Boralex Inc. (OTCPK:BRLXF) Q4 2019 Earnings Conference Call February 28, 2020 11:00 AM ET

Company Participants

Stephane Milot – Director IR

Patrick Lemaire – President & CEO

Patrick Decostre – VP & COO

Bruno Guilmette – VP & CFO

Conference Call Participants

David Quezada – Raymond James

Sean Steuart – TD Securities

Nelson Ng – RBC Capital Markets

Operator

[Foreign Language]

Ladies and gentlemen, thank you for standing by and welcome to Boralex Inc.’s Fourth Quarter 2019 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Stephane Milot, Director of Investor Relations. Please go ahead, sir.

Stephane Milot

Merci, and thank you, operator. So good morning, everyone and welcome to Boralex fourth quarter and year-end results conference call. So joining me today are Patrick Lemaire, President and Chief Executive Officer; Patrick Decostre, Vice President and Chief Operating Officer; Bruno Guilmette, Vice President and Chief Financial Officer; and other members of our management and finance teams. Mr. Lemaire will begin with comments about the highlights of the year and fourth quarter. Afterwards, Mr. Decostre will provide an update on the development, production and optimization. Mr. Guilmette will carry on with the financial highlights, and then we’ll be available to answer your questions.

As you know, during this call, we will discuss historical as well as forward-looking information. When talking about the future, there are a variety of risk factors that have been listed in our different filings with securities regulators which can materially change our estimated results. These documents are all available for consultation at sedar.com. In our webcast presentation document, the disclosed results are presented both, under IFRS and on a combined basis. Unless otherwise stated, all comments made in this presentation will refer to combined basis figures. The press release, the MD&A, the consolidated financial statements and a copy of today’s presentation are all available and posted on the Boralex website at boralex.com under the Investors section. If you wish to receive a copy of these documents, please contact me.

So, Mr. Lemaire will now start with his comments. Please go ahead, Patrick.

Patrick Lemaire

Thank you, Stephane. Good morning, everyone. 2019 has been another strong year for Boralex. I am really proud that in the first year of our strategic plan, we more than doubled our AFFO which reached $120 million on the 2023 target of $140 million to $150 million. This came from the strong — from a 39% growth in our EBITDA and the initial positive effect of around $2 billion in refinancing completed during the year. 2019 also marked the return to more normal wind condition in France. Fourth quarter was particularly strong with a production of 15% higher than anticipated in France.

In 2019, we had good results with our submissions in response to request for proposal in France, winning more than 100 megawatt. We also got the green light for the 90 megawatt Limekiln project, and we quickly set up a US team to submit a bid for 180 megawatts of solar projects. We have a solid growth path and can count on the strong pipeline to reach our 2023 target of 2800 megawatt. Patrick Decostre will give you more information on this later.

I will now report our progress towards the four orientation of our strategic plan, starting with the growth orientation. In 2019, we’ve commissioned four wind projects for 69 megawatts and two hydro power station for an additional 26 megawatt. As mentioned before, we also added projects to our growth path and pipeline. Switching now to our diversification orientation. We are waiting for the result of our 180 megawatt bid in the New York State solar RFP and remain confident about the outcome. Our development team in the US and France are making really good progress with more projects expected to be added to our pipeline in the future. We are also expecting some development in the near future on the customer orientation, in both, Europe and North America, as we are at advanced stages of negotiation with some corporate customer.

In terms of optimization initiative, the highlight was definitely the closing of our $1.7 billion refinancing in France. On top of freeing up $180 million of cash to reduce our corporate credit facility, this transaction will generate recurring interest saving of about $15 million a year.

In conclusion, for my part, we are very happy with the result and progress we are making in the execution of our plan. We remain confident for 2020, we have a solid and agile management team, dedicated employees, and a clear action plan. Everything is in place for us to continue to execute our plan like we did in 2019.

I will now let Patrick cover development, operations and optimization. I will be back later for the question period.

Patrick Decostre

Thank you, Patrick. Good morning, everyone. I will start by talking about the new way we are presenting our pipeline and growth path. In order to give greater visibility to our development initiative we are now presenting our pipeline based on specific criteria used in our development process rather than just time as we did before. This has resulted in some changes in total megawatt per stages compared to the pipeline presented in the third quarter, but it will be easier for you to follow our progress going forward.

With this change, we have also introduced a new stage called secured. The stage include project which have been awarded a contract PPA [indiscernible] or as in the case of Scotland, where permit have been obtained. These projects are not yet totally ready to be built but are close to getting all the authorization needed to get started. This new stage was added to our growth path and resulted in the addition of 167 megawatts at year-end. Our growth path also now shows the gap required to reach our target of 28 megawatts in 2023. This gap is 535 megawatt now, but could be reduced with the expected results from our US solar bid, as well as recent and upcoming bids in France.

Turning now to production. In Canada, wind production in the fourth quarter increased by 4% compared to last year, coming mainly from the commissioning of our Moose Lake wind farm in VC. Comparable production was pretty much in line with last year and with anticipated production. In France, wind condition were much better than the fourth quarter last year resulting in 17% growth over the last year on a comparable basis, and 31% growth overall. As mentioned by Patrick at the beginning, comparable production in France was also 15% higher than anticipated production for the fourth quarter. Overall, total wind production for the quarter combining Canada and France was 16% higher than last year, and 5% higher than the anticipated production. On a comparable basis, production was 8% higher than last year and 6% higher than anticipated.

Turning to Hydro now. With the commissioning of Yellow Falls and reopening of Buckingham, Canadian hydro production was 77% higher than fourth quarter last year. Comparable production was in line with last year but 12% lower than anticipated production. US hydro was up by 3% over the quarter — the fourth quarter last year and 23% higher than anticipated production. In summary, total production for the quarter was 17% higher than last year and 5% higher than anticipated. I won’t cover in detail our 2019 full year production, but I would like to highlight that wind production is in line with anticipated production in France, and 4% higher in Canada.

I would also like to highlight that wind production from assets acquired in 2018 is 9% higher than anticipated production in Canada, and 2% higher in France. In terms of optimization, I would like to mention that we successfully enforced maintenance contract at site totaling 211 megawatts. And sourcing of maintenance is a major strength at Boralex, and we are planning to continue this trend in the coming years. As mentioned before, repowering is also a good way to optimize the output at specific site. Shortly after the end of the third quarter, we restart production at our Buckingham hydro power station in Quebec. As mentioned before, capacity has doubled at this facility going from 10 to 20 megawatt and adding about $5 million in annual contribution to EBITDA. The next in-line is our Cham Longe repowering in France which we expect to complete in the second half of 2020. I would provide more information on optimization in coming quarters.

In conclusion for my part, 2019 was a good year in terms of operation. As mentioned by Patrick, and highlight with our pipeline and growth path, we’re in a very good position to pursue our growth.

This complete my part. I will now let Bruno cover the financial portion in more detail, and we’ll be back for the question period.

Bruno Guilmette

Thank you, Patrick. Good morning, everyone. I will start with a review of the progress made in light of our 2023 financial objectives.

Starting with AFFO; as mentioned by Patrick Lemaire, we more than doubled our AFFO in 2019, reaching $120 million compared to $59 million in 2018. In the fourth quarter alone, we improved AFFO by $24 million. Our dividend distribution ratio now stands at 50% which is right in the middle of our 40% to 60% target. Our net installed capacity stands at 2040 megawatt, and with the growth path and pipeline presented earlier by Patrick Decostre, we are very confident that we will reach our 2023 goal of 2800 megawatt.

As Patrick Lemaire gave you a good idea of our main achievements for the year, I will review our quarterly results. Fourth quarter revenues followed pretty much the same pattern as production presented by Patrick Decostre with growth compared to last year coming from the wind sector but also a good performance from our hydro sector, following the reopening of our Buckingham power station, the commissioning of Yellow Falls, and a good performance of our US operations.

EBITDA increased from $121 million in the fourth quarter of last year to $165 million this year. EBITDA for the wind sector was 31% higher than last year, and hydro EBITDA more than doubled, going from $8 million last year to $17 million this year; a $6 million gain on the sale of land in Scotland also explains part of the increase.

Moving to cash flow, we generated $119 million of IFRS cash flow from operations in the fourth quarter, up by 68% compared to the same quarter of last year. AFFO increased by $24 million or 56%, going from $44 million in the fourth quarter last year to $68 million this year. Finally, our financial positions remain solid with our net debt to total market capital ratio down from 65% on December 31, 2018 to 56% on December 31, 2019.

In conclusion, we delivered strong growth compared to last year. We maintained disciplined financial management and optimized our capital structure with over $2 billion in refinancings which will generate recurring benefits. We continue to make good progress in the execution of our financial objectives. Our teams are focused on growing our pipeline and strategically bidding projects in response to request for proposals. And we have a solid balance sheet and we are looking for accretive transactions in regions and technologies that we know well.

Thank you for your attention. We are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Rupert [ph] from National Bank. Your line is open.

Unidentified Analyst

Morning, everyone. I’m wondering if you can give us a little more color on what’s going on with the Moulins du Lohan project. I see you took a write-off on the project, but what’s your view on the potential for recovery of that value either through building a project under future RFPs or having some kind of claim against the loss?

Patrick Decostre

Okay. We’re waiting for a decision on the appeal on the second half of 2020 from cost side data. And we will bid the project in an upcoming RFP depending on the condition to bid but the project will be accepted to this. And the project could be commissioned two years after getting a PPA and a favorable decision on the appeal.

Patrick Lemaire

Rupert, if ever — let’s say the result of the appeal is negative, then for sure we will look at doing some procedure against the government that gave us initially the permit.

Unidentified Analyst

And when you…

Patrick Lemaire

But we’re confident the appeal will be positive for us.

Unidentified Analyst

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

Patrick Lemaire

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

Unidentified Analyst

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

Patrick Lemaire

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

Unidentified Analyst

So, do you have a sense of the timing on project awards?

Patrick Lemaire

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

Unidentified Analyst

Okay. I’ll get back in the queue. Thank you.

Operator

Our next question comes from David Quezada from Raymond James. Your line is open.

David Quezada

Thanks. Good morning, everyone. My first question here, just on the — I think you mentioned, you’re in negotiation for — with some corporate customers for [indiscernible]. I’m wondering if you can provide any color or contacts on maybe the length or pricing of those contracts relative to what you’ve been getting or maybe some examples of contracts that have happened in a market so far?

Patrick Lemaire

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

David Quezada

Okay, great. Thank you. That’s very helpful. And then, just one other question, I think similar projects you have in Scotland, aside from Limekiln; I’m just wondering if any of those are getting close to development or if there has been any progress there?

Patrick Lemaire

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

David Quezada

Okay, fair enough. Thank you. That’s it for me.

Operator

Your next question comes from Marcus [ph] from CIBC. Your line is open.

Unidentified Analyst

Thanks. Good morning, everyone. I just want to talk on the discretionary cash flow. What would it have been on a normalized basis this year? And then, as you think about the interest savings, you know, you’re pushing — getting a lot closer to your target; and is that something you guys would revise higher potentially or maybe just kind of comment on where you think you’re on a normalized basis on the path to the $140 million to $150 million?

Patrick Lemaire

By normalized you mean including…

Unidentified Analyst

Yes, sort of — right around LTA or your anticipated generation levels?

Patrick Lemaire

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

Unidentified Analyst

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

Patrick Lemaire

Yes, that’s fair.

Unidentified Analyst

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

Patrick Lemaire

Yes, we’re working on the authorization essentially of this project and we will come back when — again, when they will be authorized. Definitely, I cannot give you a precise date for that.

Unidentified Analyst

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

Bruno Guilmette

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

Unidentified Analyst

Okay. Thanks, Bruno.

Operator

[Operator Instructions] Your next question comes from Sean Steuart from TD Securities. Your line is open.

Sean Steuart

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

Patrick Lemaire

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

Sean Steuart

Okay, that’s all I had. Thank you very much.

Operator

Your next question comes from Nelson Ng from RBC Capital Markets. Your line is open.

Nelson Ng

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

Bruno Guilmette

Well, we certainly had a little bit of help from Mother Nature. And, she knows this comes and goes; so we certainly want to remain conservative as we try to predict from one year to the other. It’s the — the results are going to be on the — especially, on the wind site and the rest is on the development site. We hope to be successful and we forecast a certain ratio of potential additional megawatts. And as I’ve mentioned, we’ll review it when — we don’t expect to reach the range this year, I mean, that certainly guidance I can give. And then, we’ll see during the year how we progress, and if we need to revise the range, we will provide that information in the future.

Nelson Ng

Okay. And then, a few questions for the Scotland project. Well, can you talk about the next steps for Limekiln in terms of — will you start — do you need a contract before you start construction or would you start construction and look to obtain a contract before you complete the project?

Patrick Lemaire

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

Nelson Ng

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

Patrick Lemaire

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

Nelson Ng

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

Bruno Guilmette

Yes, it won’t be long, Nelson. Just — it’s not necessarily something that we disclose. We — I don’t know, Patrick, do you want to mentioned kind of a ballpark figure or…

Patrick Decostre

It’s part of our results, it’s part of our EBITDA but not that material at this point but enough to talk about it.

Patrick Lemaire

Yes, for this year because it was — we took over at the end of the year. So for the new facility, we came over last year, this is the Ontario asset that we got benefit this year. And if we give you an indication, it would be in percent, saving of maintenance; so I don’t want to mention dollars. And I don’t know if Patrick knows the percent, I don’t know.

Patrick Decostre

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

Nelson Ng

Okay, thanks. I’ll leave it there.

Patrick Lemaire

Thank you.

Operator

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

Stephane Milot

All right, thank you very much. So thanks, everyone for your attention. If you have any additional questions, please call me at 514-213-1045; I’ll make sure we quickly answer your questions. For your information, our next event will be the first quarter results conference call, the day of our AGM on Wednesday, May 6. And that’s it for us. So have a good day. Thank you.

Operator

[Foreign Language]

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

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2020-02-28