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Edited Transcript of INE.TO earnings conference call or presentation 12-Nov-19 7:30pm GMT

Q3 2019 Innergex Renewable Energy Inc Earnings Call

LONGUEUIL Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Innergex Renewable Energy Inc earnings conference call or presentation Tuesday, November 12, 2019 at 7:30:00pm 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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* Hassaan Khan

National Bank Financial, Inc., Research Division - Associate

* Mark Thomas Jarvi

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

* Nelson Ng

RBC Capital Markets, Research Division - Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2019 Third Quarter Results Conference Call and Webcast. (foreign language) (Operator Instructions) I would like to remind everyone that this 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. - 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. The presentation starting today's discussion is available as we speak on the homepage of our website at www.innergex.com.

This call may contain 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 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 reference 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 Q3 results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our Q3 operational highlights and Q4 priorities.

I'll now turn over the conference 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. I am proud to report strong results again this quarter with production, revenues and adjusted EBITDA, up by 35%, 23% and 28%, respectively. Before going further, I'd like to stress that all 2018 amounts mentioned were restated to be comparable with 2019, given that we are reporting on a continued operations basis, which excludes HS Orka results.

In the third quarter, our Foard City wind project reached commercial operation. Concurrent with the tax equity financing, we reassess our assumptions with a more conservative view to take into consideration transmission congestion in the region.

In the third quarter, we also sold energy from our Phoebe solar project for which commissioning is expected this month. Our proportionate results, which includes our share of joint ventures and associates, also increased significantly. Production Proportionate grew 30% in the quarter to 2,149 gigawatt hours. Revenues Proportionate reached almost $180 million, a 19% increase and Adjusted EBITDA Proportionate grew 24% at $136 million.

For the 9-month period, Production Proportionate, Revenues Proportionate and Adjusted EBITDA Proportionate increased by 28%, 23% and 22%, respectively.

On Slide 8, for the quarter, production improved mainly due to the increase of 296 gigawatt hours in the wind segment caused by the acquisition of the remaining interest in the 5 Cartier Wind Farms, higher production in France and the commissioning of the Foard City wind project. The solar segment also recorded an increase mainly attributable to the ramp-up of sales at the Phoebe solar project.

Continuing to Slide 9. Quarterly revenues reached $143 million due mainly to the Cartier acquisition and higher revenues from the wind facility in France, along with the energy sold by the Phoebe solar project.

Now if we look at the adjusted EBITDA, we can see an increase of 28% over last year at $107 million, mainly due to the same reasons as for revenue. When adding our share of joint ventures and associates on Slide 11, our Adjusted EBITDA Proportionate reached $136 million, a $26 million increase over the same quarter last year. Higher contribution from the BC facilities and the addition of Energía Llaima more than offset the lower revenues at our wind facility and segment.

On the next page. Change in the financial position items stem mainly from the sale of HS Orka and the additional construction activities at Foard and Phoebe.

As shown on the next slide, our free cash flow, which includes HS Orka since we are reporting on a trailing 12-month business, increased by $2 million to $100.5 million. Our payout ratio changed negatively at 93% compared to 87% a year ago.

On Slide 14, we announced during the quarter the redemption of our 4.25% convertible debenture that was concluded on October 8, 2019. We also completed a debenture offering of $125 million to which was added an over-allotment option of $18.75 million. Proceeds of the offering were used to redeem the 4.25% debenture, and the remaining portion was used to repay corporate indebtedness.

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

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

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Thank you, Jean-François. Good afternoon, everybody. We're sorry if the sound is not that good. We are in Texas. We just visited our Phoebe project with the Board of Director. Very, very proud to see this achievement. The construction team has focused during the Q3 to finalize the construction, although we have not declared COD. Just in mind, it's a little bit more of a technical match with the financial close of a tax equity. But the project has been generating at full capacity since the beginning of September. So pretty proud of the construction team and all the other people involved in this big project.

For the time being, just as a reminder, Phoebe is the biggest solar plant in Texas. So pretty, pretty impressive to see these panel all over the landslide. So construction also was very active in Foard City. As you've seen, we have completed the COD of Foard City. Glad to report also that usually, after a few weeks or it takes a few weeks, a few months to make sure that all the little bugs are being cleared during the COD period and after that.

But in this case, the team were reporting that actually very little downtime were recorded and these teams have performed very well in terms of putting these machine up to full production. And actually the month of October have produced 120% over budget versus the long-term average. So it's kind of interesting to see that this project is producing at full capacity since the inception of the COD and without much of a bug. So quite pleased with that as well.

In terms of construction, also, we have initiated the early replacement and supply of first material in Innavik. We have an interesting setup over there, where we have a what -- the contractor, has bought a boat, a big towboat to bring material from the lower bay -- James Bay up to the top of the Hudson Bay. So this way, we have now a system where we can bring the material on-road at the lower end of the James Bay and bring by the sea our materials. So this is a very clever way to make sure that we will be supplying the construction sites during the summer period at the peak of the construction. So pretty happy to have this initiative from our contractor to make sure that we will be able to have a continuate supply to construct this project in the north.

Also in development/construction, we have initiated a lot of discussions in Hillcrest. We have signed a limited notice to proceed with the contractor to start construction as early as January. All the other aspect of finalizing the construction permits are in -- on the way. And also, the PPA negotiation is very, very advanced. We are very hopeful to be able to announce it just before the year-end.

So actually, Hillcrest should be fully in construction as early Q1 in 2020. Quite proud of that, that's a 200-megawatt solar project in Ohio.

Now if we switch to the development section. The team were also pretty busy. If you remember, we have the strategy of deploying solar panel that we have bought in order to prequalify -- thank you, Jean-François, for full ITC for the next few years.

So the idea to just to -- for you to -- you have a little reminder is that the idea is to deploy anywhere between 500 to 700 megawatts of new solar projects. We have now a full control on one Texas site. We have a couple more in quite advanced negotiations with the land control in Texas.

And we also want to have 5 to 6 projects in the Pennsylvania, Ohio area to diversify our development and market exposure in the United States. So on that front, quite happy to see those projects being developed. We'll talk about it in the next few quarters to keep you update on that advancement.

Still in the solar in the U.S., but a little bit further, we have also advanced our Hawaiian project in there. But we also have been busy in entering the RFP in Hawaii. I'd like to report that we have submitted 4 project on 3 islands. Usually, I don't describe more because this is the first wave of the RFP. Preferred proponent will be selected before the year-end, and they will have a second chance to reopen the bid for the first quarter of 2020. So we will not comment more on these projects since they are still in competition with many others in Hawaii.

France has been busy as well. You might have read about Vent d’Est. It's an interesting venture that we have done with very experienced people in the industry in France. It's not a big transaction in a sense that we are hoping to have perhaps 5 or 6 project totaling anywhere between 100 and 150 megawatt to be developed in the next 5 years.

The earliest possible projects should be seen between 2 to 3 years being available for permitting and available to put into RFP or to take the contract for difference in France. And our own portfolio is advancing well.

The strategy is to have 2 to 3 -- at least 2 project per year starting in 2021, 2022 to be in construction. So the team in France is advancing quite well on that matter. Now if we look in Canada, there's a Saskatchewan that has announced its RFP. So we'll get ready. We have a few projects where we can put in the RFP. So it will be, of course, competitive, but we have a few projects that seem to be competitive enough. So we'll be participating in Saskatchewan in next year.

If we go back to Chile, working hard on Frontera. We are now negotiating with the contractor and the turbine supplier, trying to make sure that we can get the most interesting offer from these folks, advancing also on the financing of Frontera. But of course, what's happening in Chile is putting everybody a little bit on hold, just to make sure that things will evolve in the right way. So we are working with everybody, but we're cautious in looking or I would say, staying -- I have a hard time saying it in English. But we're just concerned, but positively -- but stay positive on the fact that the policy over there should ease.

And the President of Chile has just announced that he has now offered to change the constitution. So everybody's a little bit on the TVs, in French, we could say, some on the lookout to see what would be the outcome of this. So still positive about Chile, but just want to make sure that things are going to cool down in the right direction before committing more to start construction on Frontera.

We have a good window opportunity to start construction at the early fall next year. So that would be the general aspect of the development, always on the lookout for good acquisitions that could be accretive to our cash flow and would strengthen our position in our different markets.

So on this, we'll open the floor for questioning.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Hassan Khan from National Bank Financial.

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Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [2]

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I'm calling on behalf of Rupert. With the El Canelo project currently in the process of redesign, can we get some color on what to expect for the project on a forward-looking basis?

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

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I'm sorry, the line is a little bit difficult. Could you speak a little bit louder? We haven't heard the question well.

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Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [4]

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I'll give it one more shot. My question is on El Canelo project, which I believe is currently in the process of redesign. Can we get some color for the project looking forward?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [5]

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This one is a 10-megawatt hydro facility. Not sure that we're going -- we're concentrating our effort on Frontera for the time being. Canelo, we will have still a lot of time to review it in terms of permitting. But I would say that, for the time being, we would be focusing on Frontera.

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Hassaan Khan, National Bank Financial, Inc., Research Division - Associate [6]

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All right. And are we still -- are you guys still considering a sell-down of Phoebe upon completion of construction? And any other comments on potential other sell-downs?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [7]

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We are always trying to, I would say, enhance any financial engineering. So the teams are looking into this possibility given the maturity of Phoebe, but it's not a first priority for the time being. But we're always considering recycling some capital and making sure that we create value by doing so.

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Operator [8]

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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 [9]

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My first question relates to your developments in France. You mentioned your kind of 5-year targets and plans. I was just wondering whether like after your agreement with, I guess, it's called east wind, like, what are your expectations in terms of bidding into the French, I guess, wind or solar RFPs? Has that pushed a lot of -- or pushed any projects forward in terms of your -- what do you expect to bid into the next RFPs?

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

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It's -- regardless, will help us, I would say, strengthen the amount of project that we will have, but they don't have a project ready to build right now. So that's why I said that the -- probably the earliest one from Vent d’Est should be between 2.5 to 3 years before we can bid them. But from our part, we think that by the end of 2020, we should have at least 1 project we could fit into the RFP. And after that, we're hoping to have between 2 and 3 projects every year available to be submitted and bid. So it took a bit of time to start the bank, knowing the -- to initiate the total portfolio. As you know, France takes about 5 years to develop a project, so we've been at it for the last 3.5 years or so. And hence, we're getting now very close to start harvesting the amount of early investment that we've done in the market.

Although there's a little one that is actually ready to build. It's an expansion of our existing E.ON project. We are expanding this project by adding 3 machines. So it's not a big project, but it's the first that had gone through the permitting process. So we should be able to start construction somewhere next year on that small one, that's about 6.5 to 7 megawatt. But it's the first, so it's -- we have to start somewhere. I'm happy to state that the pipeline in France is starting to produce project ready to build.

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

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Just to clarify on that last project, the small expansion, would you have to bid that into an RFP in order to get a contract before you start construction?

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

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This one is a small one. It's the -- it's less than 6 turbines. So we can get the PPA for the difference. So it's -- you don't have to bid it in the RFP. So we -- as soon as we have all the permits in hand, then we have to submit the project and EDF would have now a price. I can't remember if -- the exact price, but it's something close to 70 (inaudible) for each kilowatt hour or about. I don't know the exact number, but it's the equivalent of about EUR 0.07, EUR 0.07.

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

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EUR 0.07, right?

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

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Yes. So it's EUR 70 per megawatt hour or (inaudible) per kilowatt hour.

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

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Okay. Got it. And then just moving on to Foard City. I was just looking at the revised forecast in terms of revenues and EBITDA. I think the latest revenue forecast assumes roughly a realized price of about $15 per megawatt hour, down from about, I think, like $16.7. And then I think the implied operating costs increased by about $3 million. So could you just give a bit more color in terms of the reduced realized price? I presume that's mainly just due to congestion but then also the increase in the implied OpEx cost by roughly $3 million.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [16]

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Yes. Jean-François will top up my answer. But the revenue, yes, the revenue is in line with a little bit more conservative view on the future congestion. This is, of course, something that will fluctuate in time. We're hopeful that the aircraft system will be upgraded. Also, the transmission system will be upgraded. But of course, Texas is very popular for -- as a state to implement wind and solar. So sometimes, you get to have a little bit of an overbuilt in certain area before they get to be upgraded. So yes for the review.

For the expenses, there's a few little items that have been moving around. The main was the property tax...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [17]

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Property tax one.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [18]

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That when we issued the first guidance, it was based on a cash basis, and we have the holiday of a few -- well, I guess...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [19]

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And it was on a basis in a turn of the first 12 months following the quarter. Whereas right now, we provide guidance on an average of the first 5 years. So you're right, Michel. So that the main element here will be -- is the property tax.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [20]

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Yes, which is close to the $3 million and then...

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [21]

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$1.5 million on an average for the first 5 years. So -- and then additional assumption will revise another operational cost.

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

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So we should have, I guess, forecasted that the -- at the initiated guidance. So that's why it seems to be a bigger difference, but it's a one-time adjustment with the property tax.

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Operator [23]

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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 [24]

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Just following up on Nelson's question. You also had smaller negative revisions to contribution from Phoebe. Similar factors at play there? Any context you can provide there.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [25]

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Yes. The revenue were mainly a reflection of the more conservative view on congestion.

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Sean Steuart, TD Securities Equity Research - Research Analyst [26]

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Okay. And Shannon and Flat Top contributions were weak this quarter. Any details you can provide there? And presuming some of that is nonrecurring.

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Jean-François Neault, Innergex Renewable Energy Inc. - CFO [27]

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Yes. A lot of the generation was good, but it's all related to the average revenue per megawatt hour generated. So it stands for the highly volatile season we had on the price of energy down in Texas. So that is the main reason of having less performing results at Shannon and Flat Top.

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [28]

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Yes. If you remember, the market was very, very volatile in terms of pricing this summer and sometimes, the price was high and the wind was low. And hence, we had to buy energy on the spot and they were quite expensive. But we're working now with a firm to try to be a little bit more proactive in the day ahead of trading so to minimize this big swing.

And we are also investigating some kind of a hedge to basically buy some exposure to the big new market, into the peaking market, to basically acquire some kind of a hedge or an insurance on those wild swing to minimize any future exposure. So to answer your question, it's -- we're hoping to see that as one of, given the fact that we'll be trying to mitigate by derivatives and being proactive on the head trading to basically minimize these exposures.

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Operator [29]

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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 [30]

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I want to go back to Foard City and the congestion issues. What would the expectation of how long it'll take before some of that clears out in the next couple of years? And have you seen those hits in the projects in Texas? Do you guys think about maybe taking some of your capital out of that project if the returns aren't really going to hit your hurdle anymore?

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

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Well, the PTC rush has brought a lot of wind in Texas. So by the time it takes to rebalance the transportation system, it can take 2, 3 years, 4 years, something like that, of course. So it's difficult to predict, right, because it's a matter of basically input and also capital expenditure to be put in place. So it's difficult to be quite true. So that's why when we say we've been a little bit conservative, when we do the tax equity closing, we take a few forecast from different expert in the field. And of course, we have to make some judgment call as well. So we hope we've been conservative in that guidance.

As your second point in saying that you want to diversify from Texas, at some point in time, yes. And there were -- the first question about recycling some of our capital in Phoebe and perhaps on Foard City.

So we are, of course, taking that in consideration, especially if we also are successful in developing more project in Texas and in greenfield. So the idea would be to kind of recycle these -- that capital and hopefully, create value when we do our own greenfield projects.

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

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Okay. And then maybe this is for Jean-François. But maybe you can explain the -- in the free cash flow reconciliation, there's this income tax paid on an intercompany loan. Can you just maybe walk us through how that flow through on cash?

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

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Yes, this is in relation to the Phoebe intercompany gain we announced in Q2 and now we needed to give the pre-deposit on the tax that would be -- to be paid on first quarter of 2020. But this is an in and out in our payout ratio. So it's not bad because in our tax line, we have paid this in current tax, and then we added back since it's in relation to the Phoebe equity contribution of the projects so we don't consider this as being cash -- current tax on operations. So that's why we added that.

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

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Okay. And then, Michel, you talked a little bit about the civil unrest in Chile. Just curious if it's impacting at all your current business. And then maybe just if you thought maybe what its kind of impacts on Frontera? Is it just people are preoccupied and can't -- is it the bank financing? Is it contracting? Or sort of how does that sort of play into how you want to advance Frontera in the next couple of quarters?

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Michel Letellier, Innergex Renewable Energy Inc. - President, CEO & Director [35]

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Well, it -- for the time being, we are not slowing down in Frontera. But of course, if for some reason, that the situation worsen, financing can be an issue. So we don't want to create ourselves a little bit an obligation and spend too much equity and then be stuck with a situation where a bank wouldn't follow us.

But like I said, I'm still positive. I was there on the -- it's just by -- it just happened that I was visiting our facility and offices, I landed on Saturday morning of the beginning of the crisis. So I was there and witnessed a little bit of what's happening. But I was glad also to be able to exchange with a lot of business individual and some politics, also people.

And I think that, in general, the Chile population is, of course, I wouldn't say are very motivated to create -- I'm sorry, if there was a disturbance -- to create a new social contract with the government. What I saw also is that the elite over there are not against it dialing their concerns. And of course, anybody that has, at the end of the day, a bigger tax payment is not that happy.

But I think that, in general, the business leader understand that it's time to renegotiate the social benefits with the population, in general. So that's why I'm quite hopeful that a situation will end up being solved in the next few months. And to some degree, to the second part, the contractor we were negotiating with local contractor.

And to some degree, that provided us to a little bit more flexibility to negotiate with them because some of the activities or construction activities are slowing down to some sort. You know the price of copper is now going through the roof. So there's less activity in the mining sector. So it's perhaps a good window for us to negotiate a very good construction contract and reduce a little bit the total cost of the project.

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

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Okay. And my last question would be on the Hillcrest. Just curious, again if -- or curious if you guys would be in a position with construction activity starting up and limited notice pursued to still capture the full 30% of the ITC to that project?

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

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Yes. Yes, yes, definitely because we already have also bought the first solar project. And yes, this Hillcrest is fully 100% ITC approved.

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Operator [38]

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(Operator Instructions) Mrs. Vachon, there are no further questions at this time.

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

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All right. So thank you very much, everybody. And we'll see you in a few months. Thank you.

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

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Thank you.

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Operator [41]

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Ladies and gentlemen, you may now disconnect your lines.