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Edited Transcript of BLX.TO earnings conference call or presentation 3-Mar-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Boralex Inc Earnings Call

Kingsey Falls Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Boralex Inc earnings conference call or presentation Friday, March 3, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marc Jasmin

Boralex Inc. - Director of IR

* Patrick Lemaire

Boralex Inc. - President & CEO

* Jean-Francois Thibodeau

Boralex Inc. - VP & CFO

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Conference Call Participants

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* Rupert Merer

National Bank Financial - Analyst

* Nelson Ng

RBC Capital Markets - Analyst

* Ian Woodward

CIBC World Markets - Analyst

* John Mould

TD Securities - Analyst

* David Quezada

Raymond James - Analyst

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Presentation

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Operator [1]

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(Spoken in French) Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boralex fourth-quarter results conference call.

(Operator Instructions)

Thank you. Marc Jasmin, Investor Relations, you may begin the conference.

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Marc Jasmin, Boralex Inc. - Director of IR [2]

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Thank you, operator. Good morning, ladies and gentlemen. Welcome to Boralex's fourth-quarter and year-end results conference call.

Joining me today are Mr. Patrick Lemaire, President and CEO; Mr. Jean-Francois Thibodeau, Vice President and CFO. 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 actual 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 proportionate consolidation basis. The particularities of proportionate consolidation have been explained previously, as well as the reason why we use it. In addition, most of the comments made in this webcast will be on a quarterly basis. However, for your convenience, we've also included some year-to-date figures on specific slides in the core of the presentation.

The press release with the Company's audited consolidated financial statements and a copy of today's presentations are posted on the Boralex website at Boralex.com, in the annual report including the MD&A, and the complete audited annual financial statements are available on SEDAR. If you wish to receive a copy of either of these documents, please do not hesitate contacting us.

Finally, take note that we will take questions only from sell side financial analysts who currently have an active coverage on Boralex. Mr. Lemaire will now start with his comments. Patrick?

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

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Thank you, Marc. Good morning, everyone. For the fourth quarter, Boralex reports lower results driven by a significant year-over-year decrease in French wind and US hydro conditions. Despite these results, explained by nature related events over which we have no control, we continued overall delivering strong growth to our shareholders as we recently completed the largest acquisition of our history, namely the 230 MW Niagara Region Wind Farm project for an enterprise value exceeding CAD1 billion.

This transaction, which is expected to be double-digit accretive 2017 cash flow per share, was financed through existing cash flow availability following an increase in our revolving credit facilities from CAD360 million to CAD460 million and the issuance of 10.4 million subscription receipts which were converted into common shares in January. We were very pleased by investors' response as they clearly supported the transaction and the issue was largely oversubscribed.

Along with this significant acquisition, Boralex increased its 2017 year-end run rate analyzed EBITDA guidance from CAD290 million to CAD375 million, and on the same day as this, increased its annualized run rate discretionary cash flow target to CAD95 million. More so, along with the transaction, the Board of Directors announced a 7.1% quarterly dividend increase from CAD0.14 to CAD0.15 per share starting with the next dividend set to be paid on March 15.

This transaction led to a nearly 16% increase in the numbers of shares outstanding to 75.7 million shares. We gained increased liquidity as our public float now stands at roughly 75% of our outstanding shares. The combination of increased liquidity and float size makes us closer than ever of being included in the TSX composite index, a milestone we hope to achieve this year.

Moving on the execution and expansion of our pipeline, we've commissioned during the quarter, 22 MW of wind projects including the 10 MW Port Ryerse in Ontario and the first wealth of 16 MW of Plateau de Savernat in France. Considering NRWF and other assets commissioned, our installed capacity grew by 25% to 1,365 MW. Generally speaking, the execution of our growth path is running smoothly as we are staying on budget and not encountering any material cost overruns.

On the other hand in France, we anticipate that given quicker than expected interconnection, we will be ahead of schedule with the 51 MW Moulin de Lohan project, which is now targeted to be commissioned in the second half of 2018 or one year earlier than originally planned. On the acquisition front, we've entered during the quarter into an agreement with the Alberta Wind Energy Corporation and created the Alberta Renewable Power Limited Partnership where Boralex retains a 52% ownership.

This collaboration in Alberta provides for a unique opportunity to leverage our expertise in the development of projects in the province Renewable Electricity Program, which calls for the development of 5,000 MW of renewable capacity between now and 2030. Seen as a whole, our recent acquisition, the 202 MW of project currently under construction and our extended pipeline, supports Boralex's revised target of 2,000 MW by the end of 2020 or nearly 50% more than today.

In the context of recent regulatory changes in France where the market is transitioning from a feed-in-tariffs scheme to a contract for difference one, including future requests for proposals, you should know that in addition to the 152 MW currently under construction in France, we have 87 MW which as nonrecourse building permits guaranteed interconnection and a fixed rate. Additionally, as of December 31, we formally had requested a fixed rate for another 235 MW for which the permitting process has been initiated.

I will now turn the conference over to our CFO, Jean-Francois Thibodeau, to further discuss our results and review our operation's financial situation. I will be back later for the closing remarks and the question period. Jean-Francois?

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Jean-Francois Thibodeau, Boralex Inc. - VP & CFO [4]

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Thank you, Patrick. Good morning, everyone. Before I get into the specifics of the numbers, I would like to mention that going forward, starting with our yearly 2016 numbers, we will be reporting figures rounded in millions of dollars and all variations in percentage are still calculated from their value in thousands of dollars.

For the fourth quarter of FY16, in comparison with 2015, on a proportionate consolidation basis as seen on the right side of slide 8, Boralex reports a 6% decrease in production, a 7% decrease in revenues, a 10% decrease in EBITDA, and a 19% decrease in cash flow from operations. Accordingly, revenues came in at CAD89 million and EBITDA stood at CAD57 million, representing margins of 64%. As for cash flows from operations, they total CAD36 million compared with CAD46 million last year.

Net earnings attributable to Boralex shareholders stands at CAD1 million or CAD0.02 per share, which compares to net earnings of CAD6 million or CAD0.09 per share in 2015. The difference between both years is mostly explained by the year-over-year [invisible] variance. I will now comment on the full-year numbers on slide 9.

Despite a weaker than expected fourth quarter, but because of a very first -- strong first quarter, for Boralex recorded in FY16 an 8% growth in production driving revenues to CAD354 million, a 10% rise in EBITDA to CAD231 million, and a 9% increase of cash flows from operations to CAD144 million.

Moving on to slide 10 with the quarterly comparative EBITDA by segment. For the reasons outlined previously, wind and hydro were weaker while the corporate, thermal, and solar sectors remain unchanged. I will later provide details on each individual segment.

Moving forward to slide 12, with the review of the quarterly EBITDA variance, the commissioning of new assets provided a net additional CAD5 million contribution. However, lower wind regimes in France and [water flow] in the US add the negative CAD12 million impact.

To put things in perspective, I would like to remind listeners that the first months of 2016 demonstrated excellent wind regimes in France, and they were actually ahead of our expectations. The levels of wind achieved this year were unseen since 1990. Based on various data, it is however impossible to derive a long-term change in wind trends. This year was just an anomaly.

Again, moving forward two slides, let's look at each segment's contribution starting with wind. Taking into account the newly acquired and commissioned assets, wind production decreased by 5%. In Canada, it was up by 20%, while in France, it decreased by 24%.

On a comparable basis, excluding the contribution of commission sites, production decreased by 17%. In France, it was 28% lower, and in Canada, it was down by 1%. Expectations were for a 38% power factor in Canada and a 30% in France for a blended 34%.

Actually, the overall blended power factor came in at 28%. Canada achieved a 37% power factor while France achieved a 22% factor.

Looking ahead to 2017, recognizing the importance of the quarterly power factor assumptions for your forecasts, we provided on page 24 of this presentation our 2017 power factor estimates or the wind sector broken down by quarter and country. Now the full contribution of the newly commissioned sites in Canada, namely Cote-de-Beaupre, Temiscouata II, Frampton, and Port Ryerse contributed CAD4 million to EBITDA.

With respect to Canadian assets, I wish to point out that despite the fact that the Niagara wind project was commissioned in early November, we will only account for its results starting January 18, 2017, the date of the closing of acquisition. Moving on to France, the new sites of Calmont, Touvent, and the first phase of Plateau de Savernat, explain a CAD1 million positive contribution to EBITDA. In view of the above mentioned items, revenues decreased by 6% to CAD69 million, and EBITDA decreased by 9% from CAD61 million to CAD55 million, representing margins of 81%.

Moving on to hydro on slide 16, the quarter's overall production was 11% lower than last year. It was 7% higher in Canada, but 25% lower in the US. In comparison with historical averages, blended production was 17% lower, where in Canada it was 7% higher and 33% lower in the US.

Lower production in the US was, however, partly mitigated by better prices, lower development and maintenance expenses. Given the above factors, quarterly revenues decreased by CAD3 million to CAD12 million, while EBITDA came in at CAD9 million or CAD1 million less than last year. As for margins, they stood at 68%, slightly above what was achieved last year.

We have no specific comments on thermal and solar sectors, as they each generated CAD1 million of EBITDA, unchanged from last year. We have, however, provided in the appendix section of the webcast additional details on production, revenue, and EBITDA.

Now, commenting on the corporate sector on slide 17. Development expenses totaled CAD3 million, unchanged from last year. Administrative expenses in the corporate sector stood at CAD5 million compared with CAD4 million in Q4 2015, reflecting the Company's growth. Finally, other expenses decreased from CAD2 million to CAD1 million offsetting the increase in administrative expenses.

Considering all of the above items, corporate EBITDA remained at negative CAD9 million. Looking ahead to 2017, we forecast administrative expenses in the CAD20 million range and development expenses in the CAD13 million range for a total corporate EBITDA of around CAD35 million, in line with the full year of 2016.

Now turning to our cash flow generation as seen on slide 18, as well as our cash flexibility and payout ratio. Cash flows from operations before changes in non-cash items came in at CAD36 million for the quarter, down from CAD46 million in 2015. During the fourth quarter, we spent a total amount of CAD85 million on investing activities. More precisely, we spent CAD53 million to mainly build our growth path, invested CAD16 million on business acquisitions, drew CAD13 million from reserve cash, and allocated CAD3 million to other items.

Financing activities provided a net amount of CAD80 million. More specifically, we drew new project related debt for CAD102 million and incurred a CAD64 million bridge loan relating to the acquisition of ready-to-build projects and land in France and Scotland. This inflow of cash allowed us to reimburse CAD17 million of capital on the existing projects, CAD43 million on our revolving credit facility, and another CAD14 million consisting for the most part of bridge loans related to reimbursable costs from Hydro-Quebec.

We also paid CAD4 million in distribution through noncontrolling shareholders and CAD9 million in dividends to Boralex shareholders. Finally, net proceeds of CAD107 million from the issuance of 10.3 million subscription receipts was designated as restricted cash. This being said, as seen on slide 20, cash stood at CAD109 million at the end of the year in addition to CAD193 million of restricted cash.

As of today, our cash flexibility at the corporate level stands at around CAD100 million, considering covenants, financial instruments, mark-to-market, and outstanding letters of credit. With respect to the upcoming year and projects identified in our growth path on slide 5, but excluding NRWF, we expect to spend approximately CAD334 million in property, plant, and equipment this year.

These investments will be financed by additional drawdowns of approximately CAD312 million, an equity injection in these projects from Boralex of approximately CAD17 million, and finally, around CAD5 million from minority shareholders. For 2017, projected debt reimbursements should amount to approximately CAD110 million. I will now discuss our payout ratio.

For 2016, it stands at 83%, outside our target of 40% to 60% of discretionary cash flows. This situation is a direct consequence of lower volume than expected from our French wind and US hydro operations. In fact, considering our revised 2017 cash flow, CFD guidance of CAD95 million on an annualized run rate basis, the recent quarterly dividend increased from CAD0.14 to CAD0.15, and the revised share count, we expect our payout ratio to fall within our guidance within the foreseeable future.

We'll now turn the conference over to Patrick for a few closing remarks before the question period. Patrick?

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

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To conclude, I would like to mention that despite the weaker than expected quarter, we are in great position to provide our shareholders a balanced mix of growth and return of capital for the foreseeable future. With a strong cash flow generation profile, a solid and flexible capital structure, a clearly identified growth path and pipeline, and very favorable interest rates, we have everything needed to continue creating long-term sustainable value.

More so, with an improved liquidity profile and potential inclusion in the TSX composite index, we believe we can attract new shareholders to our story who will further support us over the long term. Thank you for your attention. Operator, we'll now take questions from the participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Rupert Merer, National Bank Financial.

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Rupert Merer, National Bank Financial - Analyst [2]

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Good morning, everyone.

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

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Good morning.

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Rupert Merer, National Bank Financial - Analyst [4]

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If we could talk a little about your growth in France, looking at your growth pipeline, you've got that 87 MW advanced stage projects in planning. How long until you have a better view on the time to move those to construction and what's left to be done with those projects before you can get there?

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

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It's a minor thing but these projects will come online as this year goes, and the other 235 MW, a little bit of the same pace, but a year late from the 87 MW. And the 235 MW, I want to mention, that is what we always said. It is not guaranteed that all of them will be granted, all the permits, but we are confident we will get most of them.

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Rupert Merer, National Bank Financial - Analyst [6]

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So I understand you might be looking for slightly better economics on those 87 MW. How much better can the economics be than say your baseline alternative?

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

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We've always said that these 87 MW will generate returns in the rather be mid-teens than low double-digit returns that we see on a normal basis for other projects, so that's really the guidelines we can tell you.

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Rupert Merer, National Bank Financial - Analyst [8]

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Great, and then secondly, you've got that land package you acquired in France and Scotland, can you give us any updates on the thinking on the timing for selling that land package? And where the value could fall relative to your outstanding finance against the real estate?

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Jean-Francois Thibodeau, Boralex Inc. - VP & CFO [9]

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We just assigned advisors, I'm going to say, to sell those. I don't know if it is the right term for advisors, but we've just assigned some for Scotland and another one for the French land, and we give ourself -- like we've said in the past, we gave ourself two years to sell them but we're confident we'll sell them before the two-year term.

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Rupert Merer, National Bank Financial - Analyst [10]

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Okay. Any expectation that you should realize at least as much as the outstanding debt on the property, is that right?

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

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Oh, yes, sure.

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Rupert Merer, National Bank Financial - Analyst [12]

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Very good. I'll leave it there. Thank you.

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Operator [13]

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Nelson Ng, RBC Capital Markets.

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Nelson Ng, RBC Capital Markets - Analyst [14]

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So great, thanks. Just a quick question regarding the French wind development. Do you have a sense of when perhaps you will do a wind RFP and when will that competitive process start? Does it depend on the results of the election?

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Patrick Lemaire, Boralex Inc. - President & CEO [15]

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It should be an RFP this year, but it's still not clear. It's not that well defined up to now. They have changed regimes kind of fast I am going to say, and that's the reason why that we pushed to get some rights granted for many MW to be able to keep on going for the years, this year and the next year, until the RFP process comes with better, I'd say, more tangible (inaudible).

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Nelson Ng, RBC Capital Markets - Analyst [16]

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And just on that, so if they hold an RFP this year, does it make sense for you to submit any of -- you mentioned that you submitted 235 MW into the Feed-in Tariff process, but are you going to -- will you participate in an RFP if one takes place? Like would you look at your other projects that didn't make it into that 235 MW or would you look at that group of 235 MW and consider putting some of that into this RFP?

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Patrick Lemaire, Boralex Inc. - President & CEO [17]

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I'm going to say all options are open. We'll see as the RFP and the conditions of the RFP comes out. Not to forget that we have over and above the 235 MW. We have another where we are saying in total, we have 700 MW so we have another 500 MW or so of projects available.

So we could submit some of the 500 MW projects in development. We'll see because like I am saying, it is not that we don't have all the parameters yet so as they come, we'll see what we are going to do with those.

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Nelson Ng, RBC Capital Markets - Analyst [18]

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Okay. And then just a quick question for Jean-Francois. In terms of the PP&E of CAD334 million, and you mentioned that if I add the equity and the minority shareholders, that's only CAD22 million of equity funding, CAD334 million of PP&E, that seems like the leverage is pretty high to fund that CapEx. Could you comment on that, and is all the debt project level non-recourse advertising?

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Jean-Francois Thibodeau, Boralex Inc. - VP & CFO [19]

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Good question. It seems low but let's not forget that some of the equity has been put this year into some projects that were not financed. What happens during a year or so, you can have when you go into the project finance, you recreate some of the equity that you have. So on the overall basis, it looks low but all the projects are all between 80% and I would say up to 85% project debt.

So it's really -- the CAD17 million is really the reflection of multiple changes, some that we recreate from the when we draw under the project debt and stuff like that, so you should not look only at the CAD17 million as a percentage of equity to be put in these projects. It's still in the 20% mark.

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Nelson Ng, RBC Capital Markets - Analyst [20]

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Okay, thanks, and then just one last question, more longer term. I think in the past, you mentioned that you might not need any external equity to fund your growth through 2020, but subject to the timing of some projects. Is that still the case?

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

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Yes. As we said, there is a big criteria unless a major chunk of projects would come very, very early in the process. We'll see but yes, based on our forecast, we're able to finance the growth pipeline at a steady basis over the next three years.

And just to give you an example, our target is to generate cash, distributable cash of CAD95 million, and if we distribute 50% of that, you can make the math and you can see that we'll be -- we're in a good position to finance all the pipeline.

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Nelson Ng, RBC Capital Markets - Analyst [22]

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Got it. Okay. I will leave it there. Thank you.

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Operator [23]

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Ian Woodward, CIBC World Markets.

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Ian Woodward, CIBC World Markets - Analyst [24]

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Hi. This is Ian Woodward on behalf of Rob Catellier. Thank you for taking my questions. One sort of small housekeeping item just to kick off. In the notes I see that receivables greater than 90 days. Is that 17% compared to 2% in 2015? And I was just wondering what had driven that change.

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Patrick Lemaire, Boralex Inc. - President & CEO [25]

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I'm not sure I've got the question. Sorry about that.

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Ian Woodward, CIBC World Markets - Analyst [26]

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Sorry. The receivables and the financial statements greater than 90 days, the percentage outstanding was at 17% of receivables or greater than 90 days, which was a bit higher than the 2% in 2015. I just was wondering what was driving that.

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Jean-Francois Thibodeau, Boralex Inc. - VP & CFO [27]

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Let's not forget the receivables are -- you have to remove two things. There's I would say the receivables from the operations where they are very minimal and there's no difference between this year and other years. We usually have about a month of production that we sold to various counterparty. Sometimes in the receivable, you may have some projects, stuff that we couldn't recuperate let's say from Hydro-Quebec and stuff like that.

We have what we call the TVA. In France, the TVA is, I don't know how else to translate that, it's a tax that occurs that you will reciprocate. It does mislead a little bit the value of the receivable, but one thing I can tell you our core operations receivable are not higher, and we don't have any bad debt provisions in that. They are still very, very, very strong.

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Ian Woodward, CIBC World Markets - Analyst [28]

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Okay, thank you. And then in Canada, sort of outside of the procurement that's expected in Alberta, how do you view opportunities either for new development or M&A?

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Patrick Lemaire, Boralex Inc. - President & CEO [29]

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Like we've said in the past, we're looking at the US, mainly the Northeast and actually we're meeting or having discussions with the northeastern United States developers to see what can be done, partnership or acquisition, develop partially or totally develop projects, so we'll inform you as we go on that aspect.

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Ian Woodward, CIBC World Markets - Analyst [30]

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Okay, and my last question is just if you could provide any updates on the 200 MW partnership opportunity with the Innu Nation.

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Patrick Lemaire, Boralex Inc. - President & CEO [31]

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This goes along. We are still having discussions with the Innu Nation and also we're eager to have a meeting with Hydro-Quebec in the months to come. So this is going to be probably a longer process than we usually have, but we're still moving along.

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Ian Woodward, CIBC World Markets - Analyst [32]

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Okay. Thank you very much.

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

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Thank you.

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Operator [34]

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John Mould, TD Securities.

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John Mould, TD Securities - Analyst [35]

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Thanks, good morning. Just a quick follow-up on the 235 MW submitted in France. What's the timeline for confirming you've got both the rates, the fixed-rate side of things and the building permit side?

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Patrick Lemaire, Boralex Inc. - President & CEO [36]

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I'd say the timeframe is about 12 to 15 months, so like I said earlier, that's the 87 MW is going to mainly come this year as we go, and the 235 MW for the years to come after that.

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John Mould, TD Securities - Analyst [37]

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Okay, got it. All my other questions have been answered. Thanks very much.

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Operator [38]

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(Operator Instructions)

David Quezada, Raymond James.

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David Quezada, Raymond James - Analyst [39]

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Thanks. Morning, guys. Maybe just a broader question on the French market. With the change in the contract for difference versus FIT, I'm just curious and I certainly appreciate that you already have a very attractive pipeline there of projects.

But I'm wondering if you could comment at all on how the M&A environment seems there and is your phone still ringing in terms of development portfolios that are available out there and has there been any change on that front?

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Jean-Francois Thibodeau, Boralex Inc. - VP & CFO [40]

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I'm going to say I think that we made the partnership for the acquisition at the right time. Actually as we see if you follow the renewable energy market, we see very aggressive acquisitions or low return acquisitions. I think Boralex has moved at the right time, and if an opportunity comes in the months to come at the right return, Boralex will always look at that. But actually, we see very, very, very aggressive returns and on the M&A side.

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David Quezada, Raymond James - Analyst [41]

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Okay, great. Thank you. That's all I had for now.

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Operator [42]

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There are no further questions at this time. I will turn the call back over to the presenters.

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Marc Jasmin, Boralex Inc. - Director of IR [43]

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Thank you for your attention. A recording of the webcast is available until March 10. Thank you.

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Operator [44]

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This concludes today's conference call. You may now disconnect.