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Edited Transcript of INE.TO earnings conference call or presentation 5-Aug-20 2:00pm GMT

Q2 2020 Innergex Renewable Energy Inc Earnings Call

LONGUEUIL Aug 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Innergex Renewable Energy Inc earnings conference call or presentation Wednesday, August 5, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jean-François Neault

Innergex Renewable Energy Inc. - CFO

* Karine Vachon

Innergex Renewable Energy Inc. - Senior Director – Communications

* Michel Letellier

Innergex Renewable Energy Inc. - President, CEO & Director

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Conference Call Participants

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* Benjamin Pham

BMO Capital Markets Equity Research - Analyst

* David Quezada

Raymond James Ltd., Research Division - Equity Analyst

* Mark Thomas Jarvi

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

* Naji Baydoun

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Nelson Ng

RBC Capital Markets, 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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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2020 Second Quarter Results Conference Call and Webcast. (foreign language) (Operator Instructions) I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Karine Vachon, Communications Director. Please go ahead.

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Karine Vachon, Innergex Renewable Energy Inc. - Senior Director – Communications [2]

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

A presentation supporting today's discussion is available as we speak on the home page of our website at www.innergex.com. This call contains forward-looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions are reasonable under the current circumstances, listeners are cautioned not to rely unduly on these forward-looking statements as no assurance can be given that this will prove to be correct. Forward-looking information contained herein is made as of the date of this call and the corporation does not undertake any obligation to update or revise any forward-looking information, whether as a result of events or circumstances occurring after the date hereof, unless so required by law.

During this call, we will refer to financial measures that are not recognized according to international financial reporting standards. Please refer to the non-IFRS measures section of the MD&A for more information.

Our speakers today will be Jean-François Neault, Chief Financial Officer, who will present Q2 results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our operational highlights and our Q3 priorities.

I now turn the conference over to Mr. Neault.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [3]

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Thank you, Karine. Hello, everyone. The recent commissioning in the wind and solar segments contributed to increased results this quarter compared to the same period last year despite the curtailment imposed by BC Hydro in the hydro segment.

Production and revenues for the 3-month period ended June 30, 2020, were up 25% and 4%, respectively, and adjusted EBITDA was stable at $105 million compared to last year. Production proportionate, revenue proportionate and adjusted EBITDA proportionate were up by 21%, 9% and 10%, respectively. Before going further, I'd like to stress that 2019 figures are still reported on a continued operations basis, which excludes HS Orka.

On Page 8. Production for the 3-month period ended June 30 was 25% higher due mainly to the contribution of the Foard City wind farm and the Phoebe solar facility, which were commissioned, respectively, on September 27 and November 19, 2019. It was also driven by higher production from the Quebec wind facilities and hydro facilities in BC that were not affected by the curtailment imposed by BC Hydro, which impacted 5 consolidated facilities, thus partially offsetting total increased production.

On Page 9. Revenues were up 4% and the increase is mainly due to the commissioning of the Foard City and Phoebe facilities, higher revenues at the Quebec wind facilities and to the acquisition of the Salvador solar farm in Chile on May 14, 2020. These items were partly offset by lower revenues from the hydro facilities in BC, primarily due to the BC Hydro curtailment, along with lower average selling price at some facilities as well as lower revenues at some Quebec hydro facilities and France wind farms.

On next page. Adjusted EBITDA remained stable compared to the same quarter last year, mainly due to higher revenues and lower operational expenses at the Quebec wind facilities, the commissioning of Phoebe and Foard City, a higher contribution from the Ontario solar facility and Salvador acquisition. However, these items were offset almost exclusively by the BC Hydro curtailment.

The 10% increase in adjusted EBITDA proportionate compared to the same quarter last year is mainly driven by the PTCs generated by Foard City following its commissioning in September and a higher contribution from Dokie, Toba Montrose and the Chilean facility. It was partly offset by a lower contribution from the Flat Top and Shannon and Jimmie Creek facilities, which, in this case, was also impacted by the curtailment.

Continuing on Page 12. The $278 million decrease in long-term debt is mainly due to a net $309 million repayment of the corporate credit facility from the proceeds of Hydro-Québec private placement in Innergex common shares. This item was partly offset by a drawing related to the Hillcrest construction and other cash requirements.

On the next page. Change in total assets stem mainly from the increase in property, plant and equipment, attributable mainly to Hillcrest and Salvador acquisition. Change in total liabilities stems from the decrease in long-term debt. The change in shareholder equity is explained by Hydro-Québec private placement of 34.6 million shares, partly offset by dividend declared on common and preferred shares.

As shown on the next slide, the free cash flow available for distribution of $74 million represents a decrease of $41.9 million when comparing the current trading 12-month to the same period a year ago. The unfavorable free cash flow variance is due mainly to the loss in free cash flow attributable to HS Orka, including the recovery of maintenance capital expenditure and unfavorable impact from the BC Hydro-imposed curtailment, the timing of certain project loan interest payments, which resulted in the corporation having made 5 quarterly payments during the trailing 4 quarters, and a lower generation due to unfavorable weather condition.

These items were partly offset by the free cash flow contribution of recently commissioned projects and lower interest payment on the corporate revolving facilities concurrent with the Hydro-Québec private placement. Combined with these items, a higher dividend from Q1 and Q2 following Hydro-Québec private placement has increased the payout ratio to 150%.

Now that being said, let me bring you to Page 15. We have normalized the payout ratio for a better appreciation of our run rate capacity. Starting from the reported $74 million free cash flow and the 150% and when taking into account the $11 million from BC Hydro curtailment, the $13 million due to timing of interest payments, the $5 million decrease in corporate revolving facilities interest payments and the $13 million in additional dividend payment, the normalized free cash flow and payout ratio would have respectively reached $93 million and 105%.

Furthermore, on a forward-looking basis, when considering a full year contribution of our 2 recently announced acquisition and the contribution of the Hillcrest project, the nonrecurring curtailment imposed by BC Hydro, the timing of interest payments, the production at 100% of LTA levels, market softening assumption and the additional dividend, free cash flow would reach $128 million, thus bringing the payout ratio just below 100% in the next 12-month estimate. Moreover, this forecast does not take into consideration Griffin Trail or any other potential acquisition that could be achieved with the remaining unused proceeds of the Hydro-Québec private placement.

In conclusion, considering our current outlook and the additional cash-generating capacity to be derived from our growth strategy, which combine acquisition and project development, we are confident to attain a payout ratio of under 100% in the near future.

On that note, I will give the floor to Michel for the operational review of the past quarter.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [4]

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Well, thank you very much, Jean-François. First and foremost, I'd like to thank all our employees for their dedication during this crisis. I'm very, very proud of all the team. We've been very busy. And as Jean-François mentioned, we did the acquisition and we are advancing the development portfolio very well. So I think that in the context of the COVID-19, our team did a fantastic job in the last few months. And as a corporation, without even the COVID-19, I'm very excited on the development side and the acquisition execution.

So just to coming back on the COVID-19, as you know, we have been managing our assets on a different aspect in the sense that we have our health and safety in mind for our employees. We're still working from a distance, from home. For the time being, everything works very well. It's a little bit challenging in the sense that we are welcoming new employees as we grow. And this is a little bit of a challenge, of course, but we are adapting our leadership style to take into consideration this new reality that we all face.

Now for the acquisition side, you've all seen the acquisition of the Salvador, the solar plant in Chile. We're very happy to have been able to complete it, this acquisition. Mind you that, as Jean-François mentioned, we have had a little bit of a delay in the execution of those acquisitions that were announced after the investment of Hydro-Québec. But I think we were a little bit cautious given the crisis and we took our time to assess the situation. And in this case, we were able also to renegotiate a little bit the acquisition price. So all is -- all was the best.

And we maintain our, I would say, our prudent approach of deploying the -- our liquidity. And that's why also we will be talking also with Mountain Air, the wind farm that we just bought in Idaho. So those 2 acquisitions are part of our strategy to balance the cash flow. Jean-François has been talking about the payout ratio. We're mindful that we have to bring the payout ratio below 100% and into a better sustainable...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [5]

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Level.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [6]

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Level. Thanks. And one of the strategy that we want to do, and I mentioned it a few times, is to use M&A as a tool to rebalance our cash flow because we are very successful and proud to report, and I'll explain a little bit the advancement we've done in the development sector. So I think we can create a lot of value for our shareholders going forward in our own greenfield development projects. And in order to help also the cash-on-cash and the earlier cash flow contribution, we will be using M&A as a focused tool to help rebalance our portfolio. And Salvador and Mountain Air are good -- 2 good example of what we want to do. And of course, we -- our team is focused to deliver on that strategy.

So construction activities is also very important. And as you know, we have a few projects under construction. And the biggest one is Hillcrest. And we have started the construction in the middle of the crisis last January, beginning of February. Very proud again of the team that we have been able to manage and advance the construction almost as planned. So we have perhaps 4 weeks of delay that we intend to catch up with having a little bit more personnel on the ground. As of today, we have just over 320 workers on-site. And the plan is to bring this number to about 400 by the end of the month. And so we're very confident that we'll be able to achieve the COD date by the end of the year again. So pretty proud of what we have been doing over there given the COVID crisis.

And a good surprise, Innavik hydro project. Last time I was talking to you, we were not so optimistic of being able to go in the North of Quebec given the sensitivity of this village to a potential contamination with COVID-19, but the local government were looking into having some economic activities and we found a good compromise on security and health and economic development. So construction restart in early July. And so we will be able to meet the COD, the original COD. So happy to report on this as well.

Yonne II wind project is advancing very, very fast. We're hoping to be in COD by the end of the year also. It's a small project, but I would say that it's a first giant step for us in France because it's the first greenfield project that the team has put together and it's the first of, hopefully, many. France is a priority for us. We're growing our team over there in terms of development. We are seeing the European Commission putting a lot of their strategy to restart the economy towards a green economy. So we're quite happy to put a little bit more effort in France and our pipeline is growing. And hopefully, like I said, Yonne is only the first step toward putting more projects out of our greenfield pipeline in France.

From another completely different part of the world, we've been very active in Hawaii. Very happy to report that we've been shortlisted on 2 new projects, a 15- and a 20-megawatt, coupled with batteries for 60- and 80-megawatt-hour batteries. So this is -- we now have 4 projects under development in Hawaii. Pretty happy on that aspect because, as you know, this is a sector that we want to develop. And we want to have more projects being developed in this type of approach with storage.

And we're also happy to report that we won a project, a 9-megawatt-hour battery storage only in France. The project is called Tonnerre. It's interesting in a sense that it's our first investment in storage only. Again, hopefully, not the first, but we will be successful in the future developing more of those type of projects, especially with our alliance with Hydro-Québec. As you know, Hydro-Québec has a very good battery and they want to deploy that battery around the world and we will be trying to team up with them and be successful in promoting those storage projects around the world. So Tonnerre is the first interesting project we won some -- we won into an RFP and it will be installed in our Yonne facility, so which is an extension of our existing substation. So pretty exciting about this project, not because it's a big project, but because it's a first of a new segment of business that we want to develop.

And perhaps one of the surprise that we came up and I would tell you that it was not a surprise for us because we knew about Griffin Trail, but we've been given a very nice gift by the Treasury of the U.S. government when they extended the tax, the PTC in the U.S. Griffin Trail has had some work done in the past and we were able to qualify Griffin Trail for 100% PTC. So that came to a very good surprise for us. Remind you that the PTC in the U.S. are starting to be about $0.025 and it has an escalation and it's good for 10 years. So although this project will be starting to be merchant, I consider that receiving, for a period of at least 10 years, a USD 0.025 per kilowatt-hour produced coming from, indirectly, the U.S. Treasury is in a form of a PPA.

Remind you that in Quebec, in Saskatchewan and Alberta, projects were won in the 30 -- in $0.03, $0.035 per kilowatt-hour and people were happy to receive that. So USD 0.025 is almost the equivalent and we have an inflator there. Also, we will be selling electricity in the spot market in ERCOT. Even though we're seeing a weak market these days because of the COVID, the demand in ERCOT has come down by about 5%, which is not offset compared to other markets. Quebec is in that range and BC Hydro is in that range as well. So no specific really downturn in ERCOT other than the -- it's a full merchant market, so it might react differently than other markets.

But just to give you a little bit of an idea why we changed this approach is the fact that, as an example, Foard City, we have signed a PPA for $18 per megawatt-hour or $0.018 per kilowatt-hour. So this is the rate of PPA that we're seeing in ERCOT. And of course, you don't get to have the potential update -- upside when the market are peaking or even when the future market would be better in ERCOT. It's -- those PPA are nice. But again, I think that going merchant is giving us quite a bit of upside. And we still have the option to sign a PPA if a good offer come across our board. So very happy on that aspect in the sense that it's a project that were in our pipeline, but were basically on ice. And having this gift from the U.S. Treasury enable us to unwind this value that was hidden in our pipeline.

And the team did a fantastic job because, of course, a lot of people got waked up by this extension of PTC. So we were able to secure same good team that worked on Foard. We have security in Blattner for the execution of this project and we're very confident that this project will be in COD by Q3 of 2021. We're finalizing the tax equity term sheet as we speak. So pretty enthusiastic about this project that basically is unlocking some value that was hidden in our pipeline.

Also, I'm finishing with the Mountain Air acquisition in Idaho, what we just announced a few weeks ago. So again, the same idea there is that good-quality project that will help rebalance the cash flow of the company. It's not a change of mentality in Innergex, we are a long-term investor. But this is our way to mitigate the fact that we are paying a dividend and we are a growing company. So we have to have the tools to rebalance the distribution of the cash flow. And this is one way to do it. And we're quite happy on this acquisition. And like I said, the team is focused on -- the M&A team is focused on finding these type of acquisition in the near time.

Chile is also quite active. We're seeing some good deal flow. And perhaps we will be able to do some other acquisition like Salvador. So pretty upbeat in the sense that we've been doing a lot of activities, a lot of construction and a lot of development. Weather was not on our side in this quarter and BC Hydro was not very friendly to our cause. But of course, we are, like I said in the past, fighting back and we will defend our rights against BC Hydro for this PPA. I'm very confident that we'll succeed in defending our rights under this PPA. But other than that, pretty -- very, very proud, again, on my team and I thank all the Innergex team for this great success in the last few months given the COVID-19 challenge.

So on that, I would open the floor.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from David Quezada from Raymond James.

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

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My first question here, just on the curtailment of BC Hydro. I believe when the news first came out, there was a $20 million expected revenue hit. And I think you saw $11 million in the current quarter or in 2Q. Should we expect the balance of that to fall in 3Q? Or has something changed there potentially?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [3]

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No, you're right. It's just the fact that we -- the curtailment was effective until July 20. So we will see still a 20 days of July being under curtailment.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [4]

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Yes. And it's still around $20 million, yes.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [5]

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Okay. Great. And then maybe just a question on your U.S. development pipeline. I know that I think last call, we mentioned or you mentioned a couple of the solar projects in PJM in Ohio. You said at least 100 megawatts, but you're trying to get more land and potentially increase the size of those. I'm wondering if you have any update there.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [6]

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Yes, I'm sorry I didn't mention it. The team is also quite active there. We're expanding on the land. We're just cautious on starting projects for 2021 in the U.S., given the fact that those would benefit from ITC. And ITC is a little bit different than PTC in the sense that you get the benefit, the tax advantage, on the year the project is put in COD. And perhaps some tax equity provider might be a little bit more nervous in 2021, given the fact of the state of the economy. So we're cautious on putting solar in 2021.

Hence, we're happy to have now Griffin Trail being developed for 2021 and this is a PTC. So less of a concern in the sense that the tax equity provider have 10 years to take advantage of those tax equity credit. But no, the team is very active. We're also opening up a good development platform in the Northwest of the U.S. A lot of these areas have developed some aggressive policy towards having more renewable in their portfolio. So we're getting ready also to answer some RFP in that region of the States as well.

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Operator [7]

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Your next question comes from Nelson Ng from RBC Capital Markets.

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

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Just my first question relates to Griffin. So in terms of going merchant, like what's your -- like are you also assuming that your -- like obviously, you had to decide whether you want to hedge or go merchant and you have various kind of return expectations. From your perspective, what is the return premium for merchant versus hedging?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [9]

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Well, it's very difficult to answer that in the sense that this is driven a lot by future price of electricity and you could have a few curves. We're quite conservative when we're proposing this project to our Board. We're taking Wood Mackenzie without carbon as a kind of a reference. So this is probably one of the most conservative curves out there and we're basing our decision, financial decision, on that.

But I'll give you a little bit of very, very general and rough numbers. The project will probably be cost around $280 million, roughly. PTC, just the PTC, we -- we're going to get something around $21 million to $22 million of PTC as a run rate and I'm not taking into the inflation in consideration. And of course, we expect to invest something around $110 million, $116 million, our share of equity. The rest will be tax equity. We expect to have something around $10 million of distribution from that project in different ways. We're going to have PAYGO. We're going to also have some revenue from the spot price. But I think that we are looking into something around 8% to 10% cash-on-cash. And for a tax equity deal, this is not bad.

And we've seen a lot of other bigger players doing just that and walking away from very cheap PPA that was basically flat or levelized for 10 years, 12 years at a range of $15 to $18 per megawatt-hour. That's what we're seeing now in the market. That's what we're getting from the merchant portion of CB and Foard. And so it's hard to think that the market will be a lot lower than this range. Even considering the COVID-19 situation in Texas. So I think that we keep the upside going forward.

So even if there were to be some carbon introduced -- tax introduced or limitation introduced in the United States, I think that these type of projects will see a very good upside. And we'll see also with the U.S. election in November if the Democrat -- if Biden gets in, I think that U.S. investment will benefit, green energy will benefit from his election. And if Trump stays in there, it cannot be worse than what we have seen in the last 4 years, so we're still very positive about our investment in U.S.

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

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Okay. That's good color. And then in terms of raising tax equity, does tax equity typically require hedges for projects? Or do you think they've become more comfortable with unhedged?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [11]

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Well, they were requiring it. And we -- I think that given the fact that we have now delivered good project in time and in budget, that was helping also. So we have some good relationship with some few tax equity providers that we have leveraging now and that are accepting the fact that Innergex can do that type of project. So it's -- I think it's a great, I would say, outcome because 2 years ago, we wouldn't -- we would not have been able to develop a project in this way. And hence, Foard City, we had to accept a PPA of about $18 flat for 12 years. So we were happy to have it at the time because it unlocked the tax equity. But I think that the Griffin Trail proposal is a better economic proposal for us going forward.

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

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Okay. And then just moving over to Mountain Air. You guys mentioned that you only bought the -- like 1 class of, I think, the Class B shares, like the equity rather than the tax equity. Given that the project is about 8 or 8.5 years old, is -- like when is the expected flip date for tax equity? And what -- and then (inaudible)?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [13]

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Yes, it has already happened, the flip. So now it's a straight partnership where MetLife gets 1/3 of the cash flow and we get to have 68% of the cash flow. We may have some discussion in the future to acquire the remaining portion of that -- the project, but it will be a negotiation with MetLife. They don't have to sell. We don't have to buy. But if we can find the sweet spot between the 2 of us, we might execute on that as well.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [14]

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Okay. Got it. So the -- so MetLife has already taken up most of the -- like the tax attributes has already been realized for that project is what you're saying?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [15]

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Yes.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [16]

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Okay. And then 1 last question before I get back in the queue. In terms of the French energy storage or battery project, so you got a contract for differences for 7 years. So should we think of it as your EBITDA is going to be essentially fixed for 7 years and then it will be, I guess, somewhat merchant thereafter? And what should we think about how the merchant -- like what the cash flows are after 7 years? Like if today's market remains unchanged for 7 years, like how do the cash flows look after that 7-year contract?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [17]

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Well, that's a little bit far. Well, again, it all depends on how the market and the penetration of green energy and how the nuclear would have faded away. So it's a little bit hard to answer, but the guys that have put forward all those assumptions, like I said, we tend to be conservative on those assumptions. And if we unlock value in the future, we're happier. I don't have the specific number at year 11 for Tonnerre. Maybe Jean-François can give you an update...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [18]

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Follow-up, follow-up.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [19]

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Follow-up on that. I don't have the exact number.

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Operator [20]

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Your next question comes from Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [21]

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A couple of questions. With respect to the BC curtailments, can you give us an update on the arbitration process and expected timing of any resolution with BC Hydro on that front?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [22]

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We're not allowed to talk about arbitration with -- according to our contract. But of course, we can say that we're in a dispute. And dispute is -- it's going to take 4 months, 5 months, maybe perhaps 6 months to see the end of this process, certainly less than a year, but anywhere between 4 to 8 months, I would guess.

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Sean Steuart, TD Securities Equity Research - Research Analyst [23]

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Okay. And a follow-up question on Griffin Trail. Can you give us some context on the interconnection for that project? And we know that in North Texas, there's been some congestion issues. Any details you can give on that project specifically?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [24]

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Well, that project is just a few miles south of Foard City. So in Foard City, we haven't seen too much problem with congestion. ERCOT is always a funny place because it changed quite a bit, but that region has not been hurt that much actually. The place that were quite bad is the Northwest and the whole [last year] as we all know. But Foard, we have the experience of last year and it was not bad. I think it was -- and hence, we are fairly positive about this location. It's -- the wind is not as attractive as the Northwest. But we know the regime of the wind there because we had studied Foard and we had some met mast in Griffin Trail. Like I said, it's literally about, not even 100 km south of Foard, can't remember exactly, but I think it's 40 km, 50 km south of Foard. So it's -- we know the area pretty well. And we're slightly positive about those congestion in that area.

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Operator [25]

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Your next question comes from Mark Jarvi from CIBC Capital Markets.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [26]

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In the past, you guys had talked a little bit about maybe changing your exposure to Texas over time, selling down minority interest. What with another project in Griffin Trail, any updated views on that and how you guys think about potentially optimizing your exposure in Texas? And does the congestion issues or issues with the basis hedge limit you from doing anything in the near term?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [27]

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Well, it's a very good question. We -- I definitely want to go and diversify in the U.S. It just happened that we were well positioned in Texas and Griffin Trail was just a very nice gift that we received from the U.S. Treasury. It's hard to walk away from a 100% PTC. Like I said, it's $0.025 per kilowatt hour for 10 years with inflator. So this will pay 70% to 75% of the project in the next 10 years. I think that we will be looking to perhaps sell down a portion of the portfolio in ERCOT. Is today the best timing to sell it? Probably not. One way also to diminish the -- our exposure to ERCOT is to grow the rest of the business and that's what we are intending to do. And we will be opportunistic to basically divest if we find a good price for our equity, given the fact that perhaps ERCOT has been seen as a weak market, given the recent weakness in the spot market price. But it's a place where there's a lot of growth. And I think that having good assets that are fully amortized and be (foreign language)...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [28]

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Subsidy.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [29]

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Subsidized by the Treasury -- U.S. Treasury is not bad to have on a portfolio basis either.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [30]

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Okay. That makes sense. And then on Slide 15, when you guys talk about more of a normalized payout ratio, there's a line about market softening assumptions. Can you maybe just outline what that entails and what you guys are expecting over the next 12 months there?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [31]

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Sure. I think it's a little bit of a cautious in our number, making sure that we don't want to disappoint you guys. We have some exposure in Texas and to some degree in Chile. So given the COVID-19 uncertainty, we have put this type of a buffer. We don't know exactly what it is. It's just we did put a little bit of a buffer in our calculation.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [32]

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Yes. But you're right, Michel. It's mostly, Mark, related to our exposure in ERCOT, I would say, for most of it. And we have seen that in the results with the average price in Texas being a bit softer than a year ago when -- from presumably the lower demand there. So that's exactly the reason for being conservative here.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [33]

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And does that capture then any expected losses on the basis hedge? Or is that (inaudible)?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [34]

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Well, that -- on that side, I mean the basis and all the basis unfavorable variants we used to have, have slowed down over the last -- so the normal price have decreased, but the volatility on the basis have reduced as well. So on that flip side, it has been positive, like the business hedge with Phoebe has even created some value during the quarter. So we were happy about that. So we lose on the average normal selling price day-to-day because of reduced demand, but in terms of volatility on the basis risk, it has been reduced, fortunately, and the congestion may have an impact as well on that, Mark.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [35]

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Okay. That's very helpful color. And my last question is just now with Mountain Air done and Salvador done, what's sort of the expectations here on the pace of further M&A and capacity for further acquisitions, given where you guys are with your liquidity?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [36]

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We -- like I said, it's a tool. The more development we're going to do, we have to balance it with good acquisitions like Mountain Air and Salvador. And the team is focused in finding some good opportunity there. There is a lot of volume of deal. It's just that we have to find one that fits us and have a good return and part of the equation is also a big portion of the quality of a deal. So the team is there. We have some friends out there that know what we're looking for. So we're very confident that we'll be able to match our development with those type of acquisitions down the road.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [37]

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So if you think about what you're doing on the development side and Hillcrest is the next project, which really is 2021, do you still feel a desire to rebalance the current mix? Or would you feel it's more like again compensating for maybe a little less cash flow from Hillcrest next year, can the tax equity contribution...

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [38]

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We like the fact that if you look at Salvador and Mountain Air, if we can do one of those every year, that helps. That's roughly the equilibrium that we're looking for. So it's not like we're going to go out and be nuts about M&A, but the type of activities that you've seen in Mountain Air and Salvador, if we can replicate that every year. And if we can come up with 200-, 300-megawatt of new pipeline, project coming from our own pipeline, like Hillcrest is 200 megawatts and Griffin Trail will be 225 megawatts. So just for next year, we'll be putting over to 400-megawatt of new project in -- coming from our own construction activity. So this is a ratio that we want to keep and this is in line with the 10% growth of our EBITDA that we have given you as guidance.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [39]

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Okay. That's good color, Michel. And maybe last question, JF, how much remaining CapEx at Hillcrest through the year and next year?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [40]

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Remaining CapEx at Hillcrest, let me get this or maybe I call you after the call. So let me follow up on that precise question after the call, but it's looking right now also...

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [41]

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And the first tax equity disbursement is scheduled to be mid-September and that date is still on.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [42]

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Construction. Construction here, they have the table. So I'll get to you after the call, so...

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [43]

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And guys, I'm very sorry. I have a hard stop because I'm on another Board, and unfortunately, the timing of the -- has been a little bit of a overlap. So I would take another question and then Jean-François will stay in to answer the questions.

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Operator [44]

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Your next question comes from Rupert Merer from National Bank.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [45]

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So we haven't talked about France, I don't believe. You had some shutdowns there in the quarter. Can you give us some color on what happened? And is that ongoing?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [46]

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Yes, yes. We had, on Montjean and Rabier, 2 -- well, 2 events where a -- the blade failed and those are Vestas. The first time we were able to come back in work and then restart with the local government -- in France, the equivalent of the health and safety department is very, very, I would say, peculiar there. They're on every incident like that. And so the first time, it was not so bad. But the second time, only a few months after, then they took that very, very seriously. So it's not that it was a big deal to replace a blade. We have blades that over the -- our fleet that breaks now and then. But the problem is that the French government are shutting down the old part that have the same blades or the same type of machine.

And this is why it did hurt. We were -- we have insurance coverage for that. But we are in discussion, intense discussion with Vestas to find the problem with these blades. What we understand, it's one of the first batch of a new design that were introduced for their blades. And they don't necessarily have found a big problem with them. But this is -- the issue is that the local government in France wants to have answer and find the cause of the break. And now we have reintroduced the production in those 2 sites but with some kind of a protocol where we want to minimize the exposure to certain level of power to those blades. So we're working very closely with Vestas. But obviously, it's a priority of the operating team to find the long-term solution for these blades in France.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [47]

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Okay. And on Phoebe, you had some curtailment there. You talked a little about Texas and congestion already, but can you give us some color on how much curtailment you saw here and maybe what the outlook is for Phoebe going forward? Will there be any opportunities or reduction in curtailment?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [48]

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Yes, we've seen that -- yes, in the -- we were a little bit surprised to see these economical curtailment in Phoebe. It did account for almost 6% of the production, Rupert. We were surprised to see that. For the time being, that did happen in only a few months. Those occurrence happened in a few months. So sometimes, it's due of outage on the system as well when they are working on the distribution and transportation system. So lately, we haven't seen any curtailment, economic curtailment in Phoebe. Hopefully, that is behind us. But yes, it was almost 6%.

So very sorry, guys. I hate to do this, but I have to leave. So I'll have Jean-François answer the rest of the questions. Thank you very much.

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Operator [49]

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Your next question comes from Ben Pham from BMO.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [50]

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I wanted to ask you -- thanks for the numbers on Griffin. I guess like when you did a quick math there, it's over $40 million EBITDA. So that's probably going to be about 5% of your EBITDA pro forma. So is your merchant appetite now more moving to under 10% now versus under 5%? Is that directionally where you are comfortable with going?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [51]

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Yes. I mean -- you mean around -- you're speaking IRR, Ben? Sorry, I missed the question.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [52]

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Oh, I was thinking more about -- I was thinking more about commodity exposure. Like you've always been almost like 0% commodity exposure. You've slowly gone to 5%, 5%, 5%. Or as the EBITDA...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [53]

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Yes, okay. You're speaking about the total mix.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [54]

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Yes, yes. Just what you're comfortable with now. Like it seems it keeps going up over time.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [55]

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Yes, like Michel said, of course, going merchant with Griffin is a portion of the Griffin will get us more exposed to merchant revenue, definitively. But also, as Michel mentioned, when you look at our contracted book of business on a revenue proportionate basis, when you -- you have to consider the PTCs as being contracted with the Treasury. So it's kind of a, in form and shape, we'll get to a measurement of our contracted portion of the business with including also the proportion of the PTCs, which is in form of a secure contract with government with escalation, so -- but you're right. Nevertheless, I mean the normal sale at Griffin will be merchant. So we wrap our mind around that and we're comfortable with that. So that will have an overall impact on our exposure globally to more merchant market. Yes, you're right.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [56]

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Okay. And so really, like if Griffin is a 8% to 10% project, then does that mean like these other projects you have, Foard and Phoebe, is it -- directionally, it looks like it's more 5% to 6% project near term?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [57]

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Yes. So Phoebe, obviously as we mentioned, recently, the market has softer a bit in Texas. So we have seen pressure on the average selling price year-over-year. That's probably in relation with the COVID and the lower demand we see there. So we have seen a pressure down on our cash-on-cash return for sure on those projects. So we hope it's temporary. And on the other side, we have seen some less volatility on our basis, so we're happy about that. So it has compensated it.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [58]

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Okay. Can I ask you, lastly, I mean it sounds like 8% to 10%'s the sweet spot for you and whether it's merchant or contracted, that there's some upside in year 11 once tax equity comes off, although you are taking more merchant risk in year 11 at that point. So you got to make a call on that. But is it hard to get 8% to 10% outside of Texas or America in general? I mean is that why you're so enthusiastic or maybe moving more of your capital to Texas than maybe some other regions?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [59]

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So that's a good point. So like Michel mentioned, we have a view on maybe eventually recycling some of our capital there. So that would kick in 2% of return in addition to the 8% to 10%. So that's a nice way to get a better return that's definitive. But you're right. But our -- but those projects, that 8% to 10%, are less risky to develop, more faster. So that's the sweet spot we have seen so far, but we're happy to develop in Texas. It's a region that is growing. So it's less risky and much easier to develop there. Griffin Trail started from scratch. And in the quarter, we almost have construction status. So it's less risk, though returns are a bit lower. I mean it's typical in any business.

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Operator [60]

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Your next question comes from Nelson Ng from RBC Capital Markets.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [61]

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Great. I just had a quick follow-up question. Just on the Yonne wind projects. I'm not sure whether I'm reading it right, but I think -- like are you financing roughly 100% of the project with nonrecourse amortizing debt? I think the project cost is about EUR 11 million and you raised about EUR 11 million as well. Like is that typical?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [62]

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Yes, that's a small -- no, I mean that's a small addition to our actual project. So that's not probably representative of what we could do in the future, but that's -- because it's in addition to our project. So it's not to be representative in the future.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [63]

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Okay. Got it. And then just a quick follow-up on Ben's question. In terms of expected returns, I think Michel mentioned in the past that you guys are generally looking at, I guess, 6% to 8% premium over the 10-year risk-free rates. Should we assume that Salvador is at the higher end of that rate, given some of it's merchant exposure; and Mountain Air, I presume, is on the lower end of that range, given that it's fully contracted and in the U.S.? Is it?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [64]

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That's a good point, valid observation. So I would say you're pretty much right, Nelson.

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Operator [65]

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Your next question comes from Naji Baydoun from Industrial Alliance.

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Naji Baydoun, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [66]

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So my questions have been answered, but just maybe 2 quick follow-ups. I guess a follow-up on Ben's questions. Just maybe if you can expand more of your thoughts on overall merchant exposure. When you think about new projects that you're developing or acquiring, be it solar, wind, going forward, what do you think is the right mix of merchant assets like Griffin Trail or Salvador versus maybe contracted assets? Like how comfortable -- how much merchant exposure, I guess, are you comfortable taking on from a portfolio perspective?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [67]

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Well, I don't want to comment on any long-term target here. We have decided to move Griffin Trail in that fashion because of the knowledge we have gained over the past few years on the Texas market. And as Michel mentioned, we're pretty confident using the WoodMac no carbon curve that we are conservative. So -- and that Griffin Trail project will not change that much our overall mix exposure to merchant. So it's too early, but of course, Chilean market and the ERCOT market makes you have a greater exposure on merchant, so -- but commenting further down, it would not be reasonable for me to comment too long away in our average threshold here, so.

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Naji Baydoun, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [68]

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Okay. I understand. Maybe just one more question. Can you give us more details or an update on some of your wind development activities in France? Are there any opportunities, maybe some other ones that you're co-developing with Vent d'Est that might be getting ready to be bid into the onshore wind auctions in that country?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [69]

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Well, we're happy with the team there in Lyon and the progress they have made. So all of our portfolio of projects, we have over 120 megawatts around of project. I would remind you that projects in France are smaller, around 20 megawatts, something like that. So every quarter, we're progressing on that. So we're confident to -- so Yonne is our first greenfield project, very happy with it. So we're confident to see the light on a few of those prospective initiatives in France, the team are doing good. And the team also started to reflect on maybe some solar opportunity as well. So that's another nice initiative from the team there. So we're happy. So I just want to remain conservative in -- with my forecast here.

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Operator [70]

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

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Karine Vachon, Innergex Renewable Energy Inc. - Senior Director – Communications [71]

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Thank you, and thank you, everyone. We look forward to speaking to you at our next results conference call in November. Thank you.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [72]

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Thank you.

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Operator [73]

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Ladies and gentlemen, you may now disconnect your lines.