Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's Conference Call for the 2018 First Quarter Results. [Foreign Language] [Operator Instructions] I would like to remind everyone that this conference call is being recorded.I will now turn the conference over to Karine Vachon, Communications Director. Please go ahead, Miss.

[Karine Vachon, Director – Communications]

Thank you. Hello, everyone, and thank you for joining us today. I'd like to specify that this conference will be held in English. Members of the media are invited to ask their questions by phone after this call. This call contains forward-looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions on which forward-looking statements are based are reasonable under the current circumstances, listeners are cautioned not to rely unduly on these forward-looking statements as no assurance can be given that it will prove to be correct. Forward-looking information contained herein is made as of the date of this conference, and the corporation does not undertake any obligation to update or revise any forward-looking information, whether as a result of events or circumstances occurring after the date hereof, unless so required by law.During this call, we will refer to financial measures that are not recognized according to International Financial Reporting Standards. Please refer to the Non-IFRS Measures 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.I'll now turn the conference over to Mr. Perron.

[Jean Perron, Chief Financial Officer]

Thank you, Karine. Good morning. For the 3-month period ended March 31, 2018, production was 96% of the long-term average, due mainly to lower production at most of the hydro facilities in British Columbia, some challenging post-commissioning activities that are being addressed at Mesgi'g Ugju's'n and Upper Lillooet facilities, lower wind regimes in Québec. And all of these were partly offset by above-average wind farms in France, where production reached 106% of the long-term average. Overall, production increased 57% compared to Q1 2017, mainly due to the commission and the acquisition of Alterra in February 2018, the acquisition of the wind facilities in France in 2017 and the completion of the Upper Lillooet and Boulder Creek hydro facilities that were commissioned in 2017 and better overall performance from the other facilities. Revenues for the quarter were $43 million higher than in 2017. This 58% increase is attributable mainly to the commission [ contribution ] of the acquisition of Alterra and wind facilities in France in 2017 as well as through higher production at the Mesgi'g Ugju's'n facility and higher production at all of the French wind farm facilities, partly offset by lower production at the British Columbia hydroelectric facilities. Adjusted EBITDA for the quarter was $28 million higher compared to Q1 2017 due to the increase in revenue explained, but partly offset by higher operating general and administrative expense due to the higher number of facilities in operations. Adjusted EBITDA proportion stood at $85 million, an increase of $32 million over Q1 2017. Finance costs were higher by $16 million. Depreciation and amortization were higher by $9.6 million. These are mainly due to the acquisition of Alterra in 2018, the French wind farms in 2017 and the commissioning of Upper and Boulder Creek facilities in 2017. Share of earnings of joint venture and associates are higher by $2.4 million, following the acquisition of Alterra, who owns 8 investments in joint ventures and associates. But the most important element is the unrealized derivative financial instrument loss, which has a negative impact of $17 million. This really explain why the net loss increased by $12.1 million compared to 2017. So this unrealized derivative financial instrument with loss of $17 million is, again, a noncash element and is not really meaningful for the results of operation from our facilities. Our trailing 12 months free cash flow ending on March 31 reached $96 million compared to $74 million for the comparative period in 2017. Our payout ratio improved to 79% compared to 95% in 2017. The improvement is mainly due to the recent commissioning of Mesgi'g Ugju's'n operated with Boulder Creek, again the wind farms facilities acquired in 2017, which all of these generated higher free cash flow, partly offset by higher dividend payments as a result of the issuance of 24 million shares related to the Alterra acquisition and higher dividends per share that were paid. Since the beginning of Q2 2018, our production has been on line with long-term average. This concludes my review of the results. I'll be happy to answer any question you might have during the call. And I'll now leave it to Michel.

[Michel Letellier, President, CEO & Director]

Thank you, Jean. Good morning, everybody. As you might have seen yesterday, we have been busy with our Annual General Shareholder Meeting, and also we had the opportunity to press release some activities that I'll go through. But just to follow up on a little bit of how I usually do the presentation, I'm going to talk briefly on the operation. As Jean said, we have had some issue in Upper Lillooet. You remember that we had put this project in line last year. We've been working on improving the machine and the water intake last year and last winter. So, so far, we're quite happy with the result. Production is now at full capacity in Upper Lillooet. Obviously, we will have to work throughout the next few months to make sure that we adjust the methodology of passing the flow in our intake and managing the sediment in Upper Lillooet. But so far, I think we are on a good path. We also changed the shaft seal that had created so much problem last year. We changed that from a much different seal that will sustain abrasion from the sand. So quite optimistic on Upper Lillooet for the remaining of the year. But it's a plan that will need a little bit more attention than some others. We'll adjust to make sure that we take the full advantage of this nice project. In terms of Mesgi'g Ugju's'n, the turbine manufacturer is working very well with our team, technical team. We have a clear path towards improvement. We have seen a good improvement. And as you remember, our contract is protecting us in terms of downtime and some adjustment that the turbine manufacturer is going to do in the next month. And also we have a plan to retrofit some electrical component next summer year in 2019. Again, our contract is protecting us in terms of downtime. So all in all, quite happy with the update that we have done in these 2 plants to improve the long-term forecast. It's something that we're following up, of course. In terms of other operation, we were happy to see HS Orka in Iceland coming back to the budgeted production in Reykjavik. I'm very sorry, it's going to take a little bit of time for me to get accustomed to those names. But anyway, we are back to about 90 megawatts of production, 90 megawatts to 95 megawatts of production in Reykjavik #1. So quite happy on that fact. So the management over there is working hard towards the expansion plan also. We have this option to build a 30-megawatt plant, taking advantage of the residual heat, so it will be a low-pressure system. So working with management to plan this project, which is totally permitted. So working towards having this project going forward in the next year or so. But in terms of development, I guess that one of the nice thing we've done also on the quarter is to put the project, the 200-megawatt Flat Top project, on time and on service. Very good happy ending with the contractor and all the suppliers. So that's the type of project we always like at Innergex to be on time and on budget. And so far, everything is going fairly well in Flat Top considering the recent commissioning. No issue whatsoever that has been raised to -- that could be material considering the early COD, not early COD, but since the plant is online. So quite happy on that aspect. But if we [ stick ] to Texas, I think we've done a big milestone and very happy to report the PPA that we signed for Foard City. Foard City is a 350-megawatt wind project in Texas. So now we have this milestone achieved, so that means that we can negotiate with tax equity provider and back leverage provider and construction financing. So all that is being underway. Quite excited about this project. I think that you had asked a few question towards Jean and myself after the news, but we are a little bit reluctant to give all the final details because we're still negotiating with the supplier and the contractor. But in general term, quite excited about the project cost, which should be below $400 million. For a 350-megawatt project, that's quite amazing. And the utilization factor should be higher than 45%. So all in all, it's a quite attractive terms in terms of cost and production. So I think that this project will generate a good return for Innergex in the future.In terms of other development, the small 10 megawatt in Iceland, the construction is going as planned. So the project should be in line by 2020. So construction has started there. No big issue. In terms of other development, I think that the Chile announcement that we have made yesterday, for us, it's -- we're very happy first to have been able to secure this venture and those nice 2 hydro facility. But perhaps, I'll give you a hint of why we like Chile. I think we've mentioned it in the past, but the basis why we really like Chile is the fact that we think that Chile has a marginal cost to produce electricity, which is quite higher than other places in the world. Chile doesn't have fossil fuel, it doesn't have oil, it doesn't have natural gas. It has a little bit of coal, but it's a poor quality coal that cost quite a bit to extract. So they mostly import any fossil fuel to produce electricity. So that means that their cost to produce is higher. As an example, they have to bring their natural gas in LNG form. Even though there's improvement in the cost of LNG around the world, it still costs more than just having a pipeline delivering the natural gas. So as an example, in Chile, it's very common for a company to pay their -- for their natural gas something around $8 to $9 per gigajoule, versus here in North America, right now the price of natural gas is around $3.5, $4, $5 gigajoule delivered depending on where you are. Obviously, there's some constraint in wintertime or in peak of summertime. But in general, the cost of natural gas is much higher in Chile. So hence, the marginal cost to produce electricity is higher. Just to give you an example, the last 2 years have been fairly slow for the Chile economy. Remember that Chile economy is linked a lot with the commodities, mainly copper. Chile is one of, with Peru, one of the biggest producer of copper around the world. So the last 2 years have been quite slow on that. And we've seen the price of -- the merchant price in Chile not going down more than $55 to $60 per megawatt hour on an annual basis. So the philosophy or the thinking behind Chile is that there's kind of a floor where the cost to produce electricity is permitting us to build new and to acquire renewable energy and be still profitable at the forecast future price around $45 to $55 per megawatt hour. So that's the basis where we find ourselves comfortable in investing in Chile. There's also one thing that makes hydroelectric in Chile interesting is the fact that the system administrator is providing a capacity to the hydro facility, a capacity payment, which is about close to $100, well it's $8 per kilowatt per month so that's about $96 per year per kilowatt of capacity that the system recognize on hydro facility. As an example, the Duqueco acquisition that we've made out of the 140 megawatt installed capacity, the system recognize the capacity of about 62 megawatts. So it's roughly about $6 million of capacity payment on an annual basis, which is regulated. This is how the system recognize the incremental capacity in the system from the hydro facility. So this is also a very good support for hydro in Chile. We think that, that gives a financial benefit to the hydro that makes them still competitive in Chile. We also think that the Chile economy will pick up eventually. Chile economy and the actual government is pro-business. We've seen some improvement lately and the price of copper have gone up over $300 per ton, which they're coming from $200, $210, $225 in the last couple of years. So that has kind of spurred a little bit more activities in the mining sector, which is a good sign for Chile. To make a long story short about the partnership that we have entered in Chile is that we're getting into a partnership with Energía Llaima, a very young and dynamic company that have been involved in the last 4 years, 5 years in renewable energy. It's not the fact that they're quite big in renewable energy, it's the fact that they have a very strong base of shareholder that have extensive knowledge of the industry, politics and community in Chile. So for us, it was a great match because we are bringing some good knowledge and engineering in the renewable energy. They have a good team over there, but they certainly need some support in order to build out their portfolio and to acquire new facility. But ourself, we are gaining a strong long-term partner that has independent knowledge of Chile and Latin America. So that's -- this is what we were looking for, shareholder that are long-term player in their country and that have and share our vision of long-term and sustainability investment in the community as well. So it's a perfect match. So we have these guys supporting us in the development in Latin America. They have a portfolio of 2 existing facility. They have a 34-megawatt solar project that they are selling hot water to a copper mine on a long-term contract basis. They also have 12 megawatts of hydro facility operating since about 4 years, 5 years. So they do have some operating activities, and they have an extensive pipeline, which compromise of the biggest project they have is a 110-megawatt hydro facility called Frontera in the -- on the Biobío River, one of the biggest river in Chile. And they have also a 15-megawatt, 16-megawatt Canelo project and hydro facility, and both are shovel-ready. We're looking into long-term potential PPA with some player over there, talking with banks to get financing. So these projects are shovel-ready. We need a little bit more discussion on the final [ shovel ] side and to secure some contract in order to start construction. But it's a very good start. And they have also an extensive pipeline of project that are a little bit less advanced in the development. Nonetheless, very promising. But the jewel of this trade is their ability to have bringing us to bid into 2 existing facility, the project are called Duqueco. It's a 140 megawatt hydro facility compromised of two, one 85 megawatt and one 55 megawatt. The nice things about that project also is that they have reservoir upstream that can supply about 4 hours to 6 hours of full capacity for both plant. So this is a very nice jewel in an open market, so that means that you can displace the energy during the day and sell it at peak during the day. So theoretically, you can generate more revenue out of the system than just run a river hydro facility. They were very well built, they've been operating since early 2000, so they have been seasoned. We visited them with our technical team, and we are very happy on the quality of the asset. We think we can improve a little bit also on the operation by putting a little bit more automation and making sure that we apply the same standard that we have here in Canada. So we think we can improve a little bit on that side. We think we've done a good transaction, paying $220 million of total enterprise value. A good leading bank in Chile has provided project finance for about $140 million on that asset on a nonrecourse basis. So all in all, we feel that this is a very strong hold to or strong asset to start our activities in Chile. I'm sure you'll have some more question, but those are the biggest line that I wanted to share with you. So on that note, I think we can open up the question.

[Operator]

[Operator Instructions] Your first question comes from the line of David Galison from Canaccord Genuity.

[David Galison]

So my first question is just on your entrance into the Latin America market. When you look at the risk-reward of the area and now you've mentioned Chile is a good area. But when you look at the other areas, are there any areas where you are focused? And maybe can you talk about some areas maybe that you would not want to enter?

[Michel Letellier, President, CEO & Director]

That's a good question. We've mentioned that we are still looking in Peru. Peru has had a little bit more challenge lately, politically. So that's one of the issue we're having is that any discussion we're having with government regarding to project that have existing PPA, but somehow, somewhere, need some administration or delay being granted to do those PPA, nothing is moving on that sense in Peru lately. They just changed their President. So it's a little bit more difficult to advance projects, so hence, our ability to finalize some discussion with potential partners that we have. So Peru is a place where we would like to be active as well. Panama could be also another place that we feel secure enough. Columbia is a little bit more complicated and I'm not so sure that we're so interested. Brazil is huge, but we don't seem to have a handle there. It's just baked in many, many players, so we don't see where we can add value. Argentina, eventually, is a place where there's a lot of possibility. But for now, their financial position as a country is very challenging. So that's why we have looked into Chile and Peru as our first preferred market. Panama, like I said, could be something, but Panama is a very small market. You remember that we've looked in Mexico. It doesn't mean that we will never go back to Mexico, but we have had a hard time finding ourself comfortable with the return versus the risk that we were taking in Mexico. So I don't know, David, does that give you enough flavor?

[David Galison]

It does. Thank you. So just on Foard City then. And I know you're still under discussion, but with the lowering of the tax rate, just wondering what you're seeing as the dynamics with the tax equity market as you're looking to secure financing for it?

[Michel Letellier, President, CEO & Director]

Well, actually we've seen last week was a big event in Chicago, and the financial team attended that conference. And we have had some very good discussion with a lot of tax equity providers. The appetite is still there for good project. We're utilizing top-notch suppliers. So I don't see any big issue. I think that we can manage a fairly good price with them in terms of yield that we expected. We are talking with the same usual suspect that have supported Shannon in Flat Top and discussion are under way. We don't see any reason why we wouldn't be able to have a good transaction there.

[David Galison]

Okay. And this former question, and Alterra now that it's under your control, are you seeing any additional opportunities that you could maybe help simplify the business or improve it? I know you've been looking at refinancing some of the debt, but is there anything else that you see as opportunities?

[Michel Letellier, President, CEO & Director]

Well, I think, that Foard City, as an example, is a great opportunity. I think that both team worked very well together to improve the Foard City financial both in potentially -- potential financing, but also on design and engineering of the wind farm. I think that the combined force of Innergex and Alterra has brought the price down tremendously. Like I mentioned, we're very confident that the total construction cost, including our soft costs, everything included, will be below $400 million, and the project will produce more than 45% of utilization factor. So it's something over 1.4 terawatt hour or 1,400 gigawatts. It's a big production. This relation, this ratio of cost and production is amazing to me. So I think that we have created quite a bit of value there. Iceland, also, I think Iceland was undervalued quite a bit in the balance sheet of Alterra. We're still talking to our partner for the Blue Lagoon. The Blue Lagoon is doing great. We just put a new hotel in service last month. So I think that our partner would love to see the results of that first --the first year results of this hotel before coming back to the market. But I think that the discussion is constructive to see, to unlock the value of the Blue Lagoon. Remember that it's close to about $100 million value, easy, that is hidden in the balance sheet of HS Orka that we -- it's not showing in a full value, I would say.

[Operator]

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

[Nelson Ng, Analyst]

I just have a few questions on Energía Llaima. In terms of the valuation, I believe the implied valuation is about USD 110 million. But how did you -- what was your approach in valuing the company? And what was the rough, I guess, allocation between the operating assets, the shovel-ready assets on the, I guess, earlier stage development pipeline?

[Michel Letellier, President, CEO & Director]

Yes. It's a good question. What we've done, Nelson, is that we -- like everything we do, is we took all of the long-term forecasts of each of these project and apply a discount depending on the level of advancement of the project. And then we add up all the sum of these things. But theoretically, the discount for earlier-on project were something over 10%, 12%, 13% type and the operating asset was below 10%. That's the type of approach that we have done. Frontera has a very good value also. There's a little bit of -- we'll get into these a little bit more. But there's a real estate play also in Frontera because the plan will create a very nice lake, 5 kilometers by about 3 kilometers, and the project has assembled all the real estate around that lake. So perhaps a local developer could also take advantage of creating a little bit of value there. So I know that for you guys, it will be very difficult to assess if $110 million was a good deal or not. I think that we'll provide in the future some good information once the transaction will be finalized. But we didn't change our approach, Nelson. We've looked at long-term forecast, applied discount rate and probability, and come up with a single value.

[Nelson Ng, Analyst]

Okay. So when you provided the information on, I guess, the hydro acquisition, you gave the EBITDA estimate. For the 2 assets, do you have a rough EBITDA generation run rate for the 34 megawatt solar and the small hydro facility?

[Michel Letellier, President, CEO & Director]

We'll provide that later on, Nelson.

[Nelson Ng, Analyst]

Okay. Sure. And then just on the 2 Frontera, like the 2 shovel-ready projects, are they fully permitted and are you essentially just moving forward and does the economics make sense using the current merchant power price? Or are you relying on a PPA price that is a little higher than merchant's?

[Michel Letellier, President, CEO & Director]

That's a good point. Obviously, we have not finalized and a decision to start construction has not been given yet. We're sitting now with our partner and finding all the -- and reviewing all the alternative. Obviously, financing is always a big portion of this. In a perfect world, we would love to have a big portion of the long-term generation under long-term contract. But we're looking into all these possibility and the mix of possibility. What I said also is that the fact that we strongly believe that there's a floor in the spot market in Chile, so one of the assumption is to try to look at to the economics of these projects with a very conservative view on the power pricing and see if it can be built this way, too. This is a little bit of a different view or experience that we have had in the past. But it's the same basis of being conservative and making sure that we can support and cover our equity cost in such a venture. But to answer your question, yes, there is almost -- might be not as -- I'm not the total expert on permitting in Chile, but to my understanding, they are shovel-ready and they could be -- theoretically be put in construction in September or so. But we're still looking into different approach and talking to quite a bit of people in Chile in order to see -- to seek long-term PPA. But just to give you an idea, the ongoing rate of [indiscernible] is selling electricity and renegotiating PPA and -- right now. And the price is anywhere between 50-ish, to 58, 59 this is the ongoing rate right now for 5 to 10 years PPA in Chile. And remember, you have to add up the capacity payment, which is regulated payment to the hydro facility.

[Nelson Ng, Analyst]

Okay. So using the 50 to 58 plus capacity payments, the hydro projects make economic sense to move forward, right? And then it's more about I guess locking in a PPA at that range ideally and then -- before moving forward.

[Michel Letellier, President, CEO & Director]

That would be the perfect scenario.

[Nelson Ng, Analyst]

Okay. And then just moving on to Foard City. I think other IPP's in the sector but also I think one of your facilities or the Alterra facility kind of ran into some curtailment capacity constraints and basis risk or in terms of pricing. What's your view on Foard City and those factors in terms of, I guess your estimated hedge price versus realized price? And also the actual production versus the forecast, regarding constraints?

[Michel Letellier, President, CEO & Director]

All good question again. Shannon, if you're referring to Shannon, has had some quite nasty reduction in the latest risk. This is due to some big repair that are going on in the area. We were hoping to see that finalized last winter, but unfortunately, they are still working on it and apparently, they will be having some -- still some issue, not as important as in the past, but until at least next year. They are going -- they are repairing some line where apparently a manufacturing default happen on the crossbow on the line. So they are repairing that on warranty, but unfortunately, sometimes that put the system down. And further delay the full fluidity on that note. Obviously, given that experience, we have looked very closely to Foard City area, and all the experts are reassuring us that this should not happen in the area of Foard City. But of course, it's difficult to be sure at 100%, but the experts are quite positive that the node around Foard City is much stronger node and, hence, we should not experience what we have experienced in Shannon.

[Nelson Ng, Analyst]

Okay. And then just one last question. Obviously, I'm based in BC and I have seen a lot of the, I guess tragic issues relating to the BC flooding. Could you just quickly comment on whether that has impacted your facilities either positively or negatively?

[Michel Letellier, President, CEO & Director]

It's hard to find it positive in flooding. But we haven't had any issue in flooding. But as you've seen the last winter was fairly cold and a lot of snow had accumulated in the mountain range. Right now, we are having a good springtime in all over the place. Actually, we have not been flooded in any places. All the plants are running now at full capacity. So we're catching up. It's a very, for the time being, it's a very good spring. We're over our budget for April and May. April was slow, but May is really high and the end of April was good. So no issue in BC other than it's actually producing more for the time being. Very good.

[Operator]

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

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

Looking at the Duqueco acquisition, can you talk about the process? Was it a competitive process? And what put you and your partner over the top?

[Michel Letellier, President, CEO & Director]

It was a 4 people or 4 entity process. It was a reposition from a syndication of bank. What helped us, I think, was the fact that our partner had knowledge of this process really early on. And we were bang on, on the subject. They wanted to have it done quickly. And I guess, that, that helped a little bit. Some international player might not have had the time to react to the process. Just a reminder, Duke, that was an asset that was owned by Duke. They had bought it from a utility that I can't remember, but in Chile, it was owned by Iberdrola it was built and owned by Iberdrola, then sold. Then Duke bought it, but Duke bought it on a basis of something around over $480 million, if I remember well. One has to remember that the price in Chile, the electricity price in Chile following the prices of Argentina, it was in the high $120, high $140 per megawatt hour for a long period of time. So people got excited with those number, and perhaps overpaid for the asset and did put too much leverage. Obviously, this is recurrent in Chile. I think that we have some opportunity right now because some people have been burned a little bit on the market and having been probably too optimistic on the long-term forecast of the price in Chile. $130, $110 per megawatt hour cannot be sustained into this world, and people thought that perhaps Chile was very different and the price would have stayed that high for a long period of time. So a lot of opportunity are arising these days based on the fact that people basically overleveraged these asset and were overly optimistic on the long-term power curve. So that's why we -- when we're investing, we have this vision of utilizing something around $45 as a floor to give us some sensitivity view on our ability to maintain a decent cash flow out of these facility. So I guess this -- we were quick and also our partner had secured a project finance with Itau. So we were able to be firm on these 2 acquisition. And they were a bid bond of about $10 million to secure our pricing. So I guess it was a good timing and thanks to our local partner to have brought us into this bid.

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

Right. Thanks for the color. And looking at the Icelandic operations, can you talk about the performance of the geothermal in the quarter? Was it in line with expectations? And do you see any potential for further improvements in the output there, given the reinjection that was done in the geothermal field?

[Michel Letellier, President, CEO & Director]

Well, like I said, we are very happy with the result. The production now in Reykjavik is back to 90, 95. Remember 1.5 years ago, it went down as low as 70 megawatts. So now that the team has -- have refocused their energy in making sure that the field is producing and so far, we're very happy with the result. We also have drilled in other wells to have some spare steam. So basically, it will be producing at full capacity. And that unlock the value of putting the extension, the 30-megawatt, at the same plant. And now that this team has stabilized and that we are very confident that the operation now is normalized and we can think about expanding by about 30 megawatts. So this is how we see the upside on that particular plant.

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

And looking at the performance of Iceland in the quarter, it doesn't look like you included the returns from the Blue Lagoon in your financial performance. Can you give us a sense of what the EBITDA from Blue Lagoon was in the quarter?

[Michel Letellier, President, CEO & Director]

Jean, go ahead.

[Jean Perron, Chief Financial Officer]

That's a sensitive issue because as you can see, there's not a lot of [indiscernible] and it's a very sensitive issue so that's the reason why there was no really guidance about how much revenue or EBITDA were generated by the Blue Lagoon. It's kind of a pressure and that certainly doesn't help to assess a value to Blue Lagoon but like Michel explained a bit earlier that there's a very large value in Blue Lagoon, and we will try to eventually maybe extract this value.

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

So there was no earnings from Blue Lagoon included in your earnings. Was that correct? So if you do sell it, you are truly unlocking value without deteriorating the quality of your returns?

[Jean Perron, Chief Financial Officer]

Yes. So that's why the Blue Lagoon is not included either it's in the sale or the revenue, the adjusted EBITDA or even the adjusted EBITDA proportionate, it's not there.

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

All right. That's great.

[Michel Letellier, President, CEO & Director]

We'll definitely try to unlock that value. It's not that we don't like the Blue Lagoon, I think it's a great business. It's just that we're not in the business of owning hotels and spa.

[Operator]

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

[David Quezada, Equity Analyst]

My first question just on your U.S. development portfolio. And I apologize if this is something that was touched on earlier. But I wonder if you can provide us an update on Boswell Springs, and I believe there is a permitting challenge there and also the latest on Jawbone in California?

[Michel Letellier, President, CEO & Director]

Yes. Remember that I said that Boswell could be a great project? The biggest issue we're having with Boswell is our ability to interconnect on the PacifiCorp main transmission line. So we're in discussion with them in order to be in a position to interconnect. We might have to go to arbitrage with them to some degree, because they are just telling us that there is no room on that transmission line to interconnect before 2020. And yet, they are running an RFP for themselves for 1,000 megawatts. So it's a little bit frustrating. We knew that this situation was there, so that's why we haven't promoted Boswell as much as Foard City. We have concentrated ourself to make sure that Foard City was a great success. We have not thrown the towels yet on Boswell. I think it's a great location, great PPA and it's 4 PPA of 80 megawatts. Those PPA are from the [ pure positive ] so that means that PacifiCorp was forced by Foard to accept these PPA based on their marginal cost. And their perception I guess is that marginal costs have gone lower in the recent past. So hence, they would rather have a competitive bid, and that's what they did. Actually, they got about 1,000 megawatt of project in the area at probably a little bit -- a lower PPA price then the [ purple ] one. So it's an interesting discussion we are having with them and we will probably enroll FERC in order to see that our rights are protected. But would love to be able to develop this project. There's nothing wrong with the permitting around the plant. We have to permit the line between the plant and the transmission line. This is ongoing. But we should -- I don't see a big issue there. There's no -- we shouldn't have any big issue for [ perking ] that piece of line. Although it's always a challenge to permit a transmission line. But we don't see why it wouldn't be permitted. The big issue is getting an agreement with PacifiCorp for the interconnection.

[David Quezada, Equity Analyst]

Okay. That's great color. My only other question, just on the Court process that's happening right now at HS Orka. I know you got a favorable early decision there. Could you just remind us what the issue was there? And what kind of outcome you're looking for potentially?

[Michel Letellier, President, CEO & Director]

Jean will take a closer look. But it's [indiscernible] when HS Orka was sold to Magma way back when, it was owned by some municipality and there were a different pension payment or system where HS Orka thinks said that the municipality was liable to or responsible for the past experience or the amount owed to the employees, while they were honing that asset. So this is basically the quantum. I don't know exactly the amount, it's not -- it's just short of $10 million but it's all about the liability of the old employees of HS Orka that was once the employee of the municipality. So it's how, what is the responsibility to -- is it to HS Orka or to the municipality? The municipality, was saying, "Well, we sold everything", but HS Orka said, "No, no, no. You had those employees under your employment. So hence, for that period of time, you had these employees. You are responsible for their pension."

[David Quezada, Equity Analyst]

I see, and....

[Jean Perron, Chief Financial Officer]

So the agreement is in place -- technically there is an agreement between the 2 companies, it's only that the other party is contesting this agreement saying that we should not be liable for -- under this agreement. But they already lost at the first Court hearing.

[Michel Letellier, President, CEO & Director]

So we think that it's not so material and in terms of total, but we think we have a strong case and the Court has ruled in favor of HS Orka.

[Operator]

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

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just on the Duqueco hydro assets, just wondering what your assumptions are sort of on recontracting, whether it's pricing and/or how much you can recontract once those initial PPAs come off.

[Michel Letellier, President, CEO & Director]

Like I said, the PPA that have had -- the PPA that we are seeing now that are available is in the range of anywhere between $50 and $60. And this is for [ 50 ] to 10 years. That's the actual market is, plus the capacity that I discussed. So we're working on these assumptions, but in order to take our decision of investment, we also are running a potential lower case where we're utilizing about $45 per megawatt hour.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then maybe, just taking a step back here, obviously investments through Alterra asset portfolio in the U.S. or Foard City, some other projects and now Chile. If you go back a year ago, France was a fairly big focus. Wondering if you can just maybe just say where you guys are in terms of thinking of U.S. versus Chile versus France right now? They are all very valuable or if you're kind of retrenching?

[Michel Letellier, President, CEO & Director]

No, no, no. I'm sorry. That's true. I haven't spoken about France. Actually France is going great as well. We're still focusing on France now. We have 9 people in Lyon, plus the, if you remember, we have a small office of people that were -- are retained to work and develop some projects. So we're advancing with our 120 megawatts of own pipeline in France. It's nice actually now that we have more people. We can focus on different area where the guys that used to be focused in BC for hydro have less -- have more time now, so they are focusing on Chile. And a team of Alterra and our own team that were doing some project in solar and wind are focusing also on U.S. So we basically have more people being able to cover more ground at the same time. So sorry, not to have updated you on France, it's not that it's not a priority anymore, it's just that the other one were new. But we're very happy with France. And actually, we were also happy to see that the last quarter was great in terms of wind production. So France is all good actually. We're focusing there, we're seeing a lot of transaction as well, talking to local developer as well to make more joint venture with local developer. No, very happy with France. And actually if we can grow out of France towards Europe, we might utilize the team in France to do just that.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. Good to hear. And then I just want to turn to funding. On a prior call you suggested the equity for Foard City could be upwards of USD 80 million. Just wondering now with the budget you have and considerations of tax equity and back leverage, if that's still what you're targeting or if it's moved around?

[Michel Letellier, President, CEO & Director]

No, Foard City it's still the same. It can -- we could also use some back leverage to lower that amount. It depends on what would be the price for that back leverage. And also, we could probably put some pro rata equity contribution during the construction so that could delay a little bit the amount of money that we have to put upfront. And also, we are quite interested in looking into convertible debenture in the marketplace. It's still interesting to see the rates there. And we just want to make sure that we are always focused on getting a very good total cost of capital. So quite interested also on those lately.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And just one last question. And in touching with that comment on the conversion. Is there an internal target in terms of corporate leverage, whether or not it's leverage is a function of cash flow after [ sourcing [ the dividend? Or how do you guys think about how much you can lever sort of at the [ parent of the whole scale ] level?

[Michel Letellier, President, CEO & Director]

Our credit facility is roughly, without giving too much, it's something just below 5x EBITDA and distribution from the project that have some project finance. So with that, we can support something around $700 million, but mind you, that these project, that -- the line of credit is something a little bit of a different animal, because we have 13 or 14 assets, unencumbered assets, that have been granted to security under that credit facility. So we like this credit facility because it's giving us some flexibility. But we could basically put that in a portfolio and issue a long-term bond, and yet, probably even more than $700 million under these terms. So it's not -- that line of credit is not only supported by future distribution of project. It's secured by real project without any financing on them. So all in all, I think that when you look at the interim value, we're in the range of 60% leverage, 60-something percent leverage. That's something, that's a range we're comfortable. Going further could be something that we would start being a little bit uncomfortable with. But right now, and also always talking to S&P, making sure that we're not jeopardizing our S&P rating.

[Operator]

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

[Benjamin Pham, Analyst]

Just wanted to clarify some of your prepared remarks, Michel, on the currency with [ say, Foard ] under $400 million. Was that Canadian dollars you mentioned? And when you talked about Chile on pricing, was that U.S. dollars?

[Michel Letellier, President, CEO & Director]

Yes, it's always U.S. Yes, that's a good point. Ben, thank you to bring that. Chile, all the energy in Chile are traded in U.S. dollars. So that's important, so thank you, to give me this opportunity to mention it. And in U.S., of course, when I was referring to Foard City I was talking about U.S. dollar.

[Benjamin Pham, Analyst]

Okay. All right. And then can I ask you on, going back to some of the questions on Frontera and being shovel ready and hearing some of your commentary, it seems like merchant's at trough levels. There's upside to merchant [indiscernible] capacity payments, preferably you want to contract. But typically a lot of folks there tend to build merchant in the front end. So are you ruling out merchant at all at this stage? Or is it still a possibility because it seems like you guys, good expertise in hydro and looks like there's more upside to pricing than downside here?

[Michel Letellier, President, CEO & Director]

No. What I said was our local partner. We will -- if we go into merchant, we'll take all the long-term forecast under stress or sensitivity stress to make sure that we're not putting ourself in the same shoes that others have done in Chile in the past. So I guess you know my view on merchant pricing. It's -- we have to be conservative, we have to be careful whenever we're investing if there's a merchant plan. We've done it a few years ago when we bought Miller Creek. And at that time, we were utilizing $0.025 per kilowatt hour when we bought it. So far, we are about okay. We've had -- we were a little bit more conservative on the long-term forecast and also too conservative on the operating cost. So all in all, we're quite happy with the investment we did with Miller Creek. So this would be the same, if you -- meaning that if ever we take a decision to invest in a new project, and built on merchant pricing, we would be very careful on the assumptions we would be using. But I think that $45 in Chile is something that we can rely on. You will -- like I said, the last 2 years in Chile have seen price on average -- a merchant price on average between $55 and $60. And if you have ability to store water, you can make quite a bit of a difference during the day peak. It varies from -- it depends on the node, but it varies from 90, 95, [ 240 ] in a day. But even during the night, the energy seldom goes down below 40. And this is for the south portion, not necessarily the north. The north of Chile has a different dynamics, obviously. It's one of the place where in the world where you can build the cheapest solar project. But there's nobody in the north other than industrial and mining. So one of the issue with solar developer, they went there and they built out quite a big project. But the problem is that when the sun shines at 3 in the afternoon, they cannot sell the energy down south, because there were restriction in the transmission line. The government has improved this by building 1,000 megawatts of capacity line. But it's still an issue. The North and the South or the Central Chile is 2 completely different market and where we're concentrating ourselves the development of the hydro is south of Santiago, where you don't have these problems.

[Benjamin Pham, Analyst]

Okay. Thanks for that, that answer. And can I ask also any comment on it looks that you bought some stock back in the quarter. Is that more you thought your share price was attractive value? Or is that more you're deploying into dividend growth, share buyback and reinvestment in terms of capital allocation?

[Michel Letellier, President, CEO & Director]

No. We thought that you guys were quite [indiscernible]. You guys and not only you, Ben but I think we saw that the market reaction towards the acquisition of Alterra was overreacting to some degree on pricing, and we thought that it was a good thing to buy some shares back. But it's not the lack of opportunity. As you can see, we're very active, we're seeing a lot of activities. And like I said, the team that we have now in place has the ability to work in France, Canada, U.S. and now Latin America. So we're not short of opportunity. That's -- I think it's just the fact that we thought that the market has overreacted a little bit.

[Operator]

[Operator Instructions] Your next question comes from the line of Jeremy Rosenfield from Industrial Alliance Securities.

[Jeremy Rosenfield, Equity Research Analyst]

Michel, I just wanted to clarify some of the comments, and specifically the investment in Chile. In terms of the commitment for investing equity into energy, the $110 million commitment, how does that mesh with the $80 million equity commitment into the Duqueco asset? Is that asset considered part of the commitment you've made towards the partnership? Or are those separate and distinct?

[Michel Letellier, President, CEO & Director]

No, they are -- the Duqueco asset is the first installment on this $110 million. So it's not -- they are not adding up, it's up to $110 million, and Duqueco at $80 million takes a big chunk of that $110 million. Obviously, that $110 million was the commitment to reach the parity, the 50-50, and now if we have further interesting project then the partner and ourself will chip in on [ Llaima ] on a 50-50 basis.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. And then maybe if you can just discuss the timing of the -- of any investments in terms of when you have to or when you would commit that equity? So in theory, I suppose the equity, the $80 million equity would be upon closing the transaction of Duqueco, right?

[Michel Letellier, President, CEO & Director]

Yes. And theoretically, it was -- in the documentation. The target date was 60 days after the announcement. So something at the beginning of July is the target for closing. But there's a little bit of administration to be done. There's finalizing of the purchase settlement agreement and these little things. So 60 days is the target. I'm hoping we will be able to do it in that time frame. But it could slip a few weeks.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. And the investments in the working capital, is that immediate or is that in a similar time frame?

[Michel Letellier, President, CEO & Director]

It's probably immediate, because they are going -- they are very active, and we want to complete this initial $110 million as soon as possible, so that, that's behind us. And then we will be a 50-50 partner from there on.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. And maybe if I can just turn attention to the announcement to consolidate some ownership interest in the 3 assets in BC. Can you provide any more details in terms of the rationale for the investment? Obviously, you retained preferred ownership so you were getting I think most of the cash flow so what was the -- what was going on there basically?

[Michel Letellier, President, CEO & Director]

It's just that the Ledcor -- all that has been done when the market was more vibrant in BC. Remember that we had developed and acquired the right to develop Ashlu from Ledcor and this also transaction was a following up. They had a company called Creek Power and they had multiple water license in that company. Being Upper Lillooet and Boulder being 2 of them, we also have [ Early ] Creek and [ Gone ] Creek, the Callahan. Anyway, we had a bunch of water license. So Ledcor was hoping to see these water licenses being developed further. But unfortunately, the market in BC has slowed down quite a bit. So their investment was -- there, would have been more profitable, their commentary would have picked up value if we would have developed more water license, more project. Now that this likelihood is low they didn't really have any upside to keep it because like you mentioned, the preferred share system in place was capturing a lot of the cash flow of Upper and Boulder. But the reasoning why we haven't paid more than -- we paid less than $5 million for these assets, is the fact that the preferred return also applied on any development money that we had invested since the beginning. So all that money that we had invested in [ Gone ] and [ Early ] and Callahan in these project, have created the -- a liability towards Ledcor in the favor of Innergex. And they wouldn't have had seen a lot of cash flow in the future. The reasoning why we have finalized the transaction it's, for us, actually having now 100% of these facilities, it's much easier to move them around in the structure of the company and making sure that we're maximizing all of the tax shield that we have in Canada. So for us, we have a value of having this ability to move these assets into structure.

[Operator]

Miss Vachon, there are no further questions.

[Michel Letellier, President, CEO & Director]

So thank you very much, everybody. And I'm hoping you'll look into the future in Chile in a positive way. I am certainly are. So thank you for your support and have a good day.

[Karine Vachon, Director – Communications]

Thanks.

[Operator]

This concludes today's conference call. You may now disconnect.