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At this time, I would like to welcome everyone to the Boralex Third Quarter Results Conference Call. [Foreign Language] [Operator Instructions] [Foreign Language] I will now turn the call over to Marc Jasmin, Director of Investor Relations for Boralex. [Foreign Language]
Thank you, operator. Good morning, ladies and gentlemen. Welcome to Boralex' Third Quarter Results Conference Call. Joining me today are Mr. Patrick Lemaire, President and Chief Executive Officer; Mr. Jean-François Thibodeau, Vice President and Chief Financial Officer; Mr. Guy D'Aoust, Vice President, Finance; Mrs. Melanie Fiset, Corporate Controller; and Mr. Pascal Hurtubise, Vice President and Chief Legal Officer; and Mrs. Julie Cusson, Corporate Director of Communications and Public Affairs. Mr. Lemaire will begin with his comments and afterwards, Mr. Thibodeau will carry on with some financial highlights. During this call, we will discuss historical as well as forward-looking matters. When we talk about the future, there are a variety of risk factors that have been listed in our different filings with securities regulators, which can materially change our estimated results. These documents are all available for consultation at sedar.com.In our webcast, the disclosed results are presented both under IFRS and on a combined basis. The particularities of combined basis have been explained previously as well as the reasons why we use it. Please note that under IFRS, we account for the Invenergy assets under the equity method considering that we do not possess the control allowing to consolidate them, even if we are majority shareholders. The combined numbers thus include our share of the production, revenues and EBITDA generated by those assets. Unless otherwise stated, all comments made in this presentation will refer to combined basis figures. The press release, the MD&A, the consolidated financial statements and a copy of today's presentation are all posted on the Boralex website at boralex.com. If you wish to receive a copy of either of these documents, please do not hesitate contacting us. Finally, take note that we will only take questions from sell-side financial analysts who currently have an active coverage on Boralex. Mr. Lemaire will now start with his comments. Patrick?
Thank you, Marc. Good morning, everyone. For the third quarter, while results are below our expectations, Boralex still reports increased quarterly revenues from energy sales and EBITDA, driven, for the most part, by assets acquired or commissioned during the last 12 months and the better performance of Canadian wind farms. Production also increased when taking into account the production curtailment at Niagara, which wascompensated by IESO. These factors compensated for lower wind conditions in France, the lesser contribution of hydro assets, both in Canada and the United States and higher corporate expenses. On the heels of the acquisition last quarter of Kallista in France, we continued being active on the M&A front as we completed, in Canada, the acquisition from Invenergy, a participation in 5 wind sites in Quebec for a total net capacity of 201 megawatts. Both these transactions reinforce our position as an industry leader on both sides of the Atlantic, which we intend using to our advantage with respect to future development and operational activities.In the near term, this will gradually translate for us into internalizing maintenance-related activities, which over time, will drive better machine availability and higher margins. From a financial standpoint, to support these transactions, we issued in September an additional 12.8 million shares following the conversion of the sub-receipt issued when we announced the Invenergy deal. Considering this transaction, our total number of shares outstanding now stands at 89.1 million shares. Over and above these additional shares issued for a gross amount of nearly $259 million, we drew, in July, $100 million of subordinated debt set to mature in 2028, which was immediately applied towards our revolving credit facility. These transactions strengthen our capital structure and provide us with additional financial flexibility.We continued, during the quarter, executing and enhancing our growth path, which can be seen on Slide 5. And we are also taking advantage of the low interest environment in Europe as we expect that substantially all project financing will be in place by year-end. This being said, in France, we recently commissioned the 33-megawatts Inter Deux Bos project, and Boralex was a clear winner in the most recent RFP for onshore wind since it won 49 megawatts out of the 118 allocated. We look forward to participating in the 4 remaining rounds as we proceed bidding several hundred megawatts in the process. We are confident that we will win our share of future bids, fueling our growth beyond 2020. This being said, upon the closing of the Invenergy transaction and considering its confidence toward the future, the Board of Directors recently increased our dividend by close to 5%, representing the second increase of the year, or 10% on an accumulative basis. Accordingly, the annual dividend now stands at $0.66 per share a year or $0.165 per share on the quarterly basis. I will be back later for my closing remarks and the question period after Jean-François discusses further our results and financial situation.
Thank you, Patrick. Good morning, everyone. As usual, I will only comment on quarterly numbers, although year-to-date figures have been provided in the presentation for your convenience. Starting on Slide 8 with the quarterly summary. The quarterly adjusted production figures considering the impact of the curtailment at Niagara in 2018 and 2017 translated into a 2% increase in quarterly production. On the same basis, Boralex reports a 9% increase in revenues, relatively stable EBITDA(A) and a 9% decrease in cash flows from operations or $2 million. Accordingly, revenues came in at $93 million and EBITDA(A) stood at $51 million representing margins of 55%. As for cash flows from operations, they total $15 million compared with $17 million last year.The quarterly net loss attributable to Boralex shareholders stands at $34 million or $0.43 per share, which compares to a net loss of $17 million or 23 shares -- $0.23 per share in 2017. The increase in net loss between both periods is explained by lower-than-expected production volume combined with higher depreciation and financial expenses associated with our growth.As you can see on Slide 10, the wind and solar sectors both have an increased contribution on a year-over-year basis, while the hydro, corporate sectors and thermal sectors were all lower. I will later provide further details on each individual segment.Moving forward to Slide 12 with an analysis of the quarterly $1 million positive year-over-year EBITDA(A) variance at the bottom of the page. First, on the positive side, the commissioning and acquisition of new assets provided an additional [indiscernible]. This positive contribution was offset by lower volumes from existing sites representing a net amount of $5 million when considering the compensation received for forgone energy at Niagara. Finally, we spent $3 million more on development this year compared to last year.Moving on to Slide 14, with the revenue of the wind segment. Please note that the following comments about the production and capacity factors are adjusted for the 42-gigawatt hour of forgone energy, which was compensated this quarter by IESO.For the third quarter of 2018, global wind production increased by 20%. In Canada, it was 30% higher, while in France it was 7% higher. On a comparable basis, excluding the contribution of newly commissioned sites, same site production was 1.1% higher year-over-year. In Canada, it was 20% higher, while in France it was 24 -- 25% lower. If we look at it from the perspective of wind factors, expectations were for a 23% capacity factor in Canada and a 22% factor in France for a blended 22%. In reality, the overall blended capacity factor, adjusted for Niagara, came in at 19%, while Canada achieved 25% and France 13%.In dollar terms, the contribution of the newly commissioned and acquired site had a favorable impact on revenues and EBITDA(A) of $11 million and $7 million, respectively, which represents the 283 megawatts commission in France since the beginning of July 2017, and that amount includes the Kallista acquisition and also to a lesser extent, the Invenergy acquisition, which happened on September 14. In terms of -- in view of the above items, both revenues and EBITDA(A) increased by 22%, to $78 million and to $56 million, respectively, representing margins of 72%.Moving on to hydro on Slide 16. This quarter's overall production was 29% lower compared to last year. It was 14% lower in Canada and 44% lower in the U.S. As a reminder, Q3 2017 was an exceptional quarter in the U.S. as production was 28% above historical averages. This year, in comparison with historical averages, blended production was 18% lower, 10% lower in Canada and 29% lower in the U.S. As a result, and also taking into consideration that the contract price of the Hudson Falls facility decreased by 40% year-over-year, quarterly revenues decreased from $15 million to $10 million and EBITDA(A) from $11 million to $5 million. As for margins, they stood at 58% this year.We have no specific comment on the thermal and solar sectors; however, we've provided additional details on pages 22 and 23 of the appendix section. I will now comment on the corporate sector at the top of Slide 17. Development expenses within the corporate sector totaled $5 million, up from $3 million last year, resulting from efforts deployed to find solid growth opportunities.Administrative expenses in the corporate sector stood at $7 million compared with $5 million in Q3 2017 and reflects, amongst others, the company's growth. Considering all of the above items, corporate EBITDA(A) came in at $12 million in comparison to $9 million last year.I will now discuss cash flow generation and our financial position as seen on Slide 18 to 20. Take note that I will refer in this section to IFRS numbers. Quarterly cash flows from operations before changes in noncash items came in at $23 million, relatively unchanged from $24 million in 2017 and in line with the EBITDA(A) variation. Noncash working capital items represented cash outflow of $6 million, mainly consisting of a $6 million decrease in trade and other payables relating to assets under construction and an increase in taxes receivable of $6 million also relating to such projects. These amounts were offset by a decrease in trade and other receivables of $7 million, reflecting typical seasonality.During the quarter, we spent a total amount of $307 million on investing activities. More specifically, we invested [ $215 ] million for the Invenergy transaction. Over and above, we invested $110 million in property, plants and equipment, including $83 million allocated to our European wind pipeline, $23 million for our Canadian hydro projects and $4 million towards various projects. We also spent $8 million on contingent considerations for 2 projects part of the Ecoterra portfolio acquired in 2015, which are currently on a growth path. And finally, we used restricted cash of $23 million to pay for construction-related activities.Financing activities provided a net amount of $254 million. More specifically, we got from the issuance of shares gross proceeds of $259 million on which we paid $13 million in issue costs. We also drew $100 million from the unsecured subordinated debt agreement. This sub-debt has a bullet maturity in 2028. The proceeds were applied against our revolver. Also we drew $68 million of project-related debt. We made debt repayments of $45 million, consisting of $43 million of project debt and $2 million of sales tax related bridge loans.Finally, we paid $12 million in dividends to our shareholders and another $2 million to project level, noncontrolling shareholders. Overall, cash stood at $121 million at the end of the quarter in addition to $28 million in restricted cash.For the 214 megawatts of projects, identified in our growth path on Slide 5, we expect to spend between $295 million and $305 million in property, plant and equipment for the remainder of 2018 through 2020. These investments will be financed by additional debt drawdowns estimated between $240 million to $245 million and an estimated $55 million to $60 million on project-related equity.For the remainder of 2018, we expect to invest approximately $115 million in property, plant and equipment, financed through approximately $20 million of equity and $95 million of project-related debt. In 2019, we expect to invest approximately $135 million, including approximately $35 million of equity and $100 million of project-related debt.For the remainder of 2018, projected reimbursement under IFRS should amount to approximately $31 million and $44 million on a combined basis. For the next 12 months, this should amount to approximately $168 million under IFRS and $195 million on a combined basis. Finally, for the last 12-month period, our ratio -- payout ratio stands at 70%. This is above our long-term target of 40% to 60%. But we expect it to return to midrange once this year's acquisitions fully contribute and wind conditions in France return to long-term expectations. Before I turn back the call to Patrick, I would like to thank Marc Jasmin for the many years he has worked as our Director of Investor Relations. Marc has recently accepted a new position at a health care company. Thanks, Marc, for your loyalty and your support. Good luck in your new endeavors from all of us at Boralex. Patrick?
Thank you, Jean-François. To conclude, this has not been a great quarter from a wind resource perspective. However, I'm proud that we continue to regularly increase our production revenues and EBITDA(A). We still have a sizable portfolio of projects that can be brought to market in the future over and above our already identified growth path, despite these ups and downs of Mother Nature. Thank you for your attention. Operator, we'll now take questions from the participants.
[Operator Instructions] [Foreign Language] Your first question comes from the line of Rupert Merer with National Bank.
I was wondering if you could start by talking about the Apuiat project, if there's anything you can say. Of course, the news on the project doesn't look positive. I'm just wondering what your strategy is for the asset now. Can you look at still ongoing negotiations with the government in Quebec? Can you look at revised terms, maybe changing the scale or the scope of the project? Just a little color on that project, please.
If you follow the pre-election saga, I'm going to say, on that project, I think the new government, different than the liberal government, we thought its life expectation was almost nil. After the election, we are very happy that we can have discussions and that the government is, let's say, meeting with all the stakeholders and explain what we view this project, the benefits, the economical benefits of this project for the nation, the Côte-Nord and the stakeholders. So we already had a few meetings with the Minister of Energy and so -- to bring those benefits to them, and so it's -- like I mentioned, I'm very happy that it's not already dead. So we expect that -- to have, let's say, the final conclusion on this in the next few weeks.
Okay. We'll stay tuned. And on France, you've got some optimism for the potential for new contract awards in France. Can you talk about the timing of those next potential awards when you might hear about any new growth you can have in France?
I think the next one has been, let's say, because of the one -- the midyear one this year which the result came out late -- or at the beginning of the year, it came out late, so they postponed the first one of 2019 in April. And after this, there will be another one at the end of the year. It's going to go like this until the end of 2020. And so that is -- we will participate. We have a few hundred megawatts and will be eligible to be -- or qualified to be bid in those RFPs. And like I have mentioned, we think we could get a good share of these RFPs.
Sorry, when is the next award?
I think the bid is in April so. And after this, it's going to be at the end of the year. Because there were delays this year on the actual RFP. The one that we wanted to, there were delays because of the low participation and all that.
Your next question comes from the line of Nelson Ng with RBC Capital Markets.
Just to follow up on Rupert's question, in terms of French wind opportunities. So I presume you still have some FIT qualified wind projects? Like are you still trying to push those through? Or are you planning to just bid them into the wind RFPs?
We have over 100 megawatts of projects with less FIT, but contracts with different programs, so yes, we still have it. We prefer that we're pushing these ones, because to get all the permits would be realized and because this -- these products won't have to go through an RFP, so -- which sometimes can squeeze a little bit the margins or the returns.
Okay. And then on one of your slides you show the historical, I guess, wind speeds versus the long-term expectation or index, and it shows that it's like within plus, minus, call it, 4% every year, whereas, I guess, for your wind generation, I guess being much more volatile -- the volatility has been much larger than like a few percent. Could you just talk about wind speeds translating to wind generation? Like should we put a multiplier to that? Like when we think about if the wind speed was 1% above or below, how should we think about the generation?
I don't have the exact formula, but just to tell you, it's to the cube of the wind speed. So it's not a relation just like you mentioned. It's not 1% less wind is 1% less production. It's totally -- it's a formula to calculate the relation between wind speed and the wind -- the wind speed and the production generation. So I don't have the number to tell you. We could come back with that to give you the rule of thumb, 1% equals x percent of wind generation.
Okay, all right. So that's fair. And then could you talk about how October was looking in terms of wind speeds? Like has things recovered?
For the quarter-to-date, we are pretty much in line with our expectations, talking about the fourth quarter.
Your next question comes from the line of David Quezada with Raymond James.
My first question here, again on France, just related to -- I believe you guys have talked about in the past that they are looking to shorten the permitting process. I wonder if you have any update there, if they've made any progress on that?
It's an ongoing thing. We have not seen any result of that. I know it from the last election the new government wanted to cut down wind appeal process and so -- we have not seen it really accelerate the process. We didn't get projects that went that far into the appeal process, so -- but it's still a long-term permitting process.
Okay, fair enough. And then my other question just on some of the development projects you have in Scotland, I'm wondering if you can just remind us where you're at with those, and if there's any kind of potential timing on when those could move forward.
Yes, we have 1 project in the final permitting process, so that could be, let's say, fully permitted beginning of next year, in the first or at the most, second quarter. But over there too, there is an appeal process after the permitting process. So it's not only in France. I think we're learning that other countries are -- have similar long process. But we hope we can get fully permitted beginning -- and start learning how to realize projects and how we can also get a long-term contract there in the next years.
Your next question comes from the line of Mark Jarvi with CIBC Capital Markets.
I think earlier this week there were some results announced in France of an RFP that was open to wind and solar. I think solar won almost all the capacity. I'm just wondering what you guys are thinking about how the evolution of solar in the market in France, whether you're interested in doing more in the near term, or how that impacts your view on the ability to get more wind done in the next couple of years.
There have been an RFP for mixed production and -- or technologies, and it has all been won by solar from the result that I know so...
So given that result, does that change your view of maybe being more focused on solar in the next couple of years?
Sure, we have to increase our pipeline of solar in the next years.
And could you do that organically? Or would that be something through acquisition?
We'll see. If the opportunity comes -- opportunities could come either way. But we have small solar type development pipeline in France, and starting to do one here in North America.
All right. And then you're eclipsing the 2,000 megawatts by 2020. You have that well in hand, and you've said you were going to give us some new targets. I'm wondering when you think that will be provided. Is that with Q4 results? Is it still a megawatt target you're thinking about? Or is it EBITDA or cash flow per share? Maybe you can just give us some updates on your thinking around targets.
We are actually doing an internal strategic planning process. So we will -- we said we would come out beginning of next year on that.
At the end of the year, but for the year-end results.
Okay. And then just given some of the weakness in France, and I know it's out of your control, but when you think about diversification, has some of these weak results changed your opinion on how -- whether or not you'd want to either trim your exposure in France or just really add another geography to increase your diversification?
Good question. And my answer to this, by being in Scotland, this was an embryo of diversification geographically. So it probably doesn't go as fast as we thought in Scotland, but we're looking at Scotland to complement the production variation or diversification. And also we have been working for a long time trying to get involved in the U.S.; we're still there. In Denmark, we see probably our, let's say, Jammerland Bay Project that we have not talked about. I think there is -- it could be revived in the next few months because the government there is looking at new RFPs for new renewable energy. So all of this is done in our mix of diversification geographically.
Your next question comes from the line of John Mould of TD Securities.
Maybe just a follow-up on Mark's question a little bit there, longer term in France. It could represent a big potential opportunity if the country is going to meet its renewable power targets. Is there some kind of, let's say, a ceiling as to how much of your EBITDA you'd want to have from France in terms of concentration risk? Or does that not really matter as long as you can add individual projects with returns that are meeting or exceeding your targets?
I think because -- we're all questioning France because of low wind regime or wind speeds in the last 2 years. And you could say this year also, depending the result of the fourth quarter. But why did we put the historical curve? It's to show that it did happen in the past, having 3 years in a row under, let's say, expectation, and it came back up, and as it is now, it's down. So only a couple of years being above average will change all the perception that we have of France. So for sure, if you will think of it in the short term, your question, I should diversify. But there is so much opportunities there, and we still believe that the wind, we're going through a period of 3 years that are under expectations of wind, and wind is there. There has been no expert coming out, like I mentioned last quarter, that has came out in stating, yes, the wind will be for France, will be 10% lower than expectation or through the last year or the years prior to this year expectations. So that's why we're still confident. It's still a large opportunity for us over there in France, and Mother Nature, if we look at the past, should bounce back.
Also, I would like to add something is we're always trying to equilibrate our geography in terms of volume and terms like that, in terms of financial diversification. So everything Patrick is mentioning is true also. But we're keeping an eye on the overall diversification, not trying to be -- to put all of our eggs in one basket.
[Operator Instructions] [Foreign Language] Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance.
Just wondering if we could come back on France for a second, if you had a capacity factor forecast for the Q4 period based on the amount of capacity that's in service today, so what your expectation is for the Q4 period?
I don't have the exact number in front of me, but we've always said that -- that's the guidance we gave last year?
Yes.
We're talking about high 30s for Canada, something in the range of 38%, 39%, and France in the range of 30%, for a blended something like 35%. And our experience, it's still true that 60% of production is distributed between first and fourth quarter and the rest, obviously, being split between the second and third quarter, but you have an idea of about the capacity factor we expect for Q4.
Okay. Just turning to Niagara, have there been any updates in terms of the time line for relieving capacity constraints that could allow for reduced from the ISO -- IESO?
I think there are 2 things here. There is the contractual curtailment that can happen every year, and we have in our contract, 250 hours per turbine that for -- on a yearly basis. We have to let go, that's for sure. You're referring to last year we had a curtailment, which was not by IESO, that was from, I don't recall the exact -- that we were not compensated. So far this year, we have not any curtailment not compensated, so it's what we call the forgone energy by contract. When it's done by the IESO, it's always compensated. Yes, last year, we've improved our network and we put some equipment to reduce the impact of a potential curtailment by, what's the other name?
[ ONI ].
ONI, because there's 2 sides in Ontario. Every time it's from the IESO, we are compensated by contractual obligation. And when it's ONI, which last year cost us something in the neighborhood of $8 million. We had none this year. But yes, we put in place additional equipment and software to help us reduce the overall impact if ONI would come back with something like that.
Okay, good. And just sticking in Ontario for a second, I'm wondering if you have any comments that you could provide around discussions that you may have had with the government in Ontario around potential changes to the energy market and maybe changes to the contracts for some of the projects that you have, if you have had any of those types of discussions.
All the comments that we got from Ontario government who are, let's say, advisers there, they won't touch the existing PPA that we're given, so unless it changes, but it shouldn't. It would be because -- it would be for them, let's say, a huge legal opposition if they would go and touch the PPA. So we have just -- this is what we got from our advisers, that they won't touch those.
Just to be clear, I wanted to check just to make sure that you haven't looked or offered changes to the PPAs voluntarily to the government.
No, we have not done anything because we have heard that it would be open to extend your PPA to a lower rate and this and that, so we have not done that. Don't forget, we have financing attached to all these things, so would incur revisiting the financing.
Just one other question just related to the recent Saskatchewan wind RFP. I'm just wondering if you had participated and if you would be looking to participate in the next round next year?
The Saskatchewan, no, but we have participated in the Albertan one.
There are no further questions in the queue at this time. I'll turn the call back over the presenters.
Thank you, everyone. And on a final note, as Jean-François has mentioned, this will be my last conference call as Director of Investor Relations of Boralex, considering that I will be moving on to a similar position for a smaller, dual-listed TSX and NASDAQ company in the health care sector. I take this opportunity to thank Boralex, and especially Jean-François and Patrick, and all of my colleagues, for the great years we have worked together and also to thank the analysts and institutions who made my job so enjoyable day after day. I will look forward to keeping contact in the future. This being said, thank you for your attention. A recording of the webcast will be available until November 16. Thank you.
This concludes today's conference call. You may now disconnect.