I know some of the OEMs are being a bit more selective in customers that they prioritize. So the robustness and the scale of our pipeline, we believe, gives us a lot better standing with turbine vendors as the supply chain kind of works out some of its constraints so that we get priority in our view anyway, is how we see it playing out. So that’s one of the big benefits of it. But on a project level, I think, David, that’s what you’re referring to as well.
David Povall
Correct, yes. I’m thinking of very practically if you’re — the work you’re doing through the development phase. If you’re doing geotech [ph] work, you commission your vessels, you can combine the surveys that they’ve done. And so you save the costs in the development side by doing the 2 projects over 600 megawatts together as opposed to 400 and 200 separately.
Mike Crawley
And your most pronounced benefit — the quantifiable versus what I talked about earlier which is just getting the attention of the supply chain and the priority — having them put priority on you over other projects and other customers, is the tangible — most tangible and quantifiable benefit is on the ops — on the operational side because that extends through the life of the asset and you make much more efficient use of your vessels and your crews as you add scale to an offshore wind project.
Ben Pham
Okay, great. And maybe the last one on wind resource. You saw a nice pickup this quarter. I’m wondering when you look back I, don’t know, I’m sorry, 2018, ’19, there was a correlation — maybe a near correlation between heat — the heat wave in Europe and production. Are you seeing that this year at all? I mean I don’t think so but I wanted to track if you’re seeing the same sort of correlation.
Mike Crawley
No. I mean we haven’t done the analysis, I should say, to see what the correlation is. So I shouldn’t be so glib about it. It’s — yes. I mean what typically you’ve seen on the kind of wind projects in general is — when you have extended periods of hot weather, you often will actually see lower wind speeds this summer with a high temperature, that has not been the case. It’s been generally through July anyway quite good wind speeds across the Nordsee and through the Q2 as well generally. So no, I wouldn’t have anything further to comment on that correlation.
Operator
Our next question comes from the line of Sean Steuart with TD Securities.
Sean Steuart
Question for Pauline. Given the success you’ve had with the ATM program and the strength of operating results this year, can you comment on comfort with the overall liquidity position as the Hai Long financial close approaches? And further to that, beyond the partial sell-downs of the development projects, has the thinking evolved on potential recycling of operating assets, particularly the thermal portfolio at this point?
Pauline Alimchandani
Yes. So I think that today, where we sit, I think we are comfortable with our liquidity position. And we are making progress on the projects that are expected to achieve financial close. Over and above that, there’s progress in Nordsee cluster and we see continued opportunities to use liquidity to fund growth. And so we certainly have a good use of capital within our portfolio. And we are looking at — as you know, we are looking at sell-downs. I think our thinking has evolved on the sell-down front. So yes, we are focused on pursuing sell-downs in and around financial close for all the reasons we’ve stated previously. We are also looking at opportunities for earlier sell-downs and to bring in partners earlier and still being able to capture upside while we’re managing risk and just sharing the exposure on a project at an earlier stage while still maintaining control on all the things that Northland would want from an operating perspective on these projects.
And overtime, we will consider anything and everything to maximize value on the active asset management of the operating assets. To date, it’s largely been focused on debt optimizations which we are still focused on and still expect to continue to do. And over time, that may evolve into more than that.
Sean Steuart
And further to that point on the debt refinancing initiatives, there’s reference to various initiatives expected to be complete by year-end. Can you put some context around that, how large scale in terms of the liquidity you might be able to raise through that process?
Pauline Alimchandani
Yes. So I think what we said was over the next 12 months. So we are working on a number of initiatives. I think it’s too early for me to give you a sense of size of some of those, I guess, planned transactions that are underway. But as the next 2 quarters progress, I think we’d be able to give some more details.
Operator
Our next question comes from the line of Nelson Ng with RBC Capital Markets.
Nelson Ng
Congrats on a strong quarter. A quick clarification on Godewind. So that was RWE’s project and they placed it into the cluster. Do they get anything in return for doing that?
Mike Crawley
So RWE bid on the project in the last auction and were successful on bidding in the project. And so they then worked with us to roll that into the cluster. We would not typically reveal kind of what the commercial arrangement was on — including that in the cluster.
Nelson Ng
Okay. So maybe the JV would do some — like provide some type of sharing in economics with RWE for their interest in the project, right? Does that sound right?
Mike Crawley
To be clear, what it — this is what we absolutely — was kind of a bottom line for us and I think they saw the same way was that we wanted to have one single cluster which now is 1.5 gigawatts. That is constructed as one cluster, that operate as one cluster. We have a joint project team. We each share different positions on that project team. And so it’s very much a balanced partnership on pursuing that. So the Godewind is as much a part of the cluster as any of the other 3 projects. The — all I was saying that we wouldn’t talk about kind of what the arrangement was in detail. We will be able to rebuild the arrangement what it was in detail to roll that in as well as all of the details around the original formation of the cluster with RWE as well.
Nelson Ng
Okay, got it. And then, my next question relates to the cluster as well. In terms of commissioning those projects in the 2026 to 2028 period, is it safe to assume that this is, like, the quickest you could push those projects through? Or are there kind of different avenues for you to accelerate some of those projects or push some of those 2028 projects into 2027 given — like if you get the right corporate PPA and the right price, is there an opportunity to move those projects or accelerate those projects?
Mike Crawley
I mean as we said — as I said in my opening comments, I mean, we understand the need for — and then to some extent, the urgent need for incremental power supply in Europe and we also appreciate the priority on renewable power in Europe. So whether it’s for Baltic Power, the cluster, other activities that we have going on in Europe, we are actively looking at ways and the possibilities to accelerate projects. But there are constraints in terms of availability of the supply chain and just how the time it takes to mobilize and move to construction. But suffice to say, by reiterating those dates, we haven’t identified and with any confidence level yet an opportunity to accelerate it but we do continue to look at those opportunities.
David Povall
Yes. Nelson, as you can imagine, it’s fully aligned as a corporation to bring an asset online as fast as possible and obviously, very much aligned with the European agenda at the moment. As Mike said, it’s — you’ll find across these assets actually and others that use a milestone in there which is difficult to move. And grid connection data are the usual ones which are very difficult to move. Of course, we engage with all the supply chain to try and persuade and find ways of optimizing and that’s exactly what we’re doing here. But it is difficult and we will never jump any steps or miss the rigorous processes we go through in all those due diligence and geotech studies and all the things to do to make sure the project is going to be designed and optimized in the right way. So there’s a balance there to be found.
Nelson Ng
So is it fair to say that grid connection is the main bottleneck and not turbine supply or anything? Or is it just a combination of everything that’s making it difficult to move some of those dates?
David Povall
Yes. Yes. Correct. Combination.
Nelson Ng
Okay, got it. And then just one last question on Spain. Maybe it’s for Pauline. So you gave the guidance of, I think, $215 million EBITDA and $95 million of free cash flow for this year. I know that’s much higher than your expected 5-year run rate when you initially acquired the assets. Does that imply that from — in the 2023 to 2025 period, the EBITDA and free cash flow should be — should fall below your initial estimate to kind of balance things out given that the returns are supposed to be the same over the long term?
Pauline Alimchandani
Yes. So that’s something that we’re still working through. I mean all else equal, I think if you look at what happened in 2022, the Re and the Ro adjusted downwards and — while pool prices adjusted upwards. We netted out positive. However, as we go forward, we’ll have to understand market prices and in conjunction with the regulated revenues on the assets going forward. And again, we’re in a planning basis and we’ll have more information as we head into 2023 guidance.
Operator
Our next question comes from the line of Mark Jarvi with CIBC.
Mark Jarvi
Just coming back to your comment, Mike, about trying to pull forward maybe the time lines if possible on the Nordsee cluster and Baltic Power and then Pauline’s comment about doing sell-downs earlier. Is there a connection there? Obviously, getting the products on is great but that also just brings forward the funding. Is that what you’re trying to allude to, is that you’re thinking about some sell-downs earlier, just if you could accelerate your growth?
Mike Crawley
Your line is a bit muffled, Mark. Your line is a bit muffled but I think your question was related — whether there was — was about where there’s a relation between sell-downs to fund the Nordsee cluster and our ability to accelerate it. If that — if I understood correctly, there’s no relation there at all. It’s strictly on the availability of grid and availability of supply chain to meet the schedule and some permitting probably milestones in just a normal execution of a project but there’s nothing related to funding or sell-downs, if I understood the question correctly.
Mark Jarvi
Yes. Maybe you can hear me better now. But the question was just if you do pull forward the projects that just brings financial close sooner and then you’ve obviously got Hai Long as well in the near term as well. So I’m just curious when Pauline mentioned about the earlier sell-downs, that would just be another way to manage the fact that your funding obligation might come a little bit earlier.
Pauline Alimchandani
No. I meant earlier-stage sell-downs. So we — as you know, at Investor Day, we disclosed a large pipeline of projects beyond Hai Long, Baltic Power and Nordsee cluster. And those are achieving some early value milestones where we could consider earlier sell-downs of some of those assets and not waiting until financial close, just to clarify my comments.
Mark Jarvi
Okay. And then coming back to…
Mike Crawley
Sorry, Mark. I mean the sell-down strategy is all about — what we’ve always done but it’s about 2 things. One, finding establishing the most efficient capital stack to fund projects; and secondly, managing risk and exposure. So both obviously to the benefit of shareholders.
Mark Jarvi
Understood. And then coming back to your comments about trying to find more growth in Europe. Is that more on the onshore side of things? Or are you looking at more opportunities in Western Europe as well where the problems seem the most severe for — on the offshore side of things as well?
Mike Crawley
I think for near-term growth, it would be more likely onshore opportunities. And for longer-term growth, like at the back end of our pipeline, it could be offshore.
Mark Jarvi
Okay. And then going to Taiwan, maybe two points here. Just are you at a point now — maybe you don’t have to disclose it, obviously but are you close to finalizing budgets for Hai Long? And that’d be one. And then as you think about geopolitical tensions there and you look at the opportunity to bid into pending RFP, does that change sort of the risk premium in your bid, I guess, behavior in the context of the change in the last couple of months?
Mike Crawley
Capital costs on Hai Long are very close to being locked down and are largely locked down at this point. So we feel quite comfortable in that regard. And otherwise, the financing wouldn’t be moving ahead at the pace that it is at this point. With respect to round three, so the next round of bidding which will be this year, next year and I think the subsequent year to 2024. We do have projects that are available to bid into those rounds. And we would announce a decision to bid at the point when the decision is made and it wouldn’t have been made yet anyway. So — but we do remain interested in further offshore wind in Taiwan. But we do, as I said in my opening remarks, always track geopolitical dynamics in every one of our markets, including Taiwan and the recent flare-up intention. So nothing more to add to that than kind of what we’ve said in the opening remarks.
Operator
Our next question comes from the line of Andrew Kuske with Crédit Suisse.
Andrew Kuske
I guess maybe if you could just give us a bit of context from your perspective on reregulation potential in certain markets because we’ve got an environment where there’s clearly an ample opportunity to invest capital. There’s pricing escalation in a number of markets which can be attractive on a short-term basis. But how do you think about just the chatter and in some cases, reality of windfall profits taxes and just reregulation in general?
Mike Crawley
Well, we certainly track any regulatory discussions and speculation and proposals that are floated by governments in markets where we operate. It’s kind of an obvious statement but we obviously do that. I think the only thing that we can do is, number one, make sure that our voice is heard and we have a strong regulatory and government relations presence in all the markets in which we operate as those discussions may or may not be taking place. We want to make sure our voice is heard if they are.
And the second piece is to make sure that we don’t do anything that would put us in a compromised position if regulatory changes were taken, in other words, make sure that we manage ourselves with awareness that, that regulatory changes can take place at times when you see big market movements. Be clear, we don’t have any indication of anything happening in Germany and the Netherlands at this point. And what has — and with respect to Spain, we talked in this call about what changes were made there and the impact that they’ve had on our cash flows.
Andrew Kuske
Appreciate that context. And then maybe as it relates to your direct operations, what’s your preference on corporate PPAs or being involved in various government processes or regulated utility offtake?
Mike Crawley
Sorry. What’s our approach on that or…
Andrew Kuske
Your preference. If you could pick either, what would you prefer?
Mike Crawley
Well, I mean, listen, we’ve generally shown a preference for higher quality offtake, so that tilts you towards sovereign back to offtake but we recognize that the way the world is moving, is that there’s a big push of net-zero targets and so on and ESG objectives for corporations to source renewable energy supply. And for energy marketers also just to source energy — renewable energy supply under long-term contracts. So again, within that bucket of energy marketers and corporate offtake, we would tend to tilt towards higher quality offtake higher quality, higher credit quality off-takers as well. So I mean the overarching principle is stable, predictable cash flows and that’s the approach that we take.
Operator
Our next question comes from the line of Naji Baydoun with AI [ph] Capital Markets.
Naji Baydoun
Just wanted to start with the pricing in Europe. You’ve used hedges in the past to protect some downside. I’m just wondering if you’re thinking about using any hedges to maybe lock in some pricing for this year or potentially even for next year.
Mike Crawley
Well, I’d refer you to my answer two questions ago. So we would be cautious on — and exercised a lot of prudence in terms of any actions to lock in future upside prices to the extent that the financial hedge is separated or — to the operating — operations of the asset and if it exposes us to any risk on a regulatory change. And so maybe my answer before is a bit obscure but we would be very cautious and very prudent in terms of how we would — if we would do that and if we looked at how we would go about doing that. Our objective is to always try and, as I said in my last response, to have to the extent possible predictable cash flow for the business but we wouldn’t pursue that in a manner that would expose us to any risk of any substantial loss on a hedge.
Did that answer your question?
Naji Baydoun
Yes, that’s great. And just on Nordsee, I understand maybe the complexities of trying to accelerate the time line of the projects. But just wondering, have your return expectations on those projects really changed materially given just the market dynamics?
Mike Crawley
On Nordsee Two, the cluster?
Naji Baydoun
The cluster, right.
Mike Crawley
Yes, yes, yes. So I mean we’re starting to go out and talk to the market in a more serious way about the offtake. We did a sounding prior to the decision to enter into the — to exercise our step-in rights on Nordsee Two and to establish the cluster with RWE. And now we’re going back out to refresh that view as we move towards entering into offtake for Nordsee Two and Godewind now, the first phase of the cluster. Energy prices have moved up. Net-zero targets and ESG objectives for corporations have moved up. Volatility in energy prices have moved up. So all of that we would expect would be positive for what our assumption is for — certainly for the price that we could contract have and possibly for the tenure as well.
Naji Baydoun
Okay. And just maybe one last question, again, related to the same theme. Just given what’s happening now and expectations for these sort of dynamics to maybe stay in place for years. Do you — has your view on terminal power price assumptions changed in the past few months? I’m just thinking about your existing assets once they’re off contracts. Do you now see the potential for those assets to essentially do worth a lot more if we remain in an environment of volatile prices or just higher prices?
Mike Crawley
So we have a markets group that both takes a view on long-term energy prices in the markets that we’re in based — near term and long term based on publicly available — or power curves that are made available by suppliers but also we adjust those to our own view of market conditions going forward. We continue to do that. But the long-term forecasts do change over time as we’ve seen. So I mean we would stay aware of it but I wouldn’t put too much weight on our long-term forecast.
Operator
And our next question comes from the line of Brett Castelli with Morningstar.
Brett Castelli
I just had a question on the U.S. market. Curious with the Inflation Reduction Act, assuming that does pass here shortly, if that changes your approach to investment for the U.S. market in the long term.
Mike Crawley
It certainly is a positive for renewables in the U.S. So it has the potential to have impact on the onshore projects we’re currently constructing. And then we also have a portfolio of solar projects that we’ve talked about earlier that we’re developing in New York state. So yes, confirmation on ITC and PTC levels is certainly a positive thing for those projects.
Operator
And our next question comes from the line of Matt Taylor with TPH.
Matt Taylor
I want to stay on U.S. How does the Ball Hill and Bluestone updated construction costs compared to what you had originally expected?
Mike Crawley
I think the construction costs have generally come in line with what we had originally expected, more or less. There’s not — I mean if your question is in relation to kind of what you’ve seen in price escalation, those projects went to financial price escalation in the market. Those projects went to financial close and therefore, had locked in costs prior to some of the cost increases that we’ve seen across the market.
Matt Taylor
Right. So the US$600 million that you disclosed, some of the inflationary pressures that you’re seeing on High Bridge effectively, it’s immaterial at this point and sort of a separate conversation for High Bridge?
Mike Crawley
Separate conversation for High Bridge. So the costs were locked in on Ball Hill and Bluestone. They were not fully locked in High Bridge. So a separate conversation on High Bridge, exactly right.
Matt Taylor
And then on High Bridge, can you maybe just elaborate on some of those inflationary pressures you’re seeing? And then you said potential impacts. Are you trying to look for clarity on the PTC, ITCs that might get passed? Or what are the puts and takes that are going on with High Bridge?
Mike Crawley
Yes. We would — we certainly kind of working through what was passed through the Senate, I think, goes to the House today. Maybe it’s — maybe smooth as it is going to the House shortly. So we’re working through that legislation to understand the impact that it have on our projects in construction, our projects that are permitting and our projects that are under development in the U.S. Overall, it’s certainly a positive impact on all of those projects but we haven’t come on to a firm view on exactly what the impact yet is on those projects. But we will see if it’s definable. We just have — haven’t finished the analysis yet.
Operator
Mr. Crawley, I’m showing no further questions at this time. I will turn the call back over to you.
Mike Crawley
Okay. Well, thanks everybody for joining us today. We’re going to hold our next call following the release of our third quarter [ph]. I want to thank everybody for their continued confidence and support. Thank you very much.
Operator
Ladies and gentlemen, that does conclude today’s conference. Thank you for participating. Have a pleasant day.
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