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Edited Transcript of BLX.TO earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Boralex Inc Earnings Call

Kingsey Falls Oct 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Boralex Inc earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruno Guilmette

Boralex Inc. - CFO & VP

* Patrick Lemaire

Boralex Inc. - President, CEO & Director

* Stéphane Milot

Boralex Inc. - Director of IR

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Conference Call Participants

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* Mark Thomas Jarvi

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Nelson Ng

RBC Capital Markets, LLC, Research Division - Analyst

* Rupert M. Merer

National Bank Financial, Inc., Research Division - MD and Research Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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(foreign language) Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boralex Inc. second quarter results conference call. (Operator Instructions) Thank you.

Stephane Milot, you may begin your conference.

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Stéphane Milot, Boralex Inc. - Director of IR [2]

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Thank you, Julie, and good morning, everyone. So welcome to Boralex second quarter results conference call. Joining me today are Patrick Lemaire, President and Chief Executive Officer; Patrick Decostre, Vice President and Chief Operating Officer; Bruno Guilmette, Vice President and Chief Financial Officer; and other members of our management and finance teams. Mr. Lemaire will begin with comments about the key elements of the quarter. Afterwards, Mr. Guilmette will carry on with some financial highlights and then we will all be available to answer your questions.

As you know, during this call, we will discuss historical as well as forward-looking information. When talking 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. So 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. So unless otherwise stated, all comments made in this presentation will refer to the combined basis figures. The press release, the MD&A, the consolidated financial statements and a copy of today's presentations are all posted on our website at boralex.com. So if you wish to receive a copy of either of these documents, please do not hesitate to contact me directly.

Mr. Lemaire will now start his comments, so please go ahead, Patrick.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [3]

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Thank you, Stephane. Good morning, everyone. This was another strong quarter for Boralex with growth of 29% in our production, 35% in revenues from energy sales and 52% in the EBITDA. The increases came from acquisitions and commissioning of new sites both but also from organic growth from almost all sectors of activities and regions. As a result, we have generated $16 million in AFFO compared to $1 million for the same quarter last year. As you all know, we presented our strategic plan and the 2023 financial objectives at our Investor Day on June 18. Starting this quarter, we will report our progress towards the 4 orientation of our plan and our 2023 financial objectives.

Starting with the growth orientation. In the second quarter, we've commissioned the Catesis 10 megawatt wind farm in France. We also continue to make good progress from a project development point of view. As indicated in our press release, we won 68 megawatt in the April auction in France and submitted our bid last week for the August auction. We got the green light from the Scottish government for the 90-megawatt wind farm project, Limekiln. This project will also enable us to make progress in our customer orientation as the intention is to get a corporate PPA for this wind farm.

Switching now to the diversification orientation. Our development team and potential projects are growing more rapidly than expected in the U.S. solar sector. As mentioned at our Investor Day, this is a significant market potential in our selected niches to provide growth for many years to come. We have recognized expertise, which we will leverage in this new growth area. Our teams are focused on increasing our pipeline and get project financial -- final approval to include them into our growth path.

I will now cover progress made in the recent months regarding our optimization pillar. In terms of optimization initiative, repowering is a good way to optimize the output at specific site. Our Cham Longe I project in France is a good example with capacity increasing from 17 megawatt to 35 megawatt. The work related to this project is underway, and it will contribute an additional EUR 4 million EBITDA when completed. Another project under construction in Canada is the expansion of the Buckingham power station. As mentioned before, capacity will double going from 10 megawatt to 20 megawatt by the end of this year. This project will bring an additional EUR 5 million to EBITDA.

At our Investor Day, we've highlighted the initiatives and maintenance as part of our optimization program. In our year-to-date results, we have recorded a onetime saving of EUR 2 million by insourcing the maintenance contract at one of our wind farm in France.

Finally, in terms of financing, I don't want to steal Bruno's thunder, but I just want to highlight optimization projects undertaken by our finance team to reduce our borrowing cost by refinancing a EUR 40 million debt at better condition. We are also making good progress on our major refinancing project in France.

These are just a few examples of what we can achieve in terms of optimization. With Patrick Decostre now fully committed to his new position, we will be more dedicated to improving our processes and leveraging our sites. There is definitely more to come.

In conclusion, I believe we have a strong plan and the right team to pursue our growth in the years to come. As you can see, we already are making good progress on our key initiatives and this is just the beginning. I will now let Bruno cover the financial portion in more detail and we’ll be back later for the question period. Bruno?

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Bruno Guilmette, Boralex Inc. - CFO & VP [4]

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Thank you, Patrick. Good morning, everyone. I will start on Slide 10, with a review of the progress made in light of our 2023 financial objectives. We made good progress in AFFO, which stands now at $60 million year-to-date compared to $32 million for the same period last year. Our dividend distribution ratio now stands at 62%, which is close to our target, and our production capacity reached the 2,000 megawatt level during the quarter.

Turning now to production on Slide 11 of our presentation. We had another quarter with strong wind in Canada. As a result, production was 7% higher than last year and 8% higher than anticipated production on a comparable base. The assets acquired from energy produced 6% higher energy than anticipated. Overall for Canada, production was 42% higher than last year and 8% higher than anticipated. In France, wind conditions were better than in the second quarter last year, resulting in 13% growth over last year on a comparable basis, but 12% lower than anticipated. In France, overall growth for the second quarter was 59%. The Kallista acquisition and wind farms commission in the last 12 months contributed to 80% of the growth, while comparable wind farms contributed to 20% of that growth. Finally, total wind production for the quarter combining Canada and France was 9% higher than last year on a comparable basis and very close to anticipated.

Going to Slide 12. U.S. hydro has a very strong quarter with production 48% higher than last year and 33% higher than anticipated. And Canada hydro production was 13% higher than last year and 2% higher than anticipated. Lastly, total production for the quarter was 39% higher than last year and overall much in line with the anticipated production.

I won't cover in detail year-to-date production, but I would like to spend some final trends in wind production. The growth pattern in France has been quite volatile so far this year with a stronger than expected first quarter and lower -- slightly lower than expected second quarter. But given the way that each quarter, the good news is that after 6 months, as you can see on Slide 13, production in France is 47% higher than last year and only 1% lower than anticipated.

Moving to Slide 14. I would like to highlight that after 6 months, total production was up 37% compared to last year and 5% above anticipated with wind and hydro sectors both up versus last year and anticipated production.

Revenues presented on Slide 15 followed pretty much the same pattern as production.

Now on the bottom of Slide 16 for EBITDA. EBITDA increased from $68 million in the second quarter of last year to $103 million this year. As shown on the graph, $22 million came from acquisitions and commissioning of new sites, $11 million from organic growth and $4 million from IFRS 16 changes.

Moving to Slide 17. EBITDA for the wind sector was $104 million or 53% higher than last year and hydro EBITDA was up $2 million or 25% compared to last year. Corporate expenses increased by $2 million mostly due to the growth and development expenses.

Moving to cash flow now on Slide 18. We generated $55 million of IFRS cash flow from operations in the second quarter compared to $21 million in the same quarter last year. We also reimbursed $38 million of project-related debt compared to $26 million in the same quarter last year. As mentioned by Patrick at the beginning, AFFO increased by $15 million going from $1 million in the second quarter of last year to $16 million this quarter.

Finally, as presented on Slide 19, our financial position remains solid with our net debt to total market cap ratio down from 65% on December 31, 2018, to 61% on June 30 of this year.

In conclusion, we delivered another strong quarter in terms of overall production, EBITDA and AFFO. We are making good progress in the execution of our new plan and financial objectives and our teams are focused on growing our pipeline and finding accretive transactions while maintaining financial discipline.

Thank you very much for your attention. We are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) Your first question comes from the line of Nelson Ng from RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [2]

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My first question relates to the French solar RFP. I know they recently awarded just over 800 megawatts of solar. Did you guys bid into that process, and would you be looking to bid in the future solar RFPs?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [3]

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Yes, we are not aware of results being out, but we have submitted a small project, 30-megawatt project in June. So well if the results came out, we have not been know the funds.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [4]

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That might have came out yesterday. I think they were like 858 megawatts of solar, like over 100 solar projects.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [5]

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If you get the list of projects -- if you've the list of winners, give us a shout.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Sure. Sure thing. So essentially you bid 13 megawatts into it, you might not have been notified. So you might not have received, but it's a small, it's like a small part of your, I guess, overall pipeline.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [7]

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Yes, but we are -- actually, we are, let's say, finding land lease and to, let's say, beef up our potential of projects in solar in France.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Okay. And then moving over to Scotland, the 90-megawatt project. So you mentioned that, I guess, you have the green light to move forward but construction won't start until 2021. Could you just talk about what the next steps are before construction starts in 2021, like obviously, a PPA and financing, but what are some of them are kind of detailed steps you need to do?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [9]

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Actually, we're optimizing the size with different, let's say, turbine manufacturer. And from there, we will have an official or kind of official production capacity or a megawatt hour to go and see market for corporate PPA. So this is the -- step one is optimization of the site as forecast production and after that we'll move on for corporate PPA because we wish to have, let's say, kind of view on the potential sales of that production to do a better financings.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Would you need to negotiate several PPAs anyways, or do you envisage like one big corporate PPA?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [11]

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On the risk basis, we wish to just have a -- it's a good one counterpart, but if we have to go to many, we will do so.

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Nelson Ng, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Okay. Got it. And then just moving over to Alberta, obviously, things -- the landscape in Alberta is changing. What is your plan on Alberta in terms of the, I guess, wind developments you have there, like, does it make sense to develop wind on a merchant basis or are there corporate PPAs available there as well?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [13]

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To tell you or everyone, we've -- there is corporate PPA. We've submitted. We have not been selected in the corporate PPA in the last few months. So we'll look at corporate PPA because regarding financing, just to do growth in Canada on the merchant basis is not, let's say, reasonable. It's not the best capital allocation for us. So we'll -- for sure, we'll -- our cash will be, let's say, more dedicated to invest best with corporate PPAs, because it is better capital allocation way to grow. So merchant, I don't think, you are going to expect us to do something large in merchant, something very small could be, but not anything big. So for Alberta, we'll be sitting and waiting what's going to happen there, so.

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Operator [14]

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Your next question comes from the line of David Quezada from Raymond James.

Your next question comes from the line of Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [15]

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Few questions. You referenced prompt execution with respect to the U.S. solar development opportunity set. Can you give us more context on progress you're making on that front?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [16]

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There was a qualification process that was underway and got the answer at the end of June, I think. So to give you -- to be a little more precise, I won't mention megawatt on that because of, let's say, competition basis and I'm not going to tell the other players there, how many megawatt, but we qualify 4 projects for the coming RFP. We will need to deposit bids for (inaudible) in beginning of September. So that's where we stand. And we -- because, why are we saying it's going faster and we never thought that we would be able to submit for projects to this RFP talking to us 9 months ago, so that's why we're saying it's going well.

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Sean Steuart, TD Securities Equity Research - Research Analyst [17]

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Got it. One follow-up on Scotland. As you go down the path of securing one or more corporate PPAs for the first 90 megawatts, how do you think about prospective contract length for that project and your broader pipeline in Scotland, if you're looking at corporate PPAs for that capacity?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [18]

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So when you look what's being done in the market actually, you see some 5-year, 7-year, 10-year, occasionally, you see a 15-year, so for sure the longer is better, but we'll take with what's there. And so, but -- for me a 10-year would be good, because regarding financing would be easier and more we would be able to, let's say, the better leverage of debt to equity on that.

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Operator [19]

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Your next question comes from the line of Rupert Merer from National Bank.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [20]

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In your comments, you mentioned that you had bid some projects into the August RFP in France -- the wind RFP. Can you give us more color there? For example, how many megawatts did you bid and what's the expected timeline for awards?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [21]

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We've have only bid 50 megawatt because this RFP, we call it the P4 internally, so this one was more restrictive than the P3, little less restrictive than the P2, the one that was very restrictive that the government only had 200 megawatt submitted. So this is why we only had 50 megawatt and we see the next RFPs to be more relaxed on their restriction. So we should have more, let's say, more and more projects to be submitted in the next -- in the P5, if I follow my P thing, and this one should be in December. And we're all, let's say, 2 months for the answer, for the August one.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [22]

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And with those 50 megawatts, were any of those projects, projects that you had previously bid into other RFPs?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [23]

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No, no. These are 3 projects that have never been bid in our (inaudible).

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Bruno Guilmette, Boralex Inc. - CFO & VP [24]

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Just to make sure, it's 5-0.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [25]

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Yes.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [26]

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Well, because we kind of heard it 15.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [27]

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All right. Great. And then secondly, there was some news in the last month from Bloomberg suggesting that you could be looking at asset recycling of some projects in France or at least a partial asset recycling. Can you give us some thoughts on that process? Is that something we could anticipate seeing this year or next year or -- and how close are you to finalizing any transactions there?

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Bruno Guilmette, Boralex Inc. - CFO & VP [28]

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I mean, this is -- I don't know exactly where that information comes from. I think what they may have or may have misled them is discussions that I mentioned at the Investor Day about that the potential refinancing of our French assets. So right now, this is where we're spending most of our time.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [29]

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Okay. All right. Great. And on that refinancing, give us some color on the scale of the opportunity. What you may be able to do as far as, say, increasing the scale of the financing or on savings from lowering your cost of debt?

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Bruno Guilmette, Boralex Inc. - CFO & VP [30]

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I think it's a bit early to comment on that, given that we spent of our discussions with potential lenders, Rupert, but I mean, we only do it if it makes sense and I think the market is fairly supportive of us doing something over there. So I think if we do it, there is going to be a benefit, but I'll keep that for the next quarter or 2.

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Operator [31]

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(foreign language) (Operator Instructions) Your next question comes from the line of Mark Jarvi from CIBC.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [32]

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Just wanted to go maybe back to the projects that were selected in a prior RFP. Maybe you can give us expectations of when we might see those added to the identified growth path.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [33]

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You're talking about the 68 megawatt?

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [34]

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Yes, exactly.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [35]

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That was one in the P3 if I keep up moving with my Ps, I guess. This is something in the range of 3 years that we should see this. As soon as we get because this one was more relaxed. So we didn't need to reapply all the permits. So we are continuing the process of getting all the permitting and so hopefully be in to production within the next 3 years.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [36]

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Beyond just putting them into production, when do you guys think you put them into your sort of disclosures around expected EBITDA, capital cost and all that kind of stuff?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [37]

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The growth path?

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [38]

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Yes, exactly. 1.5 years, do you say?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [39]

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Yes. It is tough to predict because some can be earlier than this because if there is no recourse, if some do get recourse it can go to 3 years. So this is the way France is getting projects -- going to process projects or get permitting in France. But at least we have a PPA attached to them. So when they'll be ready, we will be the first one. We will be, let's say, more anxious than you are to announce them. So we're more anxious than you are to announce them or put them in the growth path.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [40]

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Fair enough. And then also, you guys did get some Board approval for 3 projects totaling 32 megawatts. Any update on the permitting of those projects and getting those closer to construction?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [41]

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Yes. As soon as, we -- hopefully, we thought that we could have some now, but it's -- the coming months. So when I know that answer is coming by the end of the year, the other 2 can come faster than this, or let's say, they are underway.

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Bruno Guilmette, Boralex Inc. - CFO & VP [42]

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I will add on that, Mark, like these 3 plus another one that has been just approved by our Board, so if we -- probably in the coming months, you should see the additions to our growth path.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [43]

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Okay. And then going back to, maybe to Bruno, I know you don't want to give color on the refinancing. But obviously, yield curve has really dipped and rates have dropped in Europe and in France. What has happened on margins in the spread for project finance in context of the declining yield curve and the rates?

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Bruno Guilmette, Boralex Inc. - CFO & VP [44]

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All I say, I mean, the margins are influenced by the market, they are also influenced by the different approach we're discussing on not doing an asset by asset but putting together some of our assets. So I mean, there is a few reasons why the margins are moving, but overall it's a good movement.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [45]

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But if I just think about debt financing for even the new projects or things you've won in the RFP and the tenure has moved down by close to 100 basis points, would you be able to capture all of that when you come to put in debt financing for new projects?

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Bruno Guilmette, Boralex Inc. - CFO & VP [46]

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I think we'll come out with the more precise answer on that when we finalize our discussions. It's a bit too early to comment on that.

As I said, we expect a good outcome, but if – keep your ear to the ground on this.

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Operator [47]

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(foreign language) There are no further question at this time. I will turn the call back over to the presenters.

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Stéphane Milot, Boralex Inc. - Director of IR [48]

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Well, thank you very much, operator, and thank you, everyone, for your attention. If you have any additional questions, please call me at 514-213-1045, and we'll make sure we answer your questions rapidly. So our next event will be the third quarter results conference call on Thursday, November 7 at 11 AM. So have a great day, everyone, and thank you again to be on our call.

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Operator [49]

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(foreign language) This concludes today's conference call. You may now disconnect.