Boralex Inc

TSX:BLX

Earnings Call Transcript 2019-Q4

[Operator]

[Foreign Language] Ladies and gentlemen, thank you for standing by and welcome to Boralex, Inc.'s Fourth Quarter 2019 Results Conference Call.[Operator Instructions] Please be advised that today's conference is being recorded.[Operator Instructions]I would now like to hand the conference over to your first speaker today, Stéphane Milot, Director of Investor Relations. Please go ahead, sir.

[Stéphane Milot, Director of Investor Relations]

[Foreign Language] Thank you, operator. So good morning, everyone, and welcome to Boralex Fourth Quarter and Year-End Results Conference Call. So joining me today are Patrick Lemaire, President and Chief Executive Officer; Patrick Decostre, Vice President and Chief Operating Officer; Bruno Guilmette, Vice President and Chief Financial Officers -- Officer, sorry; and other members of our management and finance teams.Mr. Lemaire will begin with comments about the highlights of the year and the fourth quarter. Afterward, Mr. Decostre will provide an update on development production and optimization. Mr. Guilmette will carry on with the financial highlights, and then we'll be able to -- available to answer all 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 security regulators, which can be -- can materially change our estimated results. These documents are all available for consultation at 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 presentations are all available and posted on the Boralex website at boralex.com under the Investors section. If you wish to receive a copy of these documents, please contact me.So Mr. Lemaire will now start with his comments. Please go ahead, Patrick.

[Patrick Lemaire, President, CEO & Director]

Thank you, Stéphane. Good morning, everyone. 2019 has been another strong year for Boralex. I am really proud that in the first year of our strategic plan, we more than doubled our AFFO, which reached $120 million on the 2023 target of $140 million to $150 million. This came from the strong -- from a 39% growth in our EBITDA and the initial positive effect of around $2 billion in refinancing completed during the year.2019 also marked the return to more normal wind condition in France. Fourth quarter was particularly strong with a production of 15% higher than anticipated in France.In 2019, we had good result with our submissions in response to requests for proposal in France, winning more than 100 megawatt. We also got the green light for the 90-megawatt Limekiln project, and we quickly set up a U.S. team to submit a bid for 180 megawatt of solar projects.We have a solid growth path and can count on the strong pipeline to reach our 2023 target of 2,800 megawatt. Patrick Decostre will give you more information on this later.I will now report our progress towards the 4 orientation of our strategic plan, starting with the growth orientation. In 2019, we've commissioned 4 wind projects for 69 megawatt and 2 hydropower station for an additional 26 megawatt. As mentioned before, we also added projects to our growth path and pipeline.Switching now to our diversification orientation. We are waiting for the result of our 180-megawatt bid in the New York State solar RFP and remain confident about the outcome. Our development team in the U.S. and France are making really good progress with more projects expected to be added to our pipeline in the future.We are also expecting some development in the near future on the customer orientation in both Europe and North America as we are at advanced stages of negotiation with some corporate customer.In terms of optimization initiative, the highlight was definitely the closing of our $1.7 billion refinancing in France. On top of freeing up $180 million of cash to reduce our corporate credit facility, this transaction will generate recurring interest saving of about $15 million a year.In conclusion, for my part, we are very happy with the result and progress we are making in the execution of our plan. We remain confident for 2020. We have a solid and agile management team, dedicated employees and a clear action plan. Everything is in place for us to continue to execute our plan like we did in 2019.I will now let Patrick cover development operations and optimization. I will be back later for the question period.

[Patrick Decostre, VP & COO]

Thank you, Patrick. Good morning, everyone. I will start by talking about the new way we are presenting our pipeline and growth path. In order to give greater visibility to our development initiative, we are now presenting our pipeline based on specific criteria used in our development process rather than just time as we did before. This has resulted in some changes in total megawatt per stages compared to the pipeline presented in the third quarter. But it will be easier for you to follow our progress going forward.With this change, we have also introduced a new stage called Secured. This stage include projects which have been awarded a contract, PPA or REC; or as in the case of Scotland, where permits have been obtained. These projects are not yet totally ready to be built but are close to getting all the authorization needed to get started. This new stage was added to our growth path and resulted in the addition of 167 megawatts at year-end.Our growth path also now shows the gap required to reach our target of 28 megawatt in 2023. This gap is 535 megawatt now, but could be reduced with the expected results from our U.S. solar bid as well as recent and upcoming bids in France.Turning now to production. In Canada, wind production in the fourth quarter increased by 4% compared to last year, coming mainly from the commissioning of our Moose Lake wind farm in BC. Comparable production was pretty much in line with last year and with anticipated production.In France, wind condition were much better than the fourth quarter last year, resulting in 17 growth -- 17% growth over the last year on a comparable basis and 31% growth overall. As mentioned by Patrick at the beginning, comparable production in France was also 15% higher than anticipated production for the fourth quarter.Overall, total wind production for the quarter, combining Canada and France, was 16% higher than last year and 5% higher than the anticipated production. On a comparable basis, production was 8% higher than last year and 6% higher than anticipated.Turning now -- turning to hydro now. With the commissioning of Yellow Falls and reopening of Buckingham, Canadian hydro production was 77% higher than fourth quarter last year. Comparable production was in line with last year, but 12% lower-than-anticipated production.U.S. hydro was up by 3% over the quarter -- the fourth quarter last year and 23% higher-than-anticipated production.In summary, total production for the quarter was 17% higher than last year and 5% higher than anticipated.I won't cover in detail our 2019 full year production, but I would like to highlight that wind production is in line with anticipated production in France and 4% higher in Canada.I would also like to highlight that wind production from assets acquired in 2018 is 9% higher-than-anticipated production in Canada and 2% higher in France.In terms of optimization, I would like to mention that we successfully in-sourced maintenance contract at site totaling 211 megawatt. In-sourcing of maintenance is a major strength of Boralex, and we are planning to continue this trend in the coming years. As mentioned before, repowering is also a good way to optimize the output at specific sites. Shortly after the end of the third quarter, we restart production at our Buckingham hydro power station in Québec.As mentioned before, capacity has doubled at this facility going from 10 to 20 megawatt and adding about $5 million in annual contribution to EBITDA. The next in line is our Cham Longe repowering in France, which we expect to complete in the second half of 2020. I will provide more information on optimization in coming quarters.In conclusion, for my part, 2019 was a good year in term of operation. As mentioned by Patrick and highlight with our pipeline and growth path, we're in a very good position to pursue our growth. This completes my part.I will now let Bruno cover the financial portion in more detail, and we'll be back for the question period.

[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. As mentioned by Patrick Lemaire, we more than doubled our AFFO in 2019, reaching $120 million compared to $59 million in 2018. In the fourth quarter alone, we improved AFFO by $24 million. Our dividend distribution ratio now stands at 50%, which is right in the middle of our 40% to 60% target.Our net installed capacity stands at 2,040 megawatt. And with the growth path and pipeline presented earlier by Patrick Decostre, we are very confident that we will reach our 2023 goal of 2,800 megawatt.As Patrick Lemaire gave you a good idea of our main achievements for the year, I will review our quarterly results.Fourth quarter revenues followed pretty much the same pattern as production presented by Patrick Decostre with growth compared to last year coming from the wind sector, but also a good performance from our hydro sector following the reopening of our Buckingham power station, the commissioning of Yellow Falls and a good performance of our U.S. operations.EBITDA increased from $121 million in the fourth quarter of last year to $165 million this year. EBITDA for the wind sector was 31% higher than last year. And hydro EBITDA more than doubled, going from $8 million last year to $17 million this year. The $6 million gain on the sale of land in Scotland also explains part of the increase.Moving to cash flow. We generated $119 million of IFRS cash flow from operations in the fourth quarter, up by 68% compared to the same quarter last year. AFFO increased by $24 million or 56%, going from $44 million in the fourth quarter last year to $68 million this year.Finally, our financial positions remain solid, with our net debt to total market capital ratio down from 65% on December 31, 2018, to 56% on December 31, 2019.In conclusion, we delivered strong growth compared to last year. We maintained disciplined financial management and optimized our capital structure with over $2 billion in refinancings, which will generate recurring benefits. We continue to make good progress in the execution of our financial objectives. Our teams are focused on growing our pipeline and strategically bidding projects in response to requests for proposals. And we have a solid balance sheet, and we are looking for accretive transactions in regions and technologies that we know well.Thank you for your attention. We are now ready to take your questions.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from Rupert Merer from National Bank.

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

Wondering if you can give us a little more color on what's going on with the Moulin de Lohan project. So you took a write-off on the project, but what's your view on the potential for recovery of that value, either through building the project under future RFPs or having some kind of claim against the loss?

[Patrick Decostre, VP & COO]

Okay. We are waiting for a decision on the appeal in the second half of 2020 from [ council ] data. And we will bid the project in an upcoming RFP depending on the condition to bid, but the project will be accepted through this. And the project could be commissioned 2 years after getting a PPA and a favorable decision on the appeal.

[Patrick Lemaire, President, CEO & Director]

Rupert, if ever, let's say, the result of the appeal is negative, then for sure, we will look at doing some procedure against the government that gave us initially the permit. But we're confident the appeal will be positive for us.

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

Okay. And when you rebid that project, what are the opportunities for getting a decent return somewhat like what you would have expected initially? And I imagine there's a bit of a sunk cost here, so you have the ability to bid fairly aggressively.

[Patrick Lemaire, President, CEO & Director]

What I'm going to say that we were conservative, let's say, negatively for us. So we took a lot of value out and not to do another write-off later on. So this is the way we've done it. And for sure, we'll do everything in -- that we have when we'll be, let's say, reengineering the project to bring back as much value with new turbines and things like this, so that we hope we'll be able to recover some of that write-off.

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

All right. And then if we can turn to New York, wondering if you can give us some thoughts on what's happening in the market there? I see there are some potential changes to the regulatory environment, both pros and cons. The government seems to be looking to speed up construction, but there could be some changes to the capacity market there as well. And then just to top that off, if you could talk about the outlook for contract awards in New York?

[Patrick Lemaire, President, CEO & Director]

Okay. I'll answer your last question first. For contract awards -- it's a new market for us, so we're anxious and we thought we would know prior than where we stand today. So that's what I can tell you. And like I'm mentioning, we're learning this new growth state or opportunity for us. So -- and we remain confident that we will be successful on some of our -- let's say, some of our bids over there. And for the regulatory changes, we don't see anything that will impact us, so...

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

Do you have a sense of the timing on project awards?

[Patrick Lemaire, President, CEO & Director]

As soon as possible. So that's the only thing I can answer you. Initially, it was supposed to be the end of the year, and we had some rumors it would be beginning of the year. And we're 2 months out in the year, and it has not been announced. We don't exactly know why it's not being awarded yet, but we're waiting and learning.

[Operator]

Your next question comes from David Quezada from Raymond James.

[David Quezada, Equity Analyst]

My first question here, just on the -- I think you mentioned your negotiation for -- with some corporate customers for power purchase agreements. Wondering if you can provide any color or context on maybe the length or pricing of those contracts relative to what you've been getting or maybe some examples of contracts that have happened in the market so far?

[Patrick Decostre, VP & COO]

Yes. Indeed, we are, especially in France, negotiating on the assets, which are -- or with -- that will finish their initial PPA contract. And today, we are negotiating between, say, 3 to 8 years of duration on this asset. And the price of the electricity is in line with -- for the first year with the quotation of baseload electricity price in the market or a little bit higher, thanks to the green value of the asset. But we cannot compare on the long term because there is no quotation over than 2 years.

[David Quezada, Equity Analyst]

Okay. Great. That's very helpful. And then just one other question. I think some of the projects you have in Scotland, aside from Limekiln, I'm just wondering if any of those are getting close to development or if there's been any progress there?

[Patrick Decostre, VP & COO]

They are developing, and we will inform you when they will be authorized.

[Operator]

Your next question comes from Mark Jarvi from CIBC.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I just wanted to talk on the discretionary cash flow. What would it have been on a normalized basis this year? And then as you think about the interest savings, you're pushing -- getting a lot closer to your target. And is that something you guys would revise higher potentially? Or maybe just kind of comment on where you think you are on a normalized basis on the path to the $140 million to $150 million?

[Bruno Guilmette, CFO & VP]

By normalized, you mean including...

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Weather including -- yes, sort of right around LTA or your anticipated generation levels.

[Bruno Guilmette, CFO & VP]

Yes. I'm not going to give you a number, right, off the top of my mind this morning. But something potentially we can work on for the next quarter. But -- I mean, in terms of revision, so -- the other part of your question. Think as I've mentioned last year when we presented initially our plan, we need to see how we progress along the plan. We've given a range of AFFO for our 2023 target. We're -- as you can see, we're well on our way to that number already. And -- I mean, during the course of the year, if we see that things are progressing well, we'll introduce a revision as needed and when we get more comfortable with -- especially with this year's results.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

So when you set the guidance last June, would you say that the refinancings that you've completed have been more positive than expected? So lower -- or sort of greater interest savings than you would have anticipated when you set guidance?

[Bruno Guilmette, CFO & VP]

Yes, that's fair.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then maybe just on the growth path basis, for Patrick -- one of the Patricks, but you've added some projects here. But by my calculation, there's still maybe about 64 megawatts of projects that were successful in the RFP that haven't made it on to identified growth path. Maybe just talk about when you think those can come on and what's required if it's for their permits and what stages those projects are at?

[Patrick Lemaire, President, CEO & Director]

Yes. We're working on the authorization, essentially, of this project. And we will come back when -- again, when they will be authorized, definitely. I cannot give you a precise date for that.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then to pick up on a comment that Bruno said at the end of his prepared remarks around accretive acquisitions. I mean, today is not the day to talk about this, given where your share prices moved, bad markets. But given where the share price had run up to, did access to the equity markets make it something more you're considering in terms of doing acquisitions?

[Bruno Guilmette, CFO & VP]

So acquisitions -- as you all know, I think the acquisitions are not generally included in our -- in the plan we presented last June. But if we see the right opportunity that brings good returns or if we have savings that we can do on the production side or a good development pipeline in a fairly -- in a potentially significant transaction, we'll certainly look at it. And yes, I mean our -- the access to market at the price of the share is some consideration we need to -- we always have in mind. So -- I mean, as you said, the markets are pretty windy today. So we'll see where we end up. But certainly, it's a good currency if we want to make a larger acquisition.For smaller things and to fund our strategic plan, as we've mentioned in the past, we're not expecting to have to do a share issue in the -- stock issue in the short term.

[Operator]

[Foreign Language] [Operator Instructions] Your next question comes from Sean Steuart from TD Securities.

[Sean Steuart, Research Analyst]

A lot of my questions have been asked. One topic I'd like to discuss, one of your peers has established a relationship with Hydro-Québec and it's been well received by the investment community. I'm wondering if you can comment on the relationship with the case and how collaborative that relationship is with respect to discussing growth initiatives beyond just the equity position they have in Boralex?

[Patrick Lemaire, President, CEO & Director]

As everyone knows, la Caisse is -- let's say, likes large investments. So this is -- we've been looking at different projects with them. And we have not seen the right fit up to now. But like mentioned earlier, we were, let's say, calm on -- pretty calm last year on M&A. And so this year, we're going to look more at M&A. But just to repeat what Bruno said, if we do any M&A, there will need to be, let's say, substantial synergies, either development synergies or operational synergies if we do some acquisitions. So -- and the stock at where it was, let's say, few hours ago, for sure, it was a good tool for us to look at the M&A. So we'll see where we end up in the next few days, so...

[Operator]

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

[Nelson Ng, Analyst]

Sure. So I was just following up on Mark's comment on the guidance. So if you guys achieved $120 million of discretionary cash flow in 2019, you add the $15 million of interest cost savings. And then, I presume there's additional savings from the -- from in-housing the O&M activities. Like, you're getting pretty close to the bottom end of that range. So was there any -- other than the land sale in 2019, was there any kind of one-off items that helped discretionary cash flow in 2019?

[Bruno Guilmette, CFO & VP]

Well, we certainly had a little bit of -- it was a help from Mother Nature. And as you know, this comes and goes. So we certainly want to remain conservative as we -- it's hard to predict from one year to the other how it's -- the results are going to be on the -- especially on the wind side. And the rest is on the development side. We hope to be successful, and we forecast a certain sort of ratio of potential additional megawatts. And as I've mentioned, we'll review it when -- we don't expect to reach the range this year. I mean, that -- certainly, guidance I can give. And we'll see for -- during the year, how we progress. And if we need to revise the range, we will provide that information in the future.

[Nelson Ng, Analyst]

Okay. And then a few questions for the Scotland project. Can you talk about the next steps for Limekiln in terms of -- will you start -- do you need a contract before you start construction? Or would you kind of start construction and look to obtain a contract before you complete the project?

[Patrick Lemaire, President, CEO & Director]

We'll -- we don't need a contract, but we need the financing. So this is to answer it. If we can finance it without a contract, we'll do so. If not, we'll try to get a contract, so a corporate PPA for that asset because the next step is finalizing engineering and looking at financing. That's the only thing, and get the green light from the Board with, let's say, a model, so...

[Nelson Ng, Analyst]

Okay. Got it. And then in terms of the land sale, like -- is there other land to sell? Or was that the one piece -- you're even now kind of looking to sell? And then related to that, like -- is there a big piece of land where you could retain -- like, where you retain the development rights on it or not?

[Patrick Decostre, VP & COO]

No. There was no development on this land, and it's the last that we are selling from some lands we acquired in 2016, so...

[Nelson Ng, Analyst]

Okay. Just one last question. In terms of in-sourcing O&M for about 211 megawatts, could you give a rough number in terms of the -- I presume there were some cost savings, whether it's like an absolute number or a percentage of cost savings? I think what was previously discussed was somewhere in the 20% range or a little bit higher, but is that in the ballpark?

[Bruno Guilmette, CFO & VP]

Yes. Won't be long, Nelson. Just it's not necessarily something that we disclose. We -- I don't know -- Patrick, do you want to mention kind of a ballpark figure? It's part of our result. It's part of our EBITDA, but not that material at this point, but enough to talk about it.

[Patrick Lemaire, President, CEO & Director]

Yes. For this year, because it was -- we took over at the end of the year, so -- for the new facility. We took some over last year. This is the Ontario asset that we got benefit this year. And if we give you an indication, it would be in percent saving of maintenance, not -- we don't want to mention dollars. And I don't know if Patrick knows the percentage -- I don't know, so...

[Patrick Decostre, VP & COO]

But I have an idea, but I think it's not -- it's a very competitive data. And this is a part of our strength, and I don't want to disclose this. I can just tell you -- another comment is that it's not just a cost reduction, it's also an improvement of the operation of the turbine. Typically, alignment is -- of the turbine with the wind is -- better performed. And then the -- this is also a gain that we see already in France and that we see in Thames River and that we will see on the next project here in Canada.

[Operator]

We have no further questions. I turn the call back over to presenters for closing remarks.

[Stéphane Milot, Director of Investor Relations]

All right. Thank you very much. So thanks, everyone, for your attention. If you have any additional questions, please call me at [phone]. I'll make sure we quickly answer your questions.For your information, our next event will be the first quarter results conference call, the day of our AGM on Wednesday, May 6. And that's it for us. So have a good day. Thank you.

[Operator]

[Foreign Language] This concludes today's conference call. You may now disconnect.