Innergex Renewable Energy Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2023 First Quarter Results Conference Call and At this time, all participants on the phone and Internet are in a listen only mode. Following the presentation, we'll conduct a question and answer session for analysts and Institutional Investors. I would like to remind everyone that this conference call is being recorded.

Operator

I I will now turn the conference over to Karen Vachon, Senior Director, Communications. Please go ahead.

Speaker 1

Thank you. Hello, everyone. Thank you for being with us today. I'd like to specify that this conference will be held in English. Members of the media are invited to ask their questions by phone after this call.

Speaker 1

Webcast. A presentation pertaining to this discussion is available as we speak on the homepage of our website at www.innergex.com. This call contains forward looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions on which forward looking statements are based are reasonable under the current circumstances. Bookings.

Speaker 1

Listeners are cautioned not to rely on DUMOURI on these forward looking statements as no assurance can be given that it will prove to be correct. Forward looking information contained herein is made as of the date of this call and the corporation does not undertake any obligation to update or revise During this call, we will refer to financial measures that are not recognized according to International Financial Reporting Standards. Bookings. Our speakers today will be Mr. Jean Soudel, Chief Financial Officer, who will present Q1 results and Mr.

Speaker 1

Michel Eterrier, President and Chief Executive Officer, will review our operational highlights. I

Speaker 2

I'd like to just give you an overview of the changes we've made to the presentation of our consolidated financial statements. On January 1, 2023, the corporation revised the presentation of its consolidated financial statements to enhance their relevance To readers, production tax credits or PTCs previously recognized as other income Bookings through the generation of electricity. In addition, certain subtotals have been removed from the consolidated statements of earnings and an operating income subtotal was included. And as a result of these changes, certain non IFRS measures have been amended as follows. So the PTCs are now presented directly in revenues and production tax credits and in adjusted EBITDA Bookings, along with the realized portion of the change in fair value of power hedges.

Speaker 2

Other income related to PTCs bookings has been removed from the revenues proportionate and adjusted EBITDA proportionate measures. And proportionate measures will now include only Energix shares of revenues and production tax credit and adjusted EBITDA of the joint ventures and associates. The corporation also revised the calculation of its free cash flow and payout ratio measures to exclude the prospective project expenses. These amendments to our measures aim to increase the relevance of the measures, allowing investors to better understand how operations As shown on that slide, the corporation posted growth in revenues for the 3 months ended March 31, 2023, Production was flat at 2.3 gigawatt hour and revenues and production tax credits were up 5% at $218,000,000 compared with the same period last year. This increase is mainly explained by the contribution of the acquisitions of Aella and the Sault Ste.

Speaker 2

Marie facilities in Ontario, Higher generation at the Curtiss Palmer facilities and higher spot prices from the Chilean facility, higher production from the U. S. Wind facilities and higher production and the impact of new power purchase agreements in place at facilities in France. But these items were partly offset by exceptionally low production at the hydro facilities in BC due to drier weather and the BC Hydro curtailment payments that we received in the Q1 of 2022. The lower production from the wind facilities in Quebec and low eruduation and selling prices and higher economic curtailment at the Phoebe solar facility in Texas and at the solar sites in Chile.

Speaker 2

So for the 3 month period ended March 31, operating, general, administrative and prospective project expenses were up 30% Bookings at $75,000,000 compared with the same period last year. The increase is mainly attributable to the acquisition of Ayla and the impacts of the 2022 supplementary budget act in France and these items were partly offset by lower maintenance cost As a result, adjusted EBITDA for the quarter reached $145,000,000 which represents a 3% decrease compared to the same period last year. Revenues and production tax credits proportionate were up 4% at $224,000,000 And adjusted EBITDA proportionate reached $148,000,000 which represents a 4% decrease compared to the same period last year. The corporation recorded a net loss of $30,000,000 for the 3 month period compared with a net loss of $35,000,000 for the same period last year. Now on the next slide, the trading 12 months ended March 31.

Speaker 2

The corporation generated free cash flow of $136,000,000 compared with $185,000,000 for the corresponding period last year. This decrease is primarily explained by a decrease in cash flows from operating activities, as I discussed above, and an increase in the Interest paid mainly stemming from the additional indebtedness to finance the acquisitions and the construction activities, and budget. The increase in merchant prices at certain USA and Chilean facilities and a decrease in free cash flow attributable bookings to non controlling interest of the BC Hydro facility. The decrease of $19,000,000 in free cash flow resulted in a payout ratio of 1 108% for the trailing 12 months ended March 31 compared to 89% for the same period last year. So on the next slide, I'm bringing back the slide on our indebtedness.

Speaker 2

So our Total indebtedness amounts to $6,100,000,000 at the end of the first quarter. And it's important to note that these loans have little exposure to rising interest rates with 92% bearing fixed Rates are fixed under long term hedging agreements and also 100% of the project loans and the tax equity financing bookings are amortized over a weighted average life of 16 years and are supported by high quality and predictable cash flows. What's important to note on this slide is that Innergex facilities have a useful life far exceeding the current amortization period of the existing debt. If we were to amortize our debt on a straight line basis over the useful lives of our underlying assets, The free cash flow and payout ratio for the trailing 12 months ended March 31 would have been $160,000,000 and the payout ratio would have been 90%. That's important to note because we can refinance that capital structure over time and Bookmark.

Speaker 2

And it's a better reflection of our capacity to generate cash flows over the long run. Now I would like to take a few minutes on the next slide To shed some light on the weather situation, more particularly in BC, so we've done some analysis and we analyzed the past 4 decades averages of the hydrometric data collected from water survey Canada stations and Book And these observed historical flows have a strong correlation with the hydrology of many of our hydro facilities in BC. These observations are indicative of course and should be taken with precaution. But as you can see, the results presented on the chart On the slide shows us that hydrology of 2022, that's the green line that you see, and End of the Q1 2023, so the yellow line for the Q1, deviated from the last 4 decades monthly averages, So the blue bars on the chart and this has significantly impacted energy production. Basically more water than what can be turbines was received in June July 2022 and very dry conditions were experienced in April, September, October November 2022 and especially in February March of 2023.

Speaker 2

We can note from the graph that April The 2023 trend gets closer to historical average and also the historical data that you see on the right side of the graph Seem to demonstrate an upward trend in annual average flows over the last 4 decades. So small trend, but yet positive. So according to this graph, year 2022 and the Q1 of 2023, I think, could be considered as an anomaly. And we can be hopeful that a return to the mean is in mother nature's plan. So that Gives me I'd like to give you an appreciation of our earnings power.

Speaker 2

And so this leads me to talk about normalized Figures. So if we are assuming 100% of long term average production That could be that would have been met. That would give us like a normalized view of our numbers. So we excluded from this analysis Our activities in Chile, where a lower production is mostly offset by a better pricing environment and therefore has little impact on free cash flows. As you can see, when the LTA is normalized, revenues and production tax credits and adjusted EBITDA would have reached 244,000,000 and $170,000,000 respectively in the Q1 of 2023.

Speaker 2

On a trailing 12 month basis And with only the Q1 of 2023 adjusted or normalized for 100 percent LTA, The free cash flow would have increased by $21,000,000 resulting in a 14% point improvement to our payout ratio From 108% to 94%. On a trailing 12 month with all For previous quarters normalized for 100% long term average, the resulting payout ratio would have been in a range from 72% to 77%. As a concluding remark, even though our first quarter results We're lower than expected in terms of production. Our fundamentals remain strong and we remain confident that our production will improve over the coming quarters. And I will now give the floor to Michel for the quarterly operational and development review.

Speaker 2

Thank you.

Speaker 3

Thank you, Jean. It was an extensive presentation and I hope that you guys can appreciate the explanation on the long term average and the Normalized results. So we although we were sad or well, Hard to be sad or happy, but it's not interesting to have 2 bad quarters in a row. As you can see, we think that long term average will come back and then we'll have much Better results. So let's hope that mother nature will cooperate.

Speaker 3

So far, April has been a little bit weak still in the West, But April is really strong and we're hopeful that the long term average in BC is coming back. We've been busy this quarter again. I think that on Page 12, you can see the 3 main activities. We Have actually signed and start the initiated the construction in Boswell. This is a 3 30 Megawatt bookings.

Speaker 3

Wind facility under a long term PPE of 30 years. So it's a big project for us, Very interesting cash flow will come from that project. We are confident that The Q4 2024 is our COD target date. We are reiterating that date. Construction that started as I mentioned.

Speaker 3

GE is all aligned to deliver the equipment. And so we're confident that this date will be met. Although construction, there could be some uncontrolled event, but so far everything is lined up to have the project Being in service, so that will be a big milestone for us and that will provide quite a bit of cash flow contribution to our bottom line. We also have consistent with some of our strategy in order to support the short term cash flow. We have for the first time well, not first time, but since 2018, it's our first acquisition in Canada.

Speaker 3

We have been successful in buying 60 Megawatt Solar Facility under contract in Ontario. Glad to have that asset, diversified the geography of our portfolio and also in terms of technology. Those are Very good track record on production. So we like that strategy to diversify our portfolio Bookings. And I guess it will help also mitigate these quarter to quarter We think that's the best solution is to have more diversification in our portfolio to take advantage of the difference between the region and technology exposure.

Speaker 3

Also pretty happy to have 1, the project, Mitsgegejukson extension, we call it MU2 extension Or a new one extension. Glad to have been able to capitalize on the very good relationship we have with the Mi'kmaq Experience with them building the MU1 and it was just a natural to expand on the MU2. So it's a first for us for a while in Quebec to have been selected for a PPA, but it's certainly not the last hopefully. As you will see, we'll talk about the Quebec RFP. There's a 1500 Megawatt Bookings.

Speaker 3

RFP going on right now. Due date is September. We're working very Hard to be present. Last time, we only submitted one project. We were happy to win that project.

Speaker 3

But in the second phase, we will be bookings. And have more project submitted to that RFP and getting prepared for the subsequent one. If we switch on Page 13, I already covered the MU2 win. Innovic is under construction. We're very confident that it will be put in service late July or early August.

Speaker 3

The construction and activities has restarted last week In order to finalize the upper pond, if you remember last year, unfortunately, The winter got us too early and we were not able to close the water bypass In order to create the at Pond to produce water, we have now been successful in Starting to basically close this water deviation and we're confident that the project will be Able to produce its 1st kilowatt somewhere early July and it's going to take 30 to 40 days To finalize the COD. Been also busy in France. We are hopeful that Oxy Boirenier Recourse in front of the court will be judged in our favor And that project would be then green light to advance. We also had the Mangere This project has its permit and its BPA. It's the interconnection that is a little bit late.

Speaker 3

We're working to potentially have a earlier date of interconnection right now. We're scheduled to be in 2028. We've been also very pleased to have been successful in obtaining for Palomino the certificate of environmental Book Compatibility, I'm sorry, and Public Need. That's a long title for an environmental Permits. But that's the main and last one that material permit that we need in order to go ahead with Palomino.

Speaker 3

The remaining, I would say, restriction for Panalomino is to have a final date to interconnect. It's sad to see that PGM is so busy and they have difficulties to give us firm dates. We're not the only one. I guess the PGM

Speaker 4

is a little bit of

Speaker 3

a mess in its ability to provide Firm date for interconnection. So we're waiting. So is our offtake. Palomino is on the front line and already We just need the green light to interconnect. Interconnection is also a little bit of a challenge in Watoma.

Speaker 3

If you Remember, we have talked about Watoma, very nice solar project in Washington, a lot of inquiry for offtake. But again, transmission is an issue. Unfortunately, the U. S, as you all know, is a huge market, A lot of possibility with the new IRA, but interconnection is the limitation of how fast The U. S.

Speaker 3

Can grow. So we're working hard to find ways where we can interconnect the project quicker, but this is the challenge in the U. S. I think we're not the only one. This is the main challenge in the U.

Speaker 3

S. Interconnection. We have also We've been a little bit active in ALCO Way. We're limiting the construction activity until we can have Hopefully, the green light to have our PPA increase in price. We have submitted A proposal of 56% price increase to the PUC that has been by by September.

Speaker 3

So stay tuned on that. Also, I guess that The other activity in construction is Salvador and Santander's battery storage. I'll talk about it a little bit later In an interesting graph that I'll show you the logic behind the installing the battery in Chile, but This is going very well. We have started to receive the battery container. All the steel works is done and we're only waiting to Put the battery together and hopefully being able to produce not to produce, but to start Using the batteries somewhere late July, August, we should start taking advantage of the battery Group.

Speaker 3

If we go on page 14, I alluded a little bit our activity in the prospective project. We're still pretty active also in France. We now have quite a bit of advanced project. We have over 2 100 Megawatt of advanced project in France and a total of a portfolio of over 400 Megawatt. We have also being more And solar as we mentioned in the past, the team is very effective.

Speaker 3

We have a small team, but very efficient and Bookings. And pretty happy to see how France is evolving these days. Working hard and you'll see Some new numbers in Q2 in terms of new project being added in the prospective. We've been working hard in Quebec, Ontario, also we have been submitting a 100 Megawatt 100 Megawatt Hour, not 100 Megawatt, 4 hours of storage in the RFP Budget. In Ontario, we also submitted 2 projects, 150 Megawatt and 35 Megawatt for our battery In the request of interest in New Brunswick, getting prepared also to answer the RFP in Saskatchewan both in solar and wind.

Speaker 3

We have 2 solar project and one very interesting 200 Megawatt When to be proposed in Saskatchewan, we are actually very, very active and proactive also On Page 15, just to have perhaps I just mentioned, but and it's no way to minimize the Other market, but I think that Canada, giving the new program in budget for the federal Supporting NITC for renewable energy in Canada is putting a lot of attention and is creating Potentially a lot of new opportunity. We already know and we mentioned in earlier call that Hydro Quebec He's adding a strategy to be coming back for RFP in and potentially also some solar facility in Quebec. So Quebec will be busy. Ontario has Started to move also, but my take on Ontario and BC, I mentioned it before, If Quebec is looking for more production and you know that Quebec Eating habit in Quebec, we have a lot of houses that are already using electricity to heat the house. So we need to basically decarbonize the transportation, some natural gas also in the heating system, but also in industrial processes, but it's lower than Ontario and in BC.

Speaker 3

So if Quebec is busy like that trying to Call. Have more renewable energy in order to meet these goal of decarbonization of the economy. I cannot imagine How busy Ontario and BC will have to be, same with New Brunswick and Nova Scotia, where they are still burning coal. So I think that Canada, with the new program, will be quite busy. And Bookings.

Speaker 3

And I'm not saying that because we will be less busy in the U. S. We think that there's a great opportunity also and by the U. S. But I think that we will have a great opportunity as well in Canada.

Speaker 3

And as you know, we have been very successful in Canada over the years, Especially being a First Choice partner with First Nation, I think that we have a great opportunity To develop future project in Canada. We also I'm coming back to the Successful in securing the financing of Santanderas for the construction. It's a very interesting concept And I would like to give you a little bit of a perspective on Page 17. On that graph, This is the average price of electricity on the node of Sant Andres and Salvador. So when you're producing solar, this graph is not a good story.

Speaker 3

As you can see, this is summer though. It's probably more intense, these huge volatility bookings during the day because in summertime as you know, obviously solar is producing at its max, but this is the price Of the electricity in the north of Chile, you see that basically as the sun rise, The price of electricity is going down up to sometime 0 during the mid afternoon, late Morning and late afternoon. You see the huge spread between $180 per megawatt hour versus almost 0. This is where the battery can make a lot of money. Our business case in this Investment was to take about $50 of volatility.

Speaker 3

Now we're seeing over $100 Webcast. Per day in terms of round trip for the use of battery. We have 4.25 Megawatt Hours. If you use $100 in that quarter on an annual basis, that's $40,000,000 of revenue On these batteries. So and we're almost the only one with material investment in that Part of Chile.

Speaker 3

So I think that we're rushing to have those battery in service. Winter is coming in Chile. So These big spread will narrow, but it will be still very volatile And we can't wait to have those battery on and available to make some arbitrage during these great volatility in that market. And this is not going to slow down that much. As you know, the new interconnection In Chile, we'll only come in service somewhere in 2029 and perhaps 2030, 2021.

Speaker 3

So we will see a lot of volatility in the north of Chile for the next 4, 5 years, and we intend to take advantage of it. So on that note, we would open the question.

Operator

Acknowledging your request. Your questions will be pulled in the order they're received. Please ensure you lift the handset Your first question comes from David Quezada from Raymond James. Please go ahead.

Speaker 5

Thank you. Good morning, everyone. My first question here, just around Your M and A strategy and the payout ratio and appreciate the thoughts you provided around what the payout ratio is with more normalized weather. Just wondering what the strategic implications of that are. I know in the past you've used M and A as kind of a bridge to help with the payout ratio.

Speaker 5

But it seems like you've got a lot of greenfield opportunities today.

Speaker 6

Does in this context,

Speaker 5

do you think you'll tilt Maybe a bit more away from M and A going forward and more towards those greenfield opportunities?

Speaker 3

Well, it's a good question. Book. We like to take advantage of the M and A when it makes sense, when it's really accretive. And as you all know, We would be reluctant to use our stock to fund new M and A. We see that price Has been depressed and we're mindful of that.

Speaker 3

We're sad about this and hopefully, we'll do a better job explaining to you guys and To the market, what we're doing. I think we have great opportunity as you mentioning in terms of growth. Our people On the ground, we are seeing a lot of opportunity. We're working hard, building up the prospective pipeline, as I mentioned earlier. Never been that optimist in terms of ability to grow from our greenfield pipeline.

Speaker 3

I've been in the business for more than 30 years and never been That busy in trying to secure new project in our 4 market. It's really impressive All the opportunities are coming. Never seen such a great support From the federal government here in Canada, remember the last effort from the Fed was the EcoEnergy program, which was bookings. $0.01 for 10 years and they only had committed $1,400,000,000 if I remember it well. So that was very limited And having this ITC that will be available for all the renewable energy industry is providing us Great support.

Speaker 3

But to answer your question, I think we'll be opportunistic in terms of M and A. If there's something that comes and makes a lot of sense, We may act, but I don't think we will be as aggressive as in the last couple of years. There is also some strategy to recycle a little bit of our As you know, we are not we have not been very active on that side in the past. We mentioned in the last call that France portion of 30% that we bought from Desjardins last year could be something that we could act in saying that we could sell 30% of the platform in France, we have been approached by financial institution in Europe. And we have actually started a small process to see if we can find the right partner and the right value.

Speaker 3

And if we do, we could act on that aspect. I don't think it's a big secret. It has been circulated in the web that we have retained Green Giraffe has an advisor on that process. So stay tuned. We think that there's Possibility of us acting on this and that would solve some of the liquidity issue that you guys have in your mind.

Speaker 3

You urge Jean alluding also on our ability to refinance some of our asset, encumber asset. Lately, we have renewed some long term PPA for hydro in BC. BC Hydro has been Acting on a program to renew. We have renewed Brown Lake. We have We're on the process of finalizing Miller Creek.

Speaker 3

Miller Creek is a 30 and 3 Megawatt Hydro Facility That was on the merchant aspect. We were being priced on midsea. Lately, it has been good. But we think that the price that Bciadro has proposed in the $60 range with inflation Is a good compromise for Miller. So we would have the ability to refinance Miller has no and Bookings.

Speaker 3

And is part of the same, renewed program by BC Hydro. So just there, we would have over 100 and Polyneft also in Quebec. We would have close to 150 megawatt of new PPA on hydro facility without any security on them. So That's a great opportunity also to refinance. So don't worry in terms of liquidity.

Speaker 3

We have a plan and we're acting on it. And it will be it'll take a few months to do this, as you all know. But we are confident that these two initiatives will solve our I wouldn't say we have liquidity issue, but it would give us A lot more flexibility in terms of liquidity. It's a long answer.

Speaker 5

No, that's great. I appreciate Bookings. And then maybe just one more from me. Just thinking about some of your larger scale development projects in the U. S, I know you touched on Waitomo and Palomino, but I believe there are others in Colorado and Texas.

Speaker 5

It sounds like you've had some promising developments there. Just wondering if you could provide any the details of that?

Speaker 3

Yes, we have one racetrack in the 200 solar facility in Texas. It's ready to go. It's off that we We're not too keen in putting more money in Texas, although we've been approached also by Some player that might be interested to take this. We may be able to advance the project or even build it and sell it. In Texas, we I'm very well, we are reluctant to have more assets in Texas.

Speaker 3

So Race Track could be an opportunity to develop and hopefully make a profit of development and And letting another player to take it over. We have been submitting my life in the Colorado Last RFP about 1.5 months ago unfortunately, we missed the we were a little bit maybe high on the price, But there is more RFP coming for Colorado. So we are going to adjust. The Mylai was 150 megawatt solar With 4 hours battery, very well located close to the airport of Denver. So we think this is this has Some good potential and we're going to still advance that project.

Speaker 3

We have also Watahoumen in Minnesota area that has some promising. We have big project in the U. S. Waiting for basically interconnection. We have to find ways To have windows of interconnection, so WattoMine might be an interesting play.

Speaker 3

It's a little bit off the Hotspot in terms of interconnection. So working hard on the team is working hard and producing large numbers of project that are in the 200 to 400 Megawatt range. But again, U. S. Is difficult to find the sweet spot to interconnect.

Speaker 3

That's unfortunate for the U. S, but this is the only, I would say, Bad news in the U. S. Is interconnection.

Speaker 5

Okay, excellent. I appreciate that color. Michel, I'll turn it

Speaker 4

over. Thanks.

Operator

Your next question comes from Nick Boychak from Cormark Securities. Please go ahead.

Speaker 5

Thanks. Good morning. As you're talking about those really attractive U. S. And Canadian growth opportunities, can you guys just wrap a number roughly around the CapEx Estimated to be spent in 2023 and potentially in 2024 as well?

Speaker 3

Well, in 2020 3 to 2024, we have already committed the equity for Boswell as if you remember. We also have the tax equity lined up and the financing for Boswell. Jean, if you You want to add up, but this is our biggest initiative. The battery in Chile is financed Already the equity portion of it is already done. MU will not be a big spend in terms of Equity.

Speaker 3

MU2 is supposed to be in service by 2026, but we're working hard to advance this. There There is a possibility where we could advance the project, but it will be Finance to 75%, 80% long term average and the ITC will help also reduce The equity component of those projects. So MU should qualify for the ITC. So we don't foresee a lot of equity need in 2023, 2024, although we're also working on project in Chile for solar thermal. It's not in our prospectives yet.

Speaker 3

We have submitted a proposal to BHP, but it's Binary, if we were selected, we win. If we don't, we're not. But we're in the last two runner book. For that project, it's a little bit I don't know if you picked up the news that we have renew With Pampa Elvira, 34 Megawatt of Solar, passive solar for their Codelco Copper Mine, we have renewed an extension of 10 years. So that's a good news for us because they will be looking also for an expansion and we think we could probably add another 15 to 20 megawatt of capacity there.

Speaker 3

So this might be a segment of our business in Chile That can expand is supplying hot water, driven by solar passage panel. This is something that we might also be Active in 2023, 2024.

Speaker 2

Maybe just a little bit of color, Nick, on the Boswell project, [SPEAKER JEAN FRANCOIS PRUNEAU:] We're really advancing the financing with the long term construction loan and long term takeout and the tax equity. And bookings. And put together, we will get to very close to 90% of total cost. And right now, we've already invested More than the equity required. So, at the closing of the financing, we expect to actually get some funding back and Book.

Speaker 2

And then to continue the construction by drawing on the loan. So that one is interesting. And also if we can actually Qualified for the others, the PTC others, that would be also a nice windfall if we can monetize upfront these others And actually increases the IRR on that project significantly, like by each trends of 10%, It's roughly 4% to 5% increase after tax IRR. So that would be extremely positive for the project. And then HK NOI has also pretty much all the equity required has been funded.

Speaker 2

So as we Finalize the financing, obviously, we need to obtain the PUC consent on the price revision. But once that's done and we put the financing in place, We would also recoup some of the funding that's already been put in HK. So for 2023, like there's really the financings are really what's It's on our mind right now, but once it's completed, there's no major need for capital.

Speaker 4

Okay. That makes a lot

Speaker 5

of sense. Thanks. And then as we're looking at the BC Hydro assets, there's a bit of an indication in your prepared remarks that some of those assets could have been Potentially optimized and that you're looking at ways to improve the operation and ongoing maintenance of those. Can you talk a little bit about what those initiatives might be and the potential magnitude if they work?

Speaker 3

It's not huge, right? It's on the margin, but we already have done one change of the It's called it's the water intake. It's the Yes. The intake that it's the I can't remember the name, I'm sorry. We have Had some early design issue that they were built with some flaw and we changed that.

Speaker 3

So that's going to help us a little bit. Trying to have better equipment for monitoring the environmental flow. In the past, it was a little bit more difficult to Calculate these flows. So in order to make sure that we would not break the environmental permit and obligation, we We're leaving a little bit more flow going over the crest of the dam. So all these little things are not Huge, but they're adding 2%, 3% perhaps on the long run.

Speaker 3

And the team is working hard in order to maximize these and take advantage. We also have been successful in Miller Creek, an example, to eliminate some environmental flow where There were actually no fish and we were able to show that the environmental flow was not needed in a section of the river. So these little things are not huge, Nick, but they're adding, right? I mean, every little 1% or 1% improvement is going right in the bottom line. So that's something and we have now Better technology.

Speaker 3

We have better data tracking and we're doing some analysis with big data On what we could do in wind also to try to tweak the software in order to take advantage of a little bit Better to win, start a little bit earlier in when you have some icing on the blades, trying To have some new methodology to restart blades that have had some icing issue. All these things are not huge by itself, but if you had all these little things, Makes some material at the end of the day, but they're not big. It's On a day to day basis and trying to have take advantage of the new technology that is coming up.

Speaker 5

Okay. That's great color. Thank you very much.

Operator

Your next question comes from Mark

Speaker 7

Lots of opportunities in Canada, you highlighted that well on Slide 15. Webcast. But it seems that there's still a little bit of uncertainty on the tax credits, the ITC. How does that play into your bidding strategy? Do you think you'll have clarity on that before you have to submit into all these RFPs?

Speaker 3

That's a very good question, Mark. It's true that we don't have all the detail yet. Our fiscal team has been trying to get and provide some feedback to the tax team of the federal agency. We're hopeful that they understand that a lot is relying and Bookings. On their final documentation.

Speaker 3

So they seem to work hard in trying to have Their final design by somewhere this summer, we're hopeful that we'll have all that information before September For Hydro Quebec, we've been talking to Hydro Quebec on what they would be trying to put in the RFP. This is The period where we can ask question during the RFP preparation. So a lot Our peers are having the same problem. So either they will continue to ask Some kind of sharing if the ITC is not clear or if it's clear then They might just say that they might take for granted that everybody will put that into their bids. But it's true, Mike.

Speaker 3

Bookings. It's complicating our life a little bit if we don't know when we're bidding.

Speaker 7

Is there any potential just to defer some of these push them back a few months just You can maybe get clarity?

Speaker 3

I would be surprised. I would be surprised. I think that the solution for Hadoop Quebec from What I understand is that they could keep the option of sharing the benefit once The detail would be clear. So that's one possibility That's not creating a problem for either of. It's just a little bit more complicated to share afterwards, Because as you know, the ITC doesn't apply to the same level from a nontaxable entity and book.

Speaker 3

And the taxable entities, so that makes our life a little bit more complicated, especially in Quebec where in these They are requesting to have local partners either municipality or First Nation. So yes, I mean, we'll be working hard with our tax adviser to find the best strategy in order to take the full advantage of the ITC. But I mean, it's part We're happy to have a program. So we cannot be too negative about it. But of course, We would need to have clarity in order to take full advantage of the program.

Speaker 2

And Mark, once I mean, we are exchanging now with Authorities whenever we can. But it's also interesting for projects that we have already, like projects like INEAVEC or the project we won in the RFP program. So we're obviously very interested to see the legislation when it comes out. But there's potentially some upside for us and our partners On these two projects, so obviously we're very interested to understand more.

Speaker 7

Second question for me is just the BC Hydro assets, obviously the volatility, obviously you don't want to see it, investors don't want to see it, Maybe not looked upon positively by public investors and maybe it kind of dampens how your shares trade. Would you consider again doing a partial sell down there where private Investors might be able to ignore those quarterly variations and recognize the long term assets and contracts there. So I'm just going to update your views in terms of maybe monetizing a partial stake in the BC Hydro assets.

Speaker 3

We're not so keen in doing so, but it's something that Yes. Has come to our mind and we're always trying to be objective and not necessarily subjective In our financial analysis, but again, right, I mean, you're trying potentially to sell something that has had some Bad quarters. We've seen that in Quebec about 10 years ago Or even 13 years ago, we had 2 or 3 really bad hydrology year almost in a row. And then things had I've cleared up. Seeing what happened in California last winter, They had extended drought and then suddenly they can and all the water they and the snow that they had received.

Speaker 3

I'm positive about the outcome in the hydrology. As Jean shown you, The last 4 decades is showing an increased hydrology. The expert that we have been talking to are showing wet year winter in BC, but perhaps drier summer. But remember, We're making more money in winter on the pricing structure in BC and we are run of the river Busch. More water.

Speaker 3

You've seen also last year on the graph that John has shown you is the fact that we had a huge Bookings. Spring runoff last year. And when you have run of labor, you cannot book. Catch that big runoff in the spring. So actually if the winter are getting warmer down the road And you have more rain events during that period of time that is only better for our long term production.

Speaker 3

So We're not saying never, but we're very optimistic on the long term hydrology. It's just 2 really bad That can happen. It's very unfortunate, but I believe I'm a strong believer or diversification. And by growing in other Places in order technology, that portion of our exposure in BC, I. E.

Speaker 3

Hydro, We'll get smaller as our portfolio gets bigger too.

Speaker 7

Yes. Okay. That makes sense. Last question, just to clarify in terms of when you might be able to do the sort of debt onto the re contracted assets or unencumbered assets, is that something that can happen in 2023?

Speaker 2

Yes. I think it's something that can happen in 2023. So, we're working and as Michel pointed out, we have some renegotiation of contracts to put in place so that we can gather the longest visibility on the power pricing and revenues on the facilities. And there's some reorg that's potentially beneficial to that as well. So we're optimizing now the number of facilities that we'd like To refinance and yes, definitely it's something that we have to complete by year end.

Speaker 3

And Mark, you're talking about Potentially selling some assets in hydro in BC, but actually refinancing these assets on a long term basis It is somehow a divestiture, a little bit of our equity exporter there to some degree, right? If we go back and put another 75%, 80 The financing on those assets indirectly, We are reducing our equity exposure to these assets and it's cheaper. As you know, that is much Cheaper than trying to sell equity.

Speaker 7

No, that's a very good point. Okay. I'll leave it there.

Speaker 2

It's a substantial amount. Also maybe we can give an indication. It's certainly an amount above 200,000,000 that we would probably get out of a refinancing like this that would delever the topco. It's material for us.

Speaker 7

Okay. Thanks, Sean.

Operator

Your next question comes from Nelson Ng from RBC Capital Markets. Please go ahead.

Speaker 4

Great, thanks. I had a few questions on Hawaii. So I guess the first question is in terms of the $13,000,000 that you'd get back, Can you just give a bit of color as to whether that's like whether you're just getting back a deposit or you're actually making some gain out of the arrangement of terminating some of the Battery contracts. And then the second part of that question is, can you just give an update on your Hawaii strategy? Because I guess you've sold an early stage project.

Speaker 4

You're canceling some of the battery supply agreements. Can you just give a bit of color on, Yes, I guess what your longer term strategy is there for Hawaii?

Speaker 3

Yes, I guess that You're right. We had a little bit of a deposit with Tesla, but the contract that we had with Tesla were firm In terms of delivery and we had also the option to have the battery delivered somewhere else. So Tesla was actually willing to pay us a finality to basically break that obligation. And Bookings. And hence, we made more money well, more money.

Speaker 3

We made more Money than only our deposits in those renegotiations. So We did capture a little bit of that value on doing this. To come back to you, I don't want to expand too much on Hawaii and you'll understand we are in front of the UC for Aliko Way. But you could probably understand that if we're Selling these things or breaking the commitment with Tesla, I guess that If we find the right moment and the right opportunity, I think we have Better use of our resources in other market.

Speaker 4

Okay. That makes sense. And then just one quick question on Simmons Creek and Rutherford Creek. So I think in the MD and A, There's a disclosure saying they're in breach of their credit facilities. Is that mainly just due to low hydrology and it'll kind of go back to normal Okay.

Speaker 4

Yes.

Speaker 2

And on Rutherford, it's important to note that there's very little left on the long term financing, Only $1,600,000 was in the long term and was put back in the short term. There's only 1 year left really to the debt schedule.

Speaker 3

Okay. Got

Speaker 4

it. And then just one last question on Innovic, The hydro development, I know it's small, it's 7.5 megawatts and you only own 50%. But I noticed that disclosure on the EPC contractor asking for roughly $58,000,000 I think looking at some older reports from a few years ago, the original project cost was about 100 and $25,000,000 on a 100 percent basis. So can you just comment on Where we are on project costs?

Speaker 3

Yes. We're showing in our MD and A A provision of $17,000,000 of extra cost. Why are you using this? I cannot Go to the we had an arbitration process that I cannot talk too much about. But We were very close to have an agreement and unfortunately for the reason I mentioned that the contractor could not Put the diversion in place and then delayed the project for about 4 or 5 months.

Speaker 3

We have liquidated damage for them not meeting the target COD date. And I think they were discouraged on that aspect. So we retain all our rights To litigate to those liquidated damage, I think that the $70,000,000 that we have embedded in our Total cost now is conservative. And according to our lawyers, we have very strong case against the contractor and that $17,000,000 in front of the court Should hold and we I think it's very conservative.

Speaker 4

Okay. All right. That's great. I'll leave it there. Thank you.

Speaker 4

Thanks.

Operator

Your next question comes from John Mould from Citi Cowen. Please go ahead.

Speaker 8

Thanks. Good morning. Maybe just going back to your broader growth strategy in the context of that 2025 run rate Book Free cash flow target. You've noted you'll probably see at least in the near term slowdown in M and A and referenced at least in the context of the U. The challenge of interconnection.

Speaker 8

So maybe just looking beyond your current pipeline, what markets are you hopeful What will be the primary driver of that remaining growth to get you to that target for about 2.5 years out?

Speaker 3

It's true that it's challenging, John, in terms of the delay of interconnection in the state. That's A little bit of sad. So we always said that the 2025 target was challenging. It's still challenging. We still think we can make it.

Speaker 3

M and A will have to play a little bit of a role in this, but we cannot be dogmatic. Also, if we have huge and great opportunity to develop project and create long term value for shareholders, that's what we're going to do. So yes, we have put a very, I would say challenging target for 2025 Dollar per share. We were trying to go on that path, But we're not dogmatic. If for all kinds of reason M and A is expensive and we have other great Bookings.

Speaker 3

To create long term value by securing a great project for the future, that's what we're going to do. We'll keep you apprised on how we are making on that long term strategy. But I think let We were there for the long term. We're there for creating value for our shareholders. And there's huge opportunities out there In all our 4 markets, it's not only I know that I've been very optimistic and upbeat on Canada, because it is Actually, opening up and fast.

Speaker 3

But boy, I mean the U. S, France and Chile Our great market as well. There's huge opportunity in all our markets at this time. And Bus. And therefore, we've been and we have and will be a company that makes Project development, as you know, we're fully integrated.

Speaker 3

We are able to develop greenfield project, follow construction And we love to operate our facility on a long term basis. We have not changed and we will not change. The little bit of difference is our Willingness sometimes these days given the very low appreciation of our stock is to recycle some of our assets. We've been also in the past willing to refinance and I think Jean has shown you our ability to refinance some of our Existing asset in order to give us some more flexibility that is less dilutive than issuing stock. We could use this more flexibility to perhaps makes attractive M and A that would help our payout target and bookings.

Speaker 3

And cash flow per share target. But we're not dogmatic. We just want to make sure that we're creating Value for our shareholders and take advantage of the great opportunity that we have.

Speaker 8

Okay. Club. Thanks for that. I'll add to you, John. Maybe just one quick one on your BC growth strategy.

Speaker 8

And I realized a few minutes ago, we were talking about How that can shrink over time, but there's some real potential need there by 2,030 you identified in your slide deck and you've got a decent Early stage price line, I think it's mostly hydrofoam will tear out. But how do you think about the opportunity there? They're pre elongated projects in terms and Of permitting and there's no process on the horizon, but your thoughts would be appreciated.

Speaker 3

Well, my thought in BC is that they have been ill advised I won't say who, and they'll wake up with a very bad headache. Webcast. Sightseeing has been a nightmare. I cannot believe that the media is not covering that nightmare. 1,000 megawatt that is going to cost to their last forecast was $16,000,000,000 and counting.

Speaker 3

And there has been delaying the COD of Site C Every time since they came public and now they're 25, 26, Site C would not be enough to drive the Shell expansion. Shell has committed to go e drive if BS Hydro And bring their transmission line to service right now. They don't have the capacity and they don't have the line to service The expansion of Shell LNG that has been announced, just that it's going to take between 700 megawatt to 800 Megawatt of firm energy. So I think that BC will wake up and have a real nightmare to Be able to have renewable energy for their clients and their customer.

Speaker 8

Okay. We'll leave it there.

Speaker 2

Well, maybe to add to this, it's important to note, we have a lot of assets in development in our pipe That could actually answer that need whenever BC Hydro wakes up and requests new capacity. So we're well positioned in BC

Operator

next question comes from Najeeb Bedouin from IA Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. By Q and A Just wanted to go back to the topic of organic growth. I think the last couple of projects that you developed in the U. S. Were in 2021 and now you have Boswell For next year, so there's a it's a bit lumpy.

Speaker 6

There's a bit of a gap there and I understand interconnection is an issue. I guess, What kind of growth do you think you can go find in Canada, let's say, now that it seems there's a bit of momentum there to maybe help Offset some of the lumpiness in the U. S?

Speaker 3

Well, Quebec, like I said, is going to be very busy. We have MU2. There's 1500 Megawatt now in terms of RFPs that are scheduled to be in service by 20 27, 20 28, 20 29. We hear that next year will be another call and delivery will be in the range of 28, 9 So Quebec will have a stream of RFP. Our intention is to be present.

Speaker 3

We have we'll be putting more than 1,000 megawatt in the 1500 and we intend to put as much, If not more next year in Quebec. So Quebec will be a big focus for us. But like I said, I think that New Brunswick will have also some needs, not a big market, but we have a few very good assets there And they will need the electricity before 2,030. So we are in 2023. It seems far 202728, but I mean once you have been awarded project And you can define what it is.

Speaker 3

You could guys put some value on these future projects on a discounted value. And I think that Even if they're further down the road in order to be in operation, we all know that when you have a good PPA price and when you have Secured your location and permit, you're creating value for the shareholders and people are willing to Ascribe value for their assets, for these assets. Sometimes, unfortunately, the public market Are not seeing that clearly, but definitely others funds and private money is seeing that value as well.

Speaker 6

Just to, I guess, pick up on some of the points there in Quebec specifically. Any thoughts about what's different in This RFP or the next one versus the one that just concluded, what are you seeing in terms of indications on pricing? And outside of the RFP, are you still Looking to do some projects directly with other partners, as you mentioned, since there's interest?

Speaker 3

Yes. There's something that We're going to be active of is the renewal of all our Asset in wind asset in remember that we were the first to the first wave, so Belle et Saab is You in 2026, Ansevalo in 2007, then Calatin in 2028. So there's discussion that will have to be done with Heiko Quebec either through RFP or direct negotiation and there's possibility of expansion. There's possibility of adding some kind of a hybrid Proposal where we could have a new machine With existing machines, so there's all kinds of scenario we're looking in order to create value for us and for Hydro Quebec obviously. And the good news is that price is coming up even with ITC.

Speaker 3

I think that renewal of existing project has potentially better value than before. We've seen That utility really needs this renewable energy for the future. So I think that it's a great window of opportunity for us To recontract our portfolio of wind assets in the Gaspe Peninsula.

Speaker 6

Okay. That's good to hear. I look forward to more updates on this year. And just one last question on capital recycling. You covered well sort of the Funding outlook for the year, no need for equity right now.

Speaker 6

But when you're just thinking about deleveraging or maybe future growth next year, do you have any specific targets on capital recycling in terms of How much you'd like to get in the sense of proceeds?

Speaker 3

Refinancing, it would be easier to talk like Jean, you're saying It should be well over €200,000,000 We'll be looking into some other opportunity if We have few other opportunity down the road next year to repackage perhaps some asset. This for us is a way of recycling capital without selling the asset itself. Webcast. So always interesting to we'll be looking at that first. Like I said, France is a little bit different.

Speaker 3

I think that the Evaluation of private equity or financial institution in Europe is very attractive And perhaps this is one way to make a little bit of arbitrage between the evaluation of our stock and the real value of that asset in Europe. So if we find very accretive and Bookings. And value added proposal, we might. I mean, there's we said that some asset in Texas It's not necessarily our Texas, it's not necessarily our prime market. We don't necessarily Like the exposure of Phoebe as an example, not easy to transact on these assets, but If we can find the right value, we could act on those things.

Speaker 6

Appreciate the details. Thank you very much.

Operator

The next question comes from Buddy Weitzman from National Bank. Please go ahead.

Speaker 5

Good morning, everyone. I'm just filling in for Rupert here. Okay. So just a quick question. So in France, would you Building projects on corporate PPAs, like is that an opportunity rather than waiting for government?

Speaker 3

Yes, definitely. There's a lot Of appetite for corporate PPA, we've been approached for 1 project, 1 solar asset. Of course. Yes, sure. I mean, if the price is better and the credit is acceptable to us, yes, why not?

Speaker 3

Yes, definitely.

Speaker 5

And then I guess just one other one. So you guys were talking just briefly there on on the Boswell capital structure. So just wondering if you guys have like any sort of free cash flow forecast net of the debt amortization for that project?

Speaker 2

Yes, I guess we did provide that, Buddy, in a press release Early in January, when we signed when the PPA became effective, so we are Expecting operating cash flows, if I'm excluding the financing structure, the operating cash flows would reach about in Canadian dollar about 30,000,000 On an annual basis. And we would then on top of that obviously benefit from the PTCs, right. So that's an additional CAD 52,000,000 CAD 53,000,000 to the project and That is indexed and for 10 years and it does not include any bonus PTC that we may receive. We're aiming to qualify Boswell for both plus 10%, the 2 times 10%, Which would be incremental to that.

Speaker 5

Okay. Thank you. That's it for me. Welcome.

Operator

Mrs. Vachon, there are no further questions at this time.

Speaker 1

Thank you.

Speaker 3

Thank you all.

Speaker 1

We will talk to you in August.

Speaker 2

Yes. Thank you, everyone.

Speaker 3

Thank you.

Operator

Ladies and gentlemen, you may now disconnect your lines.

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Earnings Conference Call
Innergex Renewable Energy Q1 2023
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