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Edited Transcript of BLX.TO earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 Boralex Inc Earnings Call

Kingsey Falls Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Boralex Inc earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm 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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* David Quezada

Raymond James Ltd., Research Division - Equity Analyst

* Hassaan Khan

National Bank Financial, Inc., Research Division - Associate

* Nelson Ng

RBC Capital Markets, Research Division - 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 Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boralex Inc. third quarter results conference call. (Operator Instructions) Thank you.

Mr. Milot, you may begin your conference.

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

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Well, thank you, operator, and good morning, everyone. Welcome to Boralex third 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. Afterward, Mr. Guilmette will carry on with the financial highlights, and then we'll 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. 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. 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 Boralex website at boralex.com under the Investors tab. If you wish to receive a copy of these documents, please contact me.

Mr. Lemaire will now start with his comments. Please go ahead, Patrick.

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

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Thank you, Stéphane. Good morning, everyone.

Third quarter was another strong quarter in terms of growth, but also in the development of projects in our different sectors of activities. Comparing to the same quarter last year, production was up 28%; sales, 22%; and EBITDA, 39%. The main driver was the wind sector in France with a 57% increase in production, including 30% growth in comparable production. This more than offset the 7% decrease in Canadian comparable wind production due to weaker wind condition than last year.

I will now report on our progress towards the 4 orientation of our strategic plan, starting with the growth orientation. In the third quarter, we won 33 megawatts out of the 50 megawatts of projects submitted in the August auction in France. So far this year, it's more than 100 megawatts we have won in the auction process in France. Please note that the next auction scheduled for December 2 has been postponed by a month to January 3, 2020.

We also recently added a 12-megawatt project to the Growth path schedule for 2021. So far this year, we've added 2 projects for a total of 27 megawatts to our Growth path, and there is more to come with projects at advanced stages in our pipeline.

We continue to make good progress with the Limekiln project following the greenlight we got from the Scottish government for the 90-megawatt wind farm project next quarter.

Switching now to our diversification orientation. Our development team and potential projects are growing more rapidly than expected in the U.S. solar sector. Our pipeline has nearly doubled, going from 200 megawatts in mid-June to close to 400 megawatts right now. During the quarter, we've bid 180 megawatts of solar projects in the State of New York in the U.S. We are expecting results to be announced by the end of the year.

I will now cover progress made in recent months regarding our optimization pillar. In terms of optimization initiatives, as mentioned before, repowering is a good way to optimize the output at specific site. Shortly after the end of the third quarter, we restarted production at our Buckingham hydropower station in Québec. As mentioned before, capacity doubled at this facility going from 10 to 20 megawatts and adding about $5 million annual contribution to EBITDA.

Finally, we continue to make good progress on the optimization of our capital structure. On October 24, we completed the redemption of our convertible debentures. 94% of the $143.7 million outstanding amount was converted by holders of debentures into 6.9 million shares of Boralex, bringing our total numbers of shares issued and outstanding to 93.6 million -- 96.3 million, sorry. $7.9 million of principal amount of debentures was redeemed for cash proceeds.

Still on the optimization front, we are also making good progress on our major refinancing project in France. In conclusion, we are happy with year-to-date result and progress we are making in the execution of our plan. We remain confident in the rest of 2019 in terms of development and continued growth of our results.

I will now let Bruno cover the financial portion in more details, and I will be back 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 with a review of the progress made in light of our 2023 financial objectives.

Starting with AFFO. As you know, given the seasonal nature of our business, the third quarter is not our strongest quarter in terms of cash flow generation. Nevertheless, we improved our AFFO by $9 million in the quarter versus last year. Year-to-date, AFFO went from $15 million in 2018 to $52 million in 2019, a $37 million increase. Our dividend distribution ratio now stands at 61%, which is almost in line with our 40% to 60% target. And our production capacity stands at 2,006 megawatts on September 30.

Turning now to production on Slide 10 of your presentation. In Canada, wind production in the third quarter increased by 18% due to acquisitions but was 4% lower than anticipated production. Comparable production was 7% lower than last year and 2% lower than the anticipated production. Production of the new site in Moose Lake was lower than anticipated, also due to weaker wind conditions than anticipated. In France, wind conditions were better than in the third quarter last year, resulting in a 30% growth over last year on a comparable basis and 57% growth overall, although production was lower than anticipated.

We observed that in weak wind quarters like the third quarter, the relationship between average wind speed and production is not necessarily the same as in stronger quarters like the first and last quarters of the year. This variation in the correlation makes it harder to predict production using only average wind speed. This is further evidenced by the data collected by RTE, the French grid operator, which shows that our wind production for the quarters -- for this quarter tracked the overall production of all French wind farms. Overall, total wind production for the quarter, combining Canada and France, was 33% higher than last year in total and 8% higher on a comparable basis.

Going to Slide 11. Canadian hydro production was 2% higher than last year but 10% lower than anticipated. U.S. hydro was up by 25% over last year but 14% lower than anticipated. In summary, total production for the quarter was 28% higher than last year and 10% lower than anticipated.

I won't cover in detail year-to-date production, but I would like to highlight on Slide 13 that despite the quarterly volatility, year-to-date production is in line with anticipated production and up by 34% over last year. Revenues presented on Slide 14 followed pretty much the same pattern as production, with growth compared to last year coming from the wind sector.

EBITDA, on Slide 15, increased from $51 million in the third quarter of last year to $70 million this year. EBITDA for the wind sector was $21 million or 36% higher than last year, and hydro EBITDA was up $1 million or 8% compared to last year.

Moving to cash flow now on Slide 16. We generated $35 million of IFRS cash flow from operations in the third quarter, up by 54% compared to the same quarter last year. Finally, as presented on Slide 17, our financial position remains solid, with our net debt to total market cap ratio down from 64% on December 31 to 57% on September 30.

In conclusion, we delivered strong growth compared to last year. Production was below anticipation in the quarter but remains in line with anticipated production year-to-date. We continue to make good progress in the execution of our strategic plan and our financial objectives. Our teams are focused on growing our pipeline and strategically bidding projects and auctions, and we are still looking for accretive transactions in technologies and regions we know well 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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(Operator Instructions) Your first question comes from the line of David Quezada with Raymond James.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [2]

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I

My first question here, just on the solar pipeline in the U.S. So it sounds like things are developing really well there. I'm just wondering if you could give us some comments on what's driven that faster-than-expected process and if you've changed your thoughts at all on the potential size of that opportunity.

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

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You're asking what, because it's going faster, our development is going faster.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [4]

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Yes.

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

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Yes. It's -- no, we see a lot of interest of the landowners. So initially, we always have in mind, let's say, a ratio of success when we see landowners, and the success rate is way higher than anticipated. So we're very pleased by that. This is the reason why we are ahead of our, let's say, forecast of land lease, and all that support megawatts. Does that answer the question?

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [6]

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Okay. Great. And then a question -- yes, that's good color. And then just switching to France. I believe the most recent French wind auction was oversubscribed. I'm wondering if you could just discuss whether that was due to maybe less onerous permitting requirements or what -- maybe what drove that better procurement. And then it sounds like the bids were higher on average. So any commentary you can provide there?

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

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Yes, you have the answer. So it became the criteria -- or the amount of permitting -- where the permitting needs to be before submitting in that process, that's the criteria. Compared to -- I think it was the second option that was very restrictive for the -- let's say, on the permitting or need almost all the permits. So this is why -- main reason why that one was undersubscribed. So the government has opened up this level of development.

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Operator [8]

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Your next question comes from the line of Nelson Ng with RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [9]

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Just a quick question in terms of what you have in terms of projects awarded versus the, I guess, identified Growth path. So as of today, like roughly how many megawatts have you been awarded that has yet to be added to the Growth path? I presume it's the roughly 100 megawatts of French wind that should be completed in 2022. Is that how I should look at it?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [10]

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Yes. It would be either because -- as the previous question, the level of development in the last RFP so -- is not as high as previous one, so some projects could happen to be 2023. But my answer would be by 2022 or 2023, when we get -- when this project gets fully permitted. And as you said, we're -- we got the PPA already, so the 100 megawatts is...

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [11]

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Okay. Got it. And then just back to the solar projects in New York State. You mentioned that there's a lot of interest from landowners. I was just wondering if you are -- like for the projects that don't get a contract, is there any opportunity for you to do what you're trying to do in Scotland in terms of get a corporate PPA? Or are the projects being awarded given some type of a special subsidy?

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [12]

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Yes, it's always possible to have a corporate PPA and go directly to have the project being, let's say -- or the revenues being in the corporate PPA. We've seen this happening in, let's say, the near past, and it's going to happen more and more in the future.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [13]

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But I was just wondering on that point. When it's solar in New York State, would the -- usually, a lot of the corporate PPAs are done at or below market price, so I'm just wondering whether the required prices is close to grid parity or not.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [14]

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It would need to be close to grid parity, otherwise why should, let's say, electricity, let's say, consumer would go with the corporate PPA. So you see -- it would see itself, let's say, getting penalized. So for sure, it will always be a discount compared to, let's say, the power forecast, so -- the price forecast.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [15]

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So that is the case in New York State. Is that what you're suggesting?

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

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Repeat your question.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [17]

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So in New York State -- like solar in New York State is at grid parity like based on what you're looking at in terms of your -- the projects you're developing and therefore, like a corporate PPA would be competitive.

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

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No, as we speak, Nelson, we would -- we're looking at getting RECs, which gets -- let's say part of it is a fixed -- you're guaranteed income for part of your income, let's say. And the next income would be to get a corporate PPA to add on to the RECs. So in that way, first of all, it would be easier to finance also with REC and also the corporate PPAs. So this is the way we're looking at it now, and we'll see later on if we go to, let's say, 100% corporate PPA.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [19]

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Okay. And then just one last question that's related. Are you -- you don't have any projects awarded yet, but like, obviously, the deadline for the ITCs is the end of this year. I'm just wondering whether you have a plan to essentially make big solar deposit to some manufacturer to ITC qualify potential solar projects going forward in the U.S.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [20]

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Yes. We're doing a little bit of safe harbor for part of the project submitted. So that's the answer. Because this is what you need, you need to do safe harbor to lock, let's say, a high tax level of 2019 projects and it's dropping the next year. Next year, it's going to be less so as the year goes. So we have locked on a little bit of safe harbor this year.

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Operator [21]

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

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Sean Steuart, TD Securities Equity Research - Research Analyst [22]

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A couple of questions. You touched on the one RFP in France being pushed to January from December. Can you give us a sense of forthcoming RFPs in France and what you anticipate in terms of scale beyond the January RFP?

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

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We've mentioned in the past it's in the range of 2,000 megawatts a year. So -- and not to forget that they won't have another 10,000 megawatts by 2023 or something like this. So I don't have the figures in front of me. But it's 2,000 megawatts a year that they're looking at, as much, let's say, for our solar and wind. So we see, let's say, this going on and on for the next few years. So -- and it's a great opportunity for us to deploy our 1,000 megawatt of pipeline that we have over there. And -- but the only thing is -- we know from one RFP to the other is the criteria needed or the level of development that the government is changing. But we see them being, let's say, at a lower, let's say, level of development than the second RFP because like you -- it was mentioned earlier, this one was undersubscribed. I mentioned earlier it was undersubscribed. So to be more competitive and to get the best rate, for sure they need to have, at least, the megawatt objective of an RFP.

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

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Just on the short-term basis, there's this one plan for January and the next after is June, so just that we already know for next year.

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Sean Steuart, TD Securities Equity Research - Research Analyst [25]

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Okay. You guys noted good progress at Limekiln. Maybe some context on -- is that your sole focus in that market? Or are there broader development opportunities in the U.K. beyond that?

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

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Well, we're still working on our partnership, our partner. Because if you remember, there was a 300-megawatt in total partnership within Infinergy, so we're still developing and this will give us opportunities in the future. This is the first 90 megawatt that is coming out of this pipeline, and we see some coming out in the years to come.

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Operator [27]

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(Operator Instructions) Your next question comes from the line of Hassaan Khan with National Bank Financial.

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Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [28]

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I'm calling on behalf of Rupert. And now we noticed that the project called Seuil de Bapaume was changed to a 20-year contract. We had 15 years. Can we get some color on what happened with this?

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Bruno Guilmette, Boralex Inc. - CFO & VP [29]

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Seuil de Bapaume, which was -- initially, we had...

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [30]

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It was 15 years, and it went to 20.

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Bruno Guilmette, Boralex Inc. - CFO & VP [31]

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20 and switched to 2021 instead of '20.

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Patrick Lemaire, Boralex Inc. - President, CEO & Director [32]

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Yes. We do -- okay. This is a good question. So because there is RFP -- and you know there was -- there are previous program, the 2016 and the 2017. And what we do, if we're eligible to the '16 or '17 and we see the RFP -- an upcoming RFP, we submit projects as an arbitrage, let's say, vision that if we can better the return in an RFP from a project that is scheduled for 2016 or 2017 -- not scheduled but eligible to the 2016 and '17 program, we submit them. So this is to better the return of these projects. And if we don't win -- because we cannot bid at the lowest rate, so if we don't win, we always have a fallback of the 2 programs I was talking about. This is a return improvement process.

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Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [33]

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All right. Just another question. With bond yields attractive, can we get some more color on your efforts to refinance your French debt portfolio?

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Bruno Guilmette, Boralex Inc. - CFO & VP [34]

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So the refinancing process in France is evolving well. We expect no such event because these things, you never know. But we expect to announce something before the end of the year. So stay tuned. That will improve our financial strength for next year's growth and development plans.

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Operator [35]

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(foreign language) There are no further questions at this time. Presenters, I turn the call back over to you.

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Stéphane Milot, Boralex Inc. - Director of IR [36]

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All right. So thank you, everyone, and thank you for your attention. If you have any additional questions, please call me at (514) 213-1045. I'll make sure we answer all your questions rapidly. So our next event will be the fourth quarter and year-end results conference call on Friday, February 28 of next year at 11 a.m.

So have a great day, everyone. Thank you.

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

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Thank you.

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Operator [38]

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(foreign language) Ladies and gentlemen, this concludes today's conference call. You may now disconnect.