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Why Amazon's New Fire Tablet Doesn't Matter

It’s no secret that Amazon ( AMZN ) fancies itself more than just an online marketplace. In recent years, the Seattle based company has launched its own brand of electronic devices, entered into the video streaming market, and created

Are Risk Parity Funds ‘Mad, Bad And Dangerous To Know?’

Summary Various people from both the sell- and buy-sides have blamed risk parity funds as well as trend-following CTAs and certain “smart beta” practitioners for recent market volatility. While these techniques certainly could contribute to volatility in crisis periods — there are few investment techniques that couldn’t — to single them out is misleading and self-serving. Risk parity has its place in the markets, and its place may well be increasing, as investors understand it better. But it still is not fully tested. In particular, how it behaves in crisis situations is not fully understood. Its behavior over the last few weeks has, however, been reassuring. There is mounting and quite vocal criticism of risk parity and other investment techniques that seem to display option-like sensitivity to changes in market volatility. The argument against them is that, in certain conditions they can destabilize the market: as volatility increases, they may respond by trading in ways that increase volatility further. While this accusation may not be entirely unfair, this characteristic is hardly unique to these funds, and it is unreasonable to single out these investors for recent market volatility. Feedback loops between volatility and selling pressure have been built into many aspects of modern markets as well as human nature. The contribution of risk parity and similar products to the recent spasm of market volatility was not even a fraction of the tip of the iceberg. Without further investigation, this might have been ascertained simply by looking at risk parity AUM. In addition to somewhere between $400 and 600 billion in worldwide institutional assets managed according to risk parity principles, there are a handful of publicly-available mutual funds practicing variants of this technique, none of them very large. These include Salient Risk Parity Fund ( SRPAX ), Putnam Dynamic Risk Allocation Fund ( PDRFX ), AMG FQ Global Risk-Balances Fund ( MMAFX ), Invesco Balanced Risk Allocation Fund ( ABRZX ), and Columbia Active Risk Allocation Fund ( CRAAX ) and the AQR Risk Parity Fund ( AQRIX ). Background There are numerous bells and whistles that can be incorporated with risk parity techniques, so that the concept has become rather diffuse and easily slips over into “smart beta.” The basic idea grew out of dissatisfaction with the standard, mean variance optimization approach to portfolio construction, with its paraphernalia of efficient frontiers, etc . The objection was simple: optimization relies on return forecasts that are rarely realized by actual asset class behavior, and it tends to craft portfolios in which the most volatile asset class ─ typically the equity component ─ accounts for the overwhelming majority of their volatility. This suggests that diversification according to the standard formula is doing little to mitigate risk. Since it is precisely the returns on the most volatile component that have most consistently confounded forecasters, proponents of risk parity argue that mean variance optimization has led consultants, trustees and CIOs astray. They claim that portfolios with more consistent performance can be constructed by targeting volatility rather than targeting forecast returns. Assumptions must still be made about future standard deviations and coefficients of correlation among assets, but at least the shakiest assumptions, about returns, can be eliminated. In its simplest implementation in a two asset portfolio, this insight would drastically reduce equity exposure and substantially boost fixed income holdings compared to the rule-of-thumb 60/40 portfolio: to contribute the same level of volatility to the portfolio as fixed income holdings, equity exposure would have to be cut back to about 24%. Without leveraging the portfolio, however, in most circumstances this implementation would also produce drastically reduced returns and would attract few buyers. Naturally, things become more complicated as more assets are included in the mix, but the principal remains essentially the same: each component is weighted and if necessary leveraged so that it contributes the same amount of volatility as each of the other components. If expected returns for a targeted level of volatility are not satisfactory, performance is boosted not by overweighting the riskier assets, but by including more risky asset classes or leveraging the less volatile ones, for instance through the futures market. Thus risk parity portfolios often include commodities and real estate as well as equities, and are typically leveraged 1.5x to 3.0x. The example shown below on the left is unleveraged, which accounts for its somewhat lower expected returns than the example of mean variance optimization on the right. (click to enlarge) There is no agreement among risk parity practitioners as to how return objectives should be set, and consequently, what the “appropriate” level of portfolio leverage is. This is hardly surprising: any such decision is completely exogenous to the theory, as it should be . Theory is getting into dangerous territory when it attempts to dictate investors’ risk tolerances. It is clear, however, that reasonable leverage of the less volatile components of this sample portfolio could raise its projected returns to the levels expected of the portfolio on the right. The Root of Recent Criticism Obviously, a proposal as radical as risk parity has attracted considerable criticism from virtually all sides ─ after all, it rejects most of the basis of Modern Portfolio Theory, dating back to 1952 and enshrined in all finance curricula. It is not my intention to review these criticisms, which is far too technical an undertaking for a short article, and many of them are unpleasantly contentious or self-serving. Rather, I confine myself to discussing the recent criticisms offered by Chintan Kotecha and Marko Kolanovic, sell-side analysts at Merrill Lynch and J.P. Morgan respectively, as well as some investors, including the well-known hedge fund manager Lee Cooperman of Omega Advisors. Their criticism has been given wide currency through the attention they have attracted in The Financial Times , Barron’s , Bloomberg , the Wall Street Journal and elsewhere. The issue involves rebalancing in crisis conditions. If the volatility of one asset class included in a risk parity or similar portfolio suddenly jumps, while that of the others remains more or less as before, this will inevitably trigger sales to rebalance the portfolio. The critics argue that these sales are destabilizing for the asset that is already suffering from heightened volatility. The implicit warning is that further increases in assets managed according to risk parity principles, in addition to those managed according to trend-following and some (but not all) “smart beta” strategies, could result in a death spiral of rebalancing giving rise to liquidations, which raise volatility, catalyzing further liquidations which in turn raise volatility and so on. The critics claim to have seen evidence of precisely this sort of behavior during the recent market drama; Mr. Cooperman goes so far as to blame some of his fund’s weak August performance on it. Otherwise, it would be difficult to see why this alleged problem should so suddenly crop up as an issue. After all, trend-following strategies are at least as old as Dow Theory, and I have found evidence for them in Dutch trading practices in the first half of the seventeenth century. While the commissars of MPT orthodoxy were never able completely to stamp out technical analysis and similar heresies, they drove them into narrow and secretive corners, out of sight of polite society for most of a generation. A few firms, such as Merrill Lynch, even continued to employ technicians in their research departments. Their return to respectability is something comparatively new to equity markets, developing gradually since the introduction of equity index futures in 1982 attracted people who had never had much use for portfolio theory (after all, Fisher Black did not believe that commodities are investments) into the equity community. The modern instantiation of trend following as algorithmic trading strategies is only a difference in degree rather than in kind from the days of eyeshades, sleeve garters and three New York baseball teams. “Smart beta” is an even more amorphous concept than risk parity, embracing portfolio construction techniques from equal weighting to fundamental indexing (for detailed discussion see this article ). However, the critics are presumably directing their fire toward those strategies which focus their efforts on maximizing a portfolio’s Sharpe Ratio. Since the denominator of the Sharpe Ratio is standard deviation, the sensitivity of such approaches to changes in volatility is obvious. Even though they may differ significantly from risk parity strategies, they share the need to rebalance if heightened volatility manifests itself in one portion of the portfolio but not the rest. Analysis of the Criticism The critics have, in fact been rather equivocal in their criticism: they do not make it clear what asset allegedly suffered from a feedback loop between its volatility and sales, nor do they make it clear when this allegedly occurred. Detailed data on the trading of the recently most volatile assets of all, Chinese ‘A’ shares, is unavailable. But surely some of the attempt to rebalance risk parity portfolios must have occurred in U.S. markets. And since there are claims that such sales affected other funds’ August performance, some of must have occurred while volatility was particularly high and markets most vulnerable to forced sales. The August spike in volatility was certainly dramatic, but it was by no means a record, nor has volatility remained at highly elevated levels as it did in 2008/9, 2010 and 2011/2. Coming as it did after an extended period of relative market quiescence, however, the return of volatility came as a considerable shock, for which many investors were unprepared. (click to enlarge) The VIX peaked at 40.74 on August 24th. At what point the alleged forced selling due to rising volatility occurred is unclear, since no one except their managers knows the details of risk parity funds’ rebalancing protocols. Some of the critics’ comments imply that these sales may not even have occurred yet, two weeks after that peak, although this begins to look implausible. In any case, the behavior of that portion of U.S. volume reflected in NYSE statistics, while reflecting the usual sharp increase in trading that accompanies a volatility event, does not suggest an abrupt, destabilizing flood of selling: Average Value of Transactions % Change in NYSE Volume % Change in SPY ETF Volume 8/14/2015 $8,739 8/15/2015 $8,863 3% 9% 8/18/2015 $8,511 0% -9% 8/19/2015 $8,370 22% 141% 8/20/2015 $8,677 9% 12% 8/21/2015 $9,599 41% 78% 8/24/2015 $7,937 26% 46% 8/25/2015 $8,332 -23% -27% 8/26/2015 $7,754 4% -8% 8/27/2015 $8,056 -5% -19% 8/28/2015 $8,158 -20% -41% 8/31/2015 $8,937 5% 2% sources: NYSE, State Street Granted, it is not clear to me how a flood of volatility-induced selling is to be distinguished from rising volatility as a result of a flood of selling. But the evidence I can see for U.S. stocks does not suggest that, this time around, things were notably different from what has occurred during other sudden bouts of heavy selling. The decline in the size of the average trade on the day of maximum volatility suggests that the selling pressure was not, or at least not entirely institutional. This view is reinforced by changes in the trading activity of the SPDR S&P 500 Spider ETF (NYSEArca: SPY ), which of course attracts a great deal of retail attention. The critics do not mention this, but volatility-induced ETF liquidation is likely to be at least as destabilizing as the behavior of the trading strategies with which they are at pains to find fault. And without the aid of algorithms it is as likely to result in a toxic feedback loop, as dropping prices encourage panicky holders to sell, pushing prices down further. During the period shown in the chart above, SPY suffered $10.2 billion in net redemptions ─ and that was just from a single ETF, albeit the world’s largest. Other ETFs, and some conventional mutual funds, had similar experiences. Different risk parity, “smart beta” and trend-following CTAs are each likely to handle portfolio rebalancing in different ways. Some may even apply judgment to the problem: Salient says that its portfolio management “…attempts to capitalize on momentum…” which it does through algorithms, but this suggests an overlay on the rebalancing signals it receives. More explicitly, AQR notes that it reserves for itself “…the ability to exploit tactical opportunities by making modest adjustments, or “tilts,” toward assets that we believe are relatively attractive…,” a practice that might even involve human beings. However, second-guessing can create difficulties of its own ─ as a systematic investor once remarked to me, “If I ignore the machine, from where will I receive the signal to pay attention to it again?” It is likely that all these sorts of investors build some measure of tolerance for changes in relative asset volatilities into their thinking, if only to keep transaction costs in check. A few, such as Columbia, engage in periodic rebalancing ─ once a month, in its case ─ rather than responding immediately to every observed change in volatility. How the critics purport to disentangle these threads is unclear to me ─ I frankly doubt that they can. And if volatility-induced selling only occurs well after the maximum volatility event, it is unclear to me how it can be especially destabilizing. Conclusions, Cautions, and a Thought from Lord Byron I am always willing to bow to contrary evidence, but I have seen none that really suggests that risk parity, either on its own or in combination with trend-followers and “smart beta” aficionados, is any more responsible for recent equity market volatility than other instruments that, in a crisis, are likely to be forced to sell portions of their portfolios. Mr. Cooperman in particular should be aware that restrictions that Chinese authorities imposed on sellers may have forced some of his hedge fund brethren to sell elsewhere, simply in order to meet margin requirements. And I am not aware of any touchstone by which a forced sale can reliably be identified as such from outside the premises of the seller. The unfortunate truth is that panicky human beings are quite able to destabilize the markets without help from machines ─ they have managed to do so since markets were first invented, and doubtless will continue to do so. Risk parity, trend-following and “smart beta” have attracted criticism because they are easy targets: generally misunderstood if they are known at all, mysteriously computer-driven and, worst of all, associated with hedge funds. Risk parity is the brainchild of Bridgewater Associates, the largest hedge fund of all. Since the Crash, populists have ensured that anything that they feel requires discrediting need only be associated with any one of these bogeymen. Stock-pickers such as Mr. Cooperman feel unappreciated, after a long period during which their undoubted talents have gone comparatively unrewarded. And they have a right to object to the fact that markets have been so unrewarding for them, if not perhaps to feel bitter. The markets depend on them: if fundamental values are not ultimately recognized, there is no rational basis for investment at all. But as Keynes noted, macro conditions can swamp the influence of security-specific fundamentals over surprisingly long periods of time, and that has been our unfortunate situation for most of the period since the Crash. Global fiscal irresponsibility, regulatory overstretch, mounting social and military tension, ever more imaginative monetary experimentalism and a host of other issues: why should investors be surprised that their investments have tended to react more to the exogenous market environment than to their own fundamentals? Yet this cannot last forever: fundamentals will out, even if it is a matter of a company surviving Fall of Rome conditions when hundreds of others fail to. Before the China crisis broke out there were signs that the returns to stock-picking were increasing relative to macro trading strategies. I believe that China is merely an interruption in, rather than the death-knell for the recovery of fundamentally-based investment strategies. Not the least of the gifts that recent market volatility has given us is a general reduction in valuations. Judicious picking among them, rather than frantic trading in and out of risk, is the way forward for investors. Which may include risk parity investors. The technique is a method for allocating among various asset classes, and for heuristic purposes is usually discussed in terms of indices for each asset class, but that does not mean that it actually requires a passive investment approach within any given asset class. Asset allocators can be stock-pickers, too, and in fact few of them, in normal conditions, are very active traders. The Putnam Dynamic Risk Allocation Fund provides an example of an active investment implementation of something resembling risk parity, while Salient, AQR, AMG, Invesco focus their portfolios primarily on derivatives, and Columbia combines derivatives with a fund of funds approach. Of all these managers, Sapient and AQR have the “purest” approach to risk parity, which would cause me to favor their funds over the others, all of which apply various tweaks and twists to the basic risk parity insight. But AQR is not accepting new investors, and of course, they and Salient will both miss out on any alpha to be obtained from stock-picking. I think a dose of risk parity or similar “smart beta” strategies will benefit most portfolios, although I would take a wait-and-see attitude toward total conversion of a portfolio to these techniques. The criticisms, however tendentious, indicate a real, if only potential problem for such strategies, and I would like more evidence on how they behave during crises before committing the entire portfolio to them. My preference for a “pure” approach to risk parity is in the spirit of empirical investigation: I want to learn more about how the strategy behaves. August has been tough, and it does not look as though the rest of the year will be a great deal easier. Some readers may recognize that my title borrows from a reference to Lord Byron. Among that poet’s many valuable pieces of advice was, “Always laugh when you can. It is cheap medicine.” Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q2 2015 Results – Earnings Call Transcript

Executives Marie-Josée Privyk – Director Communications and Sustainable Development Michel Letellier – President and CEO Jean Perron – Chief Financial Officer Jean Trudel – Chief Investment Officer Analysts Rupert Merer – National Bank Nelson Ng – RBC Capital Markets Ben Pham – BMO Capital Markets Innergex Renewable Energy Inc. ( OTC:INGXF ) Q2 2015 Results Earnings Conference Call August 6, 2015 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 the Second Quarter 2015 Results. [Foreign Language] [Operator Instructions]. I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, August 6, 2015, at 10 a.m. ET. I will now turn the conference over to Marie-Josée Privyk, Director Communications and Sustainable Development. Please go ahead. Marie-Josée Privyk Thank you.[Foreign Language] Good morning, ladies and gentlemen. I’m here today with Mr. Michel Letellier, President and CEO of Innergex, and Mr. Jean Perron, Chief Financial Officer. Also joining us is Mr. Jean Trudel, Chief Investment Officer. Please note that the presentations will be in English. However, you are welcome to address your questions either in French or English.[Foreign Language] I’d also like to point out that journalists are invited to call us afterwards if they wish to address any question. In a minute, Mr. Perron will provide some details on our financial results for the second quarter, ended June 30th, 2015. Mr. Letellier will then provide an immediate review of our operating activities and outlook, and Mr. Trudel will present our financing activity. We will then open the Q&A session will all three senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily accessible via the Internet. You may also access the press release, financial statements and the MD&A on the Internet website in the Investor’s 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, 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 explanations concerning the principal assumptions used by the Corporation to derive this forward-looking information and of principal risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the Company’s MD&A, as well as its Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Marie-Josée. Good morning. The quarterly results for Q2 2015 are showing production that was at 93% of the long-term average of 931 gigawatt-hours, due mainly to below-average water flows at the six 50%-owned facilities of the Harrison Hydro Limited Partnership in British Columbia. This translates into 904 gigawatt-hours of production, compared with production of 899 gigawatt-hours in Q2 2014. Production of the first six months of 2015 stands at 103% of long-term average. Revenues for the quarter were 70.2 million, compared with 69.6 million in 2014. Revenues for the first six months were 127.9 million compared to 107.2 million last year. The increase is due to above-average water flows in BC and higher wind regimes and to [indiscernible] of SM-1 in June 2014. Adjusted EBITDA for the quarter stood at 53.4 million, compared to 53.8 million in Q2 2014. Adjusted EBITDA for year to date stood at 96.4 million, compared to 79.1 million in 2014. The increase is mainly due to the higher production since the beginning of the year. Finance costs of 24.5 million for the quarter were similar to Q2 2014, while they stood at 41 million since the beginning of the year, down 3.2 million compared to last year due to the lower inflation compensation interest. During the quarter, a 24.7 million loss was realized on derivative financial instruments resulting from the settlement of the Big Silver Creek bond forward contract upon closing of the 197.2 million financing of the project. A similar 68 million loss was incurred in the previous quarter for the Boulder Creek and Upper Lillooet River upon closing of the 491.6 million financing of the projects. The realized losses are a result of decreases in benchmark interest rates since the date the bond forwards were entered into in late 2013, and the settlement date. It will be compensated by lower respective weighted average interest rates of 4.71% and 4.36% for the 25 to 40 years term loans, compared to higher interest rates set at the time of the issues. These losses were funded with proceeds from the project financing. For the same reasons, further losses could be recognized on closing the MU project financing in the coming months. The Corporation recognized unrealized gains on derivative financial instruments of 43.1 million, due mainly to the reversal of the unrealized loss accrued upon settlement of bond forward contacts of Big Silver Creek. Together with the settlements of the Boulder Creek and Upper Lillooet River bond forwards in Q1 2015, this resulted in a 55.1 million unrealized gain since the beginning of the year. Excluding the realized loss and unrealized gains on loss on derivatives and the related income taxes, net earnings would have reached 7.4 million for the quarter, compared with 8.5 million for Q2 2014, while it would have reached 13.6 million for the first six months, compared to a loss of 2.8 million in 2014. Overall, slightly below average second quarter, combined quarter, allowed us to achieve positive results since the beginning of the year. As a result, and combined with a very good fourth quarter 2014, our trailing 12 months free cash flow ending on June 30, 2015, reached 85.7 million, compared to 48.2 million for the same period ending in Q2 2014, and our payout ratio improved to 72% from 118%. Since the beginning of Q3 2015, power production has been somewhat above the long-term average at most facilities, at the exception of BC. We remain confident in our ability to reach our long-term average production, year over year. This concludes my review of the results. I’ll be happy to answer any questions later on during the call. I’ll now turn it back to Michel. Michel Letellier Thank you, Jean, and good morning, everybody. Just a little bit of, for people that can follow on the webcast, we are going to follow the presentation available on the website. The agenda is that we are going to recap the objectives that we had put forward at the beginning of the year, operating performance, project development; financing activities will be covered by Jean Trudel. I’ll then come back with an outlook on our 2017 run rate, and progress on the international expansion of the Company, and then we’ll follow it with period question. So, objective of performance, we had said that we would increase by 3% to 5% the revenue during 2015, compared to 2014. We will have a full contribution of SM-1 hydro facility, the acquisition last year, and we will increase the adjusted EBITDA by 1%. What we did up to date is that we have, actually, had a 19% increase on the year-to-date production, and 22% increase in EBITDA. That is basically the contribution of SM-1 for the six months that we didn’t have in 2014. Production year to date four to six months stands at 103% of the long-term average. As Jean mentioned, all our facilities across Canada is doing great, except for the Harrison LP, the six facilities that are southeast of BC that doesn’t have any glacier have had lower than long-term average. But the other ones has been very good performance up to now. So, we think we’re still on track to achieve the full year. If you remember, last year BC had been slow during summer time, but then the fall was very, very wet and we did catch up all of the power for the lack of production during early summer. So, for us, a quarter, two quarters, it’s difficult to call, but we’re still very confident on the long-term average for the corporation. Objective for the development, we said that we would advance the four projects under construction Tretheway, Upper Lillooet, Boulder, Big Silver, and start the construction on the wind farm in Quebec, Mesgi’g Ugju’s’n soon. We’re renewal of the Saint-Paulin, Windsor PPA, and we would begin commercial operation of Tretheway. I’m glad to report that the constructions are advancing very well. We’ll talk a little about the Upper Lillooet and Boulder fire. It’s unfortunate, but as we describe it, we’re very well covered with the insurance. We were also lucky to have most of our equipment and assets to be minor — well, they have minor. There’s no major losses on those assets, so, we’re still working on the insurance company, and with the firefighters to come back on site. The firefighters are basically fighting. The fire is still active. It’s about 45% contained. So, there’s still a lot of smoke in the valley. So, it’s not yet safe for our people to come back to work, but things are improving. There’s a little bit of rain in BC yesterday and tonight. So, things are cooling down a little bit, but it’s a little bit too early to call for the start of the construction onsite. Very happy, also, to have started construction on Mesgi’g Ugju’s’n in May. Things are going very well. We’re very accustomed to build wind firms in Quebec, so, don’t see an issue of going forward and make these units here. Contractual renewal process is pending with Hydro Quebec. Hydro Quebec is right now under an arbitrages system with three other smaller producers, independent producers in Quebec, so, they’re working the result to reinitiate the discussion with the other [IPB]. And we’re on track to the commissioning of Tretheway in Q4. We have received– all the equipment are installed in the power plant. Water division into the waterway has been initiated. So, things are going very well in Tretheway. So, if you flip the projects under development, I just gave quite a bit of development on Tretheway, Boulder Creek, and Upper Lillooet. Big Silver is going very well, as well. We have finished the tunnel in the last quarter. So, that is a big milestone in Big Silver. The water intake is almost finished, the diversion work very well. So, Big Silver is doing, I guess, very well in terms of civil work, and there’s no issue in the timing. Mesgi’g Ugju’s’n I just mentioned. Just a reminder, this COD date is with Hydro Quebec is the first of December. That’s a firm date in Hydro Quebec. Again, the impact of the forest fire on Upper Lillooet and Boulder I think it’s important to reiterate that we have all the coverage and insurance to have late start, so, if we’re late, the insurance would cover the interest costs or the lost revenue and, obviously, all the assets are protected, as well. So, on that note, I’ll let Jean update you on all of our financing. Jean Trudel All right. Thank you, Michel. So, the next page, that would be page 9 on the presentation, what we had mentioned early in the year is to pursue financing activities. So, therefore, close the financing of Upper Lillooet, Boulder, and Big Silver, and the MU project, and also refinance the Umbata Falls project finance that we have. So, I’m glad to report that we– well, as you’ve seen, on March 17 we closed the Upper Lillooet and Boulder Creek financing. Then the Big Silver financing was closed just late, June 22nd and we are now proceeding with the financing of the MU project. So, we have signed an engagement letter and a term sheet, and we’re in the process of putting the documentation in place to close this financing during the month of September. And, as for Umbata, we refinanced Umbata Falls on March 30th, earlier this year. So, everything is going according to plan. We actually were successful in putting financing that attractive condition that were actually a bit more attractive than what we anticipated. The market was quite receptive to our financings, and so, it provides us with additional flexibility in the future with these financings that are at the lower cost. On the next page, you see the amounts and the financing. It was a pretty significant program and so, we’re close to ending that leg of the work that we had to do. It’s very important to note that with all these projects that we are building, there is actually no additional equity component that is required to complete all these projects. So, the financing that we are putting in place will be sufficient, coupled with the use of the revolving facility and the cash flow that we generate to complete all these projects. On the next page, just an update on the corporate finance activities, we issued, as you’ve seen, I suppose, $100 million convertible debenture. Basically, the market was very favorable, a very attractive coupon at 4.25%. We took the opportunity to issue this convert, taking the advantage, of course, of the low rates, but also having in mind to potentially affect the redemption of the existing convert and, therefore, to reduce, potentially, the dilution to our shareholders. So, if we are not successful at redeeming the existing debenture in cash, well, it will provide us, actually, greater flexibility to conduct our development activities and/or potential acquisitions. So, Michel will talk about our international activities later on and I think that would provide us with great flexibility to do this. And also, the excess cash can also be used to buy back our shares and, coupled with that, I guess, we also eliminated the discount on the DRIP program today. That’s what we announced. I think we don’t– management doesn’t feel that the share price actually should offer an additional discount under the DRIP, so, it was a good thing to do to cancel the discount and also to potentially buy back shares if the situation remains. So, on this, I guess I’ll turn back to Michel. Michel Letellier Thank you, Jean. So, all good news on the terms of financing. So, 2017 run rate, I like that slide very much. Just to remind that this has been built and updated for taking into consideration the better financing that we had anticipated. Important to remember that this slide takes into consideration only the projects that the Company has existing PPA and has under developed, as I mentioned, the four hydro facilities in BC and the one wind facility in Quebec. So, we reiterate the EBITDA target rate for 2017, without having into consideration any other future project in mind, or future acquisition, only the existing projects that we have. The EBITDA takes into consideration about $8 million of prospective expenses. We always forecast those amounts. So, the EBITDA is net of those expenses. We have showed or reported $180 million of EBITDA last year. We’re forecasting for 2017, based on the long-term average $295 million of EBITDA. So, that’s an increase of about 63% from 2014 up to 2017, and the good news is that we had given the guidelines of $95 million of free cash flow for 2017. Based on the good financing and better financing than we had anticipated, we have now a conservative forecast of $105 million for 2017, so that’s 10 million more cash flow available in 2017. When we say “free cash flow,” our definition of free cash flow for us is important to remember that we take into the calculation the full reimbursement of our project finance. It’s after the dividend, and after $8 million of prospective projects. So good news for us in terms of the availability of internal cash flow. The growth opportunity after 2017, or even earlier, obviously we said that we would pursue Greenfield unlocking activities. We’re getting prepared to submit projects in the Ontario RFP. We have advanced, also, the Nulki Hills wind of BC. We have an agreement now with the Saik’uz First Nation on a fifty-fifty partnership program joint venture. And the RFP in Ontario is for the first of September. So, we’re getting very close to the date for submitting projects. We intend to have at least two very good projects. Ontario it’s very competitive, as you know, so we’re confident, but we’re cautious into the optimism of winning projects from Ontario, very busy, and it’s not a big RFP, if you remember. It’s about 300 megawatt of wind, and 150 megawatt of solar. But there’s another RFP in 2016 for roughly the same amount of power. Also, we said that we would go with the external growth opportunity. We would pursue partnership, acquisition, development opportunity in Europe and Latin America, and may be looking for acquisitions. We are focusing our international activity. We have been a little bit more focused on Europe, mainly France, for wind and solar. Latin America is big, but we’re now focusing more on Mexico than a couple of times in Mexico, meeting with very promising future partners. The market in Mexico is very dynamic. It’s in right now a little bit, I guess, in waiting for the new rules to free up the market, but the potential is great. So, we like what we have been seeing, and have been meeting with very interesting folks in Mexico. And, obviously, we’re looking into North America, as you know. Saskatchewan has said that they might come up with a new RFP for wind in the future. Alberta, with the new government, is talking about renewable energy, as well. So, still very open with Canada and the U.S. Obviously, it’s very active, but it’s very competitive, as you know. So, in summary, I just wanted to make sure that people remember that we have a sustainable dividend. I think that, given the profile of the portfolio that we have, just remember that we have one of the longest durations on the existing PPA. We have more than 70% of our revenue coming from hydro, fairly new asset, visible cash flow expansion with existing projects with PPA. As we mentioned, a internal growth with organic assets that we already have for EBITDA about 63% and for the cash flow, 54% from 2014 up to 2017. We have also, obviously, the payout ratio, given the cash flow that we’ll have, will go down. We have said that we have a target payout ratio of roughly 80%. Given the cash flow that we have announced, the $105 million of free cash flow, and given the amount of shares outstanding, you can make the calculation that this target is easily reachable for us and something else we have room there, as well. So, we will concentrate on capital deployment. We will have internal cash flow. For us, that’s something that’s a new era for Innergex. As you know, since the merger in 2010 with the income trust, the payout ratio has been always an issue but, given the advancement of our projects, this is behind us, so we can now focus a little bit more on the growth. So, on that note, we’ll be happy to answer the questions. Thank you. Marie-Josée Privyk This completes our presentation. Thank you, Michel and Jean. We now invite you to ask your questions. [Foreign Language]. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question comes from the line of Rupert Merer with National Bank. Your line is open. Rupert Merer Good morning, everyone. Michel Letellier Good morning, Rupert. Rupert Merer I wanted to follow up with a few questions on your development plans, your growth plans. You mentioned the Nulki Hills project in BC. Can you talk a little about how that project might develop? Do you expect to enter direct negotiations with BC Hydro, for example? And how much longer do you think this project would be in development if it was to move successfully to construction? Michel Letellier Well, this a big question mark. It’s a good question, Rupert. We don’t know exactly how fast BC could come up with an RFP or to start direction negotiations with the First Nation joint venture project in the northwest of BC but it’s definitely a region where it’s very sensitive in terms of, I guess, being positive towards bringing renewable energy to offset a little bit of the future CO2 emission from the LNG, if LNG’s getting built, so, it’s very linked with the development of the LNG. So far, in that area there’s Petronas and Shell that have proposed and be, I guess, aggressively pursuing the development of a LNG project. So, I guess it’s a little bit of a Catch-22 there. If the LNG goes forward, I think that demand in that area will increase and, hence, maybe more possibility will be done. We also have some good prospects in Port Nelson area where a lot of the extractions are going to be happening. We’ve been monitoring wind for the last eight or nine years in that area, so there potential, as well, in that area. But BC is, I guess, a little bit on a standby to see how much LNG projects will be developed. And, as you know, Site C is being built, and I think that more and more people are thinking that Site C is going to be a reality, even though there were a lot of pushback from First Nation and local community. I think that BC Hydro has succeeded in signing some of the First Nation that [were] against the project. So, the odds of seeing Site C being built are greater now. Rupert Merer Great. And then, on Ontario, what do you think it’s going to take to win in this RFP? Do you think the prices will be comparable to what we saw in the last Quebec RFP? And do you have any particular strengths in your bid that will make it competitive? Michel Letellier I hate to talk about active bids, as you know, Rupert. But it will be competitive, but contrary to Quebec, Ontario has a system of points where, depending on how much points you get, and those points are basically given if you have support of the population, if you have support of the land involvement around your project, both on wind and solar. So, we’ve been concentrating on obtaining the maximum of points in the project that we’d like to submit. So, these points is giving you a discount when you compare your price to the others. So, prices are obviously sensitive, but if one has all the social acceptability points, then the project can be– even if the price submitted is a little big higher, you can win the project if the project gets all the points. Obviously, most of the developers are focused that aspect of the bid, as well. But we intend to have 100% of the points, so, maybe those will help. In terms of competitive price, Quebec is a little bit different. If you remember, Quebec is paying the interconnection. So, the price is net of the interconnection, where in Ontario, the IPB has to pay for the interconnection. So, when the prices of a win might be a little bit higher than in Quebec, and the win in Ontario is a little bit less variable than in Quebec. But, in general, the prices will be competitive, and certainly below what we have seen in the FIT in the past. Solar will also be I think in Ontario they’ll be certainly below $0.20, so, a fair discount compared to the $0.42, $0.44 the FIT program was giving in the past. Rupert Merer Great. Well, thanks for the color. Operator Your next question comes from the line of Nelson Ng with RBC Capital Markets. Your line is open. Nelson Ng Thanks and good morning, everyone. Michel Letellier Good morning to you, Nelson. Nelson Ng Just a quick question on the generation this quarter. Have you seen continued weakness in the hydrology in BC? And what about wind? Have you seen continued strength into the second quarter — sorry, third quarter? Michel Letellier Yes. We’ll start with the positive, Quebec and Ontario are doing great, and they are — for July they have been over the budget. BC, it’s not a secret. BC is dry. Like Jean was mentioning, the worst effected plants are the plant that doesn’t have glacier or very little glacier component into the hydrology, and that are the six Harrison Hydro facilities that we own 50%. The rest Ashlu, Miller Creek, Fitzsimmons, Rutherford have been doing fairly good so far. But, obviously, August is also a little bit dry. So, eventually it will rain in BC and the Harrison Hydro facilities, just like last fall, were over-producing. We had a tremendous quarter with those plants last fall with the rainy season. But, again, quarter-to-quarter for us I think that, again, the diversification across Canada, both in wind and hydro has shown a great flexibility to be able to face specific dry conditions in one part of the country. Nelson Ng Okay, thanks for that. Just a clarification. Did you say Ontario and Quebec both wind and hydro were above budget in July? Michel Letellier Yes, they were even over budget. Nelson Ng Okay, got it. And then my next question relates to, you mentioned the forest fire in Upper Lillooet. When do you think you’ll be able to have a like finish, or have a detailed assessment of what the total impact would be and how much of that would be offset by insurance? And then, just more on the construction schedule. How much flexibility was kind of built into the original construction schedule? Michel Letellier That’s a couple of components. We’ve been on site. The assets, apart from two or three kilometers of transmission line, have not been touched. It’s really funny. We’ve been looking at the aerial photo and stuff like that. You can see the power houses, the [indiscernible], the intake, even the big crane at the intake of Boulder, the fire went all over or around, but didn’t touch the big crane. So, material is very limited. The camp has been also saved. The camp now is hosting about 85 firefighters. We’re glad to see these guys occupying the camp. I think it’s a mutual win/win because they have better access to both the Boulder Creek fire and the Elaho fire from this camp. It’s saving them about an hour and a half of travel morning and night. So, the firefighters are on site and, obviously, protecting the camp if they’re living in them. So, that’s a good news. They’re very dedicated fellows. It’s a hard job. They’re working hard. We were supposed to have some of our people being reintroduced this week on the construction, but we had a little bit of a drawback because of this weekend was very dry and warm. But with the rain that we had yesterday and today, conditions are a little bit improving. So, slowly, we’re getting back into the camp. To answer your question how much — when are we going to be able to fully assess the timing, it’s a little bit difficult to say. We definitely have insurance coverage on everything from delay start, delay construction, to all our assets the same thing with the contractor. The deductible for assets is about $150,000, so it’s very– it’s not material compared to the size of the construction budget there. We have two deductibles possible in terms of construction delay or startup delay. One, if we trigger from the first measure is only two days of delayed construction. If we go with natural disaster, fire and what-have-you, it’s then 30 days waiting time, so the maximum impact to the Company could be 30 days of delay start. And when we say that coverage, that means they would cover all the interest costs, all the acceleration costs related to try to catch up on the construction. It’s the equivalent of protecting your future revenue, so it’s a very comprehensive insurance package– expensive, but when you need it, it’s very handy to have that. And the other component of your question was, do we have a little bit of a buffer? Well, we had– we always had the winter of 2016 as a buffer, so it’s two, three months. We didn’t have the plan to work during winter, because it’s a little bit more expensive to clear out the road and what have you. But we had that as a buffer, so, we had three to four months as a buffer. So, we’re just hoping that that buffer would be enough to catch up and still meet COD date in 2016, might be late in 2016, but we’re still confident that we can reach the COD about that time. Given the fact that insurance might cover the acceleration cost to work during winter 2016. Does that cover your question? Nelson Ng Yes. No, that was a lot of detail. That’s good color. My next question relates to the four prospective projects with the First Nation groups. I guess, from your perspective, is there any– is there like one project that is kind of ahead of the other projects, or more advanced in terms of having a process and a more visible timeline? Michel Letellier We have an ongoing discussion with the Inshaka [ph] First Nation and their government. The issue with this government, they’re very focused on not having any impact on the cost, on the electricity for the rate payers. So, it’s– we’re very, I guess, sympathetic to that. So, we’re trying to work the prices. We’re trying to work the schedule with them to try to meet their targets with BC Hydro as well, so it’s an ongoing discussion. It’s positive. We’re talking. We’re still talking. That’s positive. But we have a little bit of a challenge trying to make sure that we get to a point where everybody’s satisfied, First Nations are very supportive, and government BC Hydro, are still engaged, so still positive but a little bit of challenge to get into the schedule and prices. Nelson Ng I see. Okay and then a quick question on the MU wind project financing. I guess that’s for Jean, but are you looking to also have an interest-only period, similar to some of your hydro facilities, or is that option limited due to the shorter PPA period relative to hydros. Jean Trudel Yes, of course, it’s limited because of the shorter period. And when you analyzes the financing, and we received, actually, a tremendous– tremendously great amount of offers, so we [indiscernible] many institutions, and we received very good term sheets. So, when we analyze the terms and conditions, that’s one of the aspects to analyze to see if it’s a better or not a better transaction for us, and we look at the IRR of the project, the NPV, the cash-on-cash profile to determine which is the best term sheet that we should finance, so, the one that we are working with is using a structure similar to the structure we’ve put in place with Upper Lillooet and Big Silver. So, there’s a dual-tranche, if you want, in it, and it’s going to be– we’re implementing it now, so you’ll see all the details if it gets announced. But it’s going to be a very favorable financing again. Right now, the market is very hot from our standpoint. There’s a lot of demand for our product, I guess, from the financial institutions. And so — Michel Letellier And I think– it goes, also, to the credit of the project. We’ve been fortunate to have had the ability to renegotiate the prices and the model of the turbine, with the same deal so, the profile of the cash flow of this project is very robust. So, it helps, also, to have very good financing conditions. Jean Trudel That’s totally right, Michel. So, the debt service coverage ratio profile of the Mi’kmaq project is very high. So, it provides a very good credit rating. So, institutions are very– can be more aggressive when that’s the case, so, we’re benefiting from that, for sure. Nelson Ng Okay, got it. And then, just one last question. You mentioned that the free cash flow guidance for 2017 is 105 million, and the increase was, I think, mainly due to have an interest-only period, I presume. I was just wondering, given that the free cash flow benefit was from having an interest-only period, like, can you comment in terms of targeting the 80% payout ratio profile, whether you’ll be targeting that 2017 80% payout, or are you thinking about longer-term normalized full debt amortization 80% payout profile? Michel Letellier Well, that’s very deep [indiscernible]. I don’t want people thinking that post-2017 only 80% payout is sustainable. I think that 80% payout means that we would have a lot of room to increase the dividend. On that basis, I think that if we don’t increase dividend, the payout ratio will be much lower than 80%, and it’s not only because we interest-only period, I think that given the fact that we have also indexation in our PPA and when I view that $105 million is sustainable going forward. It’s not just a few years and there’s a drop. Whenever we’re getting engaged in long-term forecasts and sustainability, I think, hopefully, by the time you have been following Innergex, we’ve been quite consistent in our longer view. So, if we’re giving guidance of $105 million, it’s because it’s sustainable. Jean Trudel And to add on this one, when we establish a program of debt financing, we rarely put in consideration the possibility of having a delay in capital payment. So, when it occurs, when it happens, it’s just additional cash, which is a bonus. I think our target payout ratio is 80%. It has been like this for a while now, even before what were the terms and conditions of our financing, I mean, [indiscernible]. Michel Letellier And we have a little bit of a corporate finance, as Jean has mentioned, but we have 13, 14 power assets to support that debt, and all the rest we are fully amortizing, except for a $50 million balloon payment for [upward-lowered] in 40 years. So, contrary to maybe some other player that does a little bit more project finance or bond, that we are capital — we are reimbursing the capital of those project finance in our long-term forecast for EBITDA cash. Nelson Ng Great. Thanks for that clarification. Those are my questions. Operator Your next question comes from the line of Ben Pham with BMO Capital Markets. Your line is open. Ben Pham Okay. Thank you and good morning, everybody. Michel Letellier Good morning. Ben Pham Many of my questions have been asked, and so, I just had one follow up on the fire situation in BC. You mentioned that there’s a bit of rain over the last few days, which is contained it, and I’m just wondering, just because you have a pretty big portfolio in BC, is there any potential risk that that fire could expand to some of your other facilities, or is it pretty much all contained at the moment? Michel Letellier The problem in BC is that it’s dry all over the place. There’s another fire that has started up south of Tretheway. It’s about 40 kilometers from Tretheway. For the time being, it’s not a threat for that particular asset, and Elaho fire, right now, is north of Ashlu, but quite far north, and there’s a glacier in between. So, there’s no big danger there. But obviously it’s, BC is in a situation where there’s a lot of potential fire, and people have to be very careful. The last fire that was lighting up not so far from Tretheway was a human error. I don’t know if it was a fire camp or a cigarette butt that was thrown, but I think that BC government is doing a great job in trying to educate people that the fire danger is extreme. So, who knows? There’s many places where fire can be started again in BC. Hopefully, we’re getting towards September and rainy season should start, and that should be behind us, but for the time being, the fire danger is extreme. Jean Perron And just to be clear, we have the same insurance package everywhere, if it ever happens, we’re well covered everywhere. Michel Letellier Yes, it’s in place, not only on construction site. We have the insurance coverage, which is roughly the same package that I’ve described for all our operating assets. Ben Pham Okay, great. Thanks for the update, everybody. Michel Letellier Thank you. Operator [Operator Instructions] Ms. Privyk, there are no further questions at this time. Marie-Josée Privyk Thank you, and thank you, everyone. We appreciate this opportunity to provide an update on our Company and please don’t hesitate to contact us if you have any other questions. [Foreign Language]. Michel Letellier Thank you very much. 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 the 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 at this time.