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Edited Transcript of INE.TO earnings conference call or presentation 28-Feb-20 2:00pm GMT

Q4 2019 Innergex Renewable Energy Inc Earnings Call

LONGUEUIL Apr 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Innergex Renewable Energy Inc earnings conference call or presentation Friday, February 28, 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. - 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 - Associate

* 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 2019 Fourth Quarter and Year-end 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, madam.

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Karine Vachon, Innergex Renewable Energy Inc. - 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 Homepage of our website at www.innergex.com.

This call is being -- this call contains forward-looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions on which forward-looking statements are based 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 it 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 the International Financial Reporting Standards. Please refer to the non-IFRS measures section of the MD&A for more information.

Our speakers today will be Mr. Jean-Francois Neault, Chief Financial Officer, who will present Q4 and year-end results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our operational highlights and our Q1 priorities.

And I'll 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, and good morning, everyone. I am proud to report strong results for the year 2019 with production, revenues, adjusted EBITDA and adjusted EBITDA proportionate up by 28%, 16%, 16% and 21%, respectively.

Before going further, I'd like to stress that we are reporting on a continued operations basis, which exclude HS Orka results. In the fourth quarter, revenue were up 4%, mainly explained by the contribution of the commissioning of the Foard City and Phoebe facilities and by higher production at the French wind facilities. These positive factors were partly offset by lower production in BC and lower average selling price and production at some hydro facilities in Québec.

Adjusted EBITDA was flat compared to last year, mainly due to higher contribution from the wind and solar segment, almost completely offset by lower generation in the hydro segment. Our adjusted EBITDA proportionate increased in the quarter, mainly due to higher contribution from the wind facility in Texas and BC, partly offset by lower revenues in Chile and Ontario. The increase in adjusted EBITDA proportionate is also due to production tax credit, called PTCs, generated by the Foard City facility as well as our share ownership of PTCs generated by our Shannon and Flat Top joint venture wind farm in Texas.

On that note, as you can see on Page 8, we elected to account, on a consolidated basis under IFRS, all of our wholly owned and joint venture tax equity investment as long-term loans and borrowings, which are amortized over time by the PTC generated during production, the investment tax credit, called ITC, for solar farm and all other tax attribute allocated to the tax equity investor.

For Foard City, the unamortized balance of the tax equity investment recorded as long-term loans and borrowings at year-end is $285 million compared to the initial investment at the end of Q3 of $373 million. Here, the amortization of the loan included in the quarter over $11 million of PTCs that was recorded under other revenues.

Now for Phoebe, I want to remind you that solar project in the U.S. are eligible for ITC versus PTCs. In this project, tax equity investment recorded as long-term loans and borrowings at year-end was $53 million compared to the initial funding amount of $244 million at financial close during the quarter. Here, the large reduction within the quarter of the loan is due to the ITC amortization profile being accelerated in the first year of closing. In this case, the accounting counterpart of the loan amortization is accounted in reduction of the property plant and equipment value of the project instead of other revenue in the profit and loss statement.

For this quarter only, the total PTC contribution from Foard City and our proportion of Shannon and Flat Top was $17.8 million. Foard City by itself contributed $11 million in the quarter, and we estimate that this could be contributed around $42 million on a yearly basis depending on generation.

In summary, PTC's dollar value earned by our 3 wind farm in Texas are now, and going forward, be accounted as other revenues and added back to our adjusted EBITDA proportionate since it provides a better measurement of our valuation multiple when tax equity investment loan are added to our total enterprise valuation.

Continuing on Page 9. The adjusted EBITDA can, again, be explained by the contribution of the wind and solar segment, partly offset by below-average water flows in BCs and lower revenue at Québec facility. For the year, the adjusted EBITDA proportionate, on Page 10, increased 21% since most of our joint ventures and associate facilities contributed positively during the year. Also, the PTC contribution from Shannon and Flat Top was higher due to the higher production, and the commissioning of Foard City in September also contributed to increased PTCs during the quarter.

As shown on next slide, the variation in long-term debt is mainly due to draw made on the construction and tax equity bridge loan during the construction of Phoebe and Foard City project, reimbursed by a combination of term loan and funding from tax equity investors net of ITCs, PTCs and tax attributes allocated and cash distribution made. The variation is also due to the convertible debenture. These items were partly offset by the net repayment made on the corporate revolving facilities, including repayment made with the proceeds received from the sale of HS Orka.

On the next page, changes in the financial position items stemmed mainly from the sale of HS Orka, the additional construction activities at Foard and Phoebe and the initial application of IFRS 16.

As shown on the next slide, our free cash flow, which include HS Orka, decreased to $93.3 million. This can be explained by greater debt payment and decrease in cash flow from operating activities. Our payout ratio changed negatively at 102% compared to 86% a year ago. Also worth mentioning that in the quarter, we have recorded a cash loss of $11 million on a basis hedge financial instrument due to higher congestion in Texas than anticipated. For the purpose of calculating the payout ratio and giving the limited occurrence over a 2-year period, we have added back the loss on this financial instrument in our free cash flow non-IFRS measure and recorded as well a noncash mark-to-market loss of $47 million under unrealized loss on financial instruments for the year-end.

On Slide 14, our financial performance for 2019 was aligned with the projection made at the time of the sale of HS Orka. We exceeded our projection in terms of power generated and adjusted EBITDA proportionate while we were close in terms of adjusted EBITDA and not far beyond in terms of revenue.

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

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

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Thank you, Jean-François. Good morning, everybody. It's this time of the year that we'd like to just go back and look on the achievement we've done in 2019. I must say I'm pretty proud of what we've done and achieved in the last 12 months.

Just as a reminder, the year started with the divestment of the -- well, the sale of our participation in HS Orka. We were proud to be able to generate a profit on that sale. That asset, as you remember, was part of the Alterra acquisition. And we did redeploy that money to reimburse the loan bridge that we have taken on our books for the acquisition of the remaining shares of the Cartier facility in Québec. So pretty happy on that transaction.

Also, on the development side, it's not a big project, Yonne II. It's a 7-megawatt wind farm in France, but it's the first of hopefully many to come. So it's -- if you remember, we have started the development of our project in France, our own project, a few years ago. So this is the one -- the first one to be in a Phase II start construction. And we're hoping that -- we'll talk about it a little bit later, but we're hoping to bring 1 or 2 project every year starting in 2021 in -- ready to start construction.

Also, we've been active in Hawaii. You know that our strategy to develop solar and battery has been the -- has been started a few years ago. And we were happy to win 2 project in Hawaii. We are advancing these project. And also, we have participated in the existing RFP in Hawaii for solar and battery, again. And we have 4 project that have been retained for the last section of the RFP. We should know about this project by the end of June.

In terms of construction, we just put ourselves in a position to start construction on Hillcrest. We have signed a long-term PPA at the end of the year. We also signed the 40 years PPA for Innavik, the small 7.5-megawatt hydro facility. It's small, but in a sense, it's a project that is displacing diesel. So the cost to replace that diesel is very high. So this project is going to be quite profitable. It's a project that we love in a sense that it's profitable, but it's also really in the spirit of our Three P development, which is the Person, the Planet and the Prosperity. As you remember, we are sharing the investment with the local community in the north, and we have made quite an advancement also in terms of permitting. And this construction is starting -- has start, as we speak, in the north.

We also have been very busy in construction. We just added 600 megawatt -- Jean-François was talking about Phoebe and Foard City. That's quite an achievement, 600 megawatt in 1 year, and we've made the deadline. We've made the schedule. And together with those 2 projects, we were on target in terms of total budget. So quite happy on that side for the construction team. Also, just to -- we haven't mentioned, but also happy on the way this project has been operating in the last quarter. Phoebe got the full commissioning, and the GE machine are performing quite well. We have reached 102% of the long-term average on that quarter, and for Phoebe, we reached 98%. So pretty solid quarter for these 2 new projects.

Also, while it was not last year, but we work quite a bit on it. If you go on Page 17, it's the announcement of the strategic alliance with Hydro-Québec. Of course, we announced it at the beginning of the year, but it took a bit of time in 2019 to make the discussion and align the strategic alliance with Hydro-Québec. As you recall, Hydro-Québec has taken a position in Innergex of about 20%, with a private equity placement of $661 million. And also their -- Hydro-Québec has an option to follow-up and keep this 20% in the near future, if we're making future equity insurance.

Also quite interesting in this alliance is the fact that we would like to do some joint venture with them. They have put $500 million aside for the future development of renewable energy. And as we mentioned early on, it's mainly on the same strategic market that we are, so France and nearby in Europe, Latin America. We have been focusing on Chile, Peru and potentially Colombia as we speak, and Hydro-Québec has done also a lot of studies in these markets. So we think together and putting our force and competencies together, we should be successful in these markets. So quite happy with this great transaction. And of course, it's going to be a few months before we can put the full team together and make the first acquisition. But everybody is now focused on creating some synergy and be successful on that alliance.

Now on Page 18, it's not a big project. But as you know, storage is part of our future development. And we're proud to announce that we have win a 9-megawatt storage project in France. It's going to be installed in our substation of Yonne. So quite happy. It's not a big project. Its total cost will be around EUR 5 million. We have a 7-year contract with RTE. And just to give you little bit of a guidance, we should be doing, on that period of the 7 years, the first 7 years, we should have an EBITDA double-digit return on total assets. We will probably won't put any financing on this. And cash-on-cash will also be in double digit for these periods. So not a big project, but a profitable one and one that will also help us get to be even better in storage, which is a big portion of the joint venture with Hydro-Québec.

If we go on Page '19, we'd like to focus on 2020. Of course, on construction side, we want to deliver Hillcrest in time and budget. And we also have started the Innavik project. Innavik project should take about 2.5 years to get into COD, and we are anticipating the COD of Hillcrest in Q4 at the end of the year -- of this year. So again, 200 megawatts of solar projects that could be built in less than a year, pretty impressive.

And of course, in terms of development, as you know, we will be putting a lot of effort in developing solar in the U.S. We have bought, if you remember, some solar panel in order to help us prequalify these panel and project for the ITC. Quite confident that we will have some project by the end of the year ready to go and finalize permitting. The idea is to have at least a couple of hundred megawatts per year for the next future in order to take -- near future in order to take advantage of the full ITC. We will be focusing on Texas, but also on PJM, Pennsylvania and Ohio. We will be successful in Pennsylvania. We are hoping to have at least 2 projects over there and at least one project in Ohio to complete and diversify our investment in solar in the U.S.

Wind and solar project in France will be also focused. As I mentioned, the team now has a pipeline of projects, and we are still developing some new prospective project, but the idea is to have at least 1 or 2 projects ready to submit in RFP and ready to either submit also on the FIT program in France.

Development opportunities in Chile, we're seeing a lot of potential activities in terms of M&A, but we're focusing also on the development of Frontera. And another project that will also be put forward is called St. Carlos. It's a project upstream of Frontera. It's still in early -- a little bit earlier stage than Frontera, of course. If we decide to develop this project, it's going to take about a couple of years of permitting. But this project would be around 150 megawatt, and it would have some storage capacity for about 4 and 5 hours. So that project could help also regulate the water for Frontera and help it -- and help make Frontera more profitable in the future, given the fact that Chile will benefit from these 4, 5 hours of capacity being able to be displaced during the daily hours.

Of course, we will also focus on developing and making sure that the joint venture with Hydro-Québec will create some great opportunity for us. Be patient. It will be a few months before we can be fully operative in this joint venture. But like I said, I'm very positive on the near future outcome.

So if we go on Page 20, projected financial performance for the year-end. We think that we'll be able to generate more than 25% in terms of generation over the 2019 result. In terms of revenue, we're aiming at, at least, 10% more; adjusted EBITDA by 5%; and adjusted proportionate EBITDA by about 10%. And and I would say that these numbers don't include any further acquisition. If you remember, in the last press release, when we announced the strategic alliance with Hydro-Québec, we made reference to 2 acquisition. We are advancing with these 2. They're not really fully ready to close, but it's -- in the first one, it's only matters of a few weeks, and the third -- then the second one will follow very closely in the next few weeks after that. So those numbers don't take into consideration these 2 acquisition. And as we mentioned, those will be accretive in terms of cash-on-cash for 2020.

So on those note, we would open the question period.

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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 Sean Steuart of TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [2]

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A few questions. The 2020 guidance you provided on revenue and EBITDA growth. Can you give us some context of how you're thinking about free cash flow growth, whether absolute dollar figures or on a per share basis for 2020 as well?

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

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Well, they'll be growing. If you look into basically the -- our payout ratio, the idea at the end of the year is to be below 100% for sure. Will we break the 90%? We'll see. But with the 2 new acquisitions, we'll definitely be in a range between -- very close to 90%, perhaps a little bit lower than 90.

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

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Depending on timing of execution on those 2. So obviously, Sean, the cash flow available for distribution will increase a lot on a continued operations basis, excluding HS Orka in 2020, given the Hydro-Québec financing and the debt reduction. And -- but like Michel mentioned, on the payout ratio, if we executed on the 2 acquisition, we should range between 90% and 100% in terms of payout ratio in this year.

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Sean Steuart, TD Securities Equity Research - Research Analyst [5]

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Question on, I guess, potential for further asset sales. You've surfaced some value already through the Hydro-Québec partnership. Any thoughts with respect to other potential mature asset sales to further realize value and returns in a pretty frothy valuation environment right now?

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

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Always on the lookout, but not willing to sell our core hydro asset. But we said that we might recycle some of the U.S. assets depending on how fast we're developing other projects. And also, we're always monitoring our total exposure to certain market. Of course, we like Texas. But depending on how successful we are in the solar development, we might be willing to diversify it a little bit. But not so keen in selling our base Canadian assets, especially I the long-term hydro. I think even though they might create a lot of value in terms of a sale, but in a portfolio, we think it's quite important to have the diversification in technology, but also in countries or area of investment.

So we'll be -- not optimistic, but we'll be looking for creating value out -- in selling asset or potentially divest some of -- or a portion of our asset, but not necessarily in Canada.

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Operator [7]

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Your next question comes from the line of Mark Jarvi of CIBC Capital Markets.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [8]

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Want to touch on Flat Top and Shannon, which saw a big step-up in revenue and implied pricing. So maybe just talk about what happened in the quarter and whether or not you think that's sustainable.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [9]

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Yes. So Shannon and Flat Top with regards to the power hedge there now being recorded more as a mark-to-market financial instrument, then we have a step-up in average revenue in that area in Texas, so it should be recorded more kind of on a merchant basis going forward if you look only at the revenue side. So it's difficult to predict from quarter-to-quarter, but we should see a little bit more volatility in the revenue side. So we will give more color as we go into the year, Mark, but difficult to predict in Texas given the nature of the -- of those projects.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [10]

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But if we -- if you look at the historical cycle in Texas, this quarter -- the shoulder quarter might be lower, but summertime should be quite lucrative in terms of spot market or merchant exposure. We also have the 50 megawatt of Foard City, the 350 megawatt. We have secured 300 megawatt of contract with Vistra, but we have 50 megawatt of merchant exposure. And we should see summertime being quite lucrative in Texas. And the other quarter are a little bit more volatile. But we think that in the overall portfolio, things will be balanced out with those exposure. But it's difficult to predict, as Jean-François said.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [11]

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Okay. And then on those pending acquisitions that you're pursuing, are they exclusively operating assets? Or do either of them come with any development opportunities beyond the...

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [12]

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On those -- the 2 acquisitions we're talking are exclusively operating asset. And the idea is that we want to use M&A as a tool to rebalance also the cash flow in our long-term forecast. When we have a lot of development in solar and PTCs, as you've seen, we are basically amortizing a lot of the tax equity investment in the first few years, and hence, the cash-on-cash on those assets are a little bit under pressure. So by using M&A to rebalance, so I think that you'll see a very, I would say, fast rebalancing of our cash flow. And this is something we, as management, are committed to do is making sure that as we develop project, as we grow project and growing those projects create a lot of value in our perspective. But of course, we want to balance our payout ratio and our growth of dividend. So M&A can be a tool to rebalance this profile of cash flow.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [13]

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Is it fair to say then that to rebalance the cash flow, you might sacrifice a bit of return in NPV sort of value creation to pull forward cash flows in the near term?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [14]

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In terms of NPV, not so much. In terms of internal rate of return adjusted for risk, my view in internal rate of return, we, as a portfolio, want to have a total internal rate of return that gets close to about 10%. That's -- we want to create a value to our shareholder that sits 600, 800 basis points over the 10-year span. But as a portfolio, any investment has to look into the return versus the risk. So we think that any transaction that we will do, we might have some difference in terms of internal rate of return.

Of course, if you're buying something with a long-term contract in operation that provides a good cash-on-cash, you may have a little bit of a lower internal rate of return. But when you mix that with a development of projects that create a lot more value, but more on a long-term basis, those included -- or like I said, we look at the portfolio approach, not necessarily on one single asset. Of course, we're doing our due diligence, and we're making sure that we're creating value for the risk-adjusted that we're taking, but we look to balance the portfolio on a long-term basis.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [15]

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And one maybe point I can add, Mark and Michel, is on also what we look on the internal rate of return. We look to have a greater proportion of that internal rate of return under the contracted period. So that helps as well so on the cash-on-cash.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [16]

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Right. That makes sense. And my last question is just with the share ownership of Hydro-Québec, just -- is there sort of a -- I'm not sure if it's government agreement or something. How do you manage things like future recontracting in the province of those assets that are contracted with them? Or what's sort of the -- any agreements in place on how that relationship works down the road?

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

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Yes. Well, I think that Éric Martel, the CEO of Hydro-Quebec, made it very clear. There is definitely some governments in place in Hydro-Québec and also in the province of Québec to manage these contracts. Most of our contracts are with Hydro-Québec distribution. Hydro-Québec distribution has to come up with RFPs in the future in order to secure their (foreign language) how do we say it, for -- they're...

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

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Sourcing.

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

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Sourcing of power. And Hydro-Québec distribution has to go through la Régie de l'énergie in order to have their -- those contract and RFP being overlooked. So it's completely independent from the other arms of Hydro-Québec. So on that basis, I think Hydro-Québec has made that very clear to the industry that the governments in place will make sure that there's no pressured treatment to Innergex in terms of any future contract.

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Operator [20]

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

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [21]

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My first question just relates to your 2020 guidance. So the guidance does not include the potential acquisition of the 2 projects. So when you were talking about the free cash flow range, is it fair to assume that without the acquisitions, the free cash flow would be maybe close to 100% and with the 2 acquisitions, it's closer to 90%, obviously, depending on timing?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [22]

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Yes, fair. So in terms of payout ratio, I would say without the acquisition and only taking benefit of the debt reimbursement from Hydro-Québec and the share issue, we would be slightly above the 102% in terms of payout ratio. But this is excluding the 2 transaction. But Michel commented earlier, we're far advanced on that, and we commented on the press release that those 2 acquisitions are highly accretive cash flow per share. So we're strongly confident that depending on the execution of those 2 transactions, that we could end the year, in terms of payout ratio, between 90% and 100%. But you're right, Nelson.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [23]

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Okay. And then on that acquisition, so when you initially announced the strategic alliance with Hydro-Québec, I think Innergex would put in $275 million of equity into that acquisition. And then I presume -- is Hydro-Québec buying the -- like remaining portion? Like is this...

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

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No.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [25]

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Joint investment? Or is it 100% being purchased by Innergex?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [26]

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That's 100% being purchased by Hydro-Québec -- Innergex, I'm sorry. I'm sorry. No. So these were part of the existing development of -- or M&A with Innergex. And given the fact that the investment of Hydro-Québec comes with a dividend, so it was important for us to make sure that we would have a use of proceed to deploy some of the investment that Hydro-Québec has made in Innergex.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [27]

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Got it. Okay. And then just moving to -- just a quick clarification on the Shannon and Flat Top comments earlier. So are you saying that, going forward, the revenues will reflect merchant prices? But then would you net off the, I guess, the realized hedging gains or losses like in the EBITDA line? Or how does that work?

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

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Yes. Yes, Nelson, exactly. And we've provided guidance on the Phoebe as well, our hedge on that, so you can find this on Page, I think, 26 of the MD&A, something like that. But you're right. For Shannon and Flat Top, you will remember, for the first 3 quarters of the year, we were impacted negatively by basis risk related to those power hedge. And now we're going to record, going forward, the change in the mark-to-market on those power hedge as financial instrument below EBITDA, so will not impact any more revenue. So we have a pickup in the fourth quarter in Shannon and Flat Top. Just want to cautious -- just want to be cautiously optimistic that it would be more volatile as we move into different quarters, as Michel mentioned. So yes, to answer your question, this is what's going on with Shannon and Flat Top.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [29]

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Okay. got it. And then just one last question, and it's on Hillcrest solar. So I'm not sure if I'm doing the math right. But in general, you get a 30% tax credit on your project costs. So if I look at Hillcrest and compare the project costs, like after a 30% discount relative to the EBITDA, I get like a multiple of about 17x. Is that a fair way of thinking about it in terms of -- like are you building the project at roughly 17x EBITDA?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [30]

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In terms of Hillcrest, it's getting around that, but we would have to give you a little bit more guidance on how the tax equity gets repaid. But out of about $115 million tax equity contribution, the first year or the first moment almost that the project is in COD, that get repaid around $95 million to $100 million right away in terms of taking advantage of the ITC.

The ITC also, if you remember, there's also a common practice in the U.S. to have the project being revalued or reassessed for valuation purposes just before COD. And that usually adds up in Hillcrest a bump into the value of around $50 million. That is also being part of the ITC contribution. So from the direct cost of construction of -- and soft cost of around USD 279 million, you could add up another $50-something million to $335 million and this is the amount that is used to calculate the tax contribution of the ITC. So it's slightly higher than perhaps what you have taken in consideration, but not huge. So the multiple would be a little bit lower than the 17x.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [31]

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Okay. And then can you just -- I presume it'll be flat out similar to Phoebe in terms of tax equity, debt and equity. Do you have a rough split of the 3 components for Hillcrest?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [32]

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Yes.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [33]

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So we have -- so comparing to Phoebe, so we have around -- we plan around $115 million, $117 million of tax equity out of $279 million in the cash structure. So it should -- I don't have close by the Phoebe comparisons. So Phoebe is $344 million. So Phoebe, $344 million out of what is the total project cost. So yes, it's $120 million out of $279 million, Nelson. I'm impressed.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [34]

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$120 million of tax equity?

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [35]

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Yes.

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Nelson Ng, RBC Capital Markets, Research Division - Analyst [36]

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Okay. That's great. And then you'll put project debt or holdco project debt in there as well, right?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [37]

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Small, yes...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [38]

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A small portion.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [39]

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A small portion of about 90 -- just over $90 million of back leverage.

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Operator [40]

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

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [41]

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If I can go back to the Texas market and congestion, can you give us an updated view on the outlook for congestion in the areas you're operating?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [42]

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Well, Phoebe -- we think that Phoebe, it's a place where a lot of new demand have arise with the shale gas and the shale oil. So the ERCOT distribution system have not yet finalized their upgrades. What we know in the area is that there's a reinforcement of existing 138 kV line that will be doubled. And also another 138 kV line will be twinned with this one, plus a 345 kV line is scheduled to be online before year-end. So 2020 might still be a little bit busy until these lines are fully operational. But we think that 2021 should be a lot better in terms of basis point in the area of Phoebe.

For Foard, we're hopeful that ERCOT will also be active in building lines. I think that we can see in Texas some short-term disturbance. We've -- I think it's known that it's a little bit difficult to forecast basis point in Texas. Everything is changing fast, the demand and also the supply, being solar or wind. But I think that the wind in Texas will slow down in terms of new project being introduced, and solar will pick up just because of the PTC and the ITC split. And what we understand more in Texas is that it's more of a short-term problem because ERCOT is very active in trying to mitigate any congestion. But of course, it can be delayed between 18 months to a couple of years before things are being put together because of permitting and, of course, construction time. But they're very proactive. It's just that Texas is so active in terms of new demand because Texas is only -- well, there's not that many market in North America that it's growing in terms of demand. And Texas is growing fast because it's super active in the shale gas and shale oil. So you have both new capacity and new demand, and the distribution system and transportation system is just lagging 18 months, 3 years behind. So this is short-term pain for, hopefully, long-term gain in terms of Texas.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [43]

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Great. And then on storage, so you are looking at some storage projects in Hawaii, and you've got this new project in France. If you look at the economics of the project in France, do you think it makes sense, on a stand-alone basis, if you just look at the cost of energy coming out of that battery? Or is this more of a sort of a demonstration project? Or is there some benefit from capacity? How do you view the economics?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [44]

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Well, this is -- that was an RFP, and we have the 7 years' guarantee payment from RTE, plus we have also some other ancillary services that are provided by the operator. And frankly, this project look pretty good.

For the 7 years' contract that we have, I just gave a guidance of double-digit cash-on-cash and double-digit EBITDA on -- it's not big investment. It's EUR 5 million, but the EBITDA should be just slightly over EUR 600,000 on that specific project. So it's profitable.

And it's giving us a lot of learning curve in trying to understand, on the long-term basis, what will be the dynamic on ancillary service and capacity. And this one might be interesting because we don't have much cost to interconnect. It fits directly in one of our existing substation that happened to have some capacity left on the grid to interconnect. So there's no upgrades on the distribution system to be charged to the project.

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

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So I understand the economics look attractive for Innergex. How do the economics look for the French grid as far as the cost of capacity or the cost of energy and how it might compete with other solutions? I'm just trying to get a feel for how big the opportunity could be for storage today or if this is really more of a long-term proposition.

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

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I think that it all depends on -- and I don't want to go too deep on the French politics. It's slippery. But it is definitely directly related to the ability of government to maintain or not the nuclear. If the nuclear goes down, there's definitely, definitely a big need to have storage in different part of the France. Although European market are more and more interconnected, but as you introduce more renewable energy in the mix, I think that storage has a very good and long-term potential as long as you don't introduce or maintain all the nuclear. But I think that the policy in France is to reduce, definitely, the nuclear by roughly 25%. So I think that there's definitely a long-term investment thesis in Europe that will support some more investment in storage.

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

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And will Hydro-Québec be involved in this project in France?

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

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This is definitely a potential joint venture investment. For them, it's not big, EUR 5 million for the joint venture. But we would love to be able to see if we can deploy their new technology, their new batteries. So definitely, we'll present that to the joint venture of Hydro-Québec, and of course, we'll try to maximize the learning curve on the storage technology.

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Operator [49]

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

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [50]

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My first question, just here in the U.S., on the wind side, I know you don't -- it doesn't seem like you have actively any projects that you're looking to develop there anymore. Just wondering what happens to whatever projects that you previously had in development. If you decide not to go forward with them, is there any opportunity to monetize those?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [51]

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That's a good point. Well, we haven't talked about -- but we have one project still quite alive. It's called Griffin Trail. It's just close to Foard City. With the new PTC extension of 60% for 2022 and 2023, we are reevaluating the possibility of developing Griffin Trail. We have bought one Vestas mast cell to -- that's a new strategy to prequalify project for PTC. So we will be revisiting Griffin Trail. That's a 200 megawatt. It has most of its permit in place. It's just that the fact that we had missed the window of PTC for 2020 and 2021. We hadn't put it into the forefront of our development strategy, but we still have this project. It's pretty -- it's a good decent project at 200 megawatt.

And Boswell, we're still trying to get some traction there. Remember that we have to renegotiate with PacifiCorp for the interconnection. But PacifiCorp has announced a big RFP for 2023, and we're looking into our option to see if Boswell can be fitted into this RFP.

We still have some smaller, well, development that -- or earlier-stage development, [Bijou] is a potential project that we still have on our books. But we have more focused on solar and ITC, but it's definitely something that we are in -- have in mind to keep developing and putting value on our existing project that we have on hand for wind in the U.S.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [52]

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That's interesting. Thank you for those comments. Just one other one for me. Wondering if there's any update on the Saskatchewan RFP, if there's anything moving forward there.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [53]

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Yes, we will have -- we have 3 projects ready to submit it to this RFP we'll be participating. It's just that it will be competitive, again, but we think that we have adjusted our aim a little bit in Saskatchewan. And given the last RFP result, we thought that First Nation component would have been treated differently, and it was not. So we have readjusted the product that SaskPower is looking for. So I think that this time, the project that we are going to submit will be more competitive.

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Operator [54]

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(Operator Instructions) Your next question comes from the line of Ben Pham of BMO.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [55]

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I'm just wondering your dividend increase, I know you've been saying last few years, you want more of a consistent increase each year by inflation. But I guess like your payout ratio has been going up as well, and it doesn't look like it's getting any better than 90% to 100%. So how do you guys think about just, I guess, the rationale for raising the dividend when you guys have so much growth ahead in development activities? I guess that's my first question.

And related to that, I mean, how do you think about then your access to capital then? I mean the last 3 years have been horrific in the market. I mean everyone's cost of capital's change. And so it's really -- to think about really if markets close here for you guys, can you guys grow in the same way that you thought maybe a week ago?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [56]

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There's 2 components to your question, Ben. We've said that we wanted to cover at least the inflation. And of course, the $0.02 is a little bit over the inflation. We're confident that when we look at the long-term forecast, that the target of roughly 80% payout ratio is achievable. Like I said, we will be using M&A/development. So it's not an easy task, of course, to bring growth and also keep up with growing the dividend. It's a task that Innergex has taken when we merge with the income fund about, well, 10 years ago now. So it's not easy, but I think that we have put strategy in place, and we are focused in growing the company and growing sustainably the dividend. So that being said, I think that -- like I said, we have a good look and a good handle on the long-term forecast. So again, I think that, that growth of the dividend is sustainable.

Now for the excess of capital, I'm not so sure I understand your point in saying that if the market close, if we're paying a big portion of our dividend, we would have a hard time developing our projects, if it's what you're saying. I have a hard time thinking that the value of a good project in our sector would diminish anytime soon. So if market condition makes it more difficult to issue stock, we can divest some of our project we're developing in order to keep up with the growth.

And I don't think that we -- we definitely saw a better enthusiast in terms of investment community in ESG product. And I think that -- I'm quite confident that this will last for the future. And of course, if markets are adjusting, that means that also M&A activities will be adjusting, and the price of those projects will be adjusted accordingly. And we are always, always looking into making acquisitions that are accretive to our ongoing yield and perspective of our total cost of capital. So we'll adjust, Ben, but I'm confident that our sector will see some capital dedicated to it.

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Operator [57]

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Your next question comes from the line of Naji Baydoun of Industrial Alliance.

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Naji Baydoun, Industrial Alliance Securities Inc., Research Division - Associate [58]

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You talked about projects being submitted to the Hawaii RFP. I'm just wondering if you can talk more about the growth potential in that region for you given the ongoing procurement process there.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [59]

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Well, it's not a huge market, but the market is very specific. And of course, they are very aggressive in wanting to have 100% of the island being renewable. So it's creating an interesting niche market. The development over there resemble in a lot of ways, BC. You have issue with First Nation, and that's -- permitting is a little bit more complicated than, definitely, in Texas. So it's a niche market for us. The project that we have submitted, total amount a little bit more than 100 megawatts. So it's not huge, but a little bit like the French market. It's a little bit of a niche, where, I think, our development teams can be successful.

So again, it's a little bit of a portfolio approach. We're going into bigger project in Texas or PJM in solar, in general, in mainland. And we're trying to have these interesting project that -- in Texas that one of the big advantage is that those projects come with 25 years PPA and, of course, also bring the PPA with the battery, the storage. So we use that as a market to learn and get -- having a lot more experience with solar and battery and the technology and the system that incorporate and manage those 2 and to see what solar and battery can do on grid that depends more and more on renewable energy. So I think that this is definitely a sector that will be growing in other markets in the near future. So for us, we think that getting to have that experience on hand and on the field is creating value for Innergex team.

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Naji Baydoun, Industrial Alliance Securities Inc., Research Division - Associate [60]

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Okay. That's very helpful. And just maybe to finish off on Colombia. You mentioned that that's a potential target market for you. Just wondering if you can talk about the potential scale or scope of investments you're looking at in that market. Is that a market you'd be thinking about entering through acquisitions potentially and then following that up with the developments?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [61]

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Well, we haven't studied too much Colombia. Hydro-Québec has done some studies. So of course, if we get into Colombia, we would probably be looking into acquiring some existing assets, coupled with some development, a little bit what we've done in Chile. It's a little bit early to discuss about Colombia, but it's a market that seems to be more and more, I would say, interesting in South America. Brazil is a big, big market, but a little bit complicated. We have been studying, as you perhaps know Chile and Peru. And Colombia could be the next market where we can spend some more time.

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Operator [62]

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

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Karine Vachon, Innergex Renewable Energy Inc. - Director – Communications [63]

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Thank you very much, everyone. We look forward to speaking to you at our next call in May. Have a great day.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [64]

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Thank you.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [65]

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Thank you. Bye-bye.

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Operator [66]

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Ladies and gentlemen, you may now disconnect your lines.