Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2021 First Quarter Results Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that the conference call is being recorded.I'll now turn the conference over to Karine Vachon, Senior Director, Communications. Please go ahead.

[Karine Vachon, Senior Director – Communications]

Hi, 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. A presentation supporting today's discussion is available as we speak on the Investors page of our website at www.innergex.com.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 call, 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 MD&A for more information.Our speakers today will be Mr. Jean-François Neault, Chief Financial Officer, who will present the Q1 results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our operational highlights.And I'll turn the conference over to Mr. Neault.

[Jean-Francois Neault]

Thank you, Karine. Good morning, everyone. Before we start, I would like to inform you that we have prepared a supplement of information to the first quarter report that explains in detail how the February 2021 Texas events have impacted our results. I recommend that you read that section to have a complete overview of the situation since today I will present a summary. However, the supplement provides a broader set of normalized table and information on the recent proceedings.As you can see on Page 7, we have 4 operating facilities in Texas, 3 of which with power hedges. However, all of them to a different extent have recorded extraordinary nodal revenues derived from higher price caused by the unprecedented weather conditions with $17 million for Foard City, $38 million for Phoebe, $15 million for Flat Top and $65 million for Shannon. But as we said many times before, the power hedges contain virtual hourly energy obligations, which had a negative impact of $71 million for Phoebe, $114 million for Flat Top and $93 million for Shannon. As a result, and as previously estimated in our press release in February, the net financial impact on a consolidated basis reached precisely $81.2 million.On the next page, we normalize our first quarter results to exclude the Texas impact on our revenues, adjusted EBITDA and our loss before income tax. As you can see, Foard City and Phoebe extraordinary revenues are deducted from the revenues and adjusted EBITDA to arrive to a normalized figures of $135 million and $88 million, respectively. As for the negative impact of the power and business hedge of Phoebe, it has been deducted from the change in fair value of financial instruments, whereas the net negative impact of the Texas storm on the 2 joint ventures, Shannon and Flat Top, have been excluded from the share of loss of joint ventures. Here, the normalized loss from joint ventures remain high at $144 million due to Innergex share of the impairment charges at the project level for Shannon and Flat Top.In fact, as shown on Page 9, following the storm, we have seen higher risk premium on Texas investments, which has caused the discount rate to increase substantially from December 2020. Therefore, the recalculation of value and use of these assets at the project level became lower than their respective carrying value on the balance sheet. Consequently, Innergex recognized in the first quarter its share of these impairment charges as part of the share of loss of joint ventures. This share of impairment charges was capped to the maximum amount equal to our investment value of those assets on our consolidated balance sheet. Consequently, the investment value at the end of March 31, 2021, for both assets is 0.Also, in regard to the cash settlements, it is worth mentioning that as of March 31, 2021, the Foard City's $17 million gain recognized during the storm and recorded as accounts receivable as at the end of February was subsequently paid in March. However, the liabilities for Phoebe were not settled and are still part of the consolidated balance sheet as accounts payable. As for Shannon and Flat Top, the liabilities were not settled and remain at the project level balance sheet, which, given it is accounted for as equity pickup method, consequently are not included in Innergex' consolidated accounts payable.Now let me comment on recent procedures with regards to Shannon and Flat Top. As implied in the press release dated February 17, Shannon and Flat Top have filed for force majeure. In order to protect our right until the hearing on force majeure take place, we have filed a temporary injunction to prevent Flat Top and Shannon's hedge provider to exercise its remedies on the projects. The hearing has happened on May 6, and the decision should be rendered at the latest by May 20. Now looking ahead, the worst-case scenario following these procedures would be the foreclosure of the projects. Should this worst-case scenario happen, the recurring negative impact to the free cash flow would be at approximately $4.2 million per year until the flip point. This scenario would also mean an avoided cash outflow of $76 million. In other words, under this worst-case scenario, the avoided cash outflow when compared to the minor recurring loss on free cash flow make this potential for closer outcome a more profitable scenario for our shareholders given the other investment opportunities the corporation is evaluating on a recurring basis.Now to be able to compare the results of this quarter with the same period last year, we have normalized the results to remove the impact from the Texas event. Therefore, the results that I will cover today will be on a normalized basis. On Page 11, for the quarter ended March 31, 2021, on a normalized basis, production and revenues were up 6% and 2%, respectively, compared to the same period last year. Adjusted EBITDA was down by 3%. This decrease was mainly attributable to a lower contribution from wind facilities in France and hydroelectric facilities in BC, both due to lower revenues and by higher prospective expense over lower general, admin expenses. Adjusted EBITDA proportionate was down by 2%.On Page 12, for the 3-month period ended March, hydroelectric power generation segment generated $14.5 million in adjusted EBITDA, representing a 12% decrease compared to the same period last year, mainly due to lower revenue derived from almost exclusively from the lower production at the facilities in British Columbia. This decrease was partly offset by higher revenue from higher production over higher operational expense at the Québec facility.Wind power generation segment generated $82.8 million in normalized adjusted EBITDA, representing a 2% increase compared to the same period last year. This increase was mainly attributable to the Mountain Air acquisition in 2020 and to a higher contribution from the Foard City facility due to a combined effect of higher revenues and lower OpEx. These items were partly offset by a lower contribution from the wind facility in France due to lower wind regime.Solar power generation segment generated $5.9 million in normalized adjusted EBITDA, representing a 4% increase compared to the same period last year. This increase was mainly explained by the contribution of the Salvador acquisition in 2020, partly offset by lower contribution from the Phoebe solar facility attributable to a net unfavorable impact of lower revenues due to lower selling price.On Page 30. For the quarter ended March 31, the joint ventures and associates contributed $8 million to the normalized adjusted EBITDA proportionate compared with a contribution of $7.5 million in the same quarter last year. This increase was mainly due to a higher contribution from the Chile facilities from a combined favorable impact of lower operating expense over lower revenue despite higher production. This increase is also explained by a higher contribution from facilities in BC from lower operational expenses. Higher contribution from the Shannon and Flat Top facility, mostly due to higher average selling prices, and a higher contribution of the Viger-Denonville wind facility in Québec also contributed to this increase. In addition, the proportional production tax credit decrease from $18.1 million to $17.4 million was due to lower production tax credit earned from the lower production at Shannon and Flat Top facility. Overall, normalized adjusted EBITDA proportionate decreased by 2% compared to the same period last year.Continuing on Page 14. The increase in long-term debt is related largely to the draws made toward the construction of the Griffin Trail project. In addition, the corporate revolving credit facility was used for reimbursing the outstanding balance of the Alterra term loan on January 11, 2021.On Page 15. Changes in the total assets stem mainly from the reduction in value of our investment in joint ventures and associates, as mentioned before. The change in shareholder equity is explained to the dividend declared on common and preferred share totaling $32.9 million and the total comprehensive loss of $172.5 million.As shown on the next page, the normalized free cash flow has decreased by $2 million on a trailing 12-month basis. The unfavorable variance in free cash flow was mainly due to an increase in principal payments stemming from the Phoebe and Foard City commissioned in late 2019 and from the Mountain Air acquisition from mid-2020, the BC Hydro imposed curtailment in mid-2020 and the recovery of maintenance CapEx expenditures from the sale of HS Orka. These items were partly offset by the contribution from the Phoebe and Foard City facility and from the Salvador and Mountain Air acquisition and also a decrease in interest payment on the corporate revolving credit facility concurrent with the Hydro-Québec private placement.For the trailing 12 months ended March 31, the normalized payout ratio amounted to 140% of free cash flow compared with 113% for the corresponding period last year.Now before I conclude, the guidance provided in February 2021 remain relevant when compared with the normalized 2021 financial performance. At the moment, despite a lower Q1 generation, we are not revising the guidance since it is still possible to reach these projections on a normalized basis before the end of Q4. In the event that the worst-case scenario materializes, we will then revise our guidance at that time.On that note, I will give the floor to Michel for the operational review of the past quarter.

[Michel Letellier, President, CEO & Director]

Thank you, Jean-François. This is the type of quarter that we would rather forget, but it is making us even more committed and resolve to execute on our growth strategy and to continue to diversify our portfolio. We will not forget, and we will make our best effort, so that this type of crisis will not be recurring. We have moved away from these power hedge structure and have shown that we could develop projects differently with both Foard City and Griffin Trail. Both projects could benefit from future high prices in Texas. So we have lived through this Texas crisis, we have learned the hard way, but now it is time to move on.So now let's focus on the bright side of the great opportunity that lies in front of us. We have had some great news in this quarter besides the crisis and the operation. So let's try to focus on this. While I'm glad to report that Hillcrest just as last night reached the COD, commercial operation date, under these long-term PPAs. So we're very proud and happy to report on this. A lot of people have worked pretty hard on this project over the last month, and it was a challenging period with the COVID and the restriction on traveling for us to go on our site. So our dedicated team did a great job. And now we can sell this electricity, 200 megawatts of solar is being added up to our portfolio. So congrats on our team, very happy on this.The final sustain -- not sustain, but the final construction finalization will be probably be towards the end of June. And from there, we'll be able to do the tax equity financial close by something in the mid-July, and that would conclude the final construction and tax equity contribution. We will be then reimbursing the bridge construction to tax equity.On another good note, Yonne II, our 6.9 megawatt in France has reached again the full commissioning. So that's another good news on the -- on that quarter. And Griffin Trail, as we mentioned, is now very [ advent ]. Actually reading the report from our construction crews, we should be topping all the 80 megawatt, would be totally installed by the end of this week. And they should be starting producing power by the mid-June, so that full COD could be reached by beginning of July.

[Jean-Francois Neault]

80 towers.

[Michel Letellier, President, CEO & Director]

Yes, 80 towers. Thank you. What did I say? Well, anyway...

[Jean-Francois Neault]

80 megawatts you said, it's 225 megawatts.

[Michel Letellier, President, CEO & Director]

No, no, no, that's true that -- I'm sorry, the towers. And so that plant should be in full operational to take advantage of the high prices in Texas in summertime.We have also resumed the work in Innavik, this hydro facility in the north of Québec. So glad to see that we -- this year, again, we can reach these construction site with special health and safety precaution. We have full access to the site, and construction is resuming as regular, I would say, full strength in the summer for Innavik. We still forecast the COD by the end of next year.Now on the development activities, we're seeing some good movement in the power prices in Chile. So we are still advancing our development activities there. You probably have seen the copper prices going through the roof, which is a good thing for Peru and Chile. As you know, those 2 countries are big producers of copper. And although they have been -- their economy has been hit hard by the COVID, the future looks bright for these 2 countries, and we're still committed to develop project in this area.As we go through the quarters, we're getting ready for starting construction in Hawaii. We have been advancing on both permitting, construction negotiation and final engineerings on 4 of these projects. So the first construction should start by the middle of next fall. Very happy also going through these engineering and construction negotiation. I think we are learning a lot. As you know, storage is a big part of our future strategy, and I think that storage coupled with battery, coupled with solar will pay a big role in many areas in the world to supply future electricity, and Innergex is in the forefront of that new area.We also are advancing and glad to report that we have finally signed the agreement with the supply of the battery for our Tonnerre project in France. We have signed -- we are the first commercial customer of Hydro-Québec division EVLO. So pretty happy to be the first. And hopefully, some other project will follow with them. We have come together and learned a lot in our team, so that this is -- this is basically some investment in time and resources, so that both team can work better in the future to develop even more projects. And as well, as you know, storage is a big part of our strategy. We have been talking about hydrogen, green hydrogen. And we have hired now a seasoned veteran in that business, so that we are now building our team and expertise to take advantage of future government support for green hydrogen.Now if we're looking at our prospective project, we are still focused on our strategy, which is developing solar and wind in the United States, very -- I would say, very encouraged by the policy that are being discussed to support future projects in the United States. ITC, PTC and kind of a PTC also for hydrogen. And so more local support in the state of California and Washington are being discussed to support green hydrogen in the future. So I think that United States is showing a great leadership in order to have more and more renewable energy in their portfolio mix. We are seeing also in Europe that those countries, France, Germany and others are also supporting future renewable energy project to be part of the future mix of the electrification of this economy. So very happy to have build out a stronger and stronger presence in France. Also have hired and being able now to initiate some development in solar as well in France. So we have now a team that is focusing as well on solar in France, and we should see some benefit from these efforts in the near future.Canada is -- or Québec is now being studied, and we had a great news in the last couple of months. Now we have seen that the government of Québec, together with Hydro-Québec, is going to put forward a call for an RFP for renewable energy anywhere between 200 and 500 megawatt in the -- at the end of the year or beginning of next year. So that's very positive for us. As you know, we have been working in Canada and Québec specifically. So our team are now focusing on trying to dust up some old project that we were working on in the past. And apparently, this is the first of a few more RFP for the future. So things look even better and better also in our core market or home market.So basically, this is what we've been doing in the last quarter. And since we had a lot of time passed on Texas, I would open up the question. But before that, I would thank our team that Jean-François team that have worked hard lately, as you can imagine. These numbers have been moving around, and we have these court representation that has completed the stuff. I would like also to extend my thanks to all you, the analysts that are going through these complicated numbers. Very happy to have you support us. And I'm opening now the floor. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of David Quezada with Raymond James.

[David Quezada, Equity Analyst]

My first question here, just on the offtake agreements for Shannon and Flat Top. I'm just wondering if, like, where you're at with, I guess, potentially altering or unwinding those hedge contracts, and if you've had any conversations with the tax equity providers around potentially doing that?

[Michel Letellier, President, CEO & Director]

Well, David, it's a little bit difficult to discuss these things right now. We're in the middle of trying to [ sort out ] that in court. But I would say that if we're to reinvest in those, which is, I don't know, I wouldn't say very likely, then we would try to get rid of these things. But as you've seen and heard Jean-François, I think that the worst-case scenario we have put it in front of you is that we would have written off those investments completely. So anything that would come -- could come out of these negotiations would be a little bit better than actually us writing it off completely.

[David Quezada, Equity Analyst]

Absolutely. Fair enough. And then just one other question, I guess, just related to the U.S. market, in general. I'm just curious about when you see some pretty encouraging trends like increased commercial and industrial demand for renewable power, the more supportive regulatory backdrop, I'm wondering if you could just talk about what -- how things have developed? Any color you can share on your earlier-stage development portfolio and maybe whatever activities in terms of securing land that you're undertaking for the next, I guess, phase of projects?

[Michel Letellier, President, CEO & Director]

No, that's fair enough. We've talked a little bit in the -- one of our projects, 200-megawatt solar development in Ohio, have been making a little bit of a press lately. It's Palomino. That's a 200-megawatt solar that we are advancing. We're in the middle of the permitting, and I would say, public hearing. This thing is advancing very well. Also, we have also some term sheet with offtaker that have been advanced quite a bit. So this is probably the most advanced, but we're working towards our target, which is around 600 megawatts of solar in -- outside Texas. We have PJM, we have Pennsylvania, Kentucky and, like I said, Ohio through -- I'm forgetting the name. Palomino, I'm sorry.And then we also are advancing in the Northwest. Working as well with wind, you're seeing that we have a little bit over 400 megawatt worth of wind in our advanced projects. So those are also advancing. I would say that the team is building up as well in different markets. We have now a new small office in the East Coast to cover the east as well. So I think that we're making good stride. Hawaii, we'll get also a third RFP and getting -- we're getting ready also to answer these future RFPs. Batteries opportunity are being looked with Hydro-Québec -- in joint venture with Hydro-Québec. We're trying to find good spot to deploy batteries in the United States. Now, I mean, we're focusing a lot of our activities now in The States because, like you're saying, there's definitely a lot of support -- political support both on federal and state level.

[Operator]

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

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

Going back to Texas. Have you seen any precedents in Texas where projects have been recapitalized or recontracted? And what would a scenario look like where you would consider recapitalizing your assets? Would you need just to see a change to the hedge contracts or reduced liability as well?

[Michel Letellier, President, CEO & Director]

Well, we've been trying to negotiate some discount on the total liability already invoiced. So far, the hedge provider have resisted any negotiation in discounting these invoices or -- of course, if court gives us a little bit more room and we're in front of the judge, so we're waiting for the result. Hearing has had happened on May 6. And judge said that he would render his decision by May 21. So if we have a positive note there, we may, Rupert, have a little bit more leverage to negotiate something else. Mind you that we have -- both in Shannon and Flat Top, we have also partners that we would have to agree or not. I mean we would have -- if they are not willing to put more capital, we would have to come up with some kind of a resolution on how we would recapitalize these things. Tax equity would have to waive also some of their economics for us to decide to go ahead. All in all, you heard also that Jean-François has mentioned that our perceived discount rate for Texas has gone up. And therefore, we would have to see some future accretive return for us to put more money in those [indiscernible] and certainly, have a different power hedge or configuration instead of having the power hedge. So it's a lot of the -- lot of stuff to negotiate before we could put some money. So that's why we wanted to give you the perspective to all the financial community that worst case, walking away from Flat Top and Shannon, and we writing it off from our books. Anything else could be positive, I would guess. Definitely, we would be very careful before putting more capital, but we never know, right?I mean if court is giving us some wins, some headroom there to negotiate with all the stakeholders, it might make sense. But definitely, we want to focus on something else. We have a great outcome. We have great opportunities in our core market. And it's very unfortunate what we have lived through Texas, as I mentioned. But me, I've turned the page, and we're forward-looking into these great other opportunities, but we will not forget, like I said, we have learned, and we're not going to put ourselves in that same situation. That's about what I...

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

Have there been any court precedents you had in Texas that might indicate where things are headed with the your projects?

[Michel Letellier, President, CEO & Director]

Well, there's still some -- there have been some ruling, yes, but not the full extent that we would like. We're following others, of course. Some has gone to New York. And in New York, that definitely was not very successful. So -- but the fact that 2 judges had taken in consideration our -- our representation. It's a little bit positive. But again, I don't want to give any hope to the market on Texas. If we win something, good. But like I said, time to move on from Texas.

[Jean-Francois Neault]

And by the way, our hearing is in Texas.

[Michel Letellier, President, CEO & Director]

Yes. And I think that if we're successful there, we might have some potential capacity to make a little bit better, but I don't want to focus on this. Myself, I've moved on.

[Operator]

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

[Sean Steuart, Research Analyst]

A couple of questions. Just finish off Texas. The worst-case scenario you highlighted with the $4.2 million of free cash flow until the flip point, that was based on, I think, 2020 results. Do you consider that representative of what those assets are capable of in a normal environment? We were under the impression it might be a little bit higher than that.

[Jean-Francois Neault]

Yes. That's a good point. Look backward, we never did really higher than $5 million at any year since the inception in COD. We were hoping, but those projects also carried some shape and basis is higher than the original forecast. So that's a good point. So we use $4.2 million until the flip point. So obviously, those projects were back-ended in terms of cash or greater cash. But you can refer to our value and use that we've disclosed for the impairment charges with higher discount rate to have proxy figures on the valuation we're making on those projects, Sean. So that make ours a different view of the valuation, if you don't like the $4.2 million. But so far, I mean, historically, that is the best proxy we can provide that we've achieved on those projects.

[Michel Letellier, President, CEO & Director]

Yes. Sean, I think that Texas has had in the last few years some challenging in the basis, the risk between the node and the hub that did -- did minimize the potential revenue of these things. I would think that over time[Audio Gap]the transmission system that these bases would have been reduced over time. And after flip point, as we all said, tax equity was with a structure where theoretically after flip point, the project doesn't have that much debt and perhaps would generate a lot more capital -- cash flow. But in the latest few years, as Jean-François said, Shannon, particularly, has not been a big producer and Flat Top, which has been commissioned had a little bit of issue with some commissioning deficiency from Vestas, some blade repairment were underway also and some upgrades on those blades were supposed to be done and actually are being done by Vestas as we speak. So I mean we're sad to potentially let these assets go. But the type of commitment or financial commitment that we have to look considering the relatively poor performance over the last few years of these assets are not putting -- I would say that it's not necessarily a very appealing financial proposal as we speak. And of course, we would have to do something with the existing power hedge, which might also include some more capital to be put into those projects.

[Jean-Francois Neault]

And also, Sean, you should remember, those projects are fixed return type of tax equity investment with movable flip date. And as we disclosed in Q4, those flip date for Shannon and Flat Top on the back of the recent years performance were under reassessment. So the flip date always move until a certain fixed returns, just to make it clear.

[Sean Steuart, Research Analyst]

Lots of moving pieces. Second question is, is there any update on the time line for the arbitration process with BC Hydro on last year's curtailments?

[Michel Letellier, President, CEO & Director]

Yes. We're scheduled to be early September, Sean.

[Operator]

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

[Nelson Ng, Analyst]

So just to follow up on all the Texas questions. I didn't really understand the impact on Shannon. So you bring it down to 0. But like the net impact for Shannon was about $14 million, right, like if you take your share and if you net out the revenues and the power hedges. So should we be thinking that the net impact on Shannon is $14 million. But if you discount the cash flows, it -- the net amount of 0? Like how -- am I thinking about it the right way?

[Jean-Francois Neault]

So okay. So just for clarification. So those -- I'm hearing some noise. I don't know if you can mute -- anybody can mute for now. But [Technical Difficulty] that changes from quarter-to-quarter depending on their net earnings are met. So the -- what has happened is to take the strong net [Technical Difficulty] has decreased the investment value at the balance [Technical Difficulty]

[Nelson Ng, Analyst]

Sorry, you're cutting off there. I can't hear you very well.

[Jean-Francois Neault]

No. I don't know if it's on our side, but very bad noise.

[Nelson Ng, Analyst]

It seems that there's a...

[Operator]

It sounds like it's coming from Mr. Nelson's line.

[Nelson Ng, Analyst]

Let me mute while I listen to your response.

[Jean-Francois Neault]

Okay. Yes, much better. Thank you. Okay. So yes, so put the loss of Shannon, okay, that loss of the Texas storm, the loss has decreased the beginning value on the balance sheet of their investment value because it's -- we take the beginning value on the investments, then we decrease it by any net earning gain or net earning losses. And then after the impairment calculation is a totally different view of calculating. So Shannon was not having so much of a room as at December 20, when we did the impairment calculation. But now with this increase in risk premium required in Texas and the increase in discount rate, that has created that the value and use calculated is lower than the carrying value on the balance sheet of that project. So it's a fully separate story than the storm and the impact on the storm on the net earnings. So I don't know if you've got the difference. So really, what has caused the impairment is the increase in discount rate on the back of higher risk premium. So this is a collateral. I mean I would qualify the impairment as being a collateral effect of the storm because the risk premium has gone up following the storm. So we needed -- that has triggered for accountants to make a reassessment of the impairment calculation on those assets as at Q1, which we typically do around Q3 or Q4. [indiscernible] it's precise enough.

[Michel Letellier, President, CEO & Director]

I think Jean-François, what he meant is that since we've got $65 million of revenue and loss of own power hedge 93, that's 28. Our share is 14. But I think that one of the issue with Shannon is that it had since the beginning when it was owned by Alterra had performed really poorly and had that [indiscernible] also a deficit in terms of the total account owned to City at the time. So if you take that into consideration, we would have this, well, I guess, already in this liability to overcome before the flip point being occurring. So when you take all this into consideration, I would agree that Shannon is perhaps on a borderline for us to decide if we put more money in or not. Flat Top is definitely more difficult or easier decision to make. Shannon, I would agree that it's on the borderline situation. And depending on the outcome, Shannon might be a little bit more attractive in terms of potential reinvestment than Flat Top.

[Nelson Ng, Analyst]

Okay. That's clear. But essentially, the Shannon net impact was $14 million. And what you're saying is -- what you're saying is you're kind of borderline in terms of whether to like walk away from that project or not, whereas Flat Top, it's a more definitive decision?

[Michel Letellier, President, CEO & Director]

Yes.

[Nelson Ng, Analyst]

Okay. So the next question I have is about Hawaii. In terms of -- I just want to ask, you started some -- you've given, I guess, limited notice to proceed on a few projects. Have you locked in all the project costs for those projects where you started construction, I guess, like with much higher steel prices and all the other commodity prices, copper and everything you've highlighted as well, everything is going up. But I'm just wondering how the construction costs for Hawaii is compared to what you kind of modeled in a few years ago when you bid the projects and also what the situation is now in terms of locking in pricing?

[Michel Letellier, President, CEO & Director]

It's a good point. It's true that a lot of pressure is on the raw material and what have you. So that's, our team is working hard with local trade. And we also -- since they're not that big of a project, we have undertaken to do some of our -- internally, some construction management early and manage also some supply. So we wouldn't have a full EPC type for these smaller projects. And also on the island, there's not that many big contractor acting on EPC range. So our team are finalizing these contractual agreements. We will disclose the -- I would say, the updated numbers probably in the call of Q3 in -- either in August or in November and give you a little bit more detail on the future revenue and total cost. But it's true that it's a little bit challenging. I guess, everybody is seeing some of these pressure on pricing. But we had secured battery component and also solar panel previously. So quite a bit of those prices were fixed early on.

[Nelson Ng, Analyst]

Okay. And then just one last question. In the MD&A, I know it's been kind of going on for -- I think the disclosure was there the last quarter as well, but there's been a number of financial covenants that has -- that have been tripped and a lot of debt has been moved to as current liability. Can you just talk about a few of them and give a bit more color in terms of -- I think it's like MU wind. There's like a French project. There's, I think, Mountain Air as well. So can you just kind of run through some of them? And like, is this something that you have to kind of resolve pretty quickly? Or -- yes, I just leave it there.

[Michel Letellier, President, CEO & Director]

Well, MU has been on the -- on this for a while because you remember Saint-Jean went bankrupt and we had to do the self-operation. We had -- and we are actually now doing ourselves the operation on MU. Remember that we are doing self-operating all through the Gaspé Peninsula. So for us, it was natural, and we hired all the prior employees of Saint-Jean and they are part of our team. The issue we had was to have access to the software and -- it's called resetting keys and stuff like that, that were caught into the Saint-Jean bankruptcy.And we had a hard time having this given back to us through -- but through all kinds of negotiation, we also found out that there were another supplier that could supply the software update. And we have now an agreement with these new supplier. So I guess that by next quarter, everything should be now in normal. We have a very good relationship with the existing lenders. It was a technical default. But things will be put back in order, where Innergex will do the self-operating of these assets and will be recognized by banks to do so, and we'll finalize the agreement with this joint venture. Remember that MU is a joint venture with the First Nation, the Mi'gmaq from the Gaspé Peninsula. So Innergex will provide the service -- O&M service for the project. So that should be finalized by the next call. Things should be back in normal.And as for Mountain Air, it's a little bit silly. It's an insurance commitment regarding flooding out of anywhere in [indiscernible] not that many flooding. But anyway, it was overseen when the insurance policy were put back together and that had triggered this technical default is being now being fixed, and I don't expect any big issue there.And in France, remember that I spoke about Vestas problem with blades in Flat Top. Well, we have this blade deficiencies also in France. Now Vestas has come up with repair or enhancement of their blades to make them stronger. And that should also solve the issue. And as you know, we have been curtailed for quite a bit by the health and safety department in France after 2 blades had failed. That should also be settled, but that -- those are not very material. I think that MU and Mountain Air will be fixed quickly and things should be -- get back to normal on those.

[Operator]

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

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Can you hear me?

[Michel Letellier, President, CEO & Director]

Yes.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Yes. Well, I'll start with the last comment and just on resolving those -- those covenant issues. Is there cash trapped at any of the project level that will be sort of unencumbered and come back to the top of the house once those issues are resolved in the coming quarters?

[Michel Letellier, President, CEO & Director]

MU might have some that was trapped there. And also through the Saint-Jean bankruptcy, they were 19 million -- 19.5 -- $19.8 million letter of credit issued towards the -- in favor of the project to secure some, I would say, obligation under the construction contract and supply agreement from Saint-Jean. Since Saint-Jean was not able to do these modification, we actually called on this letter of credit. And now it's been sitting in the MU accounts. So it didn't show in the first quarter, but it will show in the second quarter. So with all that money on hand, the MU has enough money to cover any, I would say, deficiencies that were identified at the COD on MU.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then coming back to Shannon and Flat Top force majeure. Sounds increasingly like if it doesn't go your way, Flat Top, you would walk away. What other implications are there in terms of -- is there any penalties or anything else beyond just the foregone cash in terms of repercussions from the tax equity or your partners? And then, I guess, implications that walking away from this project and the foreclosure, if it -- if you think it has any implications on securing tax equity in the future?

[Michel Letellier, President, CEO & Director]

Well, I think that BHE is there and City. We've been handling this crisis with consulting with BHE and our other partner, BlackRock and Starwood in the case of Shannon. We're doing our best. I mean it was pretty difficult to deal with this crisis. I don't think that any tax equity investors would take us for -- I would say, give us some repercussion on other stuff. We have negotiating -- we are negotiating with Wells Fargo, as we speak, for Griffin Trail and Hillcrest to finalize things, and they are in Phoebe. So I mean, who can blame us given the fact that this was an extreme weather event. Tax equity was asking to have this type of power hedge structure. So it's a little bit difficult for them now to tell us that it was not a good idea.Well, I agree, it was not greatest idea, but they were the one who were pushing for it. And in the case of Shannon, actually, we were trying to reduce the power hedge exposure for more than a year. And they were being difficult about it and so forth and so forth because when Alterra had put Shannon in COD, I think they were a little bit optimistic on the long-term forecast. Since then, we had when we acquired Alterra reduced this long-term forecast and wanted to reduce also the amount of supplied energy under the power hedge agreement, and they were the ones who reluctantly wanted us to reduce that exposure. So all in all, I don't think they can put this on us in a sense that if it doesn't make any sense for us to put more money into it, we've done what we had to do. We're acting as a good operator on sites. We've been negotiating and operating the site as the best as we can do. Now putting more capital in a structure that is a loser proposal for us that doesn't make much sense. So I don't think anybody can keep us accountable for that.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

So you don't foresee this as you go to get more tax equity for other U.S. projects, this issue, limiting your ability or changing who you could partner with based on this previous history. You think people will look through this, and it'll be quite easy to find the tax equity you need going forward?

[Michel Letellier, President, CEO & Director]

Well, like I said, we are now with Wells Fargo finalizing the tax equity commitment for Hillcrest and same thing in Griffin Trail. Like I said, we're honest with everybody. We're open book. We're doing our best to try to solve this issue. We're fighting the fight that we have to fight in court. I don't know what else we can do.

[Jean-Francois Neault]

And then Griffin Trail, Mark, is a good example of a different configuration with the tax equity that make the job. So we're very happy with this. So I think, Foard, there's ways to continue on tax equity. And I think it's clearly understood by the financial community that this is a one-off, nonrecurring event. So I agree with you, Michel.

[Michel Letellier, President, CEO & Director]

And I don't think we're the only one that's got caught in there.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

So Jean-François, you provided a few comments around pieces of the puzzle in Texas in terms of what happened in the quarter, what happened post quarter. If you could just fast forward to the end of Q2, maybe just on the consolidated cash balance with Phoebe, which you seem to be able to resolve, where will your sort of consolidated cash be like, what adjustments do we have to make from quarter end? And then depending on what happens, if you walk away or don't walk away Flat Top and Shannon, how else could that impact sort of the proportionate or sort of cash balance for MU?

[Jean-Francois Neault]

Okay. Good -- very good question, Mark. So on Phoebe, I will save my comments because we're into discussion. So Phoebe, as I mentioned, the cash settlement has not happened. So the cash payment resides as at end of March within our accounts payable, consolidated statements. So depending on the outcome of our discussion in that scenario, we might see kind -- we will have the according accounting transaction in that regard. But as for Shannon and Flat Top, in a worst-case scenario, what you need to understand is, for the balance sheet part, the value of those 2 assets as an equity pickup is 0 at the end of March.So no further adjustment on the balance sheet if we foreclose on those 2 projects. Maybe a slight adjustment. We are carrying at a consolidated level a cumulative translation adjustment under the AOCI, the accumulated other comprehensive income. So maybe $1 million or $2 million of adjustment that we would need to finalize on our statement. Maybe some tweaking on our deferred tax in that regard as well. But really, the foreclosure of those 2 projects -- those projects are as a stand-alone. So the only consolidated impact we can see on the balance sheet for those assets going for close in Q2 would be limited dollar impact for other comprehensive income and maybe deferred tax.And then following the forecast, let's see that we foreclose 1st of June, then the earnings for April and May are ours. So you will see the earnings flowing our share up gain on joint ventures for April and March. And then after, no records of additional revenues for the remaining of the year.

[Michel Letellier, President, CEO & Director]

Yes. But just to make sure, Mark, in the case of Flat Top, Shannon, no financial commitment or cash would be -- would be thrown to Flat Top, Shannon. There's no recourse to Innergex on that basis. So in the worst case, we just hand out the keys over there, and there's no cash that Innergex would have to send to Flat Top or Shannon.

[Jean-Francois Neault]

Exactly. And the accounts payable reside at their project level. So if they foreclose, they become the hedge counterpart ownership, then it's become an interco AP and interco AR. So they settle on their own, but on a consolidated basis.

[Michel Letellier, President, CEO & Director]

Even for the -- even for the legal fees, legal fees have been agreed in front of the judge that those are for the Flat Top and Shannon account, and the legal fees are paid out the Flat Top and Shannon accounts.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Yes. Okay. And then there was again some higher prices part of Q2. Is that a net benefit? Or any -- again, any hedge issues there in terms of what's going on with some higher prices? And I'll leave it there. And hopefully, we will not be talking about Texas next quarter.

[Jean-Francois Neault]

Mark, you referring that the comments we made under the MD&A of higher pricing in Texas, this is comparing Q1 versus Q1 a year ago...

[Mark Thomas Jarvi, Director of Institutional Equity Research]

In parts of April, we also saw some higher prices in Texas.

[Michel Letellier, President, CEO & Director]

Yes, you're right. We -- Foard benefited from it, but Phoebe was -- had a little bit of a loss on those few days, yes. Yes, nothing to compare with the other, right?

[Operator]

Your next question comes from the line of Naji Baydoun with IA Capital Markets.

[Naji Baydoun, Equity Research Analyst]

Just first off, I appreciate all the great details on the Texas situation. But just looking forward a bit, I'd like an update on the pace of organic growth and project development. Michel you provided good details on the Palomino project. Can you just talk about some of the other advanced U.S. solar projects that you have in the pipeline? And then maybe some more color on development activities in France, particularly now with the added focus on solar?

[Michel Letellier, President, CEO & Director]

Yes. Well, in France, if I start with France, we have secured now enough land for a 60-megawatt solar, but mind you that it's a little bit early. We have to go through all the permitting and a lot of stuff, but the team on the ground did very well there. So I think we have an approach that can generate a few more solar projects in the near future in that same area. I won't go too much in the details, just giving you a little bit of updates of what we're doing over there. And again, in solar, I don't want to name these type of projects just yet. But Palomino is a 200-megawatt project, and we have a few more ranging from 75 to 150 megawatts spread between Pennsylvania, Kentucky in the Northwest. The idea is to get to around the 600 megawatt, like we said, by 2023, 2024-ish to deploy the solar panel that we had previously bought, if you remember, that are guaranteeing us the full amount of the ITC, the 30% ITC commitment. So these are -- that is the strategy.The other win, I rather not to disclose too much about it just yet, but we're making some good headwind on -- not to make a joke, in the wind. But we're making a good advancement on some of those wind development as well.And I mentioned also Chile where price -- power prices are, if you look at the latest few months, have improved. And also, the shutting down of coal has accelerated and [indiscernible] has announced that they are shutting down some more coal facility in Chile. So I think that we are well positioned. And the good news, I think, it's Québec, potential RFPs. Also, one thing that the minister in Hydro-Québec has made public is the fact that they are open to an extension of at least 10 years on our existing facility. And since we are the first one to have put wind project in Gaspé Peninsula, our projects are going to be qualifying for this extension. And remember that we have roughly 600 megawatt in the Gaspé Peninsula. So this is a very good news for us. It would create, I would say, a positive scenario where we can think about expanding this project for another 10 years with, we hope, an attractive pricing.

[Naji Baydoun, Equity Research Analyst]

Got it. And just a follow-up on the last point. So the extensions that would be with, I suppose, minimal new investments required.

[Michel Letellier, President, CEO & Director]

No, no. It's just a guarantee that we -- well, a guarantee or a program where we can prove that under a prudent maintenance CapEx, this facility can sustain another 10 years. Mind you that we have overtaken the self-operation in Gaspé Peninsula really early on. And our team has done a great job in managing these preemptive CapEx, and we've shown that the availability of this machine, we've been really proactive and catching early defect on generator bearings. All kinds of, I would say, initiative from our team has made this machine available.And we think the majority of them can extend their life for another 10 years. We've been very, very aggressive in maintaining the blades. We have been creating a lot of innovation in crack detection in blades and being proactive in repairing these little cracks, a little bit like your windshield on a car. If you have a little scratch, you can go and have them repair quite effectively and very cheaply versus waiting and seeing that crack going and then suddenly you have to change your windshield. Well, we've been in the forefront of innovation by having these very, very powerful camera to take a look at the blades and have the software detecting this little crack and having a very, again, innovative way to repair it from the top of the blade and having [indiscernible] going down and having all kinds of compounds that can be used even when it's cold in Gaspé Peninsula to repair these blades. So we're very confident that the 600-megawatt [ GE ] machine can be extended for another 10 years without major CapEx.

[Operator]

And your last question comes from the line of Rupert Merer with National Bank.

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

Just a couple of quick questions. I know we're getting long in this call. A follow-up on the Québec market. You're talking about recontracting the Gaspé projects. So what's the opportunity for repowering those projects at the end of those contracts? Is that an opportunity that will -- you will have?

[Michel Letellier, President, CEO & Director]

Yes. Yes. There will be -- we're working on it, right? I mean it's the early-stage discussion with the government and [indiscernible] putting that RFP together. But theoretically, they would be open up to have an extension of 10 years and having us also bid for a repowering scenario to extend the life of these assets by another 20 or 25 years. So all in all, it could be an extension of 10 years plus 20 or 25 years of new contract. So for us, it's a great opportunity to enhance these existing facilities and make sure that they're in the portfolio for a very long term.

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

Great. And then on Griffin Trail, I think you show it still as uncontracted. Just remind us what's the long-term plan there? Are you still evaluating potential offtakes on Griffin Trail?

[Michel Letellier, President, CEO & Director]

Well, the perfect scenario would be something close to what we have in Foard City. Remember that Foard City has 300-megawatt under PPA, has produced PPA and 50-megawatt being merchant. So hoping to -- hopefully, in the next little while, I think that the crisis now in Texas has mixed up a little bit of the offer and demand, and there will be some -- a lot of activities in Texas regarding these potential restructuring into -- you have a lot of power hedges that will be looking for potential PPA. So I don't think the next 6 months or so will be a good opportunity to renegotiate PPA.But on the other hand, maybe a lot of utility and potential also some customer might have been burned on that crisis. So who knows, Rupert? But this is -- the long-term game with Griffin Trail will be to reduce a little bit the exposure on merchant. But until we finalize with Phoebe, Phoebe still has this power hedge. So we'd love to be able to have a different structure or reduce this exposure on that power hedge. But until we do, we think that Griffin Trail is a natural hedge in that area, being 225 megawatt fully merchant. So on the long run, we would rather see less merchant exposure. But for the time being, we're perfectly happy to have Griffin Trail fully merchant.

[Operator]

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

[Karine Vachon, Senior Director – Communications]

Thank you very much. Thank you, everyone, and we'll reconvene in August. Thank you.

[Michel Letellier, President, CEO & Director]

Thank you, everybody.

[Jean-Francois Neault]

Thank you.

[Operator]

Ladies and gentlemen, you may now disconnect your lines.