U.S. Markets closed

Edited Transcript of INE.TO earnings conference call or presentation 24-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Innergex Renewable Energy Inc Earnings Call

LONGUEUIL Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Innergex Renewable Energy Inc earnings conference call or presentation Friday, February 24, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Karine Vachon

Innergex Renewable Energy Inc. - Communications Director

* Jean Perron

Innergex Renewable Energy Inc. - CFO

* Michel Letellier

Innergex Renewable Energy Inc. - President and CEO

================================================================================

Conference Call Participants

================================================================================

* Rupert Merer

National Bank Financial - Analyst

* Sean Steuart

TD Securities - Analyst

* Nelson Ng

RBC Capital Markets - Analyst

* David Quezada

Raymond James - Analyst

* Robert Catellier

CIBC World Markets - Analyst

* Ben Pham

BMO Capital Markets - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's conference call for the 2016 fourth-quarter and fiscal-year results.

(Spoken in French)

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Friday, February 24, 2017, at 9AM Eastern time. I will now turn the conference over to Karine Vachon, Communications Director. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Hello, everyone, and thank you for joining us today. I'd like to specify that this conference will be held in English, and that our listeners on the phone and Internet, as well as journalists, are on a listen-only mode. Members of the media are invited to ask their questions by phone after this call.

During this presentation, we will refer to financial measures that are not recognized according to International Financial Reporting Standards. Please refer to the non-IFRS measure section of the financial review for more information.

Our speakers today will be Mr. Michel Letellier, President and CEO, and Mr. Jean Perron, Chief Financial Officer. And I will turn the conference over to Mr. Perron.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Karine. Good morning. The quarterly results for Q4 2016 show production of under the 1% of the long-term average due mainly to above-average production in the hydroelectric sector. For the 12-month period ended December 31, 2016, production was under 5% of the long-term average due mainly to above-average result in all markets but the hydroelectric market in Ontario and the wind sector in [Kelikan], France.

Revenues for the quarter were CAD17 million higher than in 2015. This 30% increase is attributable mainly to better results from most of the British Columbia hydroelectric facilities compared with the same period last year, and to the conversion of the recently commissioned or acquired facilities, namely the Tretheway Creek hydroelectric facility commissioned in November 2015, the Walden facility acquired in February 2016, the French acquisition made in April 2016, the Big Silver Creek facility commissioned in July 2016, and the MU project commissioned in December 2016, which were partially offset by lower revenues from wind regime in Quebec.

For the 12-month period, revenues were CAD45.9 million higher than in 2015. This 19% increase is attributable mainly to better results in BC hydroelectric market, and to the conversion of the recently commissioned or acquired facilities, which were partly offset by lower revenues related to the wind regime in the Quebec wind farms. Adjusted EBITDA for the quarter and 12-month periods were CAD11.4 million and CAD32.2 million higher than the same period in 2015, respectively, for the same reasons explained just before.

Finance costs for the quarter increased by CAD6.1 million compared to 2015. The increase is due mainly to the interest expense related to the commissioning of the Tretheway Creek, Big Silver Creek, and MU facility, the French acquisition, and to higher inflation compensation and interest on the Harrison Hydro real-return bonds attributable to higher inflation during the period.

For the 12-month period, finance costs increased by CAD12.1 million compared to 2015. The increase is due mainly to expense related to the recently commissioned or acquired facilities, and to higher deflation compensation interest.

For the 3- and 12-month periods, other net expense stood at CAD0.9 million and CAD0.3 million, respectively, compared to a [mere] CAD2.9 million for the quarter and an expense of CAD116 million for the 12-month period ended 2015. This latest amount needs some explanation. The significant decrease in the other net expense for the 12-month period compared to last year stemmed from the fact that the Corporation had no realized gain compared with a realized loss of CAD119 million for the same period last year upon the settlement of Big Silver Creek, Boulder Creek, Upper Lillooet, and Mesgi'g Ugju's'n bond forward contracts at the closing of their respective project financing.

For the 3-month and 12-month periods ended December 31, 2016, the Corporation recognized an unrealized net gain on financial instrument of CAD2.2 million and CAD4.3 million, respectively, due mainly to foreign exchange, rate swap, and interest rate swaps. For the corresponding periods last year, the Corporation recognized unrealized net gains on derivatives of CAD2 million and CAD81.4 million, respectively, due mainly to interest rate swaps and to the reversal of the unrealized loss accrued to December 31, 2014, upon settlement of the bond forward contracts for the closing of the Boulder Creek, operated with Big Silver and their new financing.

For the period ended December 31, 2016, the Corporation had no derivatives to be settled upon the closing of any project financing, as all of the development project financings were put in place in 2015. No impairment of long-term assets were required in 2016.

Excluding the impact of derivatives and impairments, and their related income taxes, the net earnings for 2016 would have been CAD29.1 million compared to CAD19.7 million in 2015. The increase is due to higher EBITDA, partly offset by higher finance costs, and depreciation and amortization.

Overall for the year, a very good first six-month period and fourth quarter, partly offset by a below-average third quarter, allowed us to record an excellent 12-month period, mainly due to an above-average production in all sectors except for wind. Our 12-month free cash flows ending on December 31 reached CAD75.7 million, compared to CAD74.4 million in 2015.

Our pay-out ratio stood at 91% compared to 86% in 2015. This change is due mainly to a slightly better free cash flow than in 2015, which was more than offset by higher dividend payments as a result of a higher number of common share outstanding to the issuance of 3.9 million shares to Desjardins under a private placement for the acquisition of the French assets, and to the issuance of shares following the exercise of stock option and the DRIP. Innergex also announced an increase of CAD0.02 per share of the annual dividend, starting for the next quarter.

This concludes my review of the results. I will be happy to answer your question later on during the call. And I'll turn it back to Michel.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jean. Good morning, everybody. I think it is becoming a little bit of a tradition to the first-quarter result -- not the first quarter, so the end result is to come back to the objective that we have set up for ourselves in 2016. So, if you have access to the webcast, there is the presentation there. I'm going to go through the deck. But if you don't, I think that my presentation will be quite clear and you will be also able to view that webcast on our Internet site.

2016, we said that the presentation is that we are coming back to what we said, and we are reporting on what we actually did. We said that we wanted to grow our production by 6% to 8%, grow revenue by 9% to 11%, grow our EBITDA by about 7% to 9%, and also maintain our pay-out ratio below 100%. What we did is that we increased our production by 18%, revenue by 19%, adjusted EBITDA by 18%, and we did maintain the pay-out ratio at 91%. So, happy to report on this one.

We also wanted to focus last year on delivering the project under construction. If you remember, we had still four projects under construction, three hydro in BC and one wind project in Quebec. So, we wanted obviously to advance and put Big Silver and Mesgi'g Ugju's'n in COD. We did that.

We put Big Silver in COD in July under the budget, and MU -- Mesgi'g Ugju's'n -- was put on December 29, within the budget. And I will come back on this. It is not completely finished in terms of negotiation with the contractor, so is Upper Lillooet and Boulder, so that is why we have not updated specifically those development costs.

But as I can confirm that as a portfolio, we are still into the budget that we have published. There is plus and minus in different areas. But as a whole, we are still under budget in these development.

We also are working pretty hard now also on Upper Lillooet and Boulder. If you remember, we had the delay two years ago because of a fire. We were hoping to be in COD for Upper Lillooet in Q1, earlier on in Q1. But the main reason is that we are not meeting that is the winter came quite early in BC. That is why also the BC fourth quarter was a little bit weaker than we had anticipated. December, and even November in higher altitude, we've seen a lot of snow. And that obviously has slowed down a little bit the construction activities.

Nonetheless, we are very happy to start the filling of the penstock and the tunnel, as we are speaking, for Upper Lillooet. So, we are still focusing on early COD for Upper Lillooet in March. So, hopefully we will make the Q1 target for Upper Lillooet. And Boulder will follow very early in Q2.

As you know, BC is important to be on and running for the [Frechette]. And the Frechette is coming in those altitudes somewhere in the beginning of May. So we want to make sure that we will catch the flow when it comes.

If I flip the page, I'm going to update on project development. I just did Boulder and Upper Lillooet. Like I said -- well, I guess I covered it on the other page -- we are maintaining the output in the construction. We are not changing either the forecast for the production and the EBITDA, neither, on those projects.

If I'm flipping to objectives with project financing, as you know, it is important for us to focus on our cost of capital and into structure of our capital. So, we are always trying to improve our capital structure. In that sense, we did refinance Fitzsimmons Creek with a better interest rate.

Fitzsimmons was financed during the financing crisis way back then when we started construction. So obviously we had a better deal now. The market is much more receptive now than it was at that time.

Stardale, an interesting fact -- we were able to put more than CAD12 million over the previous financing with a fairly good interest rate, as well. So, that was good.

The other thing that we are working on the existing facilities, the Saint-Paulin and Windsor PPA are under negotiation, and to some degree, arbitraged with Hydro Quebec. We are not the only one. It is a file that is under negotiation with other developer, as well. So, we are quite optimistic to see some resolution during the year on those.

Now, I think that everybody is focusing on our growth. Thank you for the coverage of the early call for the analysts, I have looked at it, we understand it, and thank you for the good words on our facility. I understand that people are focusing on the growth, and, believe me, we are working on it.

We said that we wanted to consolidate our leadership position in Canada. And we wanted to get a foothold in the international market. What we have done is that whenever we had the ability in Canada to acquire hydro facility, we are trying to do it. We did an acquisition of 16 megawatt in BC called Walden.

We also, for the first time, entered the French market with the first acquisition of seven operating facilities, we call it [wapitsi], that project. Acquisition also at the end of the year of 24 megawatt in France again. And we are still working in France and trying to develop the project.

As you remember, we have a team of development that we have done a joint venture. These guys are working. We have over 100 megawatt of greenfield project that we have started to initiate the permitting process. So, it is a learning curve for us; we are learning fast. And we intend to grow that pipeline of greenfield project. We also are very interested in looking into other projects, obviously, and other acquisitions.

This week we have also announced the conclusion of the Eon transaction that was part of the first acquisition. But we have the commitment to buy it when it was in COD. So I'm happy to report this week that we've concluded on that one.

We also said that we wanted to explore other markets. We have been quite active in Mexico. We have participated in two subasta. That is how they call their RFP in Mexico. Little bit disappointed in the fact that it was very, very competitive, and we will not name one of the leaders that was winning a big portion of the RFP in that market has been very, very aggressive. It's funny, now they are selling their asset in Mexico.

We are still very interested in the Mexican market. It is just that we have to find a good balance between the type of risk that we perceive in Mexico and the rate of return that is acceptable to that type of risk. We have learned quite a lot in the last 1.5 years in Mexico. So, we are still hoping, and interested, but we have to find a good relationship with return and risk.

As you know, we are a long-term investor. We don't want to rush into a market, or just grow for the sake of growing. We want to be accretive; we want to be comfortable with our project. So what we would say in French is prudence in Mexico, so we just want to make sure that we are prudent in Mexico.

Peru is also a market that we have been active. We have been studying at least six, seven, eight projects in Peru. Some have more potential than others. We are actively working on one. It is not a big project; it is around 20 megawatt.

The interesting thing in Peru, if you remember, we are looking into very high-capacity projects, so a 20 megawatt in Peru would produce at roughly 90%, 95%. So, it is almost the equivalent of a 40 megawatt in BC or in Ontario. So, quite interested in Peru. A little bit of a challenge, and like I said, we are committed in one project, but it is conditional on some permitting being finalized. Quite optimistic to have something in Peru during the year.

I'm flipping to the objective of 2017. I think I covered some on the different markets, but I will come back. But having now the Mesgi'g Ugju's'n project being fully operational for the full year, we will see a good benefit from there. With also the COD of Upper Lillooet and Boulder will produce a lot more cash flow. And of course, Big Silver full year will also contribute to the growth.

So we are forecasting a growth for production by about 31%, our revenue by 44%, and our EBITDA by 48%. We want to maintain a target pay-out ratio between 70% and 80%. We will come back later on to the target of free cash flow, but we are very in line into these targets, and probably much lower in terms of pay-out ratio.

The development, we want obviously to focus on making sure Upper and Boulder are put in service. We want to finalize the PPA in Quebec.

And we also have Brown Lake PPA came into an end. We are right now negotiating with BC Hydro. We think we can find a way to propose a product that is linked to capacity in that area. BC Hydro seems to need some capacity. So, working with them in order to change a little bit the profile of production to Brown, and possibly even increase the capacity if we can come up with an agreement with BC Hydro on that one.

In terms of growth opportunity, Canada is always in our radar, obviously; it is home. And if we can find growth opportunity in Canada, we will be aggressive on those.

There is three markets that have some activities in Canada. There is Saskatchewan. In Saskatchewan, we have a project, we have a joint venture with the First Nation, and we will be participating in the next RFP. It is a project between 100 and 200 megawatt of wind.

New Brunswick, we will also participate in the small call for a community participation project that will be coming this year. Alberta is also on the activity list. Although Alberta will be very, very competitive for the first call. We haven't had a lot of activity in the past in Alberta. So, we are trying to look into some ways to find an angle to be competitive in Alberta. It is a market that seems to be promising for the long term, so we will be trying to find an angle where we can create value for ourself.

The other market, the international market, I spoke a little bit about Latin America, Mexico, and Peru. But we also want to focus on the US. Even if the US right now is a little bit into some uncertainty because Mr. Trump is talking about cutting the corporate tax rate, which creates a little bit of noise in the US. But for us, I always said that the PTC, in my view, was great, but I think that now that the costs of electricity, both for wind and solar, are becoming more and more competitive, I would be happier without PTC. And I think the Canadian company can do better without PTC.

Obviously, utility will have to pay up a little bit more for their renewable energy. But I think they can. For us, we see that as an opportunity to be a little bit more competitive. Because PTC and tax equity provider and structure are a little bit cumbersome, and we like things that can be a little bit simpler.

That being said, we have now a much better understanding of the tax equity. We have made contacts, also. So we are willing to play that structure as well, but like I said, I think this will go slowly, or fade, and we will have a better angle for us to attack the US market.

We want to have a team in place in the US this year. We are looking into either a small acquisition or hire our own team. We have already started to participate, or getting prepared to participate in RFP. We have secured some land in Alabama and Georgia in light of their future RFP. So, we have initiated the, I would say, development activities in the US, and we want to be there and ready for the long term.

Coming back to the projection, I just said that the EBITDA growth now for next year, for 2017, is expected to be about CAD320 million, which represents 48% increase from last year. And the free cash flow will stand at CAD110 million, which is about 45% increase.

Just a small reminder that free cash flow is after spending what we call our development or prospective expenses. We have raised the amount of expenses that we want to do from roughly CAD10 million this year to about CAD15 million. We are projecting to spend about CAD15 million this year. So, hence, the increase could have been a little bit higher if you're comparing to last year, given the fact that we have acquired some French assets. But we are raising the budgeted development money or investment.

So this is why the CAD110 million has not grown to maybe CAD115 million. But we think that it is important for us to focus, and making sure that we can replenish the future pipeline. So we think it is a good investment.

The overview of 2017 through 2020, it is a reminder. I know that most of you know, but it is a good thing to recap what we want to do. One thing for sure is that we want to remain exclusively in renewable energy. We've been saying that for a long time. Now it's starting to be a good place to be in. Maintain our diversification of energy sources -- we love hydro, wind, and solar. We want to make sure that we keep diversified in this sense.

I've talked about the international development. We want to focus on France, and perhaps some proximity countries around France. But our focus is France for the time being. Latin America is mainly Mexico and Peru for the time being.

And obviously we want to consolidate our position in Canada, hence the participation in the Saskatchewan, New Brunswick, and looking into also Alberta. Whenever there is an acquisition that makes sense in Canada, especially in hydro, we will be interested.

So, again, we want to focus on high-quality assets. That's what we have in our portfolio. We don't want to dilute this type of portfolio. We want to maintain a low-risk business model. We have been known to be conservative and being able to deliver on our promises. That will not be changed.

Maintaining a long-term outlook, that is also very important for us. Even though short-term PPA will be available in France and in the US, we will be cautious on our assumption for post-PPA prices. This is the name of the game, I think. If you want to make acquisition, and you want to get yourself on a very nice and fat return, you just have to be very positive on future merchant prices, and then acquisition and development is very easy. But if you are conservative and making sure that you are looking into the long term, and you don't want to have to cut back the dividend, then you have to be prudent, and that is what we are.

We want to focus on partnerships. If it is in Canada, we think First Nation is a part of a great way to develop future projects in Canada. But somewhere else we are also very open to do partnership. We have proven in the past that we can be a good partner.

We want to maintain a disciplined acquisition. We will be focusing on acquisition, but they will have to be accretive to our cash flow. I always said that acquisitions that are well done are part of a good balanced portfolio. I always said that I want to have a strong portfolio with generating cash flow. We want to be involved with projects under construction. We want to also have a healthy pipeline of projects under development, and always looking to have prospective project in order to develop the future.

So, in summary, again, I think we have a sustainable dividend. By now you know Innergex, you know us; we want to grow the dividend. We have now a yield of about 4.6%, 4.8%. We just increased our dividend by 3% this year. And this is obviously something we want to continue to do.

We have a visible growth to our EBITDA of 48%, and 45% our cash flow this year. We've been talking about 2017 for a long time. It has finally arrived. So, for this year, if everything goes well, we will have a pay-out ratio well below 70%. This is a first from the last time we merged with the income funds.

I'm very proud of my team that we have been able to deliver growth, and also being able to keep the dividend and reduce the pay-out ratio. So we have done it. We are very happy, and now we are looking for the future. Thank you very much.

--------------------------------------------------------------------------------

Karine Vachon, Innergex Renewable Energy Inc. - Communications Director [5]

--------------------------------------------------------------------------------

This completes our presentation. We now invite you to ask your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

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

--------------------------------------------------------------------------------

Rupert Merer, National Bank Financial - Analyst [2]

--------------------------------------------------------------------------------

Good morning, everyone. Michel, you ended by talking about the dividend and your target payout ratio was 70% to 80%. With the current dividend it does look like we are heading for about a 65% payout ratio based on your forecasted cash flow estimate of CAD110 million for 2017. So, can you talk about the decision process on the amount of the dividend increase? What is the outlook for future dividend increases? When do you think we will be in that 70% to 80% range?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is a good question. We had obviously a discussion at the Board level. Yes, we are going to be, if everything stays as are predicted, below 70% this year. It is comfortable, we have never been there. So it is comfortable.

But we don't want to stay too conservative. But on the other hand, we are seeing a lot of activities in terms of acquisition and also in terms of development. So we want to stay flexible.

Our first focus is to replenish the pipeline. The dividend will come and the increase of the dividend will come. As you know, we have been quite disciplined in the past to increase it on a yearly basis. We are very confident in our ability to grow that dividend, especially now that the payout ratio, as you are mentioning, will be below 70%. But our first priority, and you guys are telling me all the time, the investors are doing the same thing, is to replenish the growth, so we are focusing on that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Maybe something I can add to this is that it is true that the payout may seem to be under 70%. But if ever we do some development it's always that you need to have some equity in order to make the development. And in the case that we have to build something or something like that, then we need equity. We may have to issue more shares. And building something takes a few years before you get the rewards of the income. So it takes only one or two projects, and it may shift, the payout ratio, easily.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And this is a good thing. Obviously if we get busy in development project, as you know, if you're putting the equity in first it takes two or three years to get the dividend from a greenfield project. So, we are conservative. We know that we will be able to grow the dividend. It's just that, as you know us, we don't want to cut back the dividend ever. So we are cautious, and we will be raising the dividend. But we are focusing on developing the pipeline.

--------------------------------------------------------------------------------

Rupert Merer, National Bank Financial - Analyst [6]

--------------------------------------------------------------------------------

Okay, great. And then, secondly, on growth can you talk a little bit more about France? Do you have a pipeline for bidding into the new RFP process in France? And what is the outlook for those sorts of opportunities in 2017?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We are very active now in France. First of all, we have now people on the ground. We are opening an office in Lyon. We are seeing a lot more transactions, obviously, since we have started the acquisition. We are working on many angles.

We are also hiring more people to do greenfield project. We have a small portfolio now of over 100 megawatt, where we are initiating all of the permitting and bringing these project forward. We will be ready for early COD. As you know France it can easily take four or five years to develop a project, so we've been working almost a full year now on some. So, depending on the COD date requirement, we may have some few project of our own already being a prospect to some future RFPs.

But we also are talking to developers or other players in the market to join forces. Definitely France for us is a place we want to see some growth. Acquisitions are great. I think with our friend Desjardins we are managing to get a decent return, which in a way is not bad when we are able to acquire assets when we bring the cash flow here in Canada. And we are high single digits, in the 9%, close to 10%.

Quite happy with that type of acquisition given the fact that we want to have some kind of a balance between operating and development assets. So, we are seeing a lot of activities, and hopefully we will be able to come back to you in a short period of time with more activities on that side.

--------------------------------------------------------------------------------

Rupert Merer, National Bank Financial - Analyst [8]

--------------------------------------------------------------------------------

Very good. I will leave it there. Thank you.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sean Steuart, TD Securities - Analyst [10]

--------------------------------------------------------------------------------

Thanks, good morning everyone. A follow-up on France. In the notes in the MD&A you referenced an ongoing fit regime for projects up to six turbines. Just trying to gauge how much of what you are pursuing for prospective growth in France would be those smaller-scale projects versus larger-scale projects that would a bit into the contract for a different structure that will be in place going forward. And then further to that, as you look at that more competitive procurement framework moving forward in France, how do you think about returns for prospective growth in that country?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's a good point. Obviously six units these days can fetch a project in the range of 15 megawatt, which is not bad. In terms of France, there's a lot of those types of projects in 15 and 20 megawatt in France. Bigger projects in France are a little bit more complicated, although there are some.

If we are able to get the [FIT] contract target, we will, with some project. We want to develop an approach where we will be standardizing the construction, supervision and supply of turbines so that even a small project cannot be burdened by a very heavy head office expense and what have you. So, we want to be flexible and nimble to be able to also create and build those small project.

And obviously we will be looking and maybe joint venturing with a local partner for bigger project. Some of the developers have been, I would say, spoiled in France by the FIT contract. So, certainly they are a little bit more nervous about RFP and the competition. And I think that is, to some degree, some good opportunity for us.

It used to be in France that people were starting the greenfield development, they would bring the project to a certain point, and then they were selling to private equity, or a bigger player. But this is a little bit more difficult now to do for them, obviously, because on an RFP basis it is a little bit harder to get a premium on non-PPA project. So, for us we think that this is an opportunity.

Now, yield in France will probably be tighter than some greenfield project we develop under the FIT program. But it will not be much different than Canada or other places. And probably, like I said, I think France has a lot of players. But on the other hand, those are not huge projects. And to some degree I think that competition will be strong, but fair.

Alberta might be more competitive in that sense. Those projects can be 300, 400 megawatt projects in Alberta. And that is, again, where a lot of big players are interested. We are developing 25, 30, 35 megawatt. It's not necessarily the cup of tea of all the big players. So we think that France can be a sweet spot for us. We can help the local developer and yet not necessarily having to compete against the planet.

--------------------------------------------------------------------------------

Sean Steuart, TD Securities - Analyst [12]

--------------------------------------------------------------------------------

Understood. And one other question on Mexico, you referenced the competitive RFPs. Any update you can provide on the partnership you had with the Federal Electricity Commission on the hydro opportunity set in Mexico?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is still going on, but it has been slowed to some degree because I think that CSC is digesting what is happening on the market. There is a few projects that they wanted to look on the hydro side, for capacity mainly. For the time being, we have not seen a healthy premium for capacity these days. So, we will see how it goes, but we need to see a little bit more willingness to pay for capacity before seeing hydro being competitive again.

Just a small reminder that solar prices were in the range of low CAD0.03 per kilowatt hour in the last subasta, so that doesn't leave a lot of room to be competitive for hydro, unless they put a capacity premium on it. So, I think that Mexico these days is a little bit on the shock after the election of Trump. We've all seen the pesos being hit and the local bond being hit, as well. So 100, 150 basis points on the bond.

We have seen the pesos going from 11 to 1 for Canadian dollar to close to 16 in less than three months. I think that people have to readjust a little bit to what is happening in Mexico. And that might be an opportunity also. Some people might realize that Mexico needs a little bit of a premium in terms of return.

--------------------------------------------------------------------------------

Sean Steuart, TD Securities - Analyst [14]

--------------------------------------------------------------------------------

That's useful context. Thanks very much, Michel.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets - Analyst [16]

--------------------------------------------------------------------------------

Great, thanks. Michel, you mentioned that you are negotiating a PPA for Brown Lake. I believe the Walden hydro facility does not have a PPA. Is there a process to get a contract there? And how is it currently being compensated?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is a good question. Obviously but we are selling our electricity to BC Hydro. But we are not allowed to talk about it. But there is something going on with BC Hydro.

I think BC Hydro was really focused to pass some first project in front of the BCUC. That has been done and BCUC has supported the renewal of some projects that BC Hydro has proposed. So, I think that BC Hydro now has a better feeling of what can be accepted by the BCUC, and I think things are going to speed up from now. It is just that we are not allowed to talk about the negotiation around the Walden PPA.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets - Analyst [18]

--------------------------------------------------------------------------------

Okay. My next question is in terms of your budgeted CAD15 million of development expenses for 2017. Is there a very big picture breakdown of, whether it's Canada, France, Latin America, in terms of how you intend to spend that CAD15 million?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

A good point. We are hoping to be able to spend -- it's a good question. It is almost, I would say, a quarter in each market. But that CAD15 million is somewhat flexible. This is only for prospective projects in the sense that if we are starting to have a project that has a PPA or an acquisition or a joint venture that the project have PPA, then we're not limited -- I'm not saying that we are limiting ourselves to CAD15 million, but this is a target for really prospective projects.

So as soon as we're in into a real project, meaning real project with a PPA or joint venture, then those prospective expenses switch to development expenses, and it can be a lot more. If we are signing a joint venture with somebody that has already a PPA or a project, then obviously it is not part of that CAD15 million. So, we are hoping to spend more than a quarter of our money in France because we think that we will be able to locate the expenses in a different category in our reporting.

In the US, we would love to be able to spend, it's just that if we are not making an acquisition, building an office in the States can take a little bit of time. So, even if we want to put a lot more activities, it's going to take maybe before the second quarter when we will have some people on the ground, Americans working for Innergex, on the ground.

In Peru we are not spending too much money in terms of prospective. We are looking into making a joint venture, and the ability also to start a project, to start the construction on one or two projects. So, as soon as we get into that phase, then it is not prospective, it's development expenses, and then the CAD15 million obviously can be much greater than that. I don't know if I helped you to some degree.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets - Analyst [20]

--------------------------------------------------------------------------------

Yes, that's useful. Just to follow-up on Peru, could you just talk about how the projects are compensated? I presume there's a long-term contract. And which currency is the project compensated in?

--------------------------------------------------------------------------------

Michel Letellier, Innergex Renewable Energy Inc. - President and CEO [21]

--------------------------------------------------------------------------------

The reason why we like Peru is that there is a 20-years contract provided by the government on US currency with US inflation. We like that aspect. And we like the fact that hydro can still be competitive, to some degree, because, like I said, the design or the resources is generous enough to have run-of-the-river project being almost firm energy in the range of 90%, 93%, 95% utilization factor. So, the way it works is that you signed a contract with the government where you have firm energy, but in order not to put yourself into a default position and not be able to bring the electricity you would sell typically 80% to 85% of your production under a long-term PPA, and then you would sell 10%, 15% of your production on a merchant plan.

So, basically the energy that you are selling under the long-term PPA with the government is firm energy. Typically with hydro, it's ranging from $0.04 to $0.06 depending on the project. And then the merchant in Peru has been healthy in the past, now is weak because the economy has slowed down, given the fact that Peru is really heavy in terms of mining activity. So, the spot price is in the range of CAD0.02 now, but it is coming from CAD0.06, CAD0.07, CAD0.08. So, our view is that the merchant price in Peru will pick up as soon as some mining activities will come back. And we think that the economics of the project are not bad considering the type of risk that we are taking.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets - Analyst [22]

--------------------------------------------------------------------------------

Okay. And then just one last question -- in France you had about CAD8.5 million high-yield loan from an infrastructure fund. I think it cost about 7.25%. I think you guys mentioned that was more of a relationship loan. So, I was wondering, is the infrastructure fund, is there potential for that fund to potentially take equity in future acquisitions or provide additional loans in future projects and acquisitions?

--------------------------------------------------------------------------------

Michel Letellier, Innergex Renewable Energy Inc. - President and CEO [23]

--------------------------------------------------------------------------------

It is always a possibility. The fact that it is 7.25% is not aggressive in terms of yield. The nice thing about it was that they have given us a holiday on principal, so that is the future that is interesting. But, sure, we are talking with a lot of players in Europe.

But I must say that given the fact that when we hedge the euro and bring it back in Canada, I think that the sub debt or an arrangement with the pension fund in Canada is probably a better structure in terms of increasing or reducing our cost of capital, and increasing our returns. But we are open to all kinds of structure. We are trying to obviously work into financing, the engineering around the capital structure is as important as the construction cost and so forth. So, always looking to inventive or creative structure that can enhance our return.

--------------------------------------------------------------------------------

Nelson Ng, RBC Capital Markets - Analyst [24]

--------------------------------------------------------------------------------

Okay, thanks, Michel. Those are all of my questions.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

David Quezada, Raymond James - Analyst [26]

--------------------------------------------------------------------------------

Hello. Thank you. Good morning, guys. My first question, just digging into your comments on the US a little bit. And I appreciate your preference for a non-PTC scenario. Should we interpret that as suggesting that would be a longer-term development for you? Or if you were considering participating sooner, how do you think about the competitiveness of products today now that PTC has stepped down from 2016 levels?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Obviously I would like to see some cash flow earlier on and be involved earlier than post 2020. It's just that right now it's a little bit complicated to conclude tax equity deals when the tax rate is not set. So, who is going to take the risk of that? Certainly not me. It is something that might be cleared in the next six months or so, if the Trump administration comes up with a plan, and then it will be easier to structure the deals. I'm not so sure I understand the second part of your question, David.

--------------------------------------------------------------------------------

David Quezada, Raymond James - Analyst [28]

--------------------------------------------------------------------------------

Just, a lot of companies have pre-qualified projects with the CAD23 per megawatt rate. So I'm just wondering how new projects under the 18 megawatts per hour PTC would stack up, if they can be competitive.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Obviously they will be harder, for sure. But I think on the long run, the US market will be able to pay up to a price that makes a little bit of sense. With the PTC we are seeing some wind PPA as low as CAD0.02, even breaking the CAD0.02. So, it is very nice for the utility, for sure. And it was great to introduce renewable energy in the States.

But do they really need that PTC anymore? I don't think so. I think without the PTC and having some good projects, I think that the price of electricity for wind can be in a range of CAD0.035, CAD0.04, which I think is still competitive compared to new combined cycle, especially if you are introducing eventually the carbon cost to those natural gas projects.

I think that we are confident that we will find places in the States to establish a long-term presence, with the thinking that the project will have to be competitive, and without PTC. Of course, it may take a little bit more time. But like I said, the PTC structure can be nice, but if too much risk is put into the developer, then is it worth it? We are cautious on that aspect.

--------------------------------------------------------------------------------

David Quezada, Raymond James - Analyst [30]

--------------------------------------------------------------------------------

Okay, fair enough. I appreciate those thoughts. My other question just on the outlook, or what you are seeing so far for the hydrology in BC, like you mentioned we've had a lot of snow out here so I'm wondering what you think that means for the hydrology looking into 1Q 2017.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'm pretty sure that the ski areas in BC are very happy. There is a lot of snow, especially in elevation. And even in lower mainland there is fairly good snowpack on the top of the mountain. So, actually I think that the spring and early summer will be very good, because that snow will melt. It is just a matter of how fast it will melt.

But so far there is a lot of potential kilowatts high up in the mountain range. That's why we want to make sure that Boulder and Upper Lillooet will be ready to catch it when it comes. Right now, it is even a challenge because the river and altitude are very low, mind you. Last week there were a lot of rains, so that did help. But January was weak in BC. February now is over our long-term budget. And hopefully once we have passed mid February, usually things are starting to melt and create a little bit more revenue.

So, I am very positive about what is happening in BC in terms of snowpack. But in our business, since we run up the river, the spring runoff is always something quite variable because if it starts to rain heavily and it is warm then suddenly the snow goes fast, and obviously there is a big flood, but then you cannot catch the full benefit of that snow up there. So, we are very optimistic. And of course our guys in BC are all ready to make sure that the power plant will be ready to capture spring runoff.

And in Quebec it has been great all winter. We have an early spring to some degree now in Quebec. It is forecast, today again is fairly warm with rain, and the same thing for tomorrow. So I think that most of the south project of Quebec will see quite a bit of water in the next few days.

So, Quebec is good. Ontario as good, as well. The wind is a little bit slow this winter, both in Quebec and France. So, I'm not worried, but I have high hope that the wind will pick up in the next few weeks in Quebec, and in France, as well.

--------------------------------------------------------------------------------

David Quezada, Raymond James - Analyst [32]

--------------------------------------------------------------------------------

Excellent, thank you very much. That's all I have for now.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Your next question comes from the line of Robert Catellier of CIBC World Markets.

--------------------------------------------------------------------------------

Robert Catellier, CIBC World Markets - Analyst [34]

--------------------------------------------------------------------------------

Hi. Congratulations on the results and thank you for the presentation. I just have two quick follow-up questions here. When you look at your development expense for prospective projects, that CAD15 million, unless something changes, can we expect that to be the run rate for other years, as well? Is this the new level of spending you expect?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is what we are forecasting. Like I said, this prospective expense is something that obviously we had to beef up from the previous year. Maybe three or four years ago we were spending CAD3 million, CAD4 million, CAD5 million. Obviously we were more focused on delivering on our existing development portfolio.

But I think that CAD15 million is the type of money we have to spend in order to get busy in the greenfield development. But we will adjust that amount. If we feel that we need a little bit more, we will. And if we have too much success then we will slow down on it. Obviously we are very focused in the next few years to fill up the pipeline.

--------------------------------------------------------------------------------

Robert Catellier, CIBC World Markets - Analyst [36]

--------------------------------------------------------------------------------

Okay. And I think in your comments in the presentation you discussed your willingness to consider opportunities for acquisitions in Canada. So, I was wondering if you could just discuss the state of the market in terms of number of opportunities and relative valuations?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That is the problem in Canada. It's a good problem, because I think, and actually some of you are seeing that as a great asset for Innergex, the existing long-term PPA that we have for our hydro is great, and hence there's not that many. The price for new hydro assets, or existing hydro assets under long-term PPA, in Canada is very expensive, although, we have been able in the past to find a little opportunity. Walden was a good one. We are still looking into BC. There are a couple of possibilities here and there.

And also, one thing that we are starting to create a little bit more knowledge inside the Company is to be exposed to some degree for merchant market and the States if we acquire existing hydro facility that needs a little bit of reinvestment or re-permitting under FERC. So, this is a segment that we could try to be a little bit more focused and aggressive. Mind you that we are very cautious. We don't want to have too much exposure on merchant. But as we grow, our portfolio can support a little bit of exposures, especially if it is a good long-term asset in terms of hydro in the States. But we will be cautious.

We've seen a few transactions that we thought were expensive. I think that some people are seeing the price of electricity in the States going up a little bit faster than we think. So, this is where we have a little bit of difficulty to be competitive to acquire existing hydro facility in the States.

And there is a lot of opportunity there. There is always a transaction here and there in the States that can be looked in for merchant hydro. So, we are starting to warm up to the idea. It is just that we have to find some comfort in the risk and reward relationship.

--------------------------------------------------------------------------------

Robert Catellier, CIBC World Markets - Analyst [38]

--------------------------------------------------------------------------------

Okay, thank you.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions)

Your next question comes from the line of Ben Pham - BMO Capital Markets.

--------------------------------------------------------------------------------

Ben Pham, BMO Capital Markets - Analyst [40]

--------------------------------------------------------------------------------

Hello, good morning. I was wondering if I could follow up on some of your comments on the payout ratio. I understand that you what to retain as much cash as you could for development. That's always a good signal. But it seems like the sub 70%, with you guys adding forty-year hydro contracts, it seems very conservative to me. And I was wondering how do you guys think about the potential positive benefit on your valuation by paying out 75%? It seems like your cost equity can improve by almost 1% to 2% versus retaining cash because it seems like paying out 75%, you're only really paying almost CAD10 million of free cash and you're still retaining CAD25 million. So how do you reconcile the two opposing deltas there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I would love to have a private chat with you to make sure that we raised the dividend, it will have a direct positive on the valuation. And I agree with you, Ben. Obviously if we have a better cost of capital it is easier to make acquisition, it is easier to issue stock in the future in order to support the development. I completely agree with this.

It's just that it's not that easy to understand where is the sweet spot. And, to some degree, we are seeing our peers trading at a much lower yield than ourselves, because they have a much lower payout ratio, so hence people are thinking that they have the ability to grow their pipeline, and they have a vision on future pipelines. So, it is a delicate matter that we are really focused in trying to understand and find (inaudible).

Mind you that we are forecasting 2017 being around the low of 70%, but we haven't achieved it yet. I would be nice to have a full report year to show that we have actually reached that type of payout ratio, and then we could readjust perhaps the payment of the dividend. So, we thought it would be prudent to not get excited about raising the dividend too fast, making sure that we still deploy the strategy of putting all of the projects in commercial operation, and start to see the benefit also from our investigation and investment abroad, mainly in France and in other places.

But I agree with you, Ben, I've always been an advocate of thinking that in our business equity and cost of capital is king. And obviously, even if we have a healthy payout ratio we cannot support fully by internal cash flow all of the development and acquisition we would like to do because it is a capital-intensive business. So, the game is to make sure that you have a good currency in order to be successful and ensure future development. I agree with you, Ben, it's just that it is not that easy to find the sweet spot and the perfect formula.

--------------------------------------------------------------------------------

Ben Pham, BMO Capital Markets - Analyst [42]

--------------------------------------------------------------------------------

Okay, thanks for the color. That's all I had today. Thank you.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Karine Vachon, Innergex Renewable Energy Inc. - Communications Director [44]

--------------------------------------------------------------------------------

Thank you. And we think you for taking part in this conference call. Please do not hesitate to contact us should you have any other questions.

--------------------------------------------------------------------------------

Michel Letellier, Innergex Renewable Energy Inc. - President and CEO [45]

--------------------------------------------------------------------------------

Thank you very much everybody, and have a good weekend.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Ladies and gentlemen, that concludes our conference call. Please note that a replay of the conference call will be available on the Innergex website. The press release, financial statements, and the management's discussion and analysis are also available on the Innergex website www.innergex.com in the investors section. Thank you. You may now disconnect your lines.