Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2020 Fourth Quarter and Year-end Results Conference Call and Webcast. [Foreign Language] [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]

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 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 Q4 and year-end results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our operational highlights.I'll now turn over the conference to Mr. Neault.

[Jean-François Neault]

Thank you, Karine. Hello, everyone. I am pleased to report strong financial results. The growth we posted in 2020 over last year is mainly attributable to the commissioning of the Phoebe solar and the Foard City wind facilities in late 2019 and the contribution of the Salvador and Mountain Air acquisitions completed in May and July 2020. Production and revenues from the year were up 24% and 10%, respectively, compared to the same period last year. Adjusted EBITDA was up by 3%, while adjusted EBITDA proportionate was up by 8%.Before going further, I would like to stress that we are reporting on a continued operations basis, which excludes HS Orka from the 2019 results.On Page 8, we will comment on the 3-month period results, while the remaining of the presentation, comments will be made on the full year results.For the 3-month period ended December 31, 2020, adjusted EBITDA increased by 14% compared to the same period last year. This increase was mainly attributable to a higher contribution from the hydro facilities in British Columbia and Quebec and to the Mountain Air and Salvador acquisitions completed in 2020. These items were partly offset by lower revenues from the Foard City due to an unfavorable net selling price, higher operational expenses and a lower contribution from the France wind facilities.The joint ventures and associates contributed $15.5 million to the adjusted EBITDA proportionate compared with the contribution of $20.1 million in the same quarter last year. This decrease was mainly due to a lower contribution from the Shannon and Flat Top facilities, mostly due to unfavorable net selling prices partly offset by higher contribution from Jimmie Creek and Toba Montrose facilities. In addition, the proportionate PTC's production tax credit increased from $17.8 million to $19.6 million due to the higher production from the wind farms located in the United States. Overall, adjusted EBITDA proportionate increased by 8% compared to the same period last year.On Page 9, for the year-end December 31, 2020, hydroelectric power generation segment generated $173.9 million in adjusted EBITDA, representing a 2% increase compared to the same period last year, mainly due to a higher contribution from the facilities in British Columbia despite the curtailment imposed by BC Hydro for 5 facilities. Operational expenses in British Columbia were higher compared to last year due to a favorable settlement of the water rights claim in 2019.Wind power generation segment generated $263.9 million in adjusted EBITDA, representing a 4% increase compared to the same period last year. This increase was mainly attributable to the Mountain Air acquisition completed earlier in the year, the commissioning of the Foard City wind farm in late 2019 and higher revenues from most facilities in France. These items were partly offset by a lower contribution from the Quebec facilities and temporary shutdowns and production restrictions at some facilities in France.Solar Power generation segment generated $39.2 million in adjusted EBITDA, representing a 26% increase compared to last year, due mainly to the commissioning of the Phoebe solar facility in late 2019 and to the Salvador acquisition completed earlier in 2020.On Page 10, the 8% increase in adjusted EBITDA proportionate in 2020 is mainly due to the production tax credit generated by the Foard City wind farm following its commissioning and higher revenues at the Toba Montrose and Dokie facilities. These items were partially offset by a lower contribution from the U.S. wind facilities explained by lower revenue from unfavorable net selling prices, a lower contribution from the facilities in Chile as well as by a lower contribution from the Jimmie Creek facility, mostly due to the curtailment imposed by BC Hydro.Continuing on Page 11. The $122.2 million increase in long-term debt is related to construction activities at Hillcrest and Griffin Trail and to the long-term loans and borrowings assumed in the Mountain Air acquisition. This increase was partly offset by the corporate revolving credit facility repayment made following Hydro-Québec private placement, net of the amounts used toward the respective purchase price of Mountain Air and Salvador acquisitions.On Page 12, changes in the total assets stemmed mainly from the increase in property, plant and equipment related to Salvador and Mountain Air acquisitions, the increase derived from the construction activities related to Hillcrest, the Griffin Trail projects and the increase in investment tax credit recoverable relating to Hillcrest construction cost. These increases were partly offset by $228.5 million in depreciation and amortization and a $65.1 million decrease in investment in joint ventures and associates due to distribution received and an impairment charge on the investment in Energía Llaima.Changes in total liabilities stemmed mainly from the increase in long-term debt and the increase in derivative financial instruments due to a general decrease in interest rate curves. The change in shareholder equity is explained by the private placement of $661 million to Hydro-Québec and an increase in noncontrolling interest stemming from the Mountain Air acquisitions. These items were partly offset by dividend declared on common and preferred shares.As shown on Page 13, the free cash flow remained constant on a trailing 12-month basis. The factors that have impacted the free cash flow are the free cash flow contribution of recently acquired commissioned projects, the higher contribution from Innergex hydro facilities in British Columbia and lower interest payment on the corporate revolving facilities concurrent with the Hydro-Québec private placement. The favorable items were partly offset by the BC Hydro in post curtailment, the sale of Innergex ownership interest in HS Orka in May 2019, a lower contribution from the Quebec wind facilities, the higher general and administrative expenses to support the corporation growth. Free cash flow was also negatively impacted by an increase in debt principal repayments and by the recovery of maintenance capital expenditures and prospective project expenses following the sale of HS Orka in 2019.For the trailing 12 months ended December 31, 2020, the payout ratio amounted to 135% of free cash flow compared with 102% for the corresponding period last year. When normalizing its free cash flow and payout ratio with the nonrecurring curtailment imposed by BC Hydro and the decrease in corporate revolving facility interest payment, combined with the increase in the quarterly dividend, Innergex estimate its payout ratio to be at 109%. Also, the Board of Directors has decided to maintain the annual dividend at $0.72 per common share for 2021 in light of the foreseeable growth plan both in terms of acquisition and greenfield development.Before I conclude, let me update you on the Texas situation on which we recently issued a press release. At the time of the press release, we estimated the financial impact of the recent weather events to be, on a consolidated basis, between CAD 45 million to CAD 60 million. This estimate was based on the publicly available information as at February 17. Innergex now estimates that the financial impact of the weather events during the storm that persisted until February 20 has reached, on a consolidated basis, approximately CAD 80 million, mainly due to the unfavorable impact from the realized loss on the power hedges on Flat Top, Phoebe and Shannon sites. This financial estimate could still change as additional information becomes available. Force majeure and other mitigating possibilities are being evaluated.On that note, I will give the floor to Michel for the operational review of the past year. Thank you.

[Michel Letellier, President, CEO & Director]

Thank you, Jean-François, and good morning, everybody. I think that we have to cover a little bit of this Texas situation before going to the review of the year and a little bit of a forecast for next year.It's very unfortunate that we had to live through this crisis. It's a financial crisis, but it's also a human crisis. A lot of Texan residents had gone through a really bad time last week. I'd just like to also say thanks to our dedicated employees that have gone through this crisis, even though they were facing some problem at home, and they went on site. It's true also for the Vestas and the GE guy that helped maintain our facility. So it was not an easy situation. I would stress that it was quite extreme in terms of temperature and also duration and that has led the PUC to arbitrarily come up with a ceiling or a floor price of electricity for quite a long period of time. And as you all read, it stands, for a period of a few days, at $9,000 per kilowatt hour, which is extreme.One could say and look back and say, well, it could have been foreseeable that these things could have happened. It's true. But when you put all these stats together, it was very, very difficult to forecast that type of magnitude both in terms of weather event and also on pricing and duration. Over and above that, as you've seen in our press release and probably read about it in the press, the extreme weather had brought and started with freezing rain that, unfortunately, flows up our plant in Flat Top. And the crews were trying to come up with a solution. But unfortunately, the weather persisted and also all the road access were very, very difficult and icy so, hence, prohibiting big trucks and supply to come to sites. So it was a little bit also a perfect storm in a sense that, unfortunately, our other sites were available. We have Shannon, and we also have Phoebe and Foard. They were available to produce, but somehow at the -- throughout that crisis, we've seen lower wind regime and overcast situation and some snow also that has reduced the capacity of solar plant to produce and wind, of course, to produce.So all that was very -- I would say come up with this notion of being caught in a perfect storm. Are we happy with this? No. But we had already initiated a new strategy in our investment in United States. If you remember, we were talking about Griffin Trail, a very different approach where we have secured the minimum revenue for the project to satisfy the tax equity because one has to understand that all these power hedges were put in place in Texas in view of securing the tax equity financing for the PTC and the ITC in this market.So I would say that we wanted to get out of these power hedges. It was not necessarily easy. We're in the midst of talking to some of our tax equity partners at the time. But we definitely wanted to have a different structure in Griffin Trail, and we did. We did also a different approach with Foard, which worked very well. We have a PPA based on as-produced electricity for Foard on 300 megawatts out of 350, and we kept 50 megawatts of exposure to merchant. And actually, Foard did very, very well in the last -- through that crisis. And if Griffin Trail would have been built and in service, Griffin Trail would have done a fantastic financial result during that period of time.So bear with us. We want to have a different approach for Texas, and we did, and we had already initiated this new strategy. We want also to invest differently in the United States than we've shown through Hillcrest development, the 200-megawatt in Ohio that we're going to talk about in terms of construction. We also made an acquisition, Mountain Air, that diversified our footprint in the United States, and those projects are fully contracted.So we just want to make sure that you guys understand that we are not happy with what happened. We want to take this as a good lesson learned and try to find ways also to improve going forward. There might be some possibility of reducing this potential liability, as Jean-François said. I think that the whole industry in Texas is now sitting down and looking back at what happened and are hopefully coming up with new rules that would enable that market to be, I would say, more stable. You know that ERCOT and PUC and the governor and probably also on the Federal level, they'll all sit down. This is going to generate a lot of negotiation, a lot of new ideas. And I'm hoping that at the end of the day, this crisis would have -- will change Texas to be a better place to invest and to take advantage of the great resources that the State has in terms of renewable energy.So that being said, I'll be available also to answer some questions at the end but just wanted to make sure also that we -- we wanted to say that we are not taking this as a small back -- I would probably say it's not a small hit, but it's definitely something that is out there in the sense that we knew that these contracts were not perfect, and we certainly had a different strategy. And I'm hoping that you guys are going to focus on this.In terms of corporate development, at this time of the year, we always go back to look at -- to do a little bit of a look-back on what we have done during the year. And I'm pleased to report that 2020 was a very busy year. Just to remember together on Page 16 that we welcomed Hydro-Québec in our -- as a shareholder and also as a joint venture, a potential partner to develop project -- renewable project together. So we're quite happy. And on that aspect, we have started to work with the team at Hydro-Québec. But COVID-19 had slowed down a little bit the effort that we were able to put together. But definitely, this alliance is something that we want to mature and take advantage of.We also did 2 acquisitions. We've done an acquisition in Chile called Salvador. It's a solar plant. That is doing just great. And also, we bought 6 wind farms in Idaho, the project called Mountain Air, if you remember. So these are also part of the strategy to diversify our footprint in the United States. And also, those 2 acquisitions, if you remember, were made on the basis of making sure that it's helping the corporation to build up its cash-on-cash short-term position to improve actually our ability to help reduce our payout ratio. So we've said that many will be a tool in our toolbox to improve on this and to create value for our shareholders. And those 2 acquisitions are 2 good examples of what we intend to do with M&A.So on Page 17, also pleased to report that we've been busy in construction activities in 2020. We were hoping to have Hillcrest finished by December, but the COVID and the temperature -- I must say the temperature in Ohio was quite rainy throughout the year, and that had created a little bit of issue for our contractor to install the panel. But all in all, I'm very hopeful that by beginning of April, we should be all finished. We're producing electricity as we speak. It's just a matter of finalizing all the connection and testing all the systems. So pretty hopeful that by the beginning of April, things will be in full production.Innavik project in the north of Quebec has been advanced quite well. If you remember, we were afraid because of the pandemic, we will not be able to start construction. And at the end of the day, we were able to establish a good system where our employees were safe and also the local residents were safe. And we did quite a bit of advancement in Innavik, very happy to look back at what happened during the year, and we're in a position to start the construction as soon as spring comes back.The small project in France called Yonne. It's not a big project. But like we said, it's our first project to be fully permitted and built by Innergex team in France. It's just a matter of days to be fully interconnected with ERP in France, so everything went very well. Very happy to have our first in-house project to be developed and built in France.And a little bit surprise of last year with the Griffin Trail project, I just mentioned, in Texas. This is very different from a power hedge. We are exposed to the merchant pricing over there, but we don't have any exposure to cover our production in Texas. So this is, in a way, a good achievement in the sense that we have convinced the tax equity provider to have this new structure to benefit the -- to benefit for us and not being forced into power hedge. As we mentioned, this is something that we will not do in the future. And this approach of Griffin Trail, we would like to perhaps have exposure to some corporate PPA in Texas just as Foard.So this is something that our team is going to work also to have a portion being PPA-based but as produced, so that we don't want to have this problem of being short of electricity to service those PPAs. But things are going very well in Griffin Trail in terms of construction. We have used the same team as we've done in Foard. And actually, I'm pretty enthusiastic on how fast these guys are doing. We have, to this date, all the foundation and all the major civil infrastructure done. We have about 20 turbines already erected. And if things are going well in terms of weather, we're putting almost 2 turbines per day. So we need another 40, 45 days perhaps of good weather to finalize these erection of the turbines.On Page 18, development activities have been also on the forefront of the -- of 2020. Remember that we have 4 projects in Hawaii that we are working hard to get the permit and start construction on 2 of them. So this is something that is very important for us because, as you know, this is coupling solar and batteries and in a market where the local utility is concerned and wants to develop some good technical aspect to have this wind and solar be introduced. So we are learning a lot. And I think that these experiences or these projects will help us replicate these type of projects around -- on our market. I think solar and battery are the way to go in many markets to develop renewable energy and to be able to supply capacity through the evening.We also have made a good advancement in the project Tonnerre, which is only a battery. And this is also a good first commercial transaction with EVLO, which is the subsidiary of Hydro-Québec. EVLO is producing and selling a very good battery. We're proud to be the first customer of Hydro-Québec in this, and we love to be able to deploy more battery storage initiatives together with EVLO and potentially some other supplier, but we like to develop this relationship with Hydro-Québec where they have a great expertise on how to manage a grid. So we're very hopeful that this first project will bring many more in the future.And in terms of Chile, we have continued developing Frontera. And as you know, as I spoke about El Canelo water rights that we own just upstream Frontera. El Canelo is also advancing in terms of permitting. With the COVID, everything has slowed down a little bit in Chile. But we're developing, like I said, some other leads in Chile, also some solar projects that we're looking, some thermal solar projects also. We're ensuring some RFP from a copper mine in Chile, and so very, very still positive on the future outlook of Chile.This year, on Page 19, we're giving you, and we're going to report on this on a quarterly basis, the prospective projects. We were trying to give you a little bit more color on how advanced these projects are. I think that in the past, they were lumped into one big category. But we think that bringing you a little bit more color on how advanced these projects are through 3 categories is going to give you a little bit more perspective on how successful we're advancing these projects. And I'm pretty happy on the advancement we did in 2020. You're seeing that we have advanced solar. You know that we want to work in the United States in deploying our solar panel that are basically grandfathering or prequalifying some -- up to about 600 megawatts of solar project in the state with full ITC and very happy to have 200 megawatts. But you're seeing also in mid-stage that we have another 300 megawatts, 370 megawatts, so working hard on that aspect and working also to diversify through PJM, Pennsylvania, Ohio, West of -- northwest of the United States. It's also a target for this type of projects. We're developing wind as well. We have a portfolio in the U.S. that is very promising as well.So going forward, you will hear us, every quarter, giving you some update like this. We want to make sure that also France is developing well in this. We are advancing France. It's an important market for us. It's not a big project, but those projects have usually good economics, so also putting a lot of effort in France.On Page 20, we just want to give you a little bit of guidelines for next year, 2021. We'd love to be able to increase our production by about 15%, revenue by 12%, adjusted EBITDA by 12% and also adjusted EBITDA proportionate by about 12%. So I think we're going into the right direction there. Of course, we want to improve also on the cash-on-cash or the cash flow generation in 2021. Same strategy here. We want to make sure that we are developing our own project and use M&A as a tool to rebalance the cash on cash. You've seen what we've done last year in Mountain Air and Salvador. So all the team -- M&A team are focused to deliver this again in 2021.If we go to Page 21, we just want to give you a little bit of what we forecast for the 2025 strategic plan time line, plus to be able, as we've said in the past, to provide a 10% adjusted EBITDA. But what we are focusing more and giving you more guidance now is to also bring an increase of about 12% on free cash flow per share by 2025. So that's a commitment that the corporation has. Yes, we want to grow the EBITDA, but we also want to grow the cash flow per share to improve our payout ratio. And as I mentioned, M&A will play a role with this but also our own development pipeline project that we are developing.So on this, I think that we will be opening the floor. And I thank you, and Jean-François and myself are available.

[Operator]

[Operator Instructions] You first question will come from Rupert Merer from National Bank.

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

If we can maybe start with Texas. So outside of the benefit of Griffin Trail, which will diversify your contracts, what can you do to reduce the risk of having a similar outcome in the future? Have you looked at adding deicing technology and maybe talk about what that would cost or what your opportunities are to make changes to your hedge strategy?

[Michel Letellier, President, CEO & Director]

Well, that's a good point, Rupert. I think that Texas now -- tax equity are going to be also, I would say, a partner also in trying a solution. In the past, they were acting more as a lender, so to speak. But with this happening, of course, the power hedge provider has now come up as potential lender or creditor in these things. So suddenly, tax equity are now an equity partner. They were always an equity partner, but they were kind of a preferred equity partner, almost like a -- well, almost like a lender. They were acting more like a lender. And so I think that they will be part also of the solution.In the past, we were trying to unwind these things and then find the financial solution to -- on one of these things. And they were very, very reluctant to engage. We were trying to reduce the exposure in Shannon for the last year or so. And it's always difficult, always complicated, to get their attention on these things. So now that they are part of the solution, and they're basically sitting on the same side of the table for then us, I think we will be in a position to unwind some of these power hedges, either by reducing them completely or going a little bit like Foard or Griffin Trail and having then the time to renegotiate perhaps some corporate PPA or different approach.But deicing stuff and technology, if we go back to Flat Top, it's true that if Flat Top would have been in a better position to produce, we would have incurred a lot less losses because we would have been producing throughout this period. But the problem is this $9,000 ceiling that was introduced. And I think that this is something that will have to change in Texas going forward. Of course, like I said, I think we will be in a position or trying to be in a position to get rid of this liability, these power hedges, get out of these positions. But nonetheless, that wouldn't solve the problem of Texas per se. I think that this is a good time to reflect on the market rules. And perhaps it's been a while that Texas was entertaining some discussion around capacity payment.As you may all know, Texas doesn't have any capacity payment. They rely on having this big volatility on energy pricing to entice investors to invest in Texas, but that has those limits. At one point, what is $9,000 going to do to induce people to try to produce when you're frozen, when the line -- the gas line is frozen, when the pipe -- water pipes are frozen? What else can you go? I mean $9,000 is not helping anybody. It's just creating chaos. And I think that the people will realize that. I also think that they might reconsider being interconnected to the rest of the country. They only have a few interconnections to the rest of the states, the neighboring states. So all these, I think, will come up and there will be a lot of discussion.So yes, we could definitely look into -- perhaps look into what we could do in our own facility to improve our ability to produce with cold weather. But even in Canada, a lot of our wind farms are frozen up in a recurrent occasion in Canada. It's just that we are building these downtime in our long-term forecast. And that's it. It's just that when you're not producing, it's sad. But you're not losing, you don't have to cover yourself with very, very high pricing. And this is what happened in Texas. This is the main reason why we had suffered these losses, is the fact that the price went through the roof at $9,000 per kilowatt.

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

And what do your contracts say about force majeure? And what does that process look like from here?

[Michel Letellier, President, CEO & Director]

We will be in litigation, Rupert, so I will not comment on this that much. I'm just saying that -- I think that a lot of players have retained a litigator. We have -- we're in the process of evaluating all our positions and how to react. We're in a position where our settlement dates are on a monthly basis. So we have a few weeks before we have to make our position clearer. We have issued force majeure to our hedge provider. And I think that some other folks have only 5 days to settle, and they are right now in the middle of some discussions. So this is going to be a very dynamic situation in the sense that a lot of players are going to be in this. What I can say is what we have provided is the maximum liability that we have. And one has to remember also that we own 100% of Phoebe. We own 100% of Foard. But we only own 50% of Flat Top and 50% of Shannon, and those are nonrecourse to Innergex. So there's no way that these can filter and increase the financial liability to Innergex whatsoever more than its equity portion in Shannon and Flat Top.

[Operator]

Your next question comes from David Quezada from Raymond James.

[David Quezada, Equity Analyst]

Just a quick question, a follow-up here, on Texas. Michel, I think you just described the $80 million. Maybe I should just confirm this with you that it was $80 million. But I think you also mentioned that there might be some movement in that number. Would that kind of suggest that you think the $80 million is the high end of what the exposure could be and you expect any changes to that number would be to reduce it?

[Michel Letellier, President, CEO & Director]

Well, yes. Well, right now -- and of course, we're in the middle of the crisis. There is litigation going all over place. There's politicians sitting down with ERCOT, PUC. But what we're hearing is that a lot of stakeholders are questioning this $9,000 and also the time that $9,000 were effectively enforced. So anything that comes out of those discussions that would reduce that $9,000 or the numbers of hours that, that $9,000 were input, would be directly proportionate. If you would bring that ceiling to 3 or 4, then suddenly, our exposure will be limited to something around $30-ish million. So what we want is be very transparent in this.And some of you might have been surprised that, that $80 million stands versus the ceiling of the range we had provided. But bear with us. We were in the middle of the crisis. We wanted to give you some guidance early on that crisis. And we're trying to forecast what would be happening further during the week, and we were surprised by Thursday losses that we had incurred. There was very little sun, and the forecast had forecast a little bit more sun. And the cold temperature continued and, unfortunately, a very weak wind happened in the night of Friday -- Thursday to Friday. And that's increased the losses versus our call on Wednesday.So yes, I think that the $80 million is the maximum exposure that we have. And again, it's a potential liability. We haven't settled. We haven't sent any cash yet to the third party. So like I said, it's a little bit early. Everybody are scrambling with lawyers and arguments and then meetings and stuff like that, so I think that we'll know in the next few days if PUC and ERCOT are revising that ceiling pricing. And if they do, I guess, that we'll issue perhaps, and we'll keep the market in line with those news.

[David Quezada, Equity Analyst]

That's great color. I appreciate it. It's certainly a very dynamic situation. And then maybe just one related question, just with respect to your 2021 outlook and the 12% year-over-year EBITDA target. I guess that you'll probably wait until things settle out with the litigation and the force majeure before you look to, I guess, potentially revise that number.

[Michel Letellier, President, CEO & Director]

Yes, I agree. And this was normalized without that settlement. So yes, we'll give you more color as this situation unfolds.

[Operator]

Your next question comes from Sean Steuart from TD Securities.

[Sean Steuart, Research Analyst]

And thank you for all the detail. Michel, the U.S. is still 23% of your prospective capacity pipeline. And as you gravitate away from the hedge contract structure, just your comments on appetite for more merchant exposure. I guess you prefer corporate PPAs where you have price certainty. But if more merchant exposures are part of the plan, can you comment on the need to build out an energy marketing component to your company? Is that something that's part of your thought process going forward?

[Michel Letellier, President, CEO & Director]

It's a good point, Sean. We had. I don't know how much we can describe that in percentage, but we increased our team from 0 to 2 experts in trading but also...

[Jean-François Neault]

Origination.

[Michel Letellier, President, CEO & Director]

Origination. Thank you, Jean-François. So we want to be more out there. There's some new platforms also that have been put in place where it's a little bit like an electronic base between producer and corporate off-taker. That platform is actually pretty dynamic, and it's helping. It has already proved benefit from -- for us. We have initiated term sheet with some corporate off-taker for some project in the States. So this is very interesting, I would say. I would add up also on this notion of merchant. We want to have some exposure to merchant. It depends on which market. I think Texas was, I think, a good example of not necessarily being forced to deliver capacity when you have a variable asset and -- but Foard is probably what we are aiming to. Having the majority of the output being under contract and having a little bit of exposure, so that you're not necessarily all-in for a lower price of electricity but so you can have access to those spikes.But talking about also Texas, and perhaps you have seen some negative pricing in some areas. Texas is notorious. In the northwest of Texas, you see these things happening and a low price of electricity. But I think there's a game changer here, it is hydrogen. Green hydrogen will play a role in the demand and being able also to stabilize this volatile market because electrolyzer can be switched on and off almost immediately, and that doesn't hurt the process at all. I think that just to give you a perspective, for some of you that know those maths with hydrogen. But it takes between 50 and 55 kilowatt hour to produce a kilogram of green hydrogen. So put that 50 and put the $20 per megawatt hour or $0.02 per kilowatt hour, and then the variable cost in terms of energy to produce a green hydrogen -- a kilogram of green hydrogen is about $1.So that gives you a little bit of a perspective that if prices are low in a region, and then you have this ability to go and install electrolyzer and transfer that very low renewable energy into green hydrogen, this is going to act a little bit as a buffer and as a floor to see price of electricity going forward. So I'm getting more and more optimistic in the sense that this market will not be in a position to have very long and prolonged low, low price of electricity. There will be arbitrage to be done. And these electrolyzers can be installed fairly quickly. And also, they can be mobile. So if for some reason, you have a 5-year, 10-year outcome in terms of area being weak in pricing, you could then solve these things. And I think that eventually, price of electrolyzers will go down.And so I don't think we will be seeing these type of markets having very, very low price of electricity. They will be acting also as Texas -- these things can be stopped. So you can take advantage of very low electricity when it is available. And if there's a spike, you shut down this electrolyzer and then you flow through the electricity to the market and then take advantage perhaps on high pricing. So I think that there will be a lot of outcome, and potentially positive outcome, in some area where you see these pricings today that are very low. Green hydrogen will make a revolution around these markets in the future.

[Operator]

Your next question comes from Mark Jarvi from CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

I just wanted a few more details around Texas and potential losses. It sounds like the $80 million is net of any EBITDA gains from power or assets they could generate. Can you quantify at this point? Because it looks like the losses are below the line in EBITDA. What is the impact through EBITDA?

[Jean-François Neault]

Mark, you're right. So we should see a pickup in our EBITDA and then on realized losses, on financial instruments on one side and the loss of share of -- loss of joint ventures and associates for all the realized loss on Shannon and Flat Top. It's too early to guide you, but you will see quite a good pickup in adjusted EBITDA we should see coming and a big loss on power hedges, on financial instruments. So we have decided not to disclose the pro forma of Q1 in that fashion, but this will happen this full year, Mark, exactly.

[Michel Letellier, President, CEO & Director]

I think guys, it's a little bit early, and that's why we're trying to give you the financial impact, but we're still negotiating. We're going to have a lot of discussion with our power hedges supplier. And also we're in tune with whatever policy or adjustment in pricing that ERCOT might communicate in the days ahead, so bear with us. I think we're giving you the ultimate and maximum financial impact, and we are going to work hard in the next few weeks trying to mitigate this.

[Jean-François Neault]

But the net impact on the turning will come to around $80 million. So -- and this is also excluding all of the potential reset on mark-to-market, on any other. So it will become from easy to more complex to analyze all this at this time, so Michel is right.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. Okay. And then can you just -- in terms of how you settle these losses, I know you kind of do it on a monthly basis. But in terms of where the cash comes from, I think that maybe some of these projects might have a reserve fund. I'm just curious how much capital from Innergex, like from the corporate level, has to go in to cover these losses? And does that slow your willingness either do M&A or take on new development projects until you have clarity on how much sort of corporate cash infusion you need to do to settle these losses?

[Jean-François Neault]

That's a good point, Mark. And as for each of the projects, they provide tracking account, we call, the banks. So -- and this is settled monthly. So up to now, like Michel have said, nothing has been settled. So at the month end, we will receive the final invoice. So what we have on hand is daily statement of account of the tracking accounts. So the $80 million is coming from those statements, but nothing has been settled for now. So the level of the tracking account has never been disclosed for those 3 projects up to now. But let's say that the $80 million, if we needed to refund everything above the tracking account, which is around $15 million for 2 projects and $12 million maybe for Phoebe, so then maybe what you would have to disburse could be a bit lower than the $80 million, if you follow me. But this is the way it works at the project level. But as I said, it's -- we don't want to comment too precisely on this given the current litigation that is ongoing.

[Michel Letellier, President, CEO & Director]

But Mark, in a way, a little bit crazy, but Foard made money. Foard has more cash flow. If everything sells this way, it's very positive for Foard, which is very -- the one that has been hurt the most is, of course, Flat Top, because it hasn't produced for all that period. The pain is then a little bit more towards the Flat Top where, theoretically, we'll have to sit down and see what we can do with the tax equity, yes, and the power hedge provider. But in no way, we'll be exposed more than this.

[Jean-François Neault]

And to answer your second question, very important, the revolver capacity, if sufficient enough, would come in a cash payment following any discussion or litigation process. And no, it does not impair our ability to hit on opportunities on M&A options, not at all. As a matter of fact, we have paid down the E&P loan as at January, we have option to refinance that portion. We have a few options ahead of us. There's Griffin Trail equity that needs to be invested in the second to third quarter. But looking ahead in terms of availability on our revolver, we don't foresee any issue. And most of all, we are pursuing our M&A activities as strong as before. So it does not impact at all our ability to hit on that.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then if the Griffin Trail sort of revenue projections moved around and I assume it's on assumptions around the spot curve. But do you have a sense today as you stand -- I mean, obviously, there's a lot of volatility in pricing on the short end of it on the forward curve, but what this might do to Foard and your -- where you think power prices will trend in Texas over the next 3 to 5 years?

[Michel Letellier, President, CEO & Director]

Well, I think that, Mark, we gave -- when we did the financing of Griffin Trail, it's something around $4 million, if I recall, Jean-François, that we gave on an average, for the next 5 years, a little bit over $4 million.

[Jean-François Neault]

And it's unclear where this event, Mark, Michel, could have an impact on future power price curves or -- I think it's clearly understood that this is unprecedented and one-off so...

[Michel Letellier, President, CEO & Director]

But I think, Mark, what we said is that we're pretty conservative in the curve. We're using for -- we're using Wood Mackenzie without carbon. Now with Biden, would it be -- I would love to see a federal tax on carbon somehow, somewhere. That would help, definitely, this future power pricing. Also, we've been conservative, we think, in the basis losses. You know that in Texas, you deliver on the node. And then sometimes you get paid on the hub pricing. So that is also playing in the assumption that we have put forward for Griffin Trail. Maybe an output also for these projects in Texas, not necessarily tomorrow, but I think that the -- all the ERCOT and all the stakeholders that are now sitting down and looking at this tax crisis and trying to find better solution for the future, maybe they need a lot more investment in their interconnection and also on all the transmission capacity across Texas. And they may get some federal help in order to do this.So that might also improve the market because Texas has been known to be volatile. But more interconnection and more possibility to export from Texas would probably reduce that volatility going forward. So -- and I mentioned green hydrogen. You know that in Texas, even if they're not that green in a sense that they certainly have a lot of Republican people in Texas, which is all good, but they have also all kinds of infrastructure that are consuming a lot of hydrogen. And I think that the customer that buys these finished goods are starting to put more and more pressure on the whole process, in reducing the carbon footprint of all that industrial output. And I think that if somehow some green hydrogen is available in Texas -- and the south of Louisiana also has huge industrial refineries that are consuming a lot of hydrogen, so if somehow, somewhere, they are becoming a buyer of green energy in order to reduce their footprint then, certainly, I think that electrolyzer will be installed in Texas quicker than we thought initially.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Understood. Lots of different factors at play there. Last question, maybe for JF, is the operational and maintenance expense, the hydro segment, higher in the quarter, higher year-over-year on a full year basis. Is there anything sort of one-off in the last year in the hydro segment that drove sort of about a 10% increase in the full year O&M cost?

[Jean-François Neault]

Michel can comment as well. But I see that, yes, this year was a bit of a catch-up, but we did less also capital expenditures in this year. So we went through more operational expense to support the project. What I foresee is maybe more capitalized expenditures in the months or quarters to come. So maybe this year was a bit of a catch-up in terms of O&M for the project in B.C.

[Michel Letellier, President, CEO & Director]

Yes, mainly [ upward a bit ] in the HELP tax also. I was hoping that we were to have it reduced. And I think that next year will be good news on that front. We're working hard to reduce this exposure.

[Jean-François Neault]

But don't forget -- yes, that's a good point. So if you compare to 2019, 2019 was reduced by a gain that reduced operating expense by $3 million, I think, because we had the recovery of the litigation on the water tax. So don't compare it to 2019, but 2020 was a bit higher versus our budget as well.

[Operator]

Your next question comes from Andrew Kuske from Credit Suisse.

[Andrew M. Kuske]

I promise not to ask a question about Texas, maybe just to focus a bit more broadly on your solar initiatives and the existing assets you have and then what's in the pipeline. Given the regulatory permitting and construction of solar, do you see an opportunity to generate cash faster as you have more solar in your portfolio?

[Michel Letellier, President, CEO & Director]

Well, definitely solar, especially in the United States, it's a little bit quicker to do. For some of you, you've seen -- Project Palomino came into the news a few times in the last few weeks in the States. So yes, we're very active on that project. It's a 200-megawatt project in Ohio. We're getting very advanced. We also have some very good discussion with off-takers. And I think that we're seeing in the States a lot more willingness from corporate off-takers to take on solar as well. Yes, I mean solar are being -- once they're built and fully commissioned and what have you, are fetching quite a bit of a premium, I think. But when we can them, we can certainly generate a decent cash on this projects from our own greenfield project.So that's why we're quite enthusiastic about our pipeline in the U.S. on that basis. We've said quite a bit about it regarding the investment we've done about a year ago, a little bit more than a year, in buying the equivalent of a little bit over 100 megawatts of solar panels. And this is all around this idea of prequalifying about 600 megawatts of solar project in the States, so working really diligently. And these projects have to be in service by 2023. So that gives you a little bit of a guidance where we're heading in that direction.

[Andrew M. Kuske]

Okay. That's very helpful. And I guess my second question is for Jean-François, and it really comes down to just any increased flexibility you see associated with green financings and just the sustainability initiatives that are happening from virtually every bank globally, on whether it means more favorable lines of credit, how you project finance. And could you quantify any basis points that you're going to benefit from in the future?

[Jean-François Neault]

It's a large question. I mean, of course, we're always on the look to improve, and those green bonds are there as a possibility. Right now, we're a bit tied up with our project debt structure for the next few years. It's difficult to really reshape at the moment those project debts, given the large make-whole they have with some institutions. So we don't foresee that we can benefit so much in the next 2 to 3 years unless, Michel, you see...

[Michel Letellier, President, CEO & Director]

Well, it's -- but it's a very good question. And we've been inquiring quite a bit and, of course, always open to receive some input from our friends, the merchant banks and what have you. But we have not seen a big spread reduction just yet, but we are seeing a lot of demand. So it's just, I think, a matter of time when we would see a little bit of a benefit or spread reduction for that green bond. I'm hopeful that this is going to start to become a big advantage for us. Anything that -- ESG, as we know, is becoming more attractive also. My concern is a little bit of -- what we've seen, you guys must have seen it, a little bit of a greenwashing. There's a lot of issue that are borderline green-ish in my books. So I think that as the markets mature, I think that the market will be more disciplined, and the real green bond will become something sought after. And hopefully, we'll see a benefit in the spread.So far, we have -- like Jean-François has said, we have not been so aggressive because we have this structure. Although we have -- if you remember, we have about 16 unencumbered assets that support the credit line at the holdco. Some of those projects have now been offered new PPA and could be, theoretically, a good target to take out as a portfolio for green bond. So quite interested in figuring out if we can leverage this but hopeful that, going forward, this is definitely helping. And I'm very happy to see that all the investors -- not all but a lot of investors are putting more and more weight into the ESG criteria in their investment. And we've seen some index fund being created, some infrastructure fund, based on ESG criteria, being created.So quite hopeful that this pool of money, smart money, will help us being cost -- would bring our cost of capital being very competitive to not only us, I think the renewable energy industry will see a lot of new fund being directed to them. And this is good. I mean we have tremendous opportunity to grow and to replace the fossil fuel in the near future, and we'll need a lot of capital, and that capital has to be competitive for us to displace the fossil fuels. So I'm very hopeful that this is going to help and also that fossil fuel will have a higher cost of capital and, hence, the total competitiveness of us will become more clear going forward.

[Operator]

Your last question comes from Naji Baydoun from IA Capital Markets.

[Naji Baydoun, Equity Research Analyst]

I appreciate it's early days in Texas, so maybe we can talk a bit more about the longer-term outlook. You put out a pretty strong guidance for 2025. I'm just wondering if you can walk us through what's baked into your outlook in terms of organic growth, how quickly you can move projects forward in the development pipeline and if you're factoring in any M&A in that outlook.

[Michel Letellier, President, CEO & Director]

Yes. M&A will play a role. We said that for the next few years, we'll use it as a tool to rebalance because, as you know, we are spending over $20 million in prospective expenses. And we think that if opportunities arise, we may be in a position to increase that a little bit. So in order to balance this, obviously, even if we're developing and we're successful in developing, just the permitting and building and putting in commercial operation takes a few years. So M&A is a tool that we're going to use. Now we're going to be laser-focused on our M&A. We want to create this as a balancing tool. We want to create value, but we want to create value also in our greenfield project.Just to give you an idea, we're set up to hopefully bring from our own greenfield projects something around 300 to 400 megawatts of project per year. Now megawatt is something that will be useful also to declare in the future, but you will have to take also in consideration that we might have capacity batteries that are not necessarily megawatt-based but are generating cash flow and investment opportunities. So I think that if you think forward of something of a run rate between 300 and 400 megawatts of greenfield project, and the rest would be balancing with M&A, I think that we have been set up in the last few years to do 1 or 2 M&A acquisition per year.This is -- this market is not easy. We -- in order to be successful in 1 or 2 acquisitions per year, we're looking at something around 80 where we, on an average year, would send a letter of the intent without being firm, probably around 80, 85. And then you're selected on, I would say, 10, 15 processes. And if you're successful in 1 or 2, that's roughly the average. So it takes a lot of effort but it also is useful because you can select where you want to go, where you want to diversify with M&A. So I know that M&A can be perceived sometimes as dilutive to shareholders, but it depends on how we do it and it depends also if it's a tool to help sustain also the payment of the dividend and also sustain the -- our ability to continue our own greenfield development.

[Naji Baydoun, Equity Research Analyst]

That's very helpful. And just a follow-up on that. I guess we're thinking about the 300 to 400 of greenfield development a year. I mean -- so you're pretty confident on being able to build up most of the sort of prospects in your mid and advanced stage development pipeline, kind of what that implies. Or do you think you'll also be looking to acquire additional development projects as you go along?

[Michel Letellier, President, CEO & Director]

Well, M&A, it's -- it all depends if the premium that one has to pay for development project is worth the return or the risk that we're taking. It goes pretty fast. Yes, we're confident in our pipeline. We're confident that Palomino will see the light of the day. And then we have a few more solar projects that are pretty advanced as well. Working in Chile, we have a few other leads in Chile. And in Canada, we were happy to see that Quebec -- Hydro-Québec is now talking about future RFPs in Quebec, so there will be opportunity. In France, we -- our intention is to have at least one or 2 projects per year coming out of this greenfield. So yes, we're confident that we are starting up -- and mind you that it's only been 3 years roughly that we have put a lot more effort in the greenfield development. And now we're spending, like I said, something around $20-ish million on prospective expenses. And we have hired more people. We have more people on the ground. We have -- we're more diversified also in our presence in the United States. I'm pretty confident that this number is achievable for us.

[Naji Baydoun, Equity Research Analyst]

And then just a related question, I guess, on your overall funding or financing plans to achieve these objectives, I guess similar to what you would have -- how you restructured your growth in the past, a combination of tax equity, debt and financings.

[Michel Letellier, President, CEO & Director]

Yes. Well, we'll see how tax equity evolves. Of course, as the sunset clause is slowing down, perhaps tax equity will become less of a driver in the future for the United States. But in the meantime, yes, it's interesting to take tax equity as we -- to take advantage of the PTC, of course. Yes, we like to have a balance of project finance and tax equity. And of course, equity component is always a big portion of this financing or structure. But when debt is cheap, it's always interesting to take advantage of it.

[Naji Baydoun, Equity Research Analyst]

Just one last question, if I can. I know it's been a year now, and I appreciate it's been more difficult with the pandemic but just wondering if you can give us an update on the Hydro-Québec line, how that's going so far. You partnered with them on one project now in France. Just any more color on what we should expect from that alliance going forward?

[Michel Letellier, President, CEO & Director]

Well, like I said, I think storage is a big play. We want to take advantage of the great resources that Hydro-Québec has, the great capacity, to give us support on interconnection and studies of interconnection also. I'd love to be able to play a role with them in M&A. Our team has worked together on a few ones. But like I told you, I mentioned that the odds have already -- you need to look at many in order to be successful. So I wish ourself and the joint venture with Hydro-Québec success for some M&A also in the year to come and working hard on trying to deploy the storage investment opportunity. I think that this is becoming mainstream in all the markets. And our intention is to be present and develop and take advantage of the synergy of the 2 companies. But it takes a little bit of time, right? And the COVID, unfortunately, has not helped us in terms of being able to travel and meet. And so I think that it's just a matter of us starting to make the ball rolling and things will -- hopefully, you'll see some good news in the next few months on that.

[Operator]

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

[Karine Vachon, Senior Director – Communications]

Thank you very much, and thank you, everyone. We'll gather again in May for our next conference call.

[Michel Letellier, President, CEO & Director]

Thank you. Thank you, everyone.

[Jean-François Neault]

Thank you, everyone.

[Operator]

Ladies and gentlemen, you may now disconnect your lines.