Boralex Inc

TSX:BLX

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Boralex Inc. First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would like to now hand the conference over to your speaker today, Stéphane Milot. [Foreign Language]

[Stéphane Milot, Director of Investor Relations]

Thank you, operator, and good morning, everyone. So welcome to Boralex First Quarter Results Conference Call. Joining me on the line from home today are Patrick Lemaire, President and Chief Executive Officer; Patrick Decostre, Vice President and Chief Operating Officer; Bruno Guilmette, Vice President and Chief Financial Officer; and other members of our management and finance team. Mr. Lemaire will begin with comments about the highlights of the first quarter and an update on our continuity plan relating to COVID-19. Afterwards Mr. Decostre will provide comments on the operations and development. Mr. Guilmette will carry on with financial highlights, and then we will all be available to answer your questions. As you know, during this call, we will discuss historical as well as forward-looking information. When talking about the future, there are a variety of risk factors that have been listed in our different filings with securities regulators, which can materially change our estimated results. These documents are available for consultation on sedar.com. In our webcast presentation document, the disclosed results are presented both under IFRS and on a combined basis. Unless otherwise stated, all comments made in this presentation will refer to combined basis figures. The press release, the MD&A, the consolidated financial statements and a copy of today's presentation are all posted on the Boralex website at bolarex.com under the Investors section. If you wish to receive a copy of these documents, please contact me, and that's it for me. So Mr. Lemaire will now start with comments. Please go ahead, Patrick.

[Patrick Lemaire, President, CEO & Director]

Thank you, Stéphane. Good morning, everyone. Before starting with my comments about the quarter, I would like to thank all our production and maintenance employees working very hard in the field to maintain our operations, allowing us to continue producing electricity and essential service in all areas where we have assets. I would also like to thank all our administration and development employees working hard from home, often with their kids around and with all the anxiety relating to the health of their parents and grandparents. In this time of high uncertainty, you really make the difference and allow Boralex to carry on with all aspects of our business. We had a very strong start of the year in January and February, and you allowed us to maintain the pace in March. You should all be proud. I would like to highlight here for the investors and analysts that the transition was a challenge for sure, but it went pretty smoothly for us given that we already had a flexible working hour policy and a strong crisis management plan in place. Within a day or 2, we were fully operational from home. Let's review the quarter now. It was another strong quarter for Boralex with growth in all our financial metrics. Our wind operation in France were the main driver to this overall growth in result as production was 31% over the anticipated production and 38% higher than the first quarter last year. This growth came from exceptionally strong wind conditions and the contribution of assets commissioned last year. We also benefited from savings relating to the $2 billion in refinancing concluded last year. On the development front, we made significant improvement in the quarter by winning or being selected for projects totaling 250 megawatt in recent request for proposal.I will now report our progress toward the orientation of our strategic plan, starting with the growth orientation. In the first quarter, we had good results with our submission in response to request for proposal in France, winning more than 70 megawatt in wind and solar projects. As Patrick Decostre will show you, our growth path increased to 312 in the first quarter and now counts to a strong pipeline to reach our 2023 target of 2,800 megawatt. Switching now to our diversification orientation. We were selected for our 180 megawatt bid in the U.S. solar and continue to develop this high-growth potential market. Our development teams in the U.S. and France are making really good progress with project in our pipeline even in the recent month. There's been some adaptation to do, but the projects are advancing into the different phases of our portfolio of projects. On the customer orientation, we've signed our first corporate PPA with a large industrial group in France on an existing wind farm with EDF contract ending soon. We also commissioned a 2-megawatt storage facility on 1 of our existing wind farm in France. It's small, but it will be a good pilot and learning experience. In terms of optimization initiatives, we have ongoing talks for the potential refinancing of certain assets in Canada. We are optimizing the Cham Longe wind farm in France with our repowering project under construction. And in our growth path, we have 3 additional repowering projects for a total 87 megawatts to be optimized. We also have advanced talks for the optimization of repair and maintenance work for certain assets in Canada. In conclusion for my part, a few words about COVID-19 effect on Boralex. We are not expecting material impact at this point in time. As mentioned before, we have rapidly put our continuity plan in action. After some adjustment made in the last few weeks to carry on construction work at our Cham Longe and Santerre projects, our required teams are now on site, working on these projects. This will only result in 1 month or 2 delays, which has been reflected in our growth path.In terms of finance, as you have seen, we continue to generate strong cash flow and have a solid balance sheet with over $250 million available on our credit revolver and letter of credit facility. We remain confident for the rest of 2020. We have a solid and agile management team, dedicated employees and a clear action plan on which we'll continue to execute. We are also preparing ourselves for the after crisis or the new reality and are confident governments will continue their investment in renewable energy in order to accelerate the energy transition underway. I will now let Patrick cover development, operations and optimization. I will be back later for the question period. Patrick?

[Patrick Decostre, VP & COO]

Thank you, Patrick. Good morning, everyone. As you know, wind is the biggest driver of our results. And for the second quarter in a row, France production was significantly higher than anticipated production, which explains the vast majority of our growth in the quarter. But let's start with Canada, as indicated on Slide 8 of our presentation. Comparable wind production in the first quarter decreased by 17% compared to last year and 6% lower than anticipated production. The decrease is due to weaker wind than anticipated, mainly in Ontario and Western Quebec. When comparing to last year, please recall that the first quarter last year was quite strong for Canada. Our Moose Lake wind farm in BC is performing well, with production 13% higher than anticipated. As mentioned before, in France, wind conditions were exceptionally good in the quarter, resulting in 30% growth over last year on a comparable basis and 38% growth overall. Comparable production was also 31% higher than anticipated and our assets commissioned in the past year generated production 25% higher than anticipated. Overall, total wind production for the quarter combining Canada and France was 9% higher than last year and 12% higher than anticipated production.Turning to Hydro now. When comparing to last year, production in Canada was significantly higher due to the commissioning of Yellow Falls and on the reopening of Buckingham. Comparable production was 7% lower than last year. When comparing to anticipated production, the good performance of our assets commissioned last year more than offset the lower-than-anticipated production in our comparable operations. U.S. hydro was down by 4% compared to the first quarter last year, but still 19% higher than anticipated production. In summary, total production for the quarter was 9% higher than last year and 11% higher than anticipated. Turning to development now. Our portfolio of project remains strong with some project that moved to the growth path during the quarter. In France, we have a portfolio of wind power project totaling 978 megawatt, which will continue to develop and bid in the upcoming RFPs. The next RFP is scheduled for July at 250 megawatt, which will be followed by a 500 megawatt in November 2020 and 925 megawatts at the end of 2020. For the years 2021 to 2024, 2 tranches of 925 -- 925 megawatts per year are expected. In our French solar power segment, we have a portfolio of projects at varying stages of completion with a capacity of about 181 megawatts, which will be bid in upcoming RFPs. Our portfolio of wind projects in North America represent 1,074 megawatts. Most of these projects could quickly move through our development stage once renewable energy development programs in our targeted market are reactivated. Note that many programs are on hold due to political changes. The COVID-19 crisis would, however, lead to changes of this situation as governments will announce their economic recovery plan. We also have a 360 megawatt portfolio of projects in the U.S. solar power segment and will bid some projects in the next RFP planned for the fall.Turning to our growth path now. Twelve wind farm project representing 223 megawatts in additional capacity and solar project -- power project totaling 28 megawatt are at a sufficiently advanced stage to be considered as secured and included in the growth path. This represents a total increase of 84 megawatt compared with the end of fiscal 2019. These project resulted from our wins under recent RFPs in France. Note that out of these 12 secured wind projects, 3 are for the replacement of existing wind turbines by new turbines on asset with energy sales contract expiring in the next few years. This is what we call repowering projects. These existing wind farms with 36 megawatt of installed capacity will benefit from a 16 megawatt increase for a total of 52 megawatt, which will be secured with -- by new 20 years feed-in premium contract with EDF in France. Also 4 French wind farms are either under construction or have completed all preliminary stages and obtained preconstruction approvals. They are all subject to feed-in premium contract. At this time, we are anticipating a slight delay in the commissioning of these wind farms, given the slowdown in operations caused by the COVID-19 crisis, as mentioned by Patrick in his speech. Commissioning of secured projects and projects under construction is expected to bring Boralex net capacity -- net installed capacity to 2,352 megawatts to achieve our target of 2,800 megawatt, project totaling 448 megawatt will need to be added to the growth path by 2023. We already expect project at an advanced stage to add a total of 357 megawatt. We are, therefore, confident to achieve our target by 2023.In conclusion for my part, our teams are mobilized to continue the operation and maintenance of our assets, and our development team is making good progress with the projects we have in the pipeline. I would also like to mention that upcoming wind RFP in France has been partly postponed to November and the solar RFP in New York State has been postponed from summer to fall. These delays are reasonable given the context and should not materially impact our development. This complete my part. I will now let Bruno cover the financial portion in more detail, and we'll be back later for the question period. Bruno?

[Bruno Guilmette, CFO & VP]

Thank you, Patrick. Good morning, everyone. I will start with a review of the progress made in light of our 2023 financial objectives. Starting with AFFO, which increased by 59% in the first quarter and allowed us to reach $144 million in the last 12 months. Please note that on top of the contribution from acquisitions and assets commissioning, this growth was mainly achieved by the exceptionally strong wind conditions in France in the last 2 quarters. If we adjust production to the anticipated production in France for these 2 quarters, the last 12 months AFFO would be around $124 million. Our dividend distribution ratio now stands at 43%, still within our 40% to 60% target. Our net installed capacity stands at 2,040 megawatts, and with the growth path and pipeline presented earlier by Patrick, we are confident that we will reach our 2023 goal of 2,800 megawatts. First quarter revenues followed pretty much the same pattern as production with growth compared to last year coming from the wind sector. EBITDA increased from $154 million in the first quarter of last year to $169 million this year. EBITDA for the wind sector was $18 million or 12% higher than last year and hydro EBITDA increased by $4 million or 42%. Net earnings increased from $31 million in the first quarter of last year to $37 million this year.Moving to cash flow now. We generated $124 million of IFRS cash flow from operations in the first quarter, up by 23% compared to the same quarter last year. AFFO increased by $24 million or 59%, going from $44 million in the first quarter last year to $68 million this year. Finally, our financial position remains solid with our net debt to total market cap ratio of 55% on March 31, compared to 56% on December 31, 2019. And as mentioned by Patrick earlier, we have over $250 million available on our revolver and letter of credit facility.In conclusion, production was higher than anticipated in France in the last 2 quarters. AFFO continued to significantly increase. We are progressing well on the execution of our strategic plan and financial objectives. Our teams are mobilized on the advancement of projects in the project portfolio and the growth path, and we have a solid balance sheet and are still looking for potential acquisitions or partnerships if they represent added value or are accretive to Boralex and our shareholders.Thank you for your attention. We are now ready to take your questions.

[Operator]

[Operator Instructions] [Foreign Language] Your first question comes from the line of Nelson Ng from RBC Capital Markets.

[Nelson Ng, Analyst]

Congratulations on a strong quarter. First question relates to the New York solar projects in terms of the 180 megawatts. Could you just talk about the next steps on timing and when you expect the completion date would be for those projects?

[Patrick Lemaire, President, CEO & Director]

Completion is -- we're scheduling these project 2022, 2023. And now what we have to do is finalizing the permitting process and also in the process of signing the contract after we were selected. So that's where we stand now. So we don't see -- for sure, the -- let's say, governments are not as -- or different authorities are not as fast as they used to be because they're not working from the office anymore. But we don't see any major delays on that.

[Nelson Ng, Analyst]

Okay. Got it. And then in terms of the next RFP during the fall, could you give some color on the size of the RFP? And also, given that all of your projects were selected in the last round, is there -- like have you developed a lot more solar projects in the state to participate in the next round?

[Patrick Lemaire, President, CEO & Director]

I'll let that Patrick Decostre answer this one.

[Patrick Decostre, VP & COO]

Yes, we have -- as I mentioned, we have a pipeline of 360 megawatts at different stages for project. We will be the part of this depending on what is possible to finalize during the next months, considering the situation. But we are still developing and committed to this market since we have been competitive on the first...

[Nelson Ng, Analyst]

Okay. And then my next question before I get back in the queue is, the French corporate PPA in terms of the 5-year contract. Can you just give some color as to how that contract compares to the merchant power price today? I presume it's going to be lower -- I presume the contract price is going to be lower than the PPA price, but can you just tell me how it compares to the merchant price? And then the other thing is whether that 5-year period, can you give some color as to whether there's a preference for a longer-term project -- or a longer-term contract? And I was just wondering why 5 years versus a different term?

[Patrick Decostre, VP & COO]

Three to five -- sorry, Patrick.

[Patrick Lemaire, President, CEO & Director]

No, Patrick, go ahead.

[Patrick Decostre, VP & COO]

Thank you. Sorry. Three to five years is reasonable and it's what we see in the market today for contracts after PPA with EDF. This is the first point on duration. We are -- generally speaking, we're not disclosing terms and condition of contract. So I will not disclose the price. But I can tell you that it's a little bit higher than today's quotation for 2021, which is around EUR 43, EUR 44 per megawatt hour in France. Merchant price for tomorrow is not merchant price for next year because all the market is expecting a recovery of the economy and that the price would go up afterwards. But we are not -- we are no more exposed to merchant price for the next 5 years for this asset. This is the most important point.

[Patrick Lemaire, President, CEO & Director]

And Nelson, the -- for sure, for us the longer the, let's say, the corporate PPA, the better it is. But like Patrick just mentioned, it's -- we go with what's available on the market. So...

[Nelson Ng, Analyst]

Okay. And the wind farm is going to be about 15 years old next year, right? Like the initial contract is 15 years, so you're adding another 5 years to that, right?

[Patrick Lemaire, President, CEO & Director]

Exactly. Yes.

[Operator]

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

[Sean Steuart, Research Analyst]

A couple of questions for Bruno. Can you give us some context on the scale of the potential Canadian refinancing opportunity that you referenced?

[Bruno Guilmette, CFO & VP]

We're still in discussion. And as you know, this is -- I mean, it's a fairly significant asset and would bring an interesting amount for us, but we're cautious in our comments on this because of the existing situation. We believe the market is open. But as you know, in these conditions, it comes and goes and such an operation takes -- requires a few months of work. So we're cautious, and we don't want to be too specific too specific on this opportunity. But it's significant enough for us to pursue and we still believe there would be benefits in doing this in the current context.

[Sean Steuart, Research Analyst]

Okay. And you referenced at the end of your comments potential or being open to considering acquisitions or partnerships to augment your growth. Can you give us some detail on the potential opportunity set for either acquisitions or partnerships?

[Bruno Guilmette, CFO & VP]

Well, I can certainly give you -- I mean, in terms of our strategic plan and the targets we set last year, there were a few sort of smaller partnerships included in that but no major M&A opportunities were included in those targets. So we expect and hope that the current situation will provide us with potential opportunities, which were not part of our initial strategic plan, and that's why we're increasing our watch on this and are looking at all the potential markets. I mean, ideally, we'd like to diversify a bit more. But if we see a good opportunity in parts of the business where we're already strong, I mean, it's going to be really depending on the return and the size of the opportunity. So we'd like to look at a larger opportunity. And that's what really my comment was referring to.

[Patrick Lemaire, President, CEO & Director]

And we'll be disciplined on that. So...

[Operator]

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

[Rupert M. Merer, Managing Director and Research Analyst]

Looking at the French wind RFPs. Patrick, I think you mentioned you've got a couple of RFPs coming up this year. And if I look at your growth pipeline, you've got, I believe, 137 megawatts of wind in advanced stage and a little bit more at mid stage. Those mid-stage projects, are you comfortable bidding those into the RFP? How much do you think you have ready to bid into the French RFPs?

[Patrick Lemaire, President, CEO & Director]

Thank you, Rupert. Typically, it's a very sensitive question in term of competition because we're all looking to the others in the French market. So we'll not go into -- I will not give you details.But generally speaking, the criteria of acceptance to an RFP in France are criteria of advanced project in Boralex pipeline, but not all advanced projects are -- we're not bidding them at -- are not -- sorry, are not in line with the criteria. And so we will try to maintain the pace, and we are -- we should do that to continue the -- playing all the different RFPs. But yes. It's very sensitive to give a figure.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. And with your current development cycle, how long would it take to move projects from mid-stage to advanced stage, typically?

[Patrick Lemaire, President, CEO & Director]

From mid-stage to advanced stage, I would say between 18 to 36 months, depending of the project. Really, it's variable. But this is typically the period. It depends really of the local acceptability of the project or the challenge with the environment or things like this or sometimes also grid connection could be a challenge in some area.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. And then secondly, last year at your Investor Day, you walked us through plans to move more of your turbines to self-perform and you talked a little about reducing operating costs in your prepared remarks. Wondering if you can give us some color on what percentage of your fleet do you think you can move to self-perform over the next, say, 1 and 2 years?

[Patrick Lemaire, President, CEO & Director]

Okay. Generally speaking, we are working on -- I will say the same than Bruno. We are working on a significant asset in Canada for the moment. But it depends of the acceptance of the financing part of the banks who have financed the project. But we are confident on this, and we're working around on some assets with -- which are the [ Seigneurie ] assets in France that we bought through the Kallista deal 2 years ago and so this is around -- I will -- Stéphane will come to you with the exact figure, but we have something planned for Q2 and Q3 this year.

[Stéphane Milot, Director of Investor Relations]

It's hard also, Rupert, to give specific figure on what we are expecting because -- to put it simply, I think we're looking at everything we could in-source, that would make sense, we will do it. So -- but I'll try to give you -- get back to you with some sort of...

[Patrick Lemaire, President, CEO & Director]

Yes. And just a last point on the French part. Before the refinancing, we were stuck some time with the financing facilities. Now we have the possibility to negotiate because it's in the refinancing terms and condition. And as Stéphane said, we're doing the most we can to do it, but we need to have a commercial agreement with the turbine supplier. And we're working on that for the moment.

[Operator]

[Operator Instructions] Your next question comes from the line of Paul Dhaliwal from BMO Capital Markets.

[Paul Dhaliwal, Associate]

This is Paul stepping in for Ben. Congrats on a great quarter. So we were just curious, have any operating expenses emerged post-COVID from working from home, less corporate travel? And if so, are you able to quantify a run rate on savings rate moving forward?

[Patrick Lemaire, President, CEO & Director]

I can answer that because I have asked that for to start calculating. We don't have figures as we speak, but we will be glad to mention it if it's, let's say, extensive enough to be mentioned. But for sure, there are some savings that will happen during this crisis period.

[Bruno Guilmette, CFO & VP]

If I can add just one thing. It clearly depends on the length as well of the -- of this confinement period and the travel ban, for example. So we'll know more in -- I mean, I hesitate to say a few weeks or a few months even. But I think it's -- initially, the first few weeks, we had costs that were really fixed because they were already incurred. But as times go by, we'll see potentially more savings.

[Paul Dhaliwal, Associate]

Okay. That's helpful. Just one more question before getting back in the queue here. How are you thinking about the useful life of wind farms now just post repowering? If you could share a bit of color there?

[Patrick Lemaire, President, CEO & Director]

Post repowering?

[Paul Dhaliwal, Associate]

Yes. Just how are you thinking about the useful life of wind farms now?

[Stéphane Milot, Director of Investor Relations]

You mean in general?

[Paul Dhaliwal, Associate]

Yes, in general.

[Patrick Lemaire, President, CEO & Director]

Yes, In general, it's 25 years that we have -- that we -- even longer than this, but when we do our estimation, it's -- we base it on 25 years and sometimes 30, depending on the equipment. So if we do a repowering, you are good for another 25 to 30. So it resets the clock to 0 when we do repowering. It's brand-new machines.

[Operator]

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

[Stéphane Milot, Director of Investor Relations]

Yes. Thank you very much, operator, and thank you, everyone to be on this call. So I would just like to mention to you that if you have additional questions, don't hesitate, please call me at [phone]. I'll make sure we quickly answer your questions.Our next event will be our virtual AGM at 11 AM today. Our next conference call to announce second quarter results will be on Friday, August 7. And on that, I hope you all remain healthy and have a great day. Thanks a lot for being part of this call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. [Foreign Language]