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Innergex Renewable Energy Inc. ( OTC:INGXF ) Q4 2015 Earnings Conference Call February 25, 2016 10:00 AM ET Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for its 2015 Year End Results and 2016 Objectives. [Operator Instructions] I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, February 25, 2016 at 10 a.m. Eastern Time. I will now turn the conference over to Martine Benmouyal, Senior Advisor, Communications. Please go ahead. Martine Benmouyal Good morning, ladies and gentlemen. If you haven’t done so already and would like to access the webcast, please go to our website at www.innergex.com. I am here today with Mr. Michel Letellier, President and CEO of Innergex, and Mr. Jean Perron, Chief Financial Officer. Please note that the presentations will be in English. However, you are welcome to address your questions either in French or in English. I would also like to point out that journalists are invited to call us afterwards if they wish to further address any question. In a minute, Mr. Perron will provide some details on our financial results for the year ended December 31, 2015. Mr. Letellier will then provide an overview of our operating activities in 2015 and our objectives for 2016. We will then open the Q&A session with both senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily available via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investor section. During this presentation we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratios that are not recognized measures according to International Financial Reporting Standards, the IFRS, as they do not have a standardized meaning. Please be advised that this conference call and webcast will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanation concerning the principle assumptions used by the corporation to derive this forward-looking information and the principle risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the webcast presentation, as well as Innergex’s Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Martine. Good morning. The quarterly results for Q4 2015 show production of 94% of long-term average due mainly to below average water flows and wind resources. Production for the year stands at 98% of the long-term average. Revenues for the quarter were $12 million lower than in 2014 mainly due to last year where the production was under 20% of long-term average. Revenues for the year were $5.1 million higher than last year. The increase is attributable mainly to the full year contribution of the SM-1 hydroelectric facility acquired in June 2014 and to the higher wind regimes in Québec, partially offset by lower water flows in British Columbia. Adjusted EBITDA for the quarter was $9.9 million lower compared to Q4 2014 for the reasons explained above. Adjusted EBITDA for the year was $4.2 million higher than in 2014. The increase is mainly due to the higher revenues. Finance costs for the quarter were slightly lower than in Q4 2014, while for the year they are down $3.4 million compared to last year mainly due to the lower inflation compensation interest. During the quarter $51.7 million impairment was recognized on the prospective projects acquired from Cloudworks in 2011. This impairment is due to the lack of visibility on the future RFP following the construction of sites and the decrease in demand that was expected from the construction of new LNGs planned that have been postponed. Innergex servicing the ownership of the license and may eventually develop them in the future. During the year, a total of $1.1 billion of financing was completed and we do not need any additional liquidity to complete the construction of the forward projects, an amount of $180 million remains unused and available on our revolving corporate credit margin of $425 million. During the quarter, we bought back 400,000 shares and for the year a total of 1,190,000 shares at an average price of $10.36. During the year, we also issued a new $100 million convertible debenture at the 4.25% interest rate and convertibles at $15 per share, which is less dilutive than the former convertible debenture that was bearing interest rate of 5.75% and convertible at $10.65 per share and that was partially redeemed from the proceeds of the new debenture. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to be very close to production in various targets for the year, while our operating expenses were lower than expected. As a result, free cash flow for the year reached $74.4 million, compared to $67.7 million in 2014 and our payout ratio improved to 86% from 88% last year. Since the beginning of 2016, our production has been above the long-term average mainly at our hydroelectric facilities in British Columbia. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review of the results. I will be happy to answer your questions later on during the call. And I will turn it back to Michel? Michel Letellier Thank you, Jean. Good morning, everybody. As a little bit of a tradition that we have established in the last two years, this presentation we would like to come back to what we have said in report cards for 2015 and give you what we have actually accomplished give you a little bit of a perspective on our objectives of 2016, give you our run-rate of 2017, and give you a little bit of an overview on our strategy for the next few years. And then we will have the question period. So, if we come back a little bit on what we said in 2015, we said that we wanted to increase the production and revenue by approximately 3% to 5%. We did manage to increase the revenue by 2%, even if the long-term average was a little bit weaker, as Jean mentioned. We did a little bit better on the EBITDA. We have increased 2% our EBITDA. And we have managed to keep our payout ratio at 86%, so, so far, so good. Objectives on the development, that’s where we had a big year in 2017. As you remember, we have the project of Upper Lillooet, Boulder, Big Silver and Tretheway under construction in BC. And we wanted to start the construction on Mesgi’g Ugju’s’n, the 150 megawatt wind farm in Québec. So, I am happy to report and we have a tab in the next page to give you the more – a little bit of more detail. But in a nutshell, we have managed to put the Tretheway on COD a little bit in advance and under budget by $8 million. We have started the construction on Mesgi’g Ugju’s’n project and we have overall facility reduced the construction budget by $28 million. So, if you include the $8 million saving in Tretheway, we are down to $36 million savings over a little bit over $1 billion of projects. I am pretty proud of the team there. So, if you flip on the next page, you see the project, the actual cost now forecast for the COD. And we have moved the COD a little bit in Boulder, in Upper Lillooet due mainly on the last summer fire. We have lost a few months there in the peak of the summer. So, we are managing to have Upper Lillooet and Boulder now moved a little bit further in 2017 instead of the last quarter of 2016. Mind you that Boulder and Upper Lillooet are in a remote area, where the intakes are fairly high in altitude. So, winter revenue for these projects are not big. So, our goal is to make sure that we will be in COD for the spring time, where we get the majority of the revenue. In terms of more specific costs, Boulder and Upper Lillooet have been a little bit more of a challenge, given the tunnel. So we have increased the budget and we think it’s fairly conservative by $17 million. On the other hand, Big Silver has proven to be, I would guess – I would say a very – I wouldn’t say easy project, but we didn’t have any issue with the tunnel. And most of the civil work has been done already. So we are forecasting a reduction in cost by $10 million. And Mesgi’g Ugju’s’n have – we have finalized all the construction. We have also finalized the financing. So we are now very comfortable with a reduction of $35 million. So again, all-in-all I think that I am very proud of the team to have managed a $1 billion of construction and being able to have a reduction of $36 million on their budget, so very happy on that. Financing was also a big year, if you remember last year. We had a project finance I guess portfolio of about $1 billion to be done in 2017. We managed to do all of those with at least favorable – a little bit more favorable terms, conditions. The team has been also very creative in their ability to negotiate with long-term lender to structure the reimbursement of the amortization, so very interesting financing there. We also have issue the convertible debenture of $100 million to replace the old one with more favorable terms. So that’s another plus. We did also the refinancing on Umbata Falls. So all-in-all, we managed to do a little bit more than $1 billion worth of project finance in 2015. So right now as mentioned by Jean, we don’t have any more financing to do. So every project under construction has now the equity and the financing in place with fixed term and fully amortized over the initial terms of the EPA, so quite a good achievement there too. Now, if we are talking about the growth opportunity, we said that we wanted to participate in the Ontario market. We have managed to deposit or to supply – not supply but to file two projects in the RFP with 100% of the points. I don’t know if you are familiar with the Ontario RFP. But there is a possibility of discount in your price submitted to the authority by about 40% if you have 100% of the points that the – and its social acceptance and the advancements of the project. So I am happy to report that we managed to have 100% of the points on both projects that we have submitted. So we will know a little bit later on in March if we are a winner there or not. And we also have signed a Memorandum of Understanding with the Federal Electricity Commission of Mexico, which is the equivalent of Hydro- Québec and/or BC Hydro in Mexico, to develop in cooperation a small hydro opportunity. So we are starting to initiate this meeting and opportunity. So I am quite positive on that outcome as well. Also we said that we wanted to expand internationally or to look outside Canada and to consolidate our leadership in Canada. So I am happy to report that we did another acquisition in BC. We acquired Walden North electricity facility. It’s a 16-megawatt facility, not far from our own portfolio. So we are quite happy to have been able to achieve that. And we are pursuing acquisition opportunities in France and Mexico. We are making very good progress over there. Both teams are very present in France and in Mexico. And we are still very positive on our possibility over there. Now, what we are hoping to do in 2016, we want to grow our production by 6% or 8%, grow our revenue by 9% or 11% and grow our EBITDA between 7% and 9% and obviously trying to maintain our payout ratio below 100%. We want to make sure that we also advance our construction of the three hydro facilities in BC. We want to put Big Silver and Mesgi’g Ugju’s’n project in service by the end of the year. And obviously we want to make sure that we keep on track on Boulder and Upper Lillooet construction. We also want to finalize the negotiation with Hydro-Québec regarding Saint-Paulin and Windsor PPA. And in terms of growth opportunity, we want to make sure that we are still present in Canada when there is opportunity in Canada. We reaffirm our willingness to work in Mexico and France. We want to realize at least one acquisition in one of those two markets. And we are looking into other markets, mainly the U.S. and possibly the Peru market for small hydro. We are maintaining our run rate for 2017. That run rate doesn’t include any acquisition or future development that we could have, except from the projects that we are under construction right now. So our free cash flow, we are maintaining $105 million free cash flow for 2017 and the growth of the installed capacity will go from 708, our net capacity, to about 895. That doesn’t include the acquisition of Walden or any other facilities. So I am very confident about those numbers to 2017. Now the overview of our strategy for 2016 in the next few years, we would like to again reaffirm our commitment to remain exclusively in renewable energy. We want to maintain a very healthy diversification of energy sources. We want to consolidate our leadership position in Canada. So that means that if there is opportunity in Canada, we will be there. We want to develop an international presence in target markets, as we mentioned Mexico, France and possibly the U.S. and Peru markets are still under our focus. Still again, you know us. We want to focus on high quality assets. We want to maintain a low risk business model, maintain a long-term outlook. This is very important for us. We want to focus on partnership, especially with First Nation in Canada. I think that has been a very good tool for us to develop. Maintain our discipline of acquisition that means that we want to make acquisitions that are accretive to cash flow. So in summary, I am very proud of the evolution of Innergex, from the transition following the merger of the Income Fund and the company. We have as a team, being able and patient, focused on delivering both the growth and overcoming our high payout ratio, which was the heritage of the Income Fund. We have managed to build a very strong, long-term cash flow that are based on a great diversified portfolio of assets, all under long-term PPA. With a majority of these projects being project financed with long-term and fixed rate and that are fully amortized over the first life of the EPA. We have secured the sustainability of our dividend. And finally, we will have a significant amount of free cash flow in 2017. We now have the tools to focus on growing for the future. In a nutshell, we are willing and able to deliver on our strategy. So thank you. And we will take the questions. Martine Benmouyal This concludes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] And your first question comes from Nelson Ng with RBC Capital Markets. Your line is now open. Nelson Ng Great, thanks. Good morning, everyone. Michel Letellier Hey, good morning, Nelson. Nelson Ng A quick question on the delay in the timing of construction for Upper Lillooet and Boulder Creek like was it entirely due to the forest fires last summer or did the incidents in Upper Lillooet in November contribute to the delay as well? Michel Letellier The incident that you are mentioning very unfortunate incident had delayed about 10 days as well. So, it’s a little bit of a both. We had managed to have a force majeure by BC Hydro for 95 days – 90 days, which is basically the main – if you add up those 10 days, which is mainly the delay. Also the consequences of the fire having burned all the trees and the brushes along the slope had increased also some avalanche risk. So, we have lost a few days on that aspect as well. So, it’s all related to the fire mainly and also the very sad incident, that we had last fall, yes. Nelson Ng I see. So, in terms of the cost increase, was any of like the roughly $17 million cost increase, was any of that related to the delay or was that purely just on technical items? Michel Letellier It’s a little bit of mix. Mind you that it’s still – I think it’s still conservative. What we are doing is that we have kept the risk of the geology on the tunnel. So that means that we have fixed prices for the type of rock that we encounter during the construction, but it depends on a mix of quality of the rocks. We have basically four classes, 1, 2, 3 and 4. And depending on the quality of the rocks, we get to have a different pricing. So, I think that we have been a little bit conservative and rightly so, because we don’t know what’s in front of us in the tunnel, but I think that it’s basically the tunnels that are driving the cost, the overruns. Nelson Ng Okay. So, pushing out construction doesn’t really cause much of an increase? And I guess kind of related to that and if there are any cost increases, would that be recoverable through insurance? Michel Letellier Yes. Well, the delays are bringing some cost, but we are thinking – and we are discussing with the insurance. And hence, the insurance are basically covering all of those delay costs. So, that’s why we are not – and I was not referring to the $17 million being related to delays, because we think it’s – basically it’s a flow-through in terms of cost with the insurance. Nelson Ng I see. Okay. So there would be some costs, but like you said, it’s a flow-through. So, it’s not included in the increase? Michel Letellier No. Nelson Ng Okay. And then kind of more big picture in terms of I guess opportunities and project developments. So, like is it fair to say that like in the absence of an acquisition, was it fair to say that there won’t be – given the kind of lead time to procure projects, there probably won’t be any kind of new projects commissioned either in the second half of 2017 or even 2018 and potentially even early 2019? Would there be a period where there will be like no new projects contributing new revenues? Michel Letellier Well, Greenfield project, because in acquisition we can acquire existing facility or facilities that are just ready for construction. If it’s wind or solar, you can take sometimes only 1 year to build a wind or a solar facility, so that’s also part of our strategy. As I mentioned, always in the past we love to have a good balance between existing facility, facility under construction, facilities that are just at the very late stage of development and permitting are almost ready to build. So, that’s what we are looking into when we are looking into acquisition or a little platform or partner with existing developers, both in France or in Mexico. So, those are the targets. And Nelson, we may see some other projects coming in, in late 2017 or ‘18. Obviously, those would have to be acquisition of projects that are already under development. Nelson Ng I see. Okay. Just one last question, like obviously I think in the past you mentioned that you guys are looking at French wind acquisition as probably one of your priorities, but I guess given that Alberta and Saskatchewan now want to go green and the U.S. extended their renewable tax credits like what are your priorities and also geographies? Michel Letellier Well, obviously Canada is always top priority when there is opportunity. We have been very successful over the years in Canada. Canada is our own turf. There is no exchange rate issue. So, Canada is definitely a place that we want to be present. Alberta is a little bit more complicated. We don’t know exactly what will be the way that they are going to pay for the electricity. So, it’s still a little bit of an unknown. Saskatchewan is definitely of interest for us. There is New Brunswick as well who is having a small call. And Ontario has reaffirmed their willingness to extend the LRP II. So, we will be focusing on Canada. The U.S. is maybe a little bit more, I would say, not necessarily open in terms that there is always competition in the U.S., so in other market, but the yield co has been definitely been challenged in their business models. So, suddenly there is maybe a little bit more room for the Canadian company to participate in the U.S. market. Nelson Ng I see. Thanks. Thanks, Michel. Those are all my questions. Michel Letellier Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good morning, everyone. Few questions. There was mention in the MD&A of a 200 megawatt block, wind block, given to the Innu First Nation and I gather you are exploring options to potentially partner with them. Can you give any context on developments there? Michel Letellier Yes, it’s like I said, I mean, I have been very careful to talk about active RFPs in development. So yes, we are interested definitely in the 200 megawatt Innu RFP or development, but it’s competitive. It’s under development right now. So, I won’t comment more, but definitely we are interested. Sean Steuart Okay. And with respect to the MOU in Mexico, wondering if you can give any insight on how everything is progressing there, where you are in terms of specific project development, any more detail you can provide in Mexico? Michel Letellier Yes. We are very, very active in Mexico. We have been meeting with CFE. Right now, the focus on both CFE and ourselves is the first RFP in Mexico. The prequalification for RFP have been happening. So, we are there. We hope to participate in that RFP. So, I guess that CFE is also focused on that first RFP. The date is sometimes late March to deposit the projects. So everybody, I guess the industry is really focused on that right now in Mexico. But we have been meeting with CFE on small hydro development. CFE has the ability to do its own project and not necessarily take all the supply from future RFPs. So, the small hydro project that we would like to do are on that basis is direct negotiation with CFE under potential partnership to build small hydro that will be used for supplying CFE-owned electricity. Sean Steuart Okay, thanks for that detail. And then lastly, any insight you can give on I guess potential resolution around the Québec PPA arbitration process from your perspective? Michel Letellier Alright. It’s tough to call. It’s – the arbitration is ongoing right now. I think that the arbitration – some arbitration are actually happening. I think that the conclusion should be somewhere late fall this year. So we are still hopeful that the arbitration conclusion on a few projects will bring value to the price of electricity. I think that we have a good case, the industry has a good case to come back to the avoided costs. Those projects – what we call the [indiscernible], the pricing was based on the avoided costs of electricity by Hydro- Québec. So we are hopeful that that notion will be retained by the arbitrator. Sean Steuart Okay, that’s all I had. Thanks Michel. Michel Letellier It’s my pleasure. Operator Your next question comes from Rupert Merer with National Bank. Your line is now open. Rupert Merer Hi, good morning everyone. Michel Letellier Hi Rupert. Rupert Merer So we had a dividend increase this quarter and some share buybacks, can you talk a little about how you are thinking about capital allocation, how regularly are you going to review the dividend and how you are going to look at share buybacks going forward? Michel Letellier Well, I think that again that policy or declaring a dividend is the responsibility of the Board. But as we discussed that strategy yesterday, I think that what we want to establish is the sustainability of the dividend and the foreseeable growth of the dividend. We are cautious, as I guess you gather from our development and the type of project that we are doing. So I think that what is important for us is to be able to say that our dividend is sustainable and we want to grow it sustainably. We are going to generate more cash flow in 2017. We will have a payout ratio that is going to be a lot lower than where we are experiencing right now. So again, always the decision between increasing the dividend and making that cash flow to work. We are very confident on what we are seeing abroad and eventually to Canada, to be able to make good investment and good use of that free cash flow. So whenever we are going to have some ability to invest and create value for the company, I think that will be the priority. But I think that the investors have to be rewarded on their patience with us. And creating – increasing the dividend slowly, but surely is probably what we are going to do. Rupert Merer Okay, great. Thanks for that. And then quickly then what was your outlook for Q1, can you talk about how it’s shaping up, given what you can see so far in the quarter? Michel Letellier Well, BC is probably doing the best of the best. It’s raining in lower elevation and we are capturing the rain. And it’s – there is a ton of snow in higher evolutions. So in BC we are well above 100% right now of our long-term average for the year-to-date on all our facilities. The wind in Québec is okay, a little bit over in February, but it was a little bit lower in January. So we are very close to our long-term average in the wind. And the hydro in Québec is also very good and in Ontario as well. So only the solar doesn’t have the full radiation right now. But that’s not so bad. But it’s still very close also to [indiscernible]. So far, the first quarter looks very, very strong. Rupert Merer Okay, excellent. Thank you very much. Michel Letellier It’s my pleasure. Operator [Operator Instructions] Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. There wasn’t any commentary in the MD&A or even in your prepared remarks on Alberta, where do you guys stand on Alberta with renewables? Michel Letellier Well, I would say that for a change Alberta is now focusing on renewable energy. And I don’t want to go politics on that. It’s just that I think and I said in places in public speeches that especially in Canada, coal cannot produce electricity in Canada anymore. There is no way our country should support coal to produce electricity. And Alberta has close to 5,000 megawatts to 6,000 megawatts of installed capacity in coal. So we are hoping to see that market evolving towards future RFP. Alberta is very lucky to have very good wind resources and to some degree very good solar radiation as well. So I think that Alberta, if they have the willingness, they certainly could see a very dynamic IPP sector to produce renewable energy in Alberta. So if there is a good market and if there is some fair market for us to play, we will definitely love to be present in Alberta. Ben Pham Okay. But you don’t – you are more watching in the background now, rather than setting up offices? Michel Letellier We are yet to see how it’s going to evolve in Alberta. What we – why we haven’t been very active in Alberta is that Alberta never really had a long-term PPA that makes sense for us. So depending on what they are going to put forward, we will be aggressive or not in Alberta. Ben Pham Okay. Michel Letellier So we are – basically we are looking for long-term PPA opportunity, so if the renewable energy is again focused on merchant and some green credit, it will be difficult for us to be very aggressive there. Ben Pham Okay. And my second question, I was just wondering perhaps your thoughts about the benefits of scale as you think about 2020, what are you thinking in terms of your asset base and the growth opportunities beyond then, because it seems like most of your peers, and within the sector outside are touting scale and building scale to position for the next wave, I am just wondering your thoughts on that whole situation? Michel Letellier I think that scale is important, yes. I think that our ability to be creative is also very important and flexible and also is to be present in, I would say some good markets. Especially, I would say that we like Mexico, because Mexico is a growing market. They are growing their electricity consumption. In many other markets like the U.S., the electricity consumption is not going higher. It’s just that they are changing the way they are producing electricity. So hence, it’s making a good opportunity for renewable energy. But Mexico has both. You see the growth and you also see a change towards renewable energy and target portfolio to increase their percentage of renewable energy up to about 35% of their total generation capacity. So I see those markets as being very, very interesting for us. Peru has also some long-term contracts for small hydro. And I think we have good expertise there. So we are interested in Peru, although it’s not a big market. It’s a market where I think our expertise can be put to work. And obviously, Europe is interesting. Is Europe going to be as interesting as Mexico on the long-term, maybe not, because they are not growing that much their electricity consumption base. But to come back to the scale, I think that we can certainly have the ability to make a partnership. We have done and we have proved to be able to be a very good partner, a creative partner that has the ability to bring the win-win situation where we bring sometimes the capital. Sometimes we bring the capacity, the knowledge. So I am not so concerned about the scale, because we will never be big enough. I mean, there is always a bigger guy, a bigger fish in the pond. So, what I am focused more on is our ability, our creativity, to create value for our shareholders. That being said, we are not afraid of growing. We are not afraid of making acquisitions. And I think that one of the strategies to grow in foreign markets is to have maybe a local partner and to partner with maybe pension funds. And we have shown that our ability to do that, I think that we can be a good partner for infrastructure funds or a pension fund to acquire existing assets or to grow development projects. Again, the type of partnership that we have signed with CFE in Mexico is a very good example. I think that we are willing to partner with a big, a very big entity in Mexico that somehow has lost the ability to be nimble to develop smaller hydro. Hence, I think this is a win-win situation where we can bring the knowledge and they can bring the long-term PPA. So, those are the places where I feel we can create more value for our shareholders. Just getting bigger and bigger for the sake of getting big, I don’t think is the solution. Ben Pham Okay, that’s helpful. And maybe just a last cleanup question one of your recent projects you put in is the CPA adjustment and trimming the EBITDA down. Does that impact some of your future projects or is it already in the numbers? Are you going to revisit that in ‘17 timeframe? Michel Letellier Which one, I am sorry, Ben, what you are mentioning, you mean the Québec-based contract or? Ben Pham I think it’s on – it was in the contract that’s the Tretheway, the inflation mechanisms lower than your initial expectations. So, is that incorporated in your future backlog too or are you going to revisit it later? Michel Letellier No. Now, it’s already included in our long-term forecast, but the difference was basically what we had forecast during the construction. During the construction in BC, you have 100% of the CPI during the period of the construction or the development of the project. After that, it’s depending. It’s up to 50%. In some cases, we have 30%. Some places we have 50%. But in this case, I think we had forecasted in the construction about 2.2% of inflation and we had 1.5% or 1.6%. So it’s not a big gap though. Ben Pham Okay, alright. That’s helpful. Thank you very much. Michel Letellier My pleasure. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance. Please go ahead. Jeremy Rosenfield Thanks. Good morning. Just maybe one cleanup question related to the refinancing of the Stardale debt that I think you announced earlier this week. It looks like you are pulling out some equity from that project and you are also lowering your interest expense, so kind of a win-win. But can you just comment more broadly on what I would call capital recycling or raising debt or refinancing projects and taking out equity potentially using that to finance future acquisitions or future projects as you go forward. What’s your outlook there? Michel Letellier Well, Stardale was not done on a long-term basis with life insurance. So, we had the ability to refinance it with the same Japanese Bank. And at the time, solar and the market was not known and basically the spread also on the credit risk for solar was a little bit higher. And well, we just basically take advantage of now the bank – and especially that Stardale has been performing very well as well. So, the lenders were willing to reduce the spread and make more room for a bigger amount. So, I guess that whenever I can put my hand on long-term financing in a range of less than 5% in the range of 4%, why not? So, whenever we would have the ability to do that, we certainly would rather do that than issuing stock and diluting our shareholders. So, I think that this is probably the cheapest type of capital we can get, especially after-tax when you take into account the deductibility of the interest rate. So, do we have a lot of those possibilities? Not necessarily with the new one, because obviously we have put project finance – brand new project finance, with most of the projects are done with life co. So, there is not a lot of flexibility there. But we still have about 14 unconvert facilities and maybe with Walden, it will be 15. So, there is a little bit of room there definitely to – especially after renewing the existing PPA. So, there is maybe a case to put a portfolio together and issue a long-term bond on those, instead of having the corporate loan. So, that might bring also some more liquidity on that aspect. Jeremy Rosenfield Okay. But you don’t have a specific target in terms of the amount that you could resurface, let’s say? Michel Letellier No, we are trying to stay opportunistic. The long-term bonds are very, very attractive. It keeps amazing me to see the 30-year bond below 2%. So, obviously that makes very cheap long-term money when you have a good project to finance, especially in Canada, but no, Jeremy, we don’t have a specific number. I think we are trying to be just opportunistic. For the time being, we don’t need necessarily a lot of equity. As we mentioned, everything is being fully financed. It’s only acquisitions that would require us to have a little bit more equity. I don’t have a fixed target, Jeremy. Jeremy Rosenfield Okay. And thinking about the acquisitions that you are looking at or the potential acquisitions that you are looking at in terms of financing and expected returns on those acquisitions, do you see yourself being able to earn similar spreads in terms of the return versus the cost of capital on the projects that you are looking at or on the potential acquisitions that you are looking at? Michel Letellier It’s a good question. It’s always paramount and it’s difficult to know where the market is going, right? When the 30 years bond are below 2%, one could wonder what type of return is acceptable or not, but I always said that we look at a portfolio a little bit like any equity investor, you have risk reward formula that we are trying to follow, obviously an existing facility with already financing and long-term PPA are worth more and obviously would generate a little bit less return than a Greenfield project. So, we want to make sure that we keep our global return north of 10%. That’s our perceived cost of capital for our equity. But there is reality, there is competition out there, and we want to make sure that we stay competitive in acquiring a facility. We have looked at a lot of opportunity. We have passed on. We have bid. And I think we will be successful in the near future. One thing that we are willing to use as a tool to increase our return is to partner with pension fund, as we did with SM-1 project, where we had increased the internal rate of return for Innergex by using a little bit of debenture and using a little bit of premium to manage the asset. So, that’s one tool that we have to increase a little bit the internal rate of return for our shareholders at the end of the day and manage more portfolio and being I would say active on the M&A market as well. So, that’s definitely one aspect of the capital structure that we are willing to take in order to make a decent return at the end of the day. Jeremy Rosenfield That makes sense. And maybe since you just mentioned it, in terms of opportunities that you have passed on or that you haven’t closed, is there anything specific that you can point to as reasons why you felt either it wasn’t a good fit for Innergex or why you weren’t successful with those deals? Michel Letellier Well, it’s hard. You know, when you know your business, it means that you know how much it costs to manage it. And sometimes we wonder, because there is maybe people that have a more optimistic view on long-term forecasts. We want to make sure that whenever we are taking risk is that – or risk or we are making an acquisition is that we will not be hearing on the too optimistic side on the long-term forecast. So, I rather accept a lower return, but making sure that we are going to make that return. Another way to say it, one can imagine that they can buy an existing facility at 13% internal rate of return, but it depends on the assumption that one can use. So for us, I don’t want to promise my board or lead my investor to think that we would be able to do a bigger return on a very secure asset. Usually, you could do it in a small acquisition here and there, but usually the market is fairly efficient. And I just want to make sure that we stay focused on being a conservative long-term manager and that whenever we are accepting as a return, it will materialize over time. So that means also that whenever we are going outside, we will want to make sure that we hedge and we would not put the company at risk with the foreign exchange rate. One thing that Innergex doesn’t have right now is foreign exchange exposure. And that sometimes people might underestimate the variability of foreign exchange. We take that very seriously in our analysis. And this is one of the challenges we have whenever we are looking into acquiring something in the States or in France or in Mexico. So again, we are taking our time, but whenever we are doing something, I think that we can sleep well at night. You know that I like to sleep well at night. Jeremy Rosenfield Yes, okay. Thanks, Michel. Excellent. Michel Letellier My pleasure. Operator Mrs. Benmouyal, there are no further questions at this time. Martine Benmouyal We have one more question actually from Mr. Jay Ferguson of Ferguson, Andrews Investment Advisers and it goes as follows. With the dislocation of the yield co market in the U.S., are you looking to buy assets from them such as NYLD, NRG Yield, and SUNE? Michel Letellier That’s a very good question. And I was amazed to see how quick the market realized that yield co promises were hard to deliver and we will stay opportunistic. If there is some good opportunity, definitely the U.S. market is on our radar screen. And I agree that the market seems to have evolved from being a little bit crazy to now being more reasonable in yields. Martine Benmouyal Thank you. Alright, if there are no more questions, I will thank everyone for attending this conference. We appreciate the opportunity to provide an update about our company. Please do not hesitate to contact us if you have any other questions. Operator Ladies and gentlemen, that concludes our conference call and webcast. Please note that a replay of the conference call and webcast will be available on the Innergex website. The press release, financial statements and Management’s Discussion and Analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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