Innergex Renewable Energy's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: Innergex Renewable (INGXF)

Innergex Renewable Energy Inc. (OTC:INGXF) Q4 2013 Earnings Conference Call February 26, 2014 10:00 AM ET

Executives

Marie-Josée Privyk - Director of IR

Jean Trudel - CIO and SVP, Communications

Michel Letellier - President and CEO

Analysts

Rupert Merer - National Bank Financial

Ben Pham - BMO Capital Markets

Sean Steuart - TD Securities

Nelson Ng - RBC Capital Markets

Matthew Akman - Scotiabank

Jeremy Rosenfield - Desjardins

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for the 2013 Year End Results and 2014 Objectives. [Foreign Language]. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts and institutional investors and instructions will be provided at that time for you to queue up for questions (Operator Instructions). I would like to remind everyone that this conference call and webcast is being recorded today, Wednesday, February 26, 2014 at 10.00 AM Eastern Time. I will now turn the conference over to Marie-Josée Privyk, Director, Investor Relations. Please go ahead.

Marie-Josée Privyk

Thank you. [Foreign Language] 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’m here today with Mr. Michel Letellier, President and CEO of Innergex; and Mr. Jean Trudel, Chief Investment Officer and Senior Vice President, Communications. Also joining us is Mr. Jean Perron, Chief Financial Officer and Senior Vice President. 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 would also like to point out that journalists are invited to call us afterwards if they wish to address any questions. 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 statement and the MD&A on the Innergex website in the investors section. During this presentation, we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratio that are not recognized measures according 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 principle assumption 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 the Innergex’s annual information form.

The agenda for today’s conference is as follows; Mr. Trudel will provide some details on our financial results for the year ended December 31, 2013; Mr. Letellier will then provide an overview of our operating activities in 2013, our objectives for 2014 and our growth profile in 2017. We will then open the Q&A session with all three senior executives.

I’ll now turn the conference to Mr. Jean Trudel.

Jean Trudel

All right Ms. Marie-Josée and then good morning everyone and thank you for joining this call. Last time we spoke in November, we were just out of a very good quarter and actually production was trending to enable us to complete the year close to our estimated long-term average but unfortunately Mother Nature decided otherwise. So, even though our western assets in general posted great availability rates, the region experienced a drought or actually the driest year in the 66 years of record according to Environment Canada. So, therefore our western assets produced at 54% of their long-term average. This poor weather in the west and sub-par performance in the wind segment was partially offset by a higher than average performance in Ontario. The Québec hydro assets performed at 99% of long-term average and the solar assets met its long-term average. So, overall production for Q4 stood at 82% of long-term average.

Of course weather is the one big thing that we can’t control but nevertheless we maintained our long-term view about the production profile of our facilities. For the year ended December 31, 2013, the overall performance is satisfactory. The eastern facilities all produced above their long-term average including solar and wind facilities which helps partially compensate the dry conditions experienced in the west. Overall, we ended the year at 95% of long-term average which is not so bad considering the dry conditions. So, thanks to the contribution of new assets wheeling service or acquired in 2012 such as Stardale and Gros-Morne, Brown Lake and Miller Creek and to the acquisition of the Magpie hydro facility in 2013, Innergex posted an increase of 13% in electricity production that brought us to 2.4 terawatt power, so that’s a record.

This translated into a 12% increase in revenues to 198 million and an 11% increase in adjusted EBITDA to 149 million, also a record. So, going forward Innergex results will benefit from many other achievements made during 2013 which Michel will address shortly.

With these results, we are also introducing two new key performance indicators, free cash flow and payout ratio. So we believe these indicators will help investors and analysts in assessing the corporation’s cash generation capacity, its ability to the current dividend and dividend increases and its ability to fund its growth. It is important to note that we see and calculate the free cash flow as an all-inclusive measure of cash available for distributions to common shareholders. The measure takes into account among other things the prospective project expenses that we incur every year, the maintenance CapEx, the scheduled debt principal payments, the free cash flow that is attributed to non-controlling interest and the dividends declared on preferred shares. So I invite you to take a look at this new section in our MD&A that details the calculation of free cash flow and payout ratio.

For the year, the corporation generated free cash flow of 59 million up 34% compared to 43.9 million in 2012. The payout ratio stood at 93% and improvement from 115% in 2012. So these improvements are mainly due to greater cash flow from operations resulting from a greater number of facilities in operation partly offset by increasing scheduled debt principal payments and higher dividends paid under preferred shares following our last issuance in December 2012.

On this, I will pass it on the line to Michel, who will review in more detail our 2013 achievements and provide an outlook for 2014 and beyond.

Michel Letellier

Well, thank you, Jean. Good morning everybody. So I guess we have started the tradition last year by giving you our objective for the current year. So it’s just normal that we come back to what we said last year. In our financial statement and annual report, we'll have a section showing what we have said and what we have done and achieved. So I think it’s a very good way to put accountability on what we’re saying and what we’re going to do in the future. So 2013 just to come back on what we had said in terms of construction and COD achievement we have put Kwoiek, Northwest Stave, and Viger-Denonville three construction projects that we have met the COD date and we’re slightly under budget.

We also have completed the CapEx program on Miller Creek that we had acquired a year earlier and now the completion of upgrade on Miller Creek is completed, very happy to report on that. We said also that we would put project financing on place. We have done two. We have done Viger-Denonville and Northwest Stave. We have done refinancing on Carleton extended our revolving terms of the credit facility up 2018 and we have created more flexibility to do some edging and just as an example in that facility.

We have completed also the edging program for the project under development so that now we have protected the economics of these projects in context of interest rate volatility, so glad to report on that as well.

In terms of growth opportunity, I think that the major milestone that we have done is that we have secured a Hydro-Québec BBA for 20 years for the project Mesgi'g Ugju's'n with our partner the Mi'gmaq, so this is a great project for us, a 150 megawatt that will be put in service in 2016, very advanced and I’ll talk a little bit later on in the development section.

We also have signed some agreement with the Saik'uz First Nation for wind project in BC, had done some negotiation also within Ugju's'n in terms of development for hydro facility in BC. We’ve been positioning ourselves to be in a position to participate in the 450 megawatt RFP in Québec and also be in position to eventual RFP in Ontario.

We also have completed the acquisition of Magpie that’s a great asset. It’s a 40 megawatt hydro facility in Québec and we’ve been looking into many-many potential acquisition but we’ve been very disciplined in terms of selection. And as we said, any acquisition has to be accretive for us so we’ve been very disciplined in that field.

Updated on project under construction Tretheway, Boulder, and Upper Lillooet have started their construction. We said we would start construction on these facilities so happy to report that all the permitting and the construction and selection of contractor have been done. We have a slight capital overrun on Tretheway now stand at $111 million instead of $108 million, slight adjustment, but we’re confident that we’ll meet the construction cost on all those three projects going forward.

In terms of project under development there is only one bad news is Big Silver Creek although we were trying to find ways to minimize the cost. We have to now budget an increase of little bit more than $20 million on that particular project. But I think it’s still a very good project for us, meets the long term sustainability of our -- I guess priority, a great project, it’s supported by the First Nation and has a long term PPA of 40 years so we're very supportive of that project.

Mentioned the project partnership with the Mic Mac, this is going very well. We have completed all the environmental aspect. We have done also the first information session with the [indiscernible] in Quebec. So that has completed all the technical aspect of the project. There were no problem in term of accessibility or any environmental challenge in that particular project, so very happy to see that project going through all these studies and still have a COD date of 2016 in our forecast. So even though we think that we could even start this project in 2015, the construction should start late in the fall to start building the roaster.

Update on project financing will be done by Jean.

Jean Trudel

All right. Well, I’ll just start by saying that when time comes and we need financing, its blessings have such good projects, the products that we have to offer which consist of I guess hydro-electric facilities that are brand new with 40 year PPA with a strong power off taker and all located in Canada of course in BC is very rare and it seems quite desirable for many potential vendors such as life insurance companies and pension funds who are trying to match their assets with our liability so this level of interest is still tangible as we continue to hold conversations with the potential vendors.

We intent to start a more formal process shortly on Tretheway Creek that will be closely followed by a process on ULHP. As pointed out by Michel we concluded in January our hedging program which consisted of [setting bump] forwards to lock in the reference or the benchmark base rate that will be used to finance the four BC projects. So these projects are now essentially protected if benchmark interest rates were to go up.

We are now about to implement a similar hedging strategy for the Mesgi'g Ugju's'n project and as for [indiscernible] at this point we do not foresee any difficultly to simply renew this credit facility with our existing lender prior to maturity. This was a short term financing with a hedge in place to cover the duration of our PPA, so the intention here is to do something similar to Carleton where we just extended the term which is a cheaper alternative I guess than a true refinancing.

So it’s important to note that for our existing operations about 98% of outstanding debts are either fixed rates or they are hedged via long term swaps. So the corporation and I guess the stability of its dividend is therefore well protected towards the risk of rising interest rates. And of course with this process going on, there is only Mesgi'g Ugju's'n which remains to be hedged at this point in time.

Michel Letellier

Okay. Thank you, Jean. So, I’ll go through the objective of 2014, what are we going to prioritize this year, is obviously in terms of operating performance the full year contribution of Magpie Kwoiek Northwest Stave facility and now the updated Miller Creek will bring a 20% contribution to our EBITDA margin, so that’s pretty good for us.

Objective also on project development, obviously we are concentrating our eyes on the projects that are under construction. We want to start the construction of Big Silver. We want to complete the permitting and start construction on Mesgi'g Ugju's'n project. We want to pursue the financing on Umbata Falls, close the financing on four of the five development project mainly the Upper Lillooet cluster and the Tretheway project. And the wind project and the Big Silver should be probably done early in 2015.

In terms of growth opportunity there will be a busy year as well. We have, as you know, we have a RFP in Quebec, it’s for 450 megawatt of wind, mainly in the Gaspé Peninsula and in the [indiscernible] region and a 150 megawatt for the rest of the province. So we are going to be very active in that particular RFP. The submissions are due somewhere in September. We want also to advance project in BC namely the Nulki Hills project which is close to the future LNG project in the northwest part of the BC. We are also interested in the Ontario market where an RFP has been announced by the Liberal, although they are a minority government, so we are stayed tuned on what’s going to happen in Ontario. But we would be ready to answer future RFP with couple of good projects.

We want to pursue also some acquisition opportunities, as you know we have the Hydromega asset namely the SN-1 project that you know. We have been working on it for quite a bit of time; same story, if we can complete this acquisition, this will be accretive. With the Hydromega shareholders, we're talking about their share exchange. So there is no equity required in the market for that particular acquisition if we can conclude it. And obviously we'll be very focused on looking into further acquisition that would be accretive and would help our payout ratio, so we’ll be focusing obviously on other opportunities in the M&A section.

And that will translate in our growth profile in terms of EBITDA. In 2013 as you have seen, we have $149 million of EBITDA. Now we are forecasting 2017 to be $285 million EBITDA. That includes the Mesgi'g Ugju's'n project. We include in those prospective -- in this forecast all the projects that we consider that we have PAA, and we think that the Mesgi'g Ugju's'n project is a real project. We are going to build up that particular project. So this represent 18% growth on the EBITDA aspect that doesn’t include, if you remember, this is the consolidated EBITDA. We are missing Umbata Falls and Viger, because with the new accounting rules, we are not consolidating these two. That would add about $8 million to the EBITDA if we would have them consolidated as we did in the past.

So this is, I think a great growth that can give you a little bit of the perspective on our ability to generate future cash flow in order to either grow or to raise dividend. And on that note, yesterday, the Board of Directors increased the annual dividend by 3.4% to $0.60 per share on an annual basis. I guess that speaks to this trend of the future cash flow of the company. We have a great portfolio of young assets all under long-term PPA. We have six long-term financing on those projects, so we are protected against any raising interest rate. We do not have material exposure to foreign exchange. We have provision over PPA linked to inflation, so our operation margins are protected going forward. In short we are very well positioned to provide growth and long-term sustainability to our shareholders.

On that note, I guess we'll open up the Q&A session.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen we will conduct a question-and-answer session. (Operator instruction).

Your first question comes from the line of Rupert Merer with National Bank; your line is open.

Rupert Merer - National Bank Financial

So what should we expect for dividend increases in the future? Will you review your dividend on a quarterly basis? And as you’re thinking to build on your target payout ratio?

Michel Letellier

Well that’s a good question Rupert; obviously the Board of Director is looking into this on a regular basis. We’re not prepared to give full guidance on what is our policy at this point. But as I’ve mentioned, we have obviously a lot of growth in our future cash flow given the amount of project that is going to be put in commercial operation by 2017. So we want to stay flexible. Obviously the board knows it's important to have a profile of growth on our dividend and enhance this increase. I think that it also show that we have now gone from being over 100% in our payout ratio, given the amount of project that we have been able to develop since the merger of the fund and the corporation, so I think that this is a nice path forward toward growth and growth of future dividend, but it’s always important to stay little bit flexible and depending on the opportunity that lies in front of us to stay flexible in terms of cash flow generated by the corporation in order to maximize the shareholder value.

Rupert Merer - National Bank Financial

Great, looking at the MU project, what approvals are left on that and what’s the timeline look for approvals and can you remind us of how that project is structured with regards to your partner’s participation in the equity investment and their share of the returns.

Michel Letellier

Yes, I think that we’re trying to do a good job in the MD&A in describing what it is, it’s a little bit complicated, but it’s in the same spirit of what we’ve done in, as an example, [indiscernible], it means that we provided the majority of the capital and we have a structure in order to have a preferred return, so that translate into the first 15 years that Innergex will capture roughly 75% of the cash flow but that is going to change by the -- after 15 years to somewhere around 40%, that’s about the profile, so in terms of cash generating, this project is very-very accretive in the first 15 years, so for us it matched perfectly the type of cash flow that we’re seeking, given the fact that we have a long, a long portfolio of hydro facility that grow slowly over time, this type of matching of future cash flow for the next 15 years is very-very positive for us and we’re very excited about that project.

And in terms of permitting well, like I said we’ve gone through all the permitting report for the back process, we also have the first information session held by the back last month, so now the decision to have public meetings lies with the people, we cannot project that we’ll have or not those public meetings. If we do have public meetings, we are very well prepared. The only setback, it’s costing a little bit more money and it take a little bit more than three months to four months to go through. So if we have to have further public meetings, we think that we still are able to start construction somewhere at the end of the year of this year, the year 2015.

Operator

Your next question comes from the line of Ben Pham with BMO Capital Markets, your line is open.

Ben Pham - BMO Capital Markets

Just going back to the dividend and the $0.60 raise there, just curious when the board set the dividend, are they largely baking it on your three projects that you recently commissioned, are they taking a view that you got some incremental cash flows from your future projects that you’re developing.

Michel Letellier

No, it’s based on the 2014 cash flow and the strength of the -- basically the general cash flow of the company, obviously we feel that we have quite a bit of room in the future, given the fact that we’ll have a lot of project to be commissioned in 2017. But just on the strength of the cash flow of next year we think we can support and as you know, we’ve been very disciplined in the past and we never-never caught the dividend in the past, we’ve been in operation in public since 2003, we’re very-very focused on the sustainability of the dividend, we’re not playing with that. Whenever we are going to announce a dividend, it’s because we are very confident on the ability of the company to sustain it.

Ben Pham - BMO Capital Markets

Thanks for that and can you clarify your 2014 guidance, are you assuming the conditions in BC are normal for this year in 2014?

Michel Letellier

Mainly yes, although obviously usually we’re a little bit conservative in our budgeting, but you’re right that BC seems to be slow this year although the first quarter for BC as you know, is not very strong in terms of generation because most of BC is under winter condition. It’s true that there’s little bit less, not a little bit, but there’s less snow pack although that can build up quite fast in March in BC, but nonetheless, we’re a bit affected by big amount of snow pack in BC, because we’ve run up a river as you know, so if you have a big snow pack and it melts quickly, most of the water goes over the dam anyway. So the amount of snow pack is not super, super important for us. The importance is that we have to have a slow melt and some rain in the summers. So not so concerned about the amount of snow, there is enough snow there to run our plant, it’s just a matter of how it’s going to be melt and are we going to have some rains in there in the summer.

Ben Pham - BMO Capital Markets

Okay and just my last question here, can you also review the amount of equity required to complete your current projects under development, just in terms of the incremental costs here on some of your projects?

Michel Letellier

Well we don’t need to raise more equity unless we’re making another acquisition. As I mentioned, with Hydromega acquisition, we’re talking about a stock exchange, so we wouldn’t have to come to the market. We need the DRIP in order to maintain the prospective expenses and the program that we have, and that includes a new project Mesgi'g Ugju's'n project as well. So we don’t need materially any equity in order to finalize the project that we have existing BPA as we speak.

Operator

Your next question comes from the line of Sean Steuart with TD Securities. Your line is open.

Sean Steuart - TD Securities

Few questions, Big Silver Creek, that’s I guess second significant revision we’ve had in the budget there. Wondering Michel if you can go into some details of, what’s happened specific to that project that there’s been, I think the first one was the tax increase in BC was a large contributor, but other aspects of that project that have led to significant budget revision.

Michel Letellier

Well as you know Steuart we have been very, very good in the past in trying to budget and being able to be on budget and on time. I am disappointed on that particular one; we thought we would have been able to meet our forecast. The problem is a little bit with Big Silver is that it’s a little bit too big for a pen stock contribution and a little bit too small for a tunnel. So we’re using a tunnel, but the tunnel dimension versus the costs in the installed capacity is not perfect. And the -- I guess the cost in general in BC is under pressure, with the others we were able to create through our own engineering and creating value and changing designs in order to meet both the long term forecasts and the costs.

We were not able to do it on this particular one, it’s a sad thing but it’s not -- it is material but it’s $20 million it’s not the end of the world compared to our total capital program. We’re trying obviously to minimize that and we might be successful in finding little bit more economy here and there on that particular project. But all in all we still think that it’s a great project in terms of capacity to generate the future cash flow. And it’s very well accepted in the market -- not the market but in the region and supported by our First Nation partners.

Sean Steuart - TD Securities

Okay, thanks for that context. Maybe just a little more information on I guess where negotiation stand with BC Hydro with respect to cancelling the North Creek PPA and then reconfiguring the other PPAs in that cluster, I guess it’s been several months you have been in discussions with them.

Michel Letellier

Well it’s going well, although we were focusing on finalizing the COD of both Northwest Stave and Kwoiek that has been done. Little bit more complicated these days with BC Hydro but I guess that we were successful in finalizing these two. We have advanced quite a bit on the Upper Lillooet cluster; we’re very, very close to finalize this cluster. I don’t see any major road blocks in order to finalize this in the next month or so. Discussions are going very well with BC Hydro.

Sean Steuart - TD Securities

And then just lastly for me, the math you provided for the MU Project in the MD&A suggests a price expectation of $107 a megawatt hour. That’s higher than what Hydro-Quebec had talked about as a target price for I guess the larger RFP for win there. Does that include interest on loans you are extending to your partner there, maybe a bit of detail on that price?

Michel Letellier

Yes, it actually meets the $0.09 that Hydro-Quebec has put in terms of ceilings. But this price is on today’s dollars, so Hydro-Quebec will agree to have inflation related to those projects the 2013 price, that $0.09 translates to something a little bigger by 2016 because of the inflation and also Hydro-Québec is considering to formula linked to the inflation and usually it’s creating more value for us to select the option where we’re taking only 20% of the CPI, but we’re having a higher price to start with. The reasoning behind it is that Hydro-Québec is using a discount rate much lower than ours in order to calculate the net percent value of future cash flow coming from those projects. So we have selected -- we only 20% of the CPI but in exchange we have a higher starting price on the electricity. So we’re meeting actually the $0.09 that have been published by this Hydro-Québec.

Operator

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

Nelson Ng - RBC Capital Markets

Just a few more questions on the dividend and payout ratio. In terms of the -- there is about $5 million amount was received by the Harrison Facilities from Northwest Stave, regarding wheeling services, can you provide a bit more color on that? And whether that’s a onetime payment or will it be ongoing?

Jean Perron

Well, basically, this amount is the amount that we’re financing so while we’re building the Northwest Stave project and there is somebody [indiscernible] financing from a bank and this amount is a payment that is made by Northwest Stave to [indiscernible] in order to be able to [indiscernible] that will be produced. So it’s a kind of onetime payment that is made and we’re expecting the same would be happening for the next two projects. In probably 2014, there is going to also another payment that's being made to Harrison Hydro, so it’s a cash payment that was received that is financed by a long-term debt that we spent over full year.

Michel Letellier

So it’s for basically the asset that we're using the common transmission line with the Harrison Hydro. We have Northwest Stave try to [indiscernible] Big Silver who will interconnect on the same distribution line.

Nelson Ng - RBC Capital Markets

So that transmission lines is owned by the Harrison Facility entity rather than BC Hydro?

Michel Letellier

Yes, it’s owned by Harrison, yes.

Nelson Ng - RBC Capital Markets

Okay that makes sense.

Michel Letellier

And maybe I can add that, in this amount there is half of it which is paid intermittently or considered any cash flow that we’re allocating to managing interest, so the net value for this only is about half of this amount.

Nelson Ng - RBC Capital Markets

Got it, okay and then just on the payout ratio. Do you have a sense of what the 2013 payout ratio would have been, if the long-term average was achieved in terms of the generation?

Jean Perron

It’s 5% or 5 million more.

Michel Letellier

Obviously, it would have much better but maybe we can provide you with absolutely -- we haven’t done that calculation, Nelson.

Nelson Ng - RBC Capital Markets

Okay that's fine. And then just going forward and in terms of your 2014 outlook, you’ve mentioned that revenues and EBITDA is expected to increase by 20%, is it fair to say that that would also translate to free cash flows growing by about 20% as well? Or are there some kind of onetime adjustments required such as the wheeling services amount?

Michel Letellier

No, it won’t be the same proportion. It’ll be lower than 20% but will be an improvement but not as important as the 20%.

Nelson Ng - RBC Capital Markets

Okay got it and then just kind of moving over to the projects economics of the hydro projects in BC. You mentioned that Big Silver is obviously still very economic but most of your projects you fund with about 80% debt so with Big Silver, I think there was a 13% increase in terms of the project cost, does that imply that it would be like a more than a 50% increase in your equity investment required for Big Silver? I’m just thinking about how that impacts the equity returns if the amount of equity required will need to significantly increase?

Michel Letellier

Obviously the internal rate of return will be affected because if the cost is going to be able a bit more and we haven’t finalized the assumption on the financing yet, so we are hoping that we’ll get little more financing out of Big Silver. But if not, obviously we’ll have to put more equity. That translates to maybe 1% or 2% last internal rate of return on the project than we had anticipated in the beginning.

Nelson Ng - RBC Capital Markets

Okay, got it and then just a few more quick questions. In terms of the potential asset acquisitions from the Hydromega, are you looking to buy those assets one at a time? You mentioned the SM-1 would be, you’re focusing on that, so are you looking to buy all of them at the same time or are you going to buy them piecemeal?

Michel Letellier

Easier to take one bite at a time.

Nelson Ng - RBC Capital Markets

Because, my understanding is the rest of the projects with exception of one have been completed, is that right?

Michel Letellier

It’s right.

Nelson Ng - RBC Capital Markets

Are there any kind of remaining hurdles that would prevent you from just buying all of them at the same time versus one at a time?

Michel Letellier

I don’t want to go too deep. But there is still little bit of a challenge to finalize all the -- I guess the negotiation with the contractor, both mechanical and civil; so that Hydromega is still negotiating with those, it’s complicating a little bit the process. But they’re working on it and I think they’re advancing very well on solving these issues.

Nelson Ng - RBC Capital Markets

And just one last question; on the DRIP participation level, what’s the current level, and also has it declined materially after the 2.5% discount was removed?

Michel Letellier

Yes, it was about 40%, but now it stands at 15. It’s probably a little bit of a mix that last time the price of the stock was little bit low and the discount was there. So after the announcement of cutting the discount, it went to about 15%. So we will be reconsidering it down the road if we have to reintroduce a discount or not for the DRIP.

Operator

Your next question comes from the line of Matthew Akman with Scotiabank; your line is open.

Matthew Akman - Scotiabank

I have a few questions on target returns on capital on accretion from some of the new projects and because there’s a variation in returns, so Kwoiek Creek looks like it’s going to be a very good return, but I guess Michel, I am just looking for clarification on whether you consider the return now that you are expecting on, say Big Silver or Tretheway as attractive. I think you said it was a great project. But is that an acceptable kind of return, do you guys going into a project? I mean it is what it is now and there’s nothing you can do about it. But going into a project, would you do a project like this with that kind of expected return?

Michel Letellier

It is always tough to call Matthew, when you start a project, we always said that if we want to do a Greenfield project, obviously we want a return that is related to the risk that we’re taking. Are we happy with the Tretheway and Big Silver, all in return; given the fact that we had acquired down from Cloudworks in BC; construction cost went higher than we had anticipated? No. Are we planning to do better project or better return in a new project; yes. Have we done a better return on Viger-Denonville; yes.

So obviously in Upper Lillooet and Boulder we're doing just fine return. Tretheway and Big Silver, you know if we’re going back, we're not that easy to forecast. And it was part of the Cloudworks transaction. We were not the one that had initiated the development on those two. Little bit more challenged than we had anticipated, but we remained focused on building them. Because at the end of the day when we have these projects in operation they will provide sustainable cash flow and it’s important for us. And as you remember, these are providing for 40 years PPA. So we'll have good cash flow coming from these projects. But it’s not giving you a guidance on what we’re prepared to accept in terms of Greenfield development. We are still aiming at higher internal rate of return for those future projects obviously. And a new project is going to do much better than that.

Matthew Akman - Scotiabank

That’s a great answer. I mean I’m just wondering if you guys see these types of project as accretive in your definition and the reason I’m asking is, I mean not because of [those of] their history almost, but more how we should look at Hydromega acquisitions, because you’re trying to make sure that’s an accretive acquisition, and I’m not sure exactly what that means, but can we expect, I guess my question bottom line is can we expect better returns on anything you buy out of the Hydromega?

Michel Letellier

Yes. But Matthew, as we’re trying to do always, is making sure that we have a balanced portfolio and we balance also the expected return in terms of risk associated also to a project. So if we take an existing hydro facility with a long-term PPA, obviously in our perception of risk it’s probably the lower, so hence we cannot expect to have huge internal rate of return on those particular project, if they’re mature and well built. So it’s a continuum in terms of internal rate of return. So we want to make sure that we have a strong base of generating assets that enable us to do some more development and Greenfield projects, so all in all we would have an attractive internal rate of return on our portfolio. So it’s just a matter of making sure that we have a balanced approach both on risk and return and this is always important for me making sure that we keep that balance. As you know, Innergex is a company that is conservative, I want to make sure that we deliver sustainability and that we have a low risk profile in our portfolio, so. I know that it’s a long answer to your question but I think that what you have to take away from that is that, as a portfolio we’ll be delivering I think an attractive yield considering the risk profile that we’re taking.

Matthew Akman - Scotiabank

Okay, and just as one last follow up, on the MU project which looks like it has a much better return which is good, I’m just wondering you said I think that for the first number of years that Innergex gets 75% of the cash flow, so does that mean, the 45 million of EBITDA, is that 75% or is that with you guys are getting 75% or with you getting your 50% interest, so in other words do we expect the adjusted EBITDA to be higher than 50% of that, in the initial years.

Michel Letellier

Yes, we’ll be capturing the cash flow EBITDA $45 million, we’ll get the equivalent of 75% of that in the first 15 years.

Operator

Your next question comes from the line of Jeremy Rosenfield with Desjardins, your line is open.

Jeremy Rosenfield - Desjardins

In terms of the free cash flow calculations going forward, how are you going to account for the use of the reserve accounts? Will that be included in the calculations, for example if you have below average hydro or wind resources in a particular quarter?

Michel Letellier

Directly no, no, but Jean do you want to….

Jean Trudel

Well, the problem with that is that it’s very hard to try to put an amount at what is required and what was put into reserve, you asked on the reserves so we figured out that it would be easier to try to explain without adding something that can be interpreted very differently. So the reserve is still there, so if ever there’s a large capital improvement would need to be made, obviously we’re going to be able to use a reserve to offset that portion of it, but we will not enter into the competition.

Michel Letellier

And we have both reserves, we have CapEx reserve or major reserve and we have hydrology reserve. We wanted to have a simple calculation for the average although it’s not that simple at the end of the day but we’ll give guidance also on the utilization of that reserve, but it’s a good question, we still have about $44 million worth of reserve hydrology reserve that we basically never use. So that’s a lot of money, that represents more than 70% of the annual dividend that we’ve provided, so I think that in terms of risk profile again, I think that we were very conservative in terms of reserve and ability to pay the dividend going forward.

Jeremy Rosenfield - Desjardins

And I guess the follow-on, you mentioned the size of the reserve account, would it be -- maybe it’s more aggressive but would it be smarter to use some of that reserve to potentially pursue accretive growth rather than just holding on to it, for the potential weaker hydrology or major maintenance that needs to be done.

Michel Letellier

Well, that would be wise, but since we're doing project finance, a lot of those reserve are asked by the lenders to be put aside. So you’re right, that one could decide that $44 million as a portfolio approach is high. We’re going to try to see if we can make a better use maybe by using LC in some areas in order to, as we grow in as our portfolio diversify, maybe there’s a way to better use or have more efficient ways to have the convenient asked by the project finance aspect. But it’s a good reflationary that trued, that’s a lot of money being sitting in a trust account.

Jeremy Rosenfield - Desjardins

Just on the capital cost increase for the BC hydro project, I am just curious maybe you could go over in general how you pursue sort of ETC contracts and at what point do most of the costs actually get more or less set in stone. So when do things stop moving around.

Michel Letellier

I think, that what we’ve done right now, confident that we won’t play with the number unless we have a bad experience but as you’ve seen in the past, we have been able, once the construction is started, we really-really missed the total cost and as we -- just as an example, Kwoiek, Northwest Stave and Viger-Denonville as a whole were under budget. So the way we have structured our contract and the numbers that we are coming now with Big Silver is supported by firm bid from contractors, so I don’t see any movement going forward unless we’re very unlucky on some aspect, but very confident on the numbers that we’re providing now.

Jeremy Rosenfield - Desjardins

Okay and then, just for the MU project, based on the cost estimate that you put forward now, and maybe typical leverage, how much of the total equity would you look to be putting in at this point?

Michel Letellier

Well, that’s a good question, the MU project we are forecasting $360 million now with about 515 gigawatt as production, but this is a little bit preliminary in a way that that this is with the standard machine, little bit conservative in terms of profitability because we’re negotiating and we have the ability with Hydro Quebec to sign a PPA and then after that select a turbine manufacturer so that right now there’s a lot of proposals that are coming and some are better, we have a better ratio as an example, we could have a higher cost, but having more production in terms of -- and in terms of profitability that could be more efficient or it could be lower cost and lower production, but again maybe a better internal rate of return.

Right now with the MU project and as with Viger-Denonville actually we think that the leverage on those particular wind given the cash flow profile of this project we think we can put at least 80% financing on these projects if not more. So I think that the MU project will give you more guidance throughout the years, but we’re very confident that the economics should improve going forward as soon as we’re going to be able to finalize the turbine manufacturing contract.

Jeremy Rosenfield - Desjardins

Okay and just maybe final question, in terms of receiving the order and cancel for the PPA, do you see any potential delays there, either associated with on one hand the [indiscernible] the recommendations from that report or from potential political changes with an upcoming election, does that play into this at all or do you see hopefully that it has no impact.

Michel Letellier

I don’t see any impact, both the [liberal and the PU] were very supportive of that project, one has to understand that this is solving long term discussion with the Mi’kmaq situation so and [indiscernible] has again said that they’re supporting the development of the wind and also the liberal. So I don’t see this as a political issue at all, it was just in terms of negotiating with Hydro Quebec given the fact that Hydro Quebec was also preparing the RFP, so everything is in line, we have met the $0.09 ceiling that was put forward by Hydro Quebec on the RFP so, very-very confident that it’s just a matter of processing the order and cancel and we should have it very soon.

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 about our Company. Please don’t hesitate to call us if you have any other questions. [Foreign language].

Michel Letellier

Thank you.

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 your lines.

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