Innergex Renewable's (INGXF) CEO Michel Letellier on Q2 2016 Results - Earnings Call Transcript

| About: Innergex Renewable (INGXF)

Innergex Renewable Energy Inc. (OTC:INGXF) Q2 2016 Earnings Conference Call August 4, 2016 3:00 PM ET

Executives

Martine Benmouyal - Senior Communications Advisor

Michel Letellier - CEO

Jean Perron - CFO

Analysts

Nelson Ng - RBC Capital Markets

Sean Steuart - TD Securities

Rupert Merer - National Bank

David Quezada - Raymond James

Ben Pham - BMO

Operator

Good afternoon, ladies and gentlemen, thank you for standing-by. Welcome to Innergex Renewable Energy's Conference Call for Second Quarter 2016 Results and Mid-year Review. 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 question. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, August 4, 2016 at 3.00 pm Eastern Daylight Time.

I will now turn the conference over to Martine Benmouyal, Senior Communications Advisor. Please go ahead.

Martine Benmouyal

Thank you very much. Good afternoon, ladies and gentlemen. I'm here today with Mr. Michel Letellier, President and CEO of Innergex; and Mr. Jean Perron, Chief Financial Officer.

Please note that the presentations will be commented in English. However, you are welcome to address your questions either in French or in English. I would also like to point out that journalists are invited to call us afterwards if they wish to address any additional questions. In a minute, Mr. Perron will provide some details on our financial results for the first quarter ended June 30, 2016.

Next, Mr. Letellier will provide an overview of our operating activities and outlook. We will then open the Q&A session with both senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily accessible via the Internet. You may also access the press release, the financial statements and MD&A on the Innergex website in the Investor section.

During this presentation, we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratio 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 will contain forward-looking information that reflects the Corporation's expectations with respect to future results or developments or explanations concerning the principle assumptions used by the Corporation to derive this forward-looking information and the 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, Martine. Good afternoon. The quarterly results for Q2 2016 shows production of 113% of the long-term average, due mainly to above average results in all markets, except in Ontario and in France. For the six-month period, production was under 15% of the long-term average, due mainly to above average results in most markets.

Revenues for the quarter were CAD17.6 million higher than in 2015. This 25% increase is attributable mainly to better results from most of the hydroelectric facilities operating in British Columbia compared with the same period last year. It come also from the completion of BC Tretheway Creek hydroelectric facility commissioned in November 2015, the BC Walden North hydroelectric facility acquired in February 2016 and the French acquisition made in this quarter.

The average selling price was lower due to the fact that production exceeding certain level is sold at a lower price in British Columbia. For the six month period, revenues were CAD22.4 million higher than in 2016. This 17% increase is attributable mainly to better results in most hydroelectric markets, and to the contribution, to a lesser extent of the facilities recently commissioned or acquired, which were partly offset by lower revenues in wind regime in Quebec and the hydrologic regime in Ontario.

Adjusted EBITDA for the quarter and the six month period were CAD13.5 million for and CAD18.2 million higher than the same periods in 2015 for the same reason explained above. Finance cost for the quarter totaled CAD24.6 million compared to CAD24.5 million in 2015. The small increase is due mainly to the rise in interest expense on long-term debt following the French acquisition made in this quarter and the interest expense on the Tretheway Creek commission in 2015, partly offset by lower inflation compensation interest on the real-return bonds attributable to lower inflation during the quarter. For the six month period, finance cost totaled CAD44.1 million compared to CAD41 million in 2015. The increase is due mainly to expenses related to the BC Tretheway Creek project and the French acquisition and to higher inflation compensation interest on the real return bonds.

For the three and six month periods, other net revenues totaled CAD0.2 million and CAD0.4 million respectively, compared to net expense of CAD24 million and CAD92 million in 2015. The significant variations for the quarter and for six month is driven mainly from the fact that the Corporation encountered no realized losses due in 2016 on the derivative financial instruments compared to realized losses of CAD24 million and CAD92 million respectively for the same period last year. Upon settlement of the Big Silver, Boulder Creek and Upper Lillooet bond forward contracts at the closing of financings.

For the three and six month period ended June 30, the Corporation recognized an unrealized net gain on derivative financial instruments of CAD2.1 million and CAD3.4 million respectively. For the corresponding period last year, the Corporation recognized an unrealized net gain on derivatives of CAD43 million and CAD55 million respectively, due mainly to the reversal of the unrealized loss accrued to December 31, 2014 upon settlement of the bond forward contracts, concurrently with the closing of the Boulder, Upper and Big Silver financing. For the period ending June 30, the Corporation had no derivative to be settled upon the closing of project financing, as all the development project financings were put in place in 2015. Excluding the impact of derivatives and the related income taxes until 2016 second quarter and six month period, net income would have been at CAD14.6 million and CAD21.2 million respectively compared to CAD7.4 million and CAD13.6 million in 2015. Overall, a very strong second quarter added to a very good first quarter allowed us to record an excellent last half year, mainly due to a very good production in almost all sectors. Since the beginning of Q3 2015, our production has overall been in line with the long-term average. The production of Q3 2016 will include the wholly-owned 40.6 megawatt Big Silver Creek facility for which we are waiting for confirmation that it reach COD.

This concludes my review of the result. I'd be happy to answer your question later on during the call. I now turn it back to Michel. Thank you

Michel Letellier

Thank you. Martine, the presentation is available on the website as well.

Martine Benmouyal

Yes.

Michel Letellier

Okay. So just please note that we have a deck on an update on the recap for the objective of 2016 that we have provided in previous quarter. So I'm reviewing this presentation. So, basically it's a recap or a follow-up on the objective of what we have said in 2016. We're going to take a quick look at the operating performances, project development, financing activities and growth opportunities. Also going to talk about the outlook of 2017 run rate and I'll be open for question afterwards.

So in terms of operating performance, we have set out in the beginning of the year that we would like to grow the production by 6% or 8%. Year-to-date, we have increased it by 18%. Grow revenue by 9% and 11%, year-to-date is an increase of 17%. Adjusted EBTDA approximately 7% to 9% growth, we have now 19% year-to-date and we want to maintain a payout ratio below 100%, just a small reminder that for us, 2016 is the last year before we get to have the full benefit of the construction portfolio that we are actually advancing. So 2017 will be much better in term of payout ratio. But in terms of trailing 12 month payout ratio, it stands at 84%, so it's below our target.

We said also the development in financing activities. We said that we wanted to advance Upper Lillooet and Boulder Creek. I'm very pleased to announce that we have finally have it breakthrough in the Upper Lillooet tunnel. The tunnel is now complete, secured and so that's a big milestone for us. So we think that we can catch up now a little bit of the lost time that we had last year during the fire. We have reset the -- at the time we had reset COD for Q1, 2017. We are working hard to do little bit better than that. So now that the tunnel is done, the team are now focusing on finishing the civil work and installation of the mechanical machine in order to speed up the COD date.

In terms of refinancing, we did refinance our Stardale solar farm and we've got about CAD12 million upfront from the refinancing and we did lower the interest rate to an all-interest rate of 5.36%. We also wanted to develop or to put in service Big Silver and MU. Glad to report that Big Silver has met the last test of BC Hydro. We have sent all the documentation to BC Hydro for their review. We're expecting the official answer in the next few days. So, very happy to have put another project in COD, little bit in advance of what we had anticipated. So, quite happy with the team and their effort there, MU is still forecast to be in service in December. Things are advancing very well. We'll see it later on. We also have talked about the negotiation of renewal in Saint-Paulin and Windsor PPA. We're still engaged in arbitrage with Hydro-Quebec, so nothing really new on that side.

And I know that a lot of you are looking for growth opportunity and what we are going to do. Obviously 2016 for us is a year where we're finalizing our construction pipeline which was very important. So for us, the priority was to make sure that we would deliver on-budget and on-time those project. This has been going very well, so we have now a lot more time and opportunity to look for the growth of the Company. We certainly have a great interest in Canada, there is some little pocket of interesting opportunity in Canada. Ontario RFP has been announced and it's a little bit bigger than we had anticipated. So we're getting ready to participate in that. Saskatchewan has also announced future RFP. So this is also a market of interest for us. New Brunswick, we have participated in an RFP with the First Nation, the Mi'gmaq. We're waiting for some detail later on this month or early September. And we're starting to look into Alberta, which are in the review of the future regulation for future supply of renewable energy in Alberta.

So, Canada has still some activities and we definitely are very interested. And as an example, when we did the acquisition of Walden with First Nation partner there, I think that throughout Canada, especially with partnering with First Nation community, I think there will always be some interesting opportunity and we are on the lookout for those. But obviously we want also to look abroad. We mentioned that we want to look into France, Peru, Mexico and USA, glad to report that we did our first acquisition, the French acquisition, very happy on that one. We did 87 megawatt of investment in wind and committed for acquiring 44 megawatts that are under construction. That 44 megawatt under construction called Eon project is going very well. We were planning acquire it in 2017. But so far, the construction is going very well. So we may be able to close before the year-end on that one as well.

Also, I think it's very important. We're looking in France also growth opportunity, but being also involved in the development and we have a group of people working with our team in order to secure land rights and to do Greenfield development in France. Glad to report that in the last few months, only that we've been on the ground, we have secured a little bit more 1,000 megawatt worth of land right. Obviously, those sites are prospective. They're a little bit early stage development, but we're glad to see the advancement on that front and very positive about the future involvement of Innergex in Greenfield development in France. Just an update on the construction cost and COD. I just talked about Big Silver. So, Big Silver has in our book met the COD requirement as of July 29. MU is still on-budget and on-time, Boulder and Upper Lillooet, I've just mentioned, I think we will be able to speed up a little bit with the anticipated COD. In terms of overall cost, we feel very comfortable with that number. We might be able to save a little bit of money here and there. So all-in-all, I think that we're doing very well on the construction and COD side.

In terms of update on corporate finance, we extended our revolving term credit facility from 2019 to 2020, so it's always interesting to have four, five years in front of us. But what is interesting also, and I think its part of our future strategy to enhance our cost of capital is that we have made a partnership with Desjardins to acquire or to be partner in France. They will own about 30% of our portfolio in France. This is basically to have a cost of capital to be a little bit more efficient, tax wise and also in order to maximize their willingness to invest in renewable energy, so I think it's a win-win situation. We're willing to do more of those, obviously Desjardins is a very good and well-known partner of us, but we're open to do the same thing with other pension fund or other structure where we could basically enhance our cost of capital.

If we look at our run rate, we have adjusted a little bit our forecast for 2017, the adjusted EBITDA stands now at 183 for 2016. We expect that, at the end of 2017 we'll run at CAD311 million of adjusted EBITDA and the free cash flow will raise from CAD74.4 million to about CAD110 million. Just a small reminder that that doesn't include [Eon] facility, the 44 megawatt that we have committed to acquire, it's not included in those number. And also those number are net of our prospective expenses, which are a little bit higher than CAD10 million. So, in fact, the cash flow from the operation is closer to 120 million, which we deduct about CAD10 million to take into consideration the expenses for prospective projects.

So again, just to give you the overview of 2016 to 2020 strategy, we're reiterating that we want to do exclusively renewable energy. We want to maintain the diversification of energy sources, so that we'd love to be able to do hydro, wind and solar. We want to be also always present in Canada and be in the lookout of any opportunity in Canada, but we want to be involved in international market. We have mentioned Mexico, Peru, France and the US are basically our target market for the time being. We want to focus on high-quality asset. We have a great portfolio and we don't want to dilute it, so it's important for us to look into the good and strong assets going forward. Maintaining the low risk business model, maintaining a long-term outlook, we've been known to be long-term investor and that will not change. Focus on partnership, especially with First Nation, it's been a great success for us. I think that we can export that notion also maybe in Latin America or even in Mexico. Maintain discipline of acquisition that are accretive to cash flow, that goes without saying, I guess it's important for us.

So in a way just in a summary, we have a very strong dividend that is solid and sustainable and I've talked about long-term that dividend is sustainable for long, long-term in my book. 2017 will see the full benefit of our construction pipeline. So just like I said, the EBITDA will grow by 30%, the cash flow by 21% and we'll have about CAD110 million of free cash flow generated by the operation. And we have all the intention, I can assure you to deploy capital in order to grow the Company. We have now the ability, we have the time, we have a strong base, we have a great portfolio. So we want to use that base to grow and to make sure that we can increase eventually the dividend.

So on that note, we would open up the question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] your first question comes from the line of Nelson Ng with RBC Capital Markets. Your line is open.

Nelson Ng

So, I have a few questions. For MU wins, you mentioned that you're using a turbine that has higher capacity and higher yield and that drove the better economics. Did you have to, like, pay more for the equipment?

Michel Letellier

No, actually, it's true that we're using it, but the most significant increases is the fact that we have selected the Edith blades. But for some reason, the independent engineer and to be a little bit conservative, we did not have included in our initial forecast the efficiency of those Edith blades. But we have had some feedback from the manufacturer on the efficiency and it's very confluent. So we have decided that to take that into consideration. We had already purchased and put it into the budget cost. But we were just little bit conservative in waiting for having the feedback on the ground from those system.

Nelson Ng

I see. And then just moving on to France, you mentioned that Desjardins took a 30% stake in the portfolio. Is this like, going forward, will they invest on a case-by-case basis or is there a general agreement to kind of work together and they would take a 30% interest for future investments in France?

Michel Letellier

There is no formal commitment, although the structure is little bit complicated. As you can imagine, some time when you're investing in France through Luxemburg and stuff like that. So it's little bit heavy in terms of structures. So since we have that in place with the partner being Desjardins, so that could be taken, I guess take advantage off. Obviously, we're always looking forward to have the best offer on our cost of capital. Desjardins has been always very competitive and very supportive, but there is no obligation from our part to show and to have Desjardins as a full-time partner going forward.

Nelson Ng

I see. So it'll be somewhat kind of case-by-case, but since you have a working relationship, it might make sense to just keep them as a partner going forward for future projects?

Michel Letellier

Yes. And the structure is set with them. So if we would want to use somebody else, we would have to re-create another structure, which is always possible, but just making sense to maybe reuse the same structure.

Nelson Ng

And then when you talk that structure, I noticed in the MD&A that 32 million of Desjardins investment is structured as debt. So should we view this as a loan from a practical perspective or is it really an equity investment that's structured as debt?

Michel Letellier

It's really an equity investment structured as debt and we've, we're using also preferred share with the same coupons. So basically, what we're trying to do is to be a little bit more efficient in the tax approach. We've done the same thing with someone where we have created a sub debt for Desjardins, so they're receiving a coupon and they're not taxable entity in Canada, so it doesn't really matter if they're receiving an interest coupons,, our self, we are receiving a pref, so a return of capital. So we get to have the amortization of capital, the tax wise and they do only receive the interest. So it's little bit of a structure to try to benefit from the structure between pref, common and sub debt, but they also own common shares.

Nelson Ng

I see. And then for the French, to fund the French acquisition, did you guys end up using a CAD10 million subordinated loan from an Infrastructure Fund. Was that, I can't really see it in the MD&A, but I think it was announced on the original press release when you were intending to buy the French portfolio.

Michel Letellier

You're very accurate. We are yet to finalize it. We went back to the market and the rates in France have gone down. So we were thinking of adding something little bit higher. But we're managing, we have managed to renegotiate lower rate by 50 basis point and our expectation is that this 10 million would be closed by the end of September, I'm sorry.

Nelson Ng

And then just one last question, while we are talking about France, so regarding securing the 100 megawatts of land rights for wind development, you mentioned that it was early in perspective. In terms of, I guess, your best guess or maybe it's like best case scenario, how long would it take for those land rights to translate to an operating project?

Michel Letellier

That's not an easy question to answer. But we're using, I guess, the people with a lot of experience in the development in France. So the land that we have secured, with our help also, obviously, following them and making sure that we're trying to secure land where actually we have look into all the layers of constraint. So, the likelihood that we can get permit on those land is high. But yet, we have to go through the process. But with the experience, our experience and the experience of these individual in France, we think that the land that we have selected has a very good chance to get permitted. Now, how long does the permitting takes in France? It's not short, it can take at least three years. And then you have may be a year of waiting time. So anywhere between three and five years, we can see some of those project being put forward. But probably more in the three and half years to four years before we can start construction.

Nelson Ng

Okay, that's great. Those are my questions for now, thank you.

Operator

Your next question comes from Sean Steuart of TD Securities.

Sean Steuart

A question first on BC Hydro pricing. Jean, you mentioned that over a certain production level, the pricing drops off. It was a little more pronounced than we had expected. Can you go into a bit more detail on what affected the average price realizations in BC this quarter?

Jean Perron

Well, this quarter you are meaning Q2?

Sean Steuart

Correct.

Jean Perron

Well, it's really -- there is three different pricing in BC, there is kind of what we call the window pricing and then there is extra pricing that are declining as your production is getting higher and higher. So at one point in time and it's a kind of month-by-month computation, so it's not an average since the beginning or something like that. So, if in the period you produce a lot more, you will be hitting these higher level production where the same price will be much lower. So, it's all the different structure for each in hydro facility, but it's a same concept at the base. So, yes, once you hit 10% or 15% higher than your long-term average, you kick in into these rules.

Michel Letellier

And it's no way, I guess, a proxy for future years. It's just the structuring and especially in the, what they call the run-off period in BC. I guess the third layer is very punitive, because BC Hydro, some of the contract or the newest contracts are trying to minimize the price for the electricity during the run-off, because BC Hydro theoretically also have a lot of energy in those run-off months. You will not see that much of a penalty in the months of January, February, March and April and then September, October, August is not bad neither, but the worst month to have lower rates, if you go beyond a certain amount is June, May, June and July.

Sean Steuart

Yes. Now I understood, it was just a bit more pronounced than we expected Michel, I was wondering if you can provide a bit more of an update on what you're looking at in Latin America, I guess, specifically in Mexico and Peru and are you looking beyond those countries for any opportunities?

Michel Letellier

We're trying to focus and I'm not good at that always. I'm always open to ideas, but we're trying to focus on Mexico and Peru for the time being. I'll talk about Mexico, we did participate in the first subasta, they call that -- in RFP, they call it as subasta in Mexico. That was surprising to -- at least, to see the price that came out of that process. There's another one, scheduled to be in the late September. The second subasta is twice as big as the first one. And it has less discrepancy between area, before they have the strong discount or penalty depending where -- in which regions you were in. And at that time, the project that we wanted to develop was in an area where it was penalized for the interconnection cost, it's not the cost anymore. In this particular subasta, it's fairly flat around the area.

So interested and significantly willing to participate. We have a local partner that is helping us put those project in the bid. But we're cautious, it's our first investment in Mexico. So, we want to make sure that we get the right internal rate of return, given the type of risk profile that we are facing. We're adjusting, we have to learn a little bit more on the, literally of the land and the cost of contractor and what have you in project financing as well. So it's a fast learning process. But we want to be cautious. Yes, we want to have project. But we want to be happy with that project. We don't want to get problem with future investment. So, Mexico is some wind, some solar and some hydro as well. We think that small hydro in couple of cases might have some interesting feature. The first subasta didn't really provide value for -- premium for capacity or flexibility of providing electricity during the day.

The next one has little bit more value for the capacity. But we understand that going forward, there will be some signal to rewards flexibility of projection and I think that we have the ability to take that advantage in small hydro with some kind of reserve for daily variation in the production. In Mexico, their biggest, I guess, the biggest period of today is anywhere between 4 o'clock and 10 o'clock at night. So solar won't be able to help a lot after 6 o'clock and wind is not necessarily easy to manage in terms of daily production. So for us, I think that we, as a general strategy, as I mentioned in the past, we'd love to be able to bring our knowledge and our, I guess, know how in hydro. We think that we can create a little bit more value there than in bidding in solar. Not that we don't think we would be competitive in solar, but I think we have a little bit more added valued in developing hydro. So we are interested in the industry, but little bit of a focused on small hydro with some reservoir capacity or flexibility during the production.

And Peru is little bit the same thing. Peru has wind and solar, but it has a huge amount of undeveloped hydro resources. One of the reason why hydro can still be competitive in Peru is that the way the old PPA and the next one will be set up for hydro is that they are asking for basically capacity and the way to do that even without a big dam in Peru is to basically under equip a river that basically would have, let's say, if you would have had a 20 megawatt river and then, you only install 10 megawatt on that river, your utilization factors goes up. And we're seeing utilization factor in the range of 80% to 90% in Peru for small hydro.

So that makes those small hydro, little bit more competitive, because at the end of the day, you're delivering energy and capacity. And you can still build project in Peru between CAD0.04 and CAD0.055 in small hydro, but with capacity. So that is able to compete against solar or wind in a range of CAD0.035 to CAD0.04, because it's providing capacity compared to the others. So that's why we like Peru. Peru is a smaller market and it's probably not soft as much as Mexico, because the economy is slowing down a little bit. Peru is really focused on natural resource, mining, and right now there is a little bit of a slowdown, but we think that into the next eventually cycle of resources, Peru will do well and we want to be in a position and already in place to take advantage of those growth in the demand in the future.

Sean Steuart

That's great detail. Thanks very much for that.

Operator

Your next question comes from Rupert Merer with National Bank. Please go ahead.

Rupert Merer

You talked a little about your private equity partnerships, wondering if you can get a little more color. Will private equity partnerships be standard operating procedure for Innergex now? Should we assume that in all the markets you go into, whether it's looking at requests or proposals in Canada or bidding on M&A in France and Mexico? Are you always looking at doing that with a private equity partner?

Michel Letellier

I would say that we always strive to have the lowest cost of capital and if it takes a partnership with private equity or pension fund, we're willing to do it. I think today's market is always competitive and that's one tools we have to create a little bit more returns for shareholders. And we, Innergex, was created as limited partnership being owned by pension fund, so it's not new for us, it's part of our culture. We are thinking about long-term, I think we can be aligned with those type of investor. We understand them very well and I think we can provide a win-win situation in many cases.

Rupert Merer

What's the range of benefit you're seeing in your IRRs when you partner with private equity?

Michel Letellier

That's a little bit sensitive to give, but just the structure of sub debt and preferred is helping definitely. That aspect is more tax efficient.

Rupert Merer

And are you finding that private equity partners are seeking you out for specific project opportunities? Do they actually bring project opportunities your way as well if they are looking for an operating partner?

Michel Letellier

Sometimes, but I would like to see it even more and I think that as we enlarge our contacts in territory, I think that we might see a little bit more and definitely we are in the traffic. So even more than before, so I think that that will help definitely.

Rupert Merer

And would you be interested in taking more minority stakes, if that's the way market goes, the demand from private equity is more significant?

Michel Letellier

We could, although it's always complicated to report in the financial statement. If you have a minority stake, but it's, at the end of the day, it's the cash flow and our ability to have very good long-term assets. So if it takes minority interest for us to win a project or to be involved in a project, we don't mind. It just that obviously if we can consolidate the result, it's much easier or being proportionate to our investment, but other than that, we don't have a big issue, we always like to manage the asset though we would, I don't think we would be a very good silent partner. We like to make sure that the assets are well managed.

Rupert Merer

Great. Just one more question. You touched on the U.S. market briefly. Can you give us your current thinking on the U.S. market and the potential there? Are you looking at any tax equity deals? Do you get any comfort around tax equity structures? It seems like the market has very low cost wind and of course the production tax credits are there for a few more years, so it may offer an opportunity.

Michel Letellier

You're right. It took a bit of time for us to focus on the U.S. We are doing it now. We have higher tax specialists to help us structure and understand better the tax equity market. U.S. is a great, a big market, it's complicated a little bit, but it's a great market in terms of growth. It's a huge market so for us to get a small piece of that, I'm hopeful that we'll manage it. There is the, the exchange rate is not necessarily working in our favor. But there is way to mitigate that. And Jean is pretty good in finding ways to mitigate also the tax implications. So we're getting more comfortable and, I guess, more exposed to deals. And the idea is to get also same in France is to try to get a little bit deeper into change of -- not the change, but the chain of growth is meaning that, sure in France, it's nice to make acquisition of existing assets. And I'm willing to do it if the return are good and there is good assets. But we would like to get a little bit more deeper closer to the Greenfield development or early stage construction and try to get little bit more return, because obviously you're taking a little bit more risk when you move up into the development sequences. But we're talking to many people in the States and I guess that the law of probability, the more you look at a project, at the end of day, hopefully we'll be successful in a few.

Operator

Your next question comes from the line of David Quezada with Raymond James. Your line is open.

David Quezada

Thank you, good afternoon guys. Maybe just one of my questions have already been answered, but maybe just a broad strategic question for you. I think it's an attractive attributable Company that's focused on hydro assets. But I guess, would you say that it's fair to say that it seems as though the development opportunities are a little bit weighted towards wind and how do you think about your asset mix going forward? And is it basically just a return based decision, what projects you end up going ahead with?

Michel Letellier

Well, that's a good and fair question. There is no -- we cannot hide the fact that the hydro in Canada or in North America, it's a challenge to be competitive against the wind and solar -- and solar in the south actually, not necessarily in the north. But I think there is still pocket of good opportunity. As I describe in Mexico and Peru and to some degree, there are some places in U.S. where there is some projects that have to be revamp or recapitalize in terms of mechanical aspect or even civil works. So those could be interesting for us. But it's true that it's easier to develop bigger wind farms, that's 200 megawatt of wind farm can be developed in the same time as you're developing a 50 megawatt hydro facility. But, you're right, for us, internal rate of return is very important and we don't have any problem in investing in wind or solar. It's just that we think sometimes we have a little bit of more added value in hydro and we'll try to take advantage of that. I always joke in saying that I like wind, but I love hydro. The fact is that there is maybe more opportunity in the development with wind than in hydro, but I'm not giving up on our ability to create value for our shareholders in hydro.

David Quezada

Great, thank you. I appreciate the color, that's all I had.

Operator

Your next question comes from the line of Ben Pham with BMO. Your line is open.

Ben Pham

I wanted to continue the conversation with the partnerships and pension plan, private capital and also just to ask about your commentary, Michel, about you being more open to those type opportunities. And you did mention you would be willing to do the kind of SM-1 and recent French where you offered 30% of assets through converts or prefs. But I'm wondering just more broadly because your opportunity set is as much more wider than before and what you're looking at versus even a year ago, I mean, how aggressive would you be with partnerships and would you then, let's say, the bigger package of your hydro assets are 50% or even go back to kind of your IPO early days where half of your public floats owned by private capital, were you at some sort of semi-permanent competitive cost of capital?

Michel Letellier

Well, it's a little bit complicated. We like to own the majority of the asset, but sometimes the RFPs are very competitive or there is an opportunity where it's a big portfolio. We wouldn't have any problem to partner with a group of pension fund or structure fund to invest as long as those guys have the same long-term view as we do and they're not there just for the short-term and try to pick-it up or to transfer too much risk on our part. I don't have a specific boundary. Like I said, we like to be the majority teaser in the financial reporting, but other than that, if we have a good deal, if we have a good long-term partner, and we can manage the asset, quite open to and very flexible to do many structures.

Ben Pham

Okay. So you might like package your Quebec hydro assets, maybe into half of it [multiple speakers]?

Jean Perron

That part, we never sold anything in the past. Not very inclined in selling assets, they're very hard to find, right. So once we, unless you have something that you, that we would basically replace with the same type of quality or very much better return, it's hard to say no forever, but it's not in our DNA to sell assets.

Jean Perron

That's why up to now, the partnership that we have made or set up, where we need try to enhance our rate of return on the investment. So the focus was not trying to sell a portion, it was more the, it was beneficial for us in the long-term.

Michel Letellier

Yes. Or maybe we could, theoretically, if we want to maximize the value enhancement of utilizing a pension fund or private equity structure fund is to maybe make the transaction, acquire the asset or go through the process and win the process and then look for an offer to have the best cost of capital by a third-party to take a portion of the newly acquired assets. So that's the solution.

Ben Pham

And then just one other quick one from me, the CAD110 million free cash next year, when you think about that cash flow generation and is that enough for you to effectively sustain growth perpetually going forward, let's just say, paying inflationary dividends to your shareholders, were you constantly redeploying that capital and you don't need the [indiscernible]?

Michel Letellier

Well, I think that our shareholder would be disappointed if we don't need a little bit more capital to growth the Company faster. But its meaningful cash flow, CAD110 million after CAD10 million of prospective expenses and we have not even CAD70 million worth of dividends. So it's CAD40 million, CAD45 million to reinvest. That's with the leverage, that's not bad. But obviously, I wouldn't be happy if we cannot find more project to be funded. So it's not that I like to dilute our shareholder, but I think that if we have attractive project and we're creating value, I don't think it's an issue to issue shares as long as we have good project and it's accretive for our existing shareholders.

Ben Pham

Okay, that's helpful. Thanks everybody.

Operator

[Operator Instructions] Ms. Benmouyal, there are no further questions at this time.

Michel Letellier

Okay. Well, thank you very much and I wish everybody a nice vacation if people have not taken them. Thank you.

Martine Benmouyal

Thank you very much.

Operator

Ladies and gentlemen, that concludes our conference call. Please note that a replay of the conference call 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 Investor section. Thank you, you may now disconnect your lines.

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