Boralex's (BRLXF) CEO Patrick Lemaire on Q4 2017 Results - Earnings Call Transcript

Boralex Inc.A (OTCPK:BRLXF) Q4 2017 Earnings Conference Call March 2, 2018 11:00 AM ET

Executives

Marc Jasmin - Director, Investor Relations

Patrick Lemaire - President and Chief Executive Officer

Jean-Francois Thibodeau - Vice President and Chief Financial Officer

Analysts

Nelson Ng - RBC Capital Markets

Sean Steuart - TD Securities

Rupert Merer - National Bank

David Quezada - Raymond James

Ollie Primak - CIBC World Markets

Operator

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Boralex Inc. Fourth Quarter and Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. [Foreign Language]

Mr. Jasmin, you may begin your conference.

Marc Jasmin

Thank you, operator. Good morning, ladies and gentlemen. Welcome to Boralex’s fourth quarter and 2017 fiscal year results conference call. Joining me today are Mr. Patrick Lemaire, President and Chief Executive Officer; Mr. Jean-Francois Thibodeau, Vice President and Chief Financial Officer; Mr. Pascal Hurtubise, Vice President and Chief Legal Officer; Mr. Guy D’Aoust, Vice President, Finance; and Mr. Mathieu Chassé, Corporate Controller. Mr. Lemaire will begin with his comments, and afterwards, Mr. Thibodeau will carry on with some financial highlights.

During this call, we will discuss historical as well as forward-looking matters. When you look – when we talk about the future, there are a variety of risk factors that have been listed in our different filings with securities regulators, which can materially change our estimated results. These documents are all available for consultation at sedar.com. In our webcast, the disclosed results are presented both under IFRS and on a proportionate consolidation basis. The particularities of proportionate consolidation have been explained previously as well as the reason why we use it. Also, unless otherwise stated, all comments made in this presentation will refer to proportionate consolidation figures and will be on a quarterly basis.

Finally, since earlier this morning, the press release, the MD&A and the audited annual financial statements are also available on Sedar. If you wish to receive a copy of either of these documents, please do not hesitate contacting us. Finally, take note that we will only take questions from sell-side financial analysts who currently have an active coverage on Boralex.

Mr. Lemaire will now start with his comments. Patrick?

Patrick Lemaire

Thank you, Marc. Good morning, everyone. For the fourth quarter, Boralex reports increased quarterly production, revenues from energy sales, EBITDA and cash flow from operations, driven for the most part by the contribution of assets, either required or commissioned, better wind condition in France and Canada, and improved hydro conditions in the U.S.

In addition to these improved results, we’re also pleased to announce that we’ve commissioned in Q4 two additional wind sites in France, namely the 23-megawatt Apuiat project and the 30-megawatt Chemin de Gres project, which both benefit from a 15-year fixed price contract with EDS. Considered together, these two projects are expected to contribute about $16 million to 2016 [ph] EBITDA.

In addition, as can be seen on Slide 5 of the webcast, we also added this quarter another 8-megawatt to our growth path, which is explained by the Basse Thierache project, which got modified permits, increasing its capacity from 12 to 20. Considering these changes, Boralex currently adds 233 megawatts of identified projects in its growth path, supporting its 2020 year-end objective of 2,000 megawatts.

Over and above these projects, Boralex expects to get final nonrecourse approval for additional projects in France over the next few quarters and is also waiting for the final ministerial decree to go ahead with the 10-megawatt expansion of its Buckingham Hydro facility in Quebec, Canada, which would begin construction in June.

In France, Boralex was the winner in the latest solar RFP as it qualified its 15-megawatt [indiscernible] project. We are confident we will realize this projects although we still have a few details to work out before we are fully committed and include this project in our growth path.

Boralex is also pursuing many other opportunities, and as mentioned in the past, we’re constantly looking at potential accretive acquisition in North America and Europe that would come along with development assets. This being said and based solely on the currently identified portion of the growth path, Boralex introduces today, a new 2019 year-end EBITDA run rate estimate of between $405 million and $425 million, which takes into account administrative and development expenses in line with our current and expected growth.

I will now turn the conference over to Jean-Francois to further discuss our results and review our operations and financial situation. I will be back later for my closing remarks and the question period. Jean-Francois?

Jean-Francois Thibodeau

Thank you, Patrick. Good morning, everyone. As usual, I will only comment on quarterly numbers, although we’ve provided for your convenience the full-year figures in the presentation.

Starting on Slide 8. For the fourth quarter of 2017, in comparison with 2016, Boralex reports a 43% increase in production, a 66% increase in revenues and 81% increase in EBITDA and more than double the cash flow from operations. Accordingly, revenues came in at $147 million and EBITDA stood at $104 million, representing margins of 70% and a $47 million increase against 2016.

As for cash flows from operations, the total $79 million, up $43 million from the $36 million achieved last year. Net income attributable to Boralex shareholders stands at $26 million, or $0.34 per share, which compares to net income of $1 million, or $0.02 per share in 2016.

On a comparative basis, the year-over-year 81% EBITDA increase more than compensated for higher depreciation and financial expenses. Also, the Q4 of 2017 net income was impacted by the one-time effect of the reduction in tax rates in both the U.S. and France, which adds up to $12 million.

The full-year numbers are on Slide 9 for your benefit. Now, as you can see on Slide 10, all of our key operational segments performed better. However, our corporate expenses were higher driven by higher development expenses, partly explained by our acquisition in Scotland earlier this year and by higher professional fees. I will later provide additional details on individual segments.

Moving forward to Slide 12, with an analysis of the quarterly $47 million positive EBITDA variance at the bottom of the page. The contribution of the newly commissioned sites had a favorable impact on revenues and EBITDA of $37 million and $33 million, respectively, mostly driven by the contribution of the Niagara site, who generated close to $30 million – $32 million in revenue and $28 million in EBITDA.

Note during the fourth quarter, the Niagara project was curtailed by the IESO, causing a shortfall in production of approximately 87-gigawatt hour at this site. This type of curtailment is fully compensated by the IESO under the PPA. Overall, volume from existing sites had a $20 million positive contribution on the year-over-year net EBITDA variance, resulting from the improved performance of both French and Canadian wind sites, but also the U.S. hydros.

Moving to Slide 14. Let’s look at the wind contribution. Considering the newly acquired or commissioned assets, wind production increased by 53%. In Canada, it was up by 56%, while in France, it increased by 50%. If we take into consideration the foreground energy at Niagara, wind production increase in Canada would be 84%, and for the sector as a whole, the growth would be 69%.

On a comparable basis, excluding the contribution of newly commissioned sites, billable production was 25% higher year-over-year. In France, it was up 32%, while in Canada, it was up by 19%. If we look at it from the perspective of wind capacity factors, expectations were for 39% capacity factor in Canada and a 32% factor in France for a blended 35%.

Now if we take into consideration the foreground production in Niagara, the overall blended capacity factor came in at 36% and Canada reached 41%, while France achieved 29%. In view of the above mentioned items, wind revenues increased by 83% from $69 million to $125 million, while EBITDA increased by 91% from $55 million to $106 million, representing quarterly margins of 85% this year compared to 81% last year.

To conclude. Looking ahead to 2018, recognizing the importance of the quarterly power factor assumptions for your forecast, we provided on Page 44 in the appendix section our 2018 capacity factor estimates for the wind sector broken down by quarter and country.

Moving on to Hydro on Slide 16. This quarter’s overall production was 14% higher compared to last year. It was 3% lower in Canada and 32% higher in the U.S. In comparison with historical averages, blended production was 5% lower, 3% higher in Canada and 10% lower in the U.S. As a result, quarterly revenues increased from $12 million to $14 million and EBITDA went from $9 million to $10 million. As for margins, they stood at 70%, up from the 68% achieved last year.

Going forward. I remind you that as disclosed in the notes of our financial statements, that the contracted price at the 46-megawatt Hudson Falls facility will go from $80.58 in 2017 to US$48.27 in 2018, a level it will stay at until November 2020 – 2025, sorry. This decrease is expected to have an impact on yearly revenues and EBITDA of approximately $7 million.

Also assuming we get the final ministerial decree to go ahead with the Buckingham expansion, we expect to start producing in June of this year. And in April of 2019, we plan to restart three turbines and the remaining two should be placed in service at the end of June 2019. This should impact EBITDA in both years by an estimated $3 million per year. We do not ask any specific comments on the thermal and solar sectors. However, we provided for your convenience additional details on Pages 22 and 23 of the appendix section.

We’ll now comment on the corporate sector at the top of Slide 17. Development expenses totaled $6 million against $3 million last year, driven by a general increase of activity, but also by expenses relating to the Infinergy acquisition. Administrative expenses within the corporate sector stood at $7 million, compared with $5 million in Q4 of 2016, reflecting the company’s growth, and as mentioned earlier, additional professional fees. Considering all of the above items, corporate EBITDA came in at the negative $15 million or $6 million higher than last year.

I will now discuss cash flow generation and our financial position, as seen on Slide 18 to 20. Quarterly cash flows from operations before changes in non-cash items came in at $79 million, up from $36 million in 2016.

During the fourth quarter, we spent a total amount of $54 million on investing activities. More specifically, we invested $46 million for new assets and another $6 million as a milestone payments for the Sources de l’Ancre project, which was acquired from ECOTERA and previously added to the growth path.

As for financing activities, we provided a minimum of $50 million. First, we drew another $8 million on the revolver and incurred $82 million of new project-related debt. On the end – on the other end, we reimbursed $26 million of project-related debt and another $1 million for sales tax-related loans.

We also received $1 million following the exercise of stock options, which brought our total number of shares outstanding to 76.3 million shares, paid an $11 million dividend to our shareholders and another $2 million to project level non-controlling shareholders. This being said, cash stood at $126 million at the end of the quarter in addition to $35 million in restricted cash.

With respect to the 233-megawatt of projects identified in our growth path on Slide 5, we expect to spend in 2018 approximately $285 million in property, plant and equipment. These investments are expected to be financed by $35 million of equity, additional debt draw downs of $245 million and $5 million from our minority shareholders.

Now for the company’s debt reimbursement. For the next 12 months, they should amount to roughly $240 million, this including $82 million for various French bridge loans.

Now for our payout ratio. For 2017, our ratio stands at 63%, slightly outside of our target ratio of 40% to 60% of discretionary cash flows, and as explained for the most part, by weaker than expected wind production in France.

Thank you for your attention. I will now turn the conference over to Patrick for a few closing remarks before the question period. Patrick?

Patrick Lemaire

Yes. To conclude, I would like to remind you that 2017 as a whole was a great year for Boralex, as we added more than 320 megawatts to our portfolio, including the largest acquisition of our history, namely the Niagara wind site in Canada in addition to the 140-megawatt or so added to our growth path and entry into the UK market through our partnership with Infinergy.

The financial community also recognized our achievements, as were added to the TSX Composite Index and la Caisse de depot et placement du Quebec, one of the largest fund manager in Canada made a substantial investment into Boralex.

Looking forward, based on our existing growth path and other organic or M&A opportunities, I wish to reiterate that we are confident we will reach or surpass our 2020 year-end objective of 2,000 megawatt, as we have the team, the mean and the agility necessary to create long-term shoulder value with a balanced mix of growth and a return of capital going forward.

Thank you for your attention. Operator, we will now take questions from the participants.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question [Foreign Language] comes from the line of Nelson Ng with RBC Capital Markets. Your line is open. [Foreign Language]

Nelson Ng

Great. Thank you. Good morning, everyone.

Patrick Lemaire

Good morning, Nelson.

Jean-Francois Thibodeau

Good morning, Nelson.

Nelson Ng

A quick one on France. So for the solar RFP, you were awarded 15 megawatts. Could you talk about the, I guess, the timetable or timeframe for additional solar RFPs? Is that every six months? And like generally what’s the size and frequency of the RFPs?

Patrick Lemaire

Yes, the RFPs are two times a year. And also -- and this one was between 5 and 17 megawatt. This was the range of our – the size of project. And the next RFP, we’re already aware, it’s going to be – I know that’s the minimum, but it’s going to increase to 30 megawatt. And so this is the answer to your question. And also, we’re…

Nelson Ng

Just on that, how much – what’s the total megawatt they plan to award?

Patrick Lemaire

300.

Nelson Ng

Okay, got it. Okay, thanks. And then on the wind side, I guess they recently or earlier this week, they awarded contracts. It was their first round. I believe you guys participated, but to a very limited degree. What – is your expectation that you will kind of participate in a larger way going forward, whether it’s like the second round or subsequent rounds?

Patrick Lemaire

Yes, we will – for the next round, already there – it’s public that they wish to change certain conditions to qualify for. And as soon as we know the new conditions and if we have projects that do qualify, we will participate to the next rounds of RFP.

Nelson Ng

Okay. And in terms of the completion date for those projects. So currently, you have your feed-in-tariff projects that would, I guess, go through 2019 probably into 2020. So for these wind projects, are they more about 2020 and 2021?

Patrick Lemaire

Yes, if you’re awarded – for the wind projects, if you’re awarded a contract, you have three years after you sign the PPA. And for the solar, it’s two years after you sign the PPA to go online.

Nelson Ng

Okay, thanks. I’ll get back in the queue.

Operator

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

Sean Steuart

Thanks. Good morning, everyone. First, a follow-up – following on Nelson’s question, the government indicated with the RFP awards that they’re going to redefine eligibility for the small project tariffs, and Patrick, you touched on this. Do you have any deals you might unfold and how it affects your overall growth strategy in France?

Patrick Lemaire

No, I don’t – we don’t really know it yet, but it could be certain permits that were necessary in the initial RFP, that you will need those permits for the second RFP. And it seems like this – the information will come on time. So – but the next one is in June, if I recall it right. The next RFP is going to be in June. So we should know within the next couple of months what are going to be the new conditions. Because for sure, the French government once it elects, let’s say, a – or select a player or a submission, they want the project to be realized.

In the initial one, there’s 150 megawatts that is – it doesn’t have all the permits or certain permits that probably the government is going to change to have this environmental permit, I think and it was not necessary in the initial one, it could be necessary. So we’ll wait, because we don’t want to have too much attrition from the selected projects.

Sean Steuart

All right. Thanks for that. A question on the Apuiat project. Your MD&A suggests that the project could be commissioned before the end of 2020. Based on media, it sounds like the local community is eager to get started on that project. What’s your anticipated timeline for completing a PPA with Hydro-Quebec for that project?

Patrick Lemaire

In the Innu project, it’s – we’re still working with the different authorities and we wish to – probably two quarters ago, I told – I’ve said that we wish to get this by the end of the year. And now, I’m saying I wish to get this in the next few months. But there is good news regarding these projects, so it’s not public. But according to us, there are good news that it’s going to move forward.

Sean Steuart

Okay. Thanks very much. I’ll get back in the queue.

Operator

Your next question [Foreign Language] comes from the line of Rupert Merer with National Bank. Your line is open. [Foreign Language]

Rupert Merer

Good morning.

Patrick Lemaire

Hi.

Rupert Merer

Can you remind us how many megawatts you still have of projects that are not a construction, but could be eligible for the feed-in-tariff program? And give us a sense of the outlook for those projects?

Patrick Lemaire

We have approximately 150 megawatts.

Jean-Francois Thibodeau

For the 2016, our tariff, as we’ve said last year, we have initially about 235. We see – we stand now at about 150. Under the 2016 tariff, which is a north of €80 per megawatt hour.

Rupert Merer

Can you comment on the status of those projects? How they’re progressing in the outlook before moving them into your construction pipeline over the course of the year?

Patrick Lemaire

They’re – there’s still in the permitting process and they’re at different states. So I cannot tell you we’re going to do half of it or we’re going to do most of it. But for sure, someone may get through, but I cannot give you a number.

Rupert Merer

Okay. And the overall French pipeline, if you include these feed-in-tariff projects, as well as other projects that could be bid into an RFP in the future, what does that look like now?

Patrick Lemaire

Let’s say, I could tell you 1,000 megawatts. But more, let’s say, more tangible ones would probably have 600, 700 megawatts of projects that could be processed not in the next RFP, but RFPs to come the next couple of years, because it’s RFP, we’re going to be selective on those. So the one that have the best win, less cost and all this. So we have, let’s say, a good portfolio of projects, when we get the conditions, condition that we don’t do yet for the next RFP and future RPFs, and we’ll have, let’s say, a good bag of projects that we can select the one that have the best chances to win.

Rupert Merer

And then just finally, looking at that RFP award earlier this week in France with an average price of €65 a megawatt hour. How do you view that price? Is that’s still attractive for you? Can you make a great return? And do you suspect that the price be at a similar level in the future RFPs?

Patrick Lemaire

Yes we will do – for sure, we’ll do a study of what is happening now – from now until the next RFP. But let’s say the win as we all – as you saw worldwide, price has been going down drastically. So because of the rate there is in France used will be the feed-in-tariff over €80 and – so the price of the turbine, the manufacturers sell their turbine for you to get a fair return and for them to get, let’s say, make a little more money.

So as pressure is going to come on them because of lower rate, we’ll squeeze the turbine manufacturer to the level that we still can make a fair return and add better rates for France, so.

Rupert Merer

Great. Okay, thank you. I’ll leave it there.

Operator

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

David Quezada

Thanks. Good morning, everyone. My first question, just on Moulin de Lohan, I’m wondering if you have any update on what the process is there for the appeal?

Patrick Lemaire

We’re still expecting – we’re still waiting for a date of hearing, so that could have been – like the date of hearing could be towards the end of this year, we’re hopeful.

David Quezada

Okay, great. And my only other question, I believe in the MD&A, there were some commentary to the effect that in – with the partnership with the case, you might be able to go after some larger projects. I’m wondering if you’ve had any initial discussions with them on the parameters and jurisdictions of where those projects might be and what the initial thoughts are, if at all?

Patrick Lemaire

We’re still – we’re looking – we’re always looking at opportunities and discussion with la Caisse are – will take place when the time is right and when we feel that the project need – we need that way to share between us and include them, and it’s an open dialogue. But so far, we’re still looking the – for the opportunity that will be classified, as what you say, an opportunity for both of us.

David Quezada

Thank you very much. That’s all I had.

Operator

[Operator Instructions] [Foreign Language] Your next question [Foreign Language] comes from the line of Mark Jarvi with the CIBC. Your line is open. [Foreign Language].

Ollie Primak

Thank you very much. This is actually Ollie Primak calling on behalf of Mark. I’ve just got a quick question for you guys and it pertains to the run rate guidance that you’re providing for 2019 of between $405 million – $425 million for the EBITDA. So we just calculated here that the – based on your current assets of – in 2017, you’ve got a run rate of about $375 million. And then if you take into account your identified projects that adds up roughly $65 million EBITDA. Totaling those two together, it works out to $440 million. So we’re just wondering if like, is your run rate guidance conservative, or do you see some offsets that might track on EBITDA growth going forward?

Jean-Francois Thibodeau

The first point you have to be careful is, when you have the $65 million, there’s two projects that were – how do you say that….

Patrick Lemaire

Included in the $275 million…

Jean-Francois Thibodeau

Included in the $275 million, they were part of the run rate that we were looking at, because they were just pushed back a little bit few months, but overall. So right there, you have probably $12 million or $13 million of – so if you bring that down, we’re not – we’re trying – us, so we’re not trying to push this to another limit. But we’ve introduced a range, because there’s so many moving parts in terms of – because of the size of France depending on the exchange rates, for example, and with one thing that could happen is increases in department or admin fees for various reasons, blah, blah, blah.

So we’ve introduced a range. But bottom line, no, we’re – you have to remove some of the aspect that we’ve just discussed. And you should come closer to the higher limit in that sequence.

Jean-Francois Thibodeau

And the two projects that Jean-Francois mentioned was the Yellow Falls hydro facility in the Moose Lake wind farms…

Jean-Francois Thibodeau

Yes.

Patrick Lemaire

…that were delayed.

Jean-Francois Thibodeau

Yes.

Ollie Primak

Okay. That’s great. Thank you. That’s all the question we’ve got.

Operator

There are no further questions at this time. [Foreign Language] Presenters, I turn the call back over you.

Marc Jasmin

Yes. Thank you for your attention. A recording of the call is available through March 11 – March 9, and the next call and AGM are scheduled for next Wednesday, May 9. Thank you. Bye.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. [Foreign Language]