Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy 2021 Second Quarter Results Conference Call and Webcast. [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, Senior Director of Communications. Please go ahead.

[Karine Vachon, Senior 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. A presentation supporting today's discussion is available as we speak on the on page of our website at www.innergex.com. This call contains forward-looking statements within the meaning of 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-Francois Neault, Chief Financial Officer, who will present Q2 results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our operational highlights. I now turn the conference over to Mr. Neault.

[Jean-Francois Neault]

Merci, Karine. Good morning, everyone. Before I present the financial results, I want to provide you an update following the February 21 Texas event. The Flat Top and Shannon facilities have been excluded from our results from April 1 and onwards due to the project, asset and liabilities being classified as disposal groups held for sale. Therefore, the balance sheet values remain at 0, and no results have been recorded while we removed them from our number of operating facilities. As for Phoebe, we have reached an agreement after the end of the quarter to settle the amount that remained unpaid. We have disbursed USD 24 million, representing the net amount of these 3 elements: the agreed upon settlement on the disputed amount, the payment on the project tracking account minus the unpaid energy sold during the negotiation process. Therefore, we consider the February 21, 2021 Texas event impacts to be concluded. On Page 8, our second quarter results posted growth over the same period last year, mostly due to higher contribution from idle facilities in BC and the contribution of the Salvador and Mountain Air acquisitions completed in May and July last year. Revenues proportionate and adjusted EBITDA proportionate were up by 3% and 4%, respectively. For the quarter ended June 30, 2021, production and revenues were up 10% and 13%, respectively, compared to the same quarter last year. Adjusted EBITDA was up by 16%. This increase was mainly attributable to a higher contribution from the facilities in BC because of higher production in 2021, whereas the 2020 figures were negatively impacted by the BC Hydro curtailment. The increase is also attributable to the contribution of the Mountain Air and Salvador acquisitions, a higher contribution from the wind facilities in France, and the ramp-up of production at the Hillcrest solar facility that have reached PPA commercial operation on May 11. The increase was partially offset by a lower contribution from the Québec wind facilities, and by higher general administrative expense and prospective expense. On Page 9, for the 3 months ended June 30, 2021, hydroelectric power generation segment generated $63 million in adjusted EBITDA, representing a 21% increase compared to the same quarter last year due to a higher contribution from the facilities in British Columbia. This increase was partly offset by lower average selling price at some facility in British Columbia and in Québec. The wind power generation segment generated $57.6 million in adjusted EBITDA, representing a 3% increase compared to the same quarter last year. This increase is mainly due to the Mountain Air acquisition and to a higher contribution from the facilities in France, explained by higher revenues from higher production. These items were partly offset by lower contribution from the Québec facilities, explained by lower revenues from lower production and by a lower contribution from Foard City facility due to lower revenue. The solar power generation segment generated $19.4 million in adjusted EBITDA, representing a 71% increase compared to the same quarter last year. This increase is mainly explained by the ramp-up of production at the Hillcrest solar facility in Ohio and by the contribution of the Salvador acquisition in May 2020. The increase is also explained by higher contribution from the Phoebe solar facility attributable to higher revenues from higher average selling price despite a lower generation. On Page 10, for the quarter ended June 30, 2021, the joint ventures and associates contributed $13.8 million to adjusted EBITDA proportionate compared with the contribution of $15.2 million in the same quarter than last year. The decrease in the hydro segment was mainly due to the lower revenue from the Umbata Falls facility and higher operating expenses in Chile. This decrease was partly offset by a higher contribution from Jimmie Creek facility due to higher revenues from higher production compared to 2020 figures that included the impact of the BC Hydro curtailment. In the wind segment, the decrease is explained by a lower contribution from Dokie facility due to lower revenues and higher operating expense, and the lower revenue from Viger-Denonville facility. The decrease is also attributable to the exclusion of the result from the Flat Top and Shannon joint ventures facility from April 1, 2021, onwards as mentioned before. In addition, the proportionate PTC's production tax credit decreased from $19.4 million to $9.5 million was due to the exclusion of the results from Flat Top and Shannon. This decrease is also attributable to lower PTCs earned at the Foard City facility due to lower production. Continuing on Page 11. Compared to December 31, 2020, the increase in long-term debt is related largely to the draws made towards the construction of Griffin Trail project. In addition, the corporate revolver credit facility was used for reimbursing the outstanding balance of the Alterra term loan on January 11, 2021. On Page 12, compared to December 31, 2020, changes in the total assets results largely from the share of loss in joint ventures and associate due mainly to the February 2021 Texas event and the impairment loss of the Shannon and Flat Top facility. Changes in total liabilities stem mainly from the decrease in derivative financial instruments due to a general upward shift in interest rate curves, which were partly offset by an increase in long-term debt. The change in shareholder equity is explained by the total comprehensive loss of $139.8 million, the dividends declared on common and preferred shares totaling $65.7 million, and by the $11.6 million in distribution to noncontrolling interest. As shown on the next page, the normalized free cash flow has increased by $18.6 million on a trailing 12-month basis. This increase in free cash flow was due mainly to the contribution of the Salvador and Mountain Air acquisition achieved during mid-2020 and from the Hillcrest facility, which started delivering energy during the second quarter of 2021. A decrease in interest payments on the corporate revolving credit facility concurrent with the Hydro-Québec private placement in February 2020 and a decrease in interest payments related to the Alterra loan reimbursement in full in January 2021. Also an increase in revenue from the facility is affected by the BC Hydro and post-curtailment which mainly impacted the second quarter of last year. And an increase in distribution from joint ventures and associates primarily due to a distribution received from Energy Llaima in the second quarter of 2021, ahead of the closing of the transaction. These items were partly offset by an increase in debt principal payments stemming from the Phoebe and Foard City facilities commissioned in late 2019 and from the Mountain Air acquisition in July 2020. An increase in free cash flow attributable to noncontrolling interest, stemming mainly from the Mountain Air acquisition, and a decrease in cash flow from operating activities before change in noncash operating working cap from the Phoebe facility commissioned in late 2019 due mostly to an unfavorable difference between sales at the Phoebe node and purchase at the ERCOT south hub compared with a favorable difference in the comparative period. For the trailing 12 months ended June 30, 2021, the normalized payout ratio amounted to 136% of free cash flow compared with 150% for the corresponding period last year. On that note, I will give the floor to Michel for the operational review of the past quarter. Thank you.

[Michel Letellier, President, CEO & Director]

Thank you, Jean-Francois. [Foreign Language]. Good morning, everybody. Busy, busy subsequent event. We have been quite active lately. We -- you have seen that we have completed the acquisition of Llaima in Chile. So we now own 100% of the activities in Chile. We did that in the sense that we like what we are seeing in Chile. We have now been there for almost 3 years. Got to know the management, got to know also the lay of the land. And I must say that we have now a good team in order to continue the development and also some M&A activity. As you've seen also, we've made this little acquisition, Licán. Not a big acquisition. And for some of you that have questioned perhaps the price or the multiple of EV over EBITDA, we have been quite conservative in the next few years in terms of merchant pricing. These forecasts are using something around $35 per megawatt hour. As we speak, the spot market in Chile is in the range of $100, $115 per megawatt hour. So there is some volatility in that market. I think that on the long range, price will go forward in -- perhaps stabilizing around $50 to $60 per megawatt hour. The reason behind this and the reason why we are bullish on Chile, as I mentioned in the past, is the fact that Chile doesn't have any fossil fuel in its territory. They rely on import, especially natural gas and also coal. Now coal has been targeted by government agencies to be shut down. Initially, they were talking to shut it down by 2035. Now, there is a lot of rumors in the Congress to pass a law to speed up this to 2025, which is big because in Chile, almost 30% of their production comes with coal. So that's why we're bullish in a sense that we think that having coal being removed will actually bring the merchant pricing or even the PPA opportunity to a higher level. And we want to be there. We want to increase our presence in Chile in the sense that we want to have more diversified portfolio with solar, hydro and potentially some wind as well. If we go also, we -- quite a great news, great team effort for the full commissioning of Griffin Trail, on time and on budget. So very happy to report that now, we will be producing and potentially taking advantage of the good pricing in Texas in the summertime. This facility is merchant for the time being. We would love to have a structure like Foard City where we would have a as-produced PPA for the majority of the output. And then they expose on some of the volume into the spot market to take advantage of the volatility in Texas. It's also a -- showing our strategy to go away from these financial instrument, the power hedge, which, if you remember, creates such a liability for us in last winter. So I think that Griffin Trail will give us some natural hedge against potential problem with Phoebe with the ongoing power edge. We will try to get out of that arrangement, as we said earlier on. But right now, Texas is a little bit busy. There's a lot of activities regarding these power hedges. So we will be patient. And now that we have Griffin Trail fully merchant, I think we're well-protected for a future event. Also, unfortunately, you have all seen the fire in BC. You've seen also the sad story about the little town, Lytton. Lytton is a small town close to Kwoiek, our facility. Now unfortunately, that fire has grown and is now affecting some portion of our transmission line. We expect most of the cost be covered by insurance, but it's a little bit too early to quantify the amount of work that we'll have to do. But the team are getting busy to have all the spare parts being delivered on site, and we will assess the damage as the fire recede eventually. Construction activities, we've been quite active as well. We have advanced, almost finished the Hillcrest. As you've seen, we have achieved the COD, and we plan now to report that we can talk about power offtaker in Hillcrest. It's Amazon. So pretty happy to have reached COD last quarter. And we're only meeting -- the substantial completion for the construction will be met in the next few weeks. It's just a matter of finalizing all the tests on site. But the production is at full capacity. We are just finalizing all the remaining small tests and the punch list with the contractor. Innavik construction has started again. We have received the delivery by boat for the supplies for the summer. So things are going well. We're still forecasting the COD for the late Q4 of next year. Also, Tonnerre, the 9-megawatt storage in France, our first -- I would say, our first commercial activities with EVLO the subsidiary of Hydro-Québec, is advancing very well. We have received the first container in France, and we're forecasting the on-service date late Q4 and potentially the first week of January. So things are going well on that aspect as well. Development activities. We've been very busy. We have advanced the Hawaii project. Construction should start fairly soon in Hale Kuawehi. Paeahu, also later on this year, we should start construction. And the 2 other, Kahana and Barbers Point, are advancing pretty well. The people -- even if we had some restriction with COVID, the activities around the permitting have been going pretty well. Development activities. We're glad to report that -- actually, we've been talking about it for a long time. We just received our first construction permit for the Bois Régnie. It's our first fully developed project from our team. So pretty happy to see this. That's a first. We've been talking about it for quite a bit. Remember that France greenfield projects are a long process. It can take roughly 5 to 6 years to develop. So this is the first of, hopefully, a regular flow of projects that will be coming out from our prospective and development activities in France. Also, we have Lazenay. It's a 9-megawatt that has signed a PPA, but we only own 25%. Nonetheless, it's great to see France advancing and delivering these type of projects. So the idea there is to get 1 or 2 of these projects per year. And also activities around solar development has picked up, and we have made some good advancement also on that front. So pretty happy with what's going on in France. Not a big market in the sense that the project are fairly small in France. But they will be steadily now coming from this pipeline as we were expecting. Frontera in Chile has been fairly slow activities in a sense that we have all the permits. If you remember, for Frontera. We are now concentrating our development in [ San Carlos ], which is another hydro facility just upstream from Frontera on the same river. [ San Carlos ], as we mentioned a little bit in the past, has discrete advantage of potentially having a 5 hours storage capacity, which is great. If you remember, Chile is a market where we will see a lot of solar. And when you're talking about solar, obviously, the evening and night hours of the day are interesting in the sense that, usually, you see some more pricing in these type of the day. So we think that having a capacity, just like Licán has, a 3.5 and 4 hours capacity is a great tool to play in that market. Also very interesting to see that the price, as I mentioned, is coming up, especially for an offtaker. And the spot market is also quite active. And we're seeing more and more interest in these 2 projects. So we're confident that we will be able to reach an agreement eventually to sign PPA that would be supporting the decision to start the construction on both Frontera, and eventually, San Carlos. On prospective project, also as you know, we have been busy in the U.S. quite a bit. We have now been selected for our project, Boswell. It's a 330-megawatt wind project. I think that we were perhaps not so clear at -- when we issued a press release. We've been selected; final selection to sign the PPA. So there's no more selection on the price. We've been selected for a 30-year PPA. It's just that we have to sit down with them, negotiate the terms in the PPA. Usually, it takes a bit of time. We don't expect any big issue there. And then PacifiCorp has to go through the regular PUC approval that should go through by the middle of the year next year. And so we could be building Boswell sometimes in Q -- we could start construction in Q4 2022 or in 2023. So pretty happy on that aspect. Also, Palomino, we have been advancing. We have had a lot of public meetings on Palomino. Things are going pretty good. We have also advanced our term sheet with 2 offtaker for that project as well. So on the side of the U.S., things are advancing very well. We also have been advancing other project, earlier-stage project, for solar and wind in the U.S. as well. And of course, getting ready for the future RFP in Québec, the announcement was made, and we're getting ready to be in a position to submit some project in that RFP. On a general more comment, I would say that we've been seeing some extreme event lately from the [indiscernible] west -- forest fire in the West. You've seen also the big freeze in Texas. More flooding in the north part of Europe and Asia. I think that all these events are showing that we are definitely seeing some global warming effects. And I would say that Innergex has never been focused more in to trying to participate to solve this problem or to reduce the fossil fuel used in producing electricity. It's sad to see these things. And obviously, we have a human part of these events that we are seeing all in the news. But we're definitely seeing a great potential for us to take advantage of the new government incentive in order to have the fossil fuel being reduced to produce electricity, and Innergex will be there to meet these challenges. So on this, I would open up the question floor.

[Operator]

[Operator Instructions] Your first question comes from Sean Steuart with TD Securities.

[Sean Steuart, Research Analyst]

Michel, you touched on the RFPs coming in, in Québec. And I'm hoping you can give us some more context on the scale of projects you might anticipate submitting to that process as it evolves in the coming months.

[Michel Letellier, President, CEO & Director]

Well, the RFP is not that big. So obviously, project in Québec, we have project starting from just in addition to our existing ones. So those can be 25 to 50 megawatts. And we have project up to 300, 400 megawatts that we can work in and submit to these. So as you know, we don't like to talk too much about our strategy when we are getting prepared for RFP. But the -- I think that the very positive aspect is that Hydro-Québec and the government are saying that this is the first of, hopefully, many more RFP in the future. So we're very positive that at the end of the day, some of our projects will be able to win in these future RFPs.

[Sean Steuart, Research Analyst]

And you also addressed Griffin Trail, and you touched on opportunities to augment the revenue stream and supplement the merchant exposure. We're just wondering, how comfortable are you going ahead with merchant exposure short term? How could we think about potentially changing the revenue stream for that project? What time frame might that evolve? How hard are you working on supplementing that merchant exposure?

[Michel Letellier, President, CEO & Director]

Well, we -- as you know, Sean, we now have a team that can market and be more proactive looking for PPA. So we're seeing definitely more and more corporate America desire to sign long-term PPA. We -- Texas is a little bit of a peculiar market, as we all know. But we are more confident that price for long-term PPA are getting more, I would say, attractive for us. Remember that one of the reason why we went merchant in this case is that given the PTC and the volume of new projects that were developed in that area, long-term PPA will offer around $13 per megawatt hour. So I mean it's a little bit hard to commit on that type of PPA, knowing that on an average, the merchant is giving you a lot more than that. So as long as we could find some good pricing and that we can make sense of the PPA, we would definitely be looking. And again, we will be looking for a as-produced PPA. We don't want to get into a situation where we have to deliver and not be producing and is being forced to cover ourselves on the market. So that's why we are more comfortable right now to hone Griffin Trail on a merchant basis. But definitely, if we can find an attractive level of PPA, we would be, of course, happy to engage in such a PPA.

[Sean Steuart, Research Analyst]

And one last quick one for me, and I don't like to focus on quarterly hydrology, but it seems it's an extreme summer in BC. And beyond the transmission issues that should be covered by insurance. Can you speak to how hydrology is trending in the third quarter relative to LTA?

[Michel Letellier, President, CEO & Director]

Yes. Well, July was fairly good, but August is the driest month in BC. And we've seen the super heat that we have experienced in end of June and beginning of July have melted all of the low-altitude snow. So I guess that August is looking a little bit dry in BC for the next few weeks. The forecast for rain is not that great neither. So I would think that probably August will be lower than our long-term forecast for BC.

[Operator]

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

[Nelson Ng, Analyst]

I just want to follow up on Sean's question in terms of merchant exposure. So the last acquisition, the 18-megawatt hydro facility in Chile, is like that's fully merchant, right? And then Energía Llaima, those assets are now merchant as well, is that right?

[Jean-Francois Neault]

No. Duqueco will still have some contract until 2022. Licán is fully merchant. But what we want to do in Chile is to build up a portfolio where we can rely on a few assets in order to sign long-term PPA. There's always possibility in Chile to sign offtaker in a range of 4, 6, 7, 8 years. There's always, on a weekly basis, some small RFPs that are happening. Price right now are around $40, $42, $43 per megawatt hour for these 2, 3, 4, 5 years PPA. We think that it's a little bit weak, and we think that the market will improve. And we're waiting for the good opportunity to sign some long-term PPA, long term, 5 to 10 years PPA. I'm not that concerned about this possibility. If we really want to sign PPA, there is PPA available in Chile, it's just that, again, I think that we want to be patient. The coal facility will be taken out. And we have seen this summer, the effect of, one, decommissioning of coal, and the difficulties also to receive LNG has created a really hot market the summer -- well, their winter in Chile. And we've seen pricing over -- price $100 per megawatt hour. So we think that eventually, Chile will see their PPA pricing to come up. And like I said, we will be willing to sign PPA when we think they are attractive. And I think that $45 to $55 per megawatt hour is probably a good level for Chile.

[Nelson Ng, Analyst]

Okay. So you're going to put like several merchant facilities together, and then market it together as a, I guess, a more stable energy source to...

[Jean-Francois Neault]

Yes.

[Nelson Ng, Analyst]

Okay. Got it. And then just a quick question on the last acquisition, the 18-megawatt Licán hydro facility.

[Michel Letellier, President, CEO & Director]

Licán.

[Nelson Ng, Analyst]

Can you give a bit of background on that sales process? Like was it a distressed asset? Or was it a like competitive process? The reason I ask is, I know you assumed a very conservative power price, but using the $35 power price, I think the debt -- the implied debt is about like 11x EBITDA. And I think the press release indicated that some of the purchase price went to pay down debt. So I just want to try to understand some background on the sales process?

[Michel Letellier, President, CEO & Director]

Well, the sale with -- it was some, I would say, friend from Llaima management. So we were able to have a direct negotiation with them. It seems -- when you look at the next couple of years, it seems to be expensive. Although we could have chosen to show you numbers with $55 or $60 per megawatt hour, then you would have seen a more regular and reasonable multiple. It's just that when we made this acquisition, we were very conservative in the next few years. If you look at the curve in Chile, the power curve, the power pricing are showing the next 4 years to be weak because some of the old -- not old, but prior RFPs have or are going to be put in COD. But I think some of those projects won't be built, and I don't think this pricing will be reflecting the actual market. We -- like I said, we'd rather be conservative in the numbers we are giving you, and it's not a big acquisition, of course. But it's a great small, almost brand-new asset, very well-built in a region a little bit souther than our existing facility. So I think when we have the ability to acquire hydro at a reasonable pricing with a good design and well built, I think that we are going to act on it. In Chile also, which is great, you own the facility, meaning that you own the land. So these facilities are perpetual in a sense that as long as you are maintaining this hydro, they'll be lasting forever.

[Nelson Ng, Analyst]

Okay. That's great color. And then just one last question before I get back in the queue. Your Investor Day on September 15. I don't remember the last time you had an Investor Day. This might be the the first, or...

[Michel Letellier, President, CEO & Director]

That would be a first. Your memory is good.

[Nelson Ng, Analyst]

Yes, I was trying to think back to see if you had one previously. But yes. So that's your first Investor Day. So should we be expecting any kind of new announcements? Or is this more of an update on strategy? Could you just give some color on what we should expect on the Investor Day?

[Michel Letellier, President, CEO & Director]

I think that we are going to deep down a little bit more on our development activities, the market we're working on. There's not going to be a big announcement or a change of strategy. It's just that we want to explain you what we're doing. And I think that we have been investing a lot in our team to build up our capacity, to develop project, and grow our portfolio of development activities. And I, personally, I'm very enthusiastic about the latest development that we have reached. Boswell and Palomino are 2 good examples. Those are fairly big projects. We're also advancing quite well in France. So I think that the message there is to show you our strategy on -- and the amount of effort we're doing in the development so that you could understand a little bit more our growth and reaffirming how 2025 financial guidance will be met.

[Jean-Francois Neault]

Yes. And I'll also give additional colors on our ability to go even beyond the 2025 guidance we provided due to the fact that we have Hydro-Québec here with us working as a partner for the JV we have announced last year. So we'll give more color into that. So that would be around the 2025 start plan, a deeper dive on how we will accomplish the plan, finance and everything. So that should be around that, and give a bit of color on the potential upside with Hydro-Québec.

[Operator]

Your next question comes from Mark Jarvi with CIBC.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I want to go back to Chile, and question around the debt. You took some of it out on Licán. But now that you own 100% of Energia Llaima in this asset, is there a plan to re-optimize the debt? And if you do and you stay a merchant for a while, what's the appropriate leverage going forward? So maybe just a bit of color in terms of the debt financing plans in Chile for the time being?

[Michel Letellier, President, CEO & Director]

For the time being, those 2 projects at Duqueco and -- well, the 3 project that hydro facility has existing non-recourse debt that are not necessarily optimal. So I think that also in the Investor Day, I think we'll give you a little bit of our view on our ability to create a little bit more synergy out of these existing debt and some other debt that we have in our portfolio. I think that -- it will be interesting to see a little bit of our strategy towards some of our mix of project finance corporate level. So I think that owning 100% of these will give us a little bit more flexibility also in that aspect and create a little bit more cash on cash distribution out of the existing facility.

[Jean-Francois Neault]

Yes. We're early innings into reorganizing Chile to make all that possible. And we'll give more color in mid-September, and we should start to see some synergies on our corporate structure, maybe 2022 and forward. So we'll provide more color in September.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And until you re-optimize the debt, is Licán -- does that actually add positive free cash flow? Because these EBITDA projections -- I know you're using conservative pricing, but if you took your pricing and the debt service, are you cash flow-positive right now?

[Jean-Francois Neault]

Yes. We cover -- yes, we're slightly positive for the first 5 years we provide. But again, we're very conservative on the EBITDA for the first 5 years. So we see, on an average, 10 years is much better. And -- but yes, with the current debt structure and amortization schedule, we're free cash flow-accretive. Not big, but...

[Michel Letellier, President, CEO & Director]

There's also something also in Chile that you guys have to remember. There is a good system where the reward capacity. And in the case of Licán, we're receiving -- roughly 25% of the total revenue are coming from capacity payments. And I'm saying that also because it's creating also some opportunity for potential investment in batteries in Chile. Recently, the rule has been updated to include battery for full recognition of capacity contribution to the system. There will be a -- well, the recognition will be subject to a 5-hours capacity battery in Chile for receiving 100% of the capacity payment. So that's going to create potentially some opportunity for us to mix solar and battery in Chile in order to have, I would say, access to this capacity payment, and of course, trying to take advantage of the arbitrage between solar hours and evening and night pricing.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Great. And I know you probably don't want to take a question on Texas, Michel, but going to come back to it quickly on Flat Top and Shannon. I know that one option is a foreclosure, the other one is maybe the tax equity or the other partners buy you out. Is there a difference between either of those now you've taken the impairment? I mean the hedge losses are pretty substantial. Just help us understand if it goes either the foreclosure route or the, I guess, asset sale where you shared your equity? Is there any change in terms of our view of what the impact is?

[Jean-Francois Neault]

No, Mark. I mean, I doubt that foreclosure is an option for the tax equity and Citi. So this -- I doubt that this is an option for now. So those assets are held for sale. So guys only see what could happen from Shannon and Flat Top as a bonus for us. Okay? So either foreclose or a sale will not bring any more write-offs or impairments or anything. So this is all done. So anything that can happen from the sales process is going to be a bonus for us. So we don't want to provide more -- unless Michel, you want to get into it -- we don't want to provide more color on the outcome of the sales process. But I would say my view is more likely to be a sale or a consensual handover, if you will, versus a foreclosed, but that's our view. But no change.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then a lot of questions around inflation and solar panel cost increases. You did mention Hillcrest CapEx a little bit. Is that from a cost increase on the supply chain? Or is that just [indiscernible] you think about Palomino and the projects in Hawaii, where are you guys in terms of procuring things and trying to lock in prices at this point?

[Michel Letellier, President, CEO & Director]

That's a very good point. Hillcrest, not necessarily. Some costs were related to accelerated means to deliver some components, but not that much. I think it was unusual or unfortunate because it's PCL, a Canadian contractor, big Canadian contractor, was using also a Canadian subcontractor for electrical component. And I would say that they had some difficulties in managing the site from their perspective of using Canadian going into the U.S. while we had those restrictions. And it created a lot of inefficiency throughout the construction period. And just, I guess, very unfortunate to have seen that, but they had to have also a lot of people. Not necessarily skilled people, and that might not have been the greatest strategy neither to complete this facility, because at one point, they have more than 900 people on site. So all in all, I would say that we were finalizing these negotiation with PCL, but a lot of inefficiency is at the bottom of this increase, I would say.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then in terms of any pressure on cost increases for projects you're working on in terms of your ability to pass that on the PPA? Or just where you guys are in terms of locking in prices on some of the projects you want to complete in the next couple of years?

[Michel Letellier, President, CEO & Director]

We're quite advanced in Hawaii, and we have updated our construction costs for Hawaii. We're okay. I guess that the worst there is the transportation costs. We're hoping that we have an agreement with the supplier to share some of the risk on the transportation. We're seeing some relief on that aspect. And most of the component will have to be delivered in the first quarter next year. So we're hoping that by that time, the pressure on transportation would have eased a little bit. Other than that, it's not huge. I think that we're still in line with our initial budget with some small increase. And for Boswell as an example, or Palomino and all that stuff, we have had some update before agreeing with the PPA pricing. So I think we're in a good spot on that aspect. We're not too exposed on these, I would say, increase in pricing. And for future RFP, if price of equipment are more expensive, we'll definitely adjust in the PPA pricing that we will be submitting.

[Operator]

Your next question comes from Rupert Merer with National Bank.

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

In your disclosure, there's some discussion about curtailments on Foard City. Wondering if you can give us an update on what you're seeing in Texas on curtailments? What's the outlook for future curtailments, not just on Foard, but on the other projects, Griffin Trail and Phoebe?

[Michel Letellier, President, CEO & Director]

Well, it's a tough question, though. Some curtailment are economic, or sometimes, they can be related to some upgrades on lines. In summer time, usually, they don't work on the transmission unless it's an urgent repair. I would say that we are seeing some curtailment -- economic curtailment in Phoebe. But remember that at Phoebe, we can -- when does that -- when this happened, we can buy on the market and then deliver on our obligation on the power hedge. Usually, when we have economic curtailment in Phoebe, it's because prices are below 0, and hence, we can take advantage of buying at 0 and selling at our agreed price under the power hedge. For Griffin Trail and Foard, we're not expecting too many curtailments. We're actually -- we're seeing a little bit of improvement on the long-term basis in terms of Griffin Trail. I think that the -- also the last crisis and fixes are putting a lot more focused on the reliability of the system of ERCOT. And the -- I think, are planning to upgrade their distribution system to take into consideration the new build that is going on in Texas. But, Rupert, it's difficult to answer that question. We -- of course, we are asking some expert to give us some guidance on those. We're using also our new team that specialize in trading to try to understand more what's going on in the grid in Texas. But we're hopeful that over time, the grid will get upgraded in order to take advantage of their great natural resources. And we're still positive about these, I would say, basis story in Texas, but it's volatile. It's a market that's pretty volatile.

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

Okay. Great. And then getting back to Phoebe. So you've settled the contracts following the storms earlier this year. How do you view the contracts that you have on Phoebe now and the risk to that project going forward?

[Michel Letellier, President, CEO & Director]

Well, it's -- we've said it, we didn't change our view. We don't like these power hedges. They're not that easy to get rid of. We're working on it. We have to have also the blessing of the tax equity, which is sometimes a little bit of a challenge. Now if we can switch that at a reasonable price, we will. We are a little bit more comfortable knowing that we now have Griffin Trail on the spot market. So we think it's a little bit of a natural hedge for us. Not a perfect hedge, because sometimes wind and solar are not match in terms of natural resources. But we think we're better protected this way than before. And we settled with the hedge provider for Phoebe because we think there's still some value, economic value in Phoebe. So it made sense. We had more difficulty to find some economical value in Shannon and Flat Top.

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

Great. And can you remind me how long are the hedge contracts you have in Phoebe? How much longer will they go?

[Jean-Francois Neault]

The business edge contract is ending this December.

[Michel Letellier, President, CEO & Director]

But the power hedge...

[Jean-Francois Neault]

But the power our hedge is lasting a few more years. About 9...

[Michel Letellier, President, CEO & Director]

I think 9, 9.5 years left, or...

[Jean-Francois Neault]

So we'll get -- I'll get back to you precisely on that, Rupert. Or if we find the answer during the meeting, we'll let you know.

[Operator]

The next question comes from Ben Pham with BMO.

[Benjamin Pham, Analyst]

Just a couple of questions. BC wildfires, is that impacting any of your other assets?

[Michel Letellier, President, CEO & Director]

No. Not for the time being. We're early in the season, of course, but our crews are working also to get prepared, try to clean up as much as possible the right of way to have the minimal fuel around our transmission line. But no, the fighters are more present in the interior. And we -- most of our facility are more on the coast, where it's a little bit more -- less of an issue these days. But we're early in the season. So I can't say that we wouldn't be affected anywhere else. But for the time being, there's no other threat.

[Benjamin Pham, Analyst]

Okay. And then going back to Texas Shannon, Flat Top, if you end up looking to sell these assets. Let's say that's the relative -- would you consider adding any other Texas assets in the mix maybe to improve the sale price?

[Michel Letellier, President, CEO & Director]

I think it would be difficult to do this. The -- in order to have, I would say, to manage the timing and the process, it would be difficult because in the case of Flat Top and Shannon, we have to go with the time line of Citi. And we don't want to get caught into being forced to a certain time line that we would not control for another sale process. So -- but I wouldn't -- I would say -- how do we say that? I will not say that we're not looking into or be willing to sell some more assets in Texas in the near future. But it would be very difficult to have those while we're talking about Shannon and Flat Top.

[Jean-Francois Neault]

Yes. And we do have partners also. We have partners in Shannon and Flat Top. So if anything happen, it's not going to be bundled. I don't foresee that as a possibility.

[Benjamin Pham, Analyst]

Okay. Makes sense. You mentioned Hydro-Québec in some of your commentary. Could you maybe share any sort of progress year-to-date on projects that you're looking at? Will the HQ anything you've agreed on a lot, did not agree on? Did you pass on some projects? Any additional color would be helpful.

[Michel Letellier, President, CEO & Director]

Well, I guess, as we've said, we -- the teams are starting to work very well together. And starting is not a good word because we've been at it for 1.5 years. But it takes -- of course, it takes a little bit of time, right, to develop a good chemistry between 2 companies that are very different. I'm very, very happy to see how the evolution of the strategy, the way we have been working in some due diligence together are very positive. I think that the confidence between the team are getting stronger and stronger. So we can rely on each other instead of sometimes doing twice the same due diligence. Sometimes, that can happen when you have a partner. In this case, we are working very well and sharing some responsibility on due diligence. So it's just a matter of time. I think that we'll see some success out of these effort. And again, very, very positive relationship with Hydro-Québec in these processes. And also looking into deploying more battery with them is -- there are some effort also on that ground. It's just -- sometimes, it takes a little bit of time before we can announce some success. But I have no doubt that seeing the team working so hard together will be successful in the near term.

[Jean-Francois Neault]

Yes. If I can add, Ben, the process is well tuned right now. We've bid together 3 to 4 process. We're aligned in interest and everything. So I agree with you, Michel. I mean, it's a matter of time, and we still are, both of us, disciplined looking into this. So you have to be, but I'm confident.

[Operator]

Your next question comes from Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

I think it's on Page 20 of your presentation where you've got prospective projects by region. And those projects are really skewed to Canada at this point in time. And is that really a function of just legacy competitive positioning and comfort with the market? And then I guess the follow-up question really is when do we see the larger markets like the U.S., and to a certain degree, Chile where you've started to build quite a platform, become bigger elements of prospective projects?

[Michel Letellier, President, CEO & Director]

That's a very good point, and you're right on. It's a little bit of a legacy work that we have done in Canada. Just in Québec, we have, I guess, thousands of megawatts in wind resources that we have measured. We still have some win also in BC and some hydro in BC. So you're right, it's a little bit of a legacy effort from the past. And sometimes, these project doesn't cost that much to keep on our portfolio. And we're happy to have kept some active or semi-active project in Québec now that the RFP are coming back. But you will see a lot more project being developed in the United States. We're not -- we have started in the United States in the last 2, 3 years to be more and more active. So yes, you will see U.S. being a big driver for future prospective project. A good example of this is Boswell and Palomino, but we're still developing. We have this strategy to grow in solar in the States and also some wind. You'll see numbers coming up soon, Andrew. And in Chile, prospective project, we have some -- like I said, we have Frontera and we have San Carlos. Working also on the possibility of developing our own pipeline of new projects, solar and wind. But lately, it has been, I would say, in Chile, a market where we could have acquired existing facility at discount. Remember, Salvador. I wouldn't say that Licán is a discount, but building brand-new hydro facility these days are costing anywhere between $2.5 million to $3.5 million per megawatt. So when you can acquire one fully permitted and in very good design at a lower price than building a brand new one, we're taking advantage of these markets right now in Chile. But that doesn't mean that we wouldn't be able to eventually develop our own pipeline of solar and wind and battery. And battery that I would say.

[Andrew M. Kuske]

Okay. That's helpful color and context. And then maybe just a follow-up. Do you see yourselves having a higher win rate, if we're going to call it that, processes in Canada versus those in the U.S. at this stage in time? And then when does that start to equalize?

[Michel Letellier, President, CEO & Director]

Well, wind, definitely, in Québec, right? Solar in Québec is -- well, I wouldn't say that we will not develop solar in Québec in the near future. But definitely, wind is less expensive to develop in Québec. So definitely more wind in Quebec. The state would be probably half and half. It depends on some of the opportunity, but we're working hard on trying to develop solar. In France, it will be wind, more wind, but actually, we're making good progress on solar in France as well. So you will see some solar project being developed in France. And in Chile, it will be a mix. I would say solar will be fairly easy to build in Chile, but solar without battery or without a different portfolio, i.e., wind and hydro, just solar, building solar by itself in Chile will be quite challenging economically. So solar will have to be embedded in a portfolio or match with some batteries. And Chile has still some opportunity for developing some hydro as we are mentioning, and we're always on the lookout to acquire existing hydro if it makes sense in terms of economics.

[Operator]

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

[Naji Baydoun, Equity Research Analyst]

I just had a couple of questions on the M&A front to start off. I know you touched on this earlier, Michel, but maybe you can provide us more details on really the thesis behind the recent acquisitions in Chile. I mean, since you originally acquired the stake in an Energia Llaima, it's been really difficult getting some new projects off the ground. So in your view, what's really changed since 2018 that gives you a lot more confidence on the outlook in Chile today?

[Michel Letellier, President, CEO & Director]

Yes. Price, price, price. I think that -- and the driver for better pricing in Chile is the decommissioning of coal. Chile is working with marginal cost and the operator of the system is managing, first, the big hydro available. And then it was coal. And thereafter, it was natural gas, and eventually, diesel. So these were stacking in terms of marginal cost, and coal was very low. I think coal was in the range of $20, $25 per megawatt hour. I remind you that they were able to be profitable because they were receiving also the capacity payment as recognition for their contribution to the system. So that's why it was, I guess, really, really low. One has to understand that Chile went from an energy crisis following the natural gas crisis with Argentina, where Argentina stopped delivering natural gas to Chile, then price went up to the roof in the 150 to 200 megawatts. Some contracts were signed at north of $100 per megawatt hour. So a lot of projects were developed at that time, given this market [ signal ]. And it took a bit of time for the market to digest all these overbuilt, I would say, following that crisis. Remember that Salvador, we bought Salvador on that basis. Salvador was in a foreclosure process with their bank. So -- and was a little bit of a legacy of that earlier crisis where the market [ signal ] give a lot of opportunity to renewable energy developer to build the facility. But things have evolved, and some LNG will build, and coal continue to be on the market. So the price from, I would say, 5 years ago, went very high to low, low, low. And I think we have hit the ground and prices are now improving. So we have not developed Canelo. Canelo was just a 12-megawatt. It could have been okay. But we decided not to focus on Canelo and go for existing acquisition and having more significant investment in Chile. So I wouldn't say that the management there were not good. They were great in developing hydro facility. Frontera is fully permitted, and [ San Carlos ] is advancing very well. So I think that their ability to actually bring a project to finance permitting and being available for construction is great. They were not focusing on wind or solar. That was the decision of the prior owner. And why have they decided to sell? Is it -- well, it was not their, I would say, their core business. They have a lot of other investments. Some of our past partner had a lot of real estate exposure in Peru and Chile and in other places in South America. And you understand that with the COVID, these investments suffered quite a bit. So I think that they had other opportunity to deploy their capital, and that's why we decided to acquire them in a sense that we want to continue developing, and it was becoming a little bit more difficult to have the common view and common strategy on growth for Chile. So the guys in Chile, the management in Chile have had some, I would say, some limitation in their ability to grow with us. I think that we will unlock their full potential, and you will see some more activities in Chile that will show that they have a great -- the great ability. And supported with our own team here in Montreal, I think we can do great things.

[Naji Baydoun, Equity Research Analyst]

Okay. That's fantastic color. And you mentioned South America is a good segue to my other question on M&A. I think in the press release, for the Energía Llaima acquisition, you talked about having ambitions, I guess, to expand further into Latin America. Is that something you're looking at closely today? And what would be kind of the approach to entering a new market there?

[Michel Letellier, President, CEO & Director]

Well, we like Chile. Latin America is complicated. Peru, we've seen what's happening in Peru. So Peru was always a country where we wanted to deploy some capital. I think we can take a little bit of a pause and look maybe in a few months what's -- what will be the outcome of the existing political, I wouldn't say, crisis, but the event. Chile, on the other hand, I think, will come out from the renegotiation of the constitution in a good shape. We'll see some -- the present -- the Presidential -- the present -- the election for the new president in the fall. I think that it will be something centered. Left probably will win, which is a good thing. We've seen some government in the past, center, center-left, that has done great for the economy. I think that it would be even better to have a center to center-left government to oversee the new discussion around the constitution. So we feel very comfortable with the political aspect in Chile. And the economy of Chile is looking great. I mean, you've seen the price of copper these days. We understand that the economy of Chile rely a lot on that copper, and the future for the use of copper seems to be very bright given the fact that electrification of transportation will consume a lot of copper for the future. So I think that Chile is a great place. It's not a big market. We're going to have this team on the ground. So it doesn't take that much effort or time from Montreal to follow-up smaller acquisition and then to continue to develop under Chile. It's just giving us another platform to develop and another market to grow.

[Operator]

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

[Karine Vachon, Senior Director – Communications]

Thank you very much, and we look forward to seeing you at our first IR Day in September.

[Michel Letellier, President, CEO & Director]

Thank you, everybody.

[Jean-Francois Neault]

Thank you.

[Operator]

Ladies and gentlemen, you may now disconnect your lines.