Boralex Inc. (BLX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to this Boralex Conference Call. [Operator Instructions]. Also note that this call is being recorded. [Operator Instructions]. Finally, media representatives are invited to contact Boralex's advisor, External Communications, Camille Laventure. Her contact information is provided at the end of the press release regarding the announcement. And I would now like to turn the conference over to Stephane Milot, Senior Director of Investor Relations for Boralex. Please go ahead.

Well, thank you, operator, and good morning, everyone. So welcome to Boralex conference call about the announcement of our first wind acquisition in the U.S. As you probably know, we are quite excited about this transaction. And we are really happy to ask this call and answer all questions you might have relating to this transaction. So joining me today on the call, Patrick Decostre, our President and Chief Executive Officer; and Bruno Guilmette, our Executive Vice President and Chief Financial Officer. As you know, during this call, we will discuss historical as well as forward-looking information. In talking 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. So these documents are all available for consultation at sedar.com. I was saying, since most of the information is already included in the press release, we'll go directly to the Q&A. And operator, we can open the line and start the Q&A.

[Operator Instructions] Our first question comes from the line of Nelson Ng with RBC Capital Markets.

Congrats on the acquisition. So my first question just relates to the other 50% ownership interest of the projects. Like are there like multiple parties? Are there financial investors or developers like you? Can you just give a bit of color there?

Yes. I think the remaining part is owned by Axium Infrastructure, which is a Montreal-based infrastructure fund. And it's a great opportunity also for us to have this partner along with us because we see each other in the development in North America specifically, and we can be [indiscernible] and they really welcome [indiscernible] when we -- during the process to see, [indiscernible] because they know we are a good operator. So Axium Infrastructure in Montreal.

Okay. And then my next question is in terms of the, I guess, merchant facilities or at least the one with 3 years remaining as well. Do you plan to partially or fully hedged any of your exposure in the future?

We don't partake hedge with risk of volume. That is something which is forbidden in the risk policy in Boralex everywhere. We will look through opportunity if there is corporate PPA or things -- or PPE with municipalities like we have [indiscernible] ready. And -- but no volume risk, that's very important. And I think [indiscernible] of the energy crisis is also a good period to be merchant exposed considering that it's a way to reduce the impact of inflation globally. So [indiscernible] very closely, but within our risk policy.

Okay. Got it. And then one more question. In terms of your 2023 EBITDA and discretionary cash flow guidance. Can you give a bit of color on what the merchant power price assumption is that you've used in your forecast?

We've used -- what is it, Patrick?

We used -- I don't have the figure in mind, maybe Bruno, you have it. But just to -- we have to go through the analysis of the market. And we have worked with [indiscernible] which is a very well-known company, but based in Texas for some years now, a great model of the system, and we have also other information for Milo in New Mexico. So I think the risk is -- the remaining risk is not important today [indiscernible] long term. But we have taken also the scenario [indiscernible] the high risk, obviously, because we don't think -- we think it's good and it's prudent.

We can -- we get back to you on the '23 price that we used, Nelson.

Okay. And then just one quick follow-up. In terms of the project with a 3-year PPA term, do you expect the EBITDA contribution from that project to like increase, remain flat or decrease post PPA expiration?

Not sure. Could you just repeat the question? Nelson, I'm not sure, we got it right.

Okay. Yes. So there's Longhorn, the PPA expiration is in about 3 years. I was just wondering if you have a view of whether the EBITDA contribution from that one project will increase or decrease or remain relatively flat once it hits merchants?

Bruno, do you have the answer to this question?

No, I'm looking at -- I think we'll get back to you on this one.

For this specific asset?

Yes.

Our next question comes from the line of Sean Steuart with TD Securities.

A couple of follow-up questions. Can you give us the approximate split in the 2023 EBITDA guidance between the contracted and merchant assets?

Don't have this figure?

No.

Okay. I guess once tax equity out is -- tax equity is out in 2 to 3 years, would you consider adding leverage to any of these assets at that point?

Yes, we'll look at -- I think leverage in the early part of the year, we'll look whether it makes sense. We've looked at it during the acquisition, decided not to put leverage early on. We'll review that position. From a financing perspective, we're fine with the resources we have on the balance sheet, but we'll review the situation early in the year to see if it's -- it makes sense to add some leverage, but we don't want to over-leverage given that they already have tax equity investors involved in these assets.

Okay. Understood.

It would be back leverage or in the structure that we look at it if we are to add leverage.

And final question, just on the pro forma liquidity position for the company. You had a really good cushion before this deal, it eases up a little bit of the available liquidity. Can you speak to the comfort in your overall capital structure flexibility with respect to further growth ambitions that the company has?

We're still quite well capitalized. And we -- our assessment is that we'll find for a good part of 2023 with the known growth assets and construction that we have to do. So if there's additional M&A opportunities that are not foreseen at this time, we'll see. But right now, for a good part of '23, we're still well capitalized and we're getting good cash flow from our operations.

Our next question comes from the line of Nicholas Boychuk with Cormark Securities.

Coming back to the tax equity, I was wondering if you guys could please give a little bit more color on how close we are to reach that [ flipping ] point and what that could potentially imply for the remaining PTCs over the life of the asset?

The [ flipping ] point is vary. We have 6 different tax investors. They vary over a number of years. So I'm not allowed to go into details given the agreements we have in place with those tax equity investors. But -- well, essentially, they vary between 25% and up to 33%, I believe. So there's different flipping points and different constructions in those. Overall, the value it represents is just looking for that number is $237 million, the remaining amount invested by tax equity investors overall, $237 million.

Okay. And moving to the PPAs. Can you share any additional color, Bruno, on the fixed price aspect, the bus bar and the hub price, are they indexed to inflation? Is there any additional upside you could see in those contracted assets?

We can -- the additional upside for us in those assets is certainly continuing to improve the situation, running them in line with our standards once we take over and certainly the size of this transaction is important in the overall mix. It increases our presence in the U.S. significantly. We believe it's -- based on different discussions we've had with different market participants, including on the financing side, we believe that size is important for us in the U.S. It's a growth market that we've said in our strategic plan is important. And getting that critical size that this acquisition certainly helps us get to a critical size in the U.S. So it will help on the cost of financing, it will help on different asset -- different aspects of procurement overall. And so we've looked at it as giving us synergies in different parts of the company as well.

Okay. And you mentioned the operations of these assets. That was going to be my follow-up. Have you already identified any near-term improvements, either asset changes or repowering that you might want to do near term to enhance the assets?

Patrick?

Yes. It's -- yes, sorry. It's -- since it's [indiscernible] we have gone through quite in-depth due diligence [indiscernible] EDF Renewables but there is also some optimization [indiscernible] the way we share risk or not with OEM. So all this is on the table and would be looked by our team. And on longer term, for sure, there is some commercial optimization and also some potential [indiscernible] when they will -- that would be possible and [indiscernible] possible. So we have all this on the table.

If I may add about -- regarding the tax equity partner, the $237 million mentioned by Bruno is for 100% of the business. They also have to take into consideration that the net present value of PTC is around $185 million. So if you were to look like at what this exposure there, it's $52 million, if you deduct the PTC that will be used to reimburse a part of the tax equity partner. I just want to mention that to make sure that [indiscernible] with mixing up 100% numbers with 50% numbers.

Our next question comes from Rupert Merer with National Bank Financial.

It's [ Luca fring ] in for Rupert. So I'd like to know if the numbers you provided take into account any congestion that you expect in those 2 markets?

Yes, we have to make all the study of -- on one side, market price and congestion. And this is taken into account where [indiscernible] just here, and Stéphane will be certainly able to provide things. But yes, the answer is yes, we have to look to all the potential impacts. And we have also potential strategy we're thinking that congestion is something that will -- that could be more [indiscernible] in transport, transmission, local demand. There are a lot of potential local demand that can be developed, but we haven't put that part into account, but that could be an upside if there is [indiscernible] than expected.

Good. And in your estimate, would person to -- let's say, like the LTA production that you would expect to be a discount caused by congestion?

Yes, there is on some assets, there is congestion risk, and we have taken that into account in our long-term evaluation. But as I mentioned, it means also that we will look to try to optimize this [indiscernible] number, some value from that, but this is not taken into account [indiscernible] as we have today.

Okay. Fair enough. And how do your forecasting numbers compared to historical numbers that were achieved by these assets?

I would say they are totally in line because we have taken the existing figures. This is assets which [indiscernible] we have taken into account. The wind resource and [indiscernible] we have checked the [indiscernible] and we have evaluated what can be achievable like we do in any acquisition. And so we have taken into account the historical. We have made operational evaluation of the asset. It's not just [indiscernible] production evaluation, it's exposed with some years of [indiscernible]. And uncertainty is smaller than [indiscernible] evaluation.

Okay. Good, which means your spot price assumptions are fairly in line with the historical spot prices we've seen in ERCOT and SPP?

Yes, I'm speaking here about the volume, about production.

I guess I am more referenced to free cash and EBITDA.

Okay. For the price themselves, there are some contracted assets and there are some short-term assets 3 years and then merchant assets. And these assets, we have made [indiscernible] but others, too, to cross-check the different way, so the different curve and evaluation of the future, and we have taken a prudent view of that and put that in our model.

Okay. And I guess the last one for me. On the Longhorn, so the upsettled PPA one, would you be able to provide details as to which of you will be settling into? Is it the south hub? And also is there -- or are you considering having any basis hedge on that PPA? So I understand you don't have any fixed volume contracts -- contractual fixed volume on the PPA. But any basis hedge that you either have or are looking to add on to the asset?

We'll get back to you on this question.

[Operator Instructions] Our next question comes from Naji Baydoun with iA Capital Markets.

Congrats on the transaction. Just want to start off with the clarifying questions. So the acquisition won't be consolidated, correct on your financial statements and the EBITDA and the AFFO contributions are on a net basis. Is that correct?

It's correct. [indiscernible] it will not be consolidated.

Okay. Okay. Perfect.

Well, I mean, I'm speaking sort of 80%. There's a far chance that we might find a way. But our assessment so far is that it will not be consolidated, just to be precise.

Okay. Got it. That's very clear. Can you just maybe talk about your expected return on this investment compared to maybe your sort of other opportunities that you're seeing in the market?

Yes. It fits well within our -- the expected return range that we've given to the market and based on our risk-adjusted return. These are operating assets and either contracted or well-known like ERCOT markets, liquid markets. So it fits quite well within the range that we've given in the past 8% to 10% adjusted for risk.

Okay. You mentioned earlier, Axium being a partner in this project. Do you see other opportunities with Axium or EDF to look at new build or greenfield ops in the U.S.?

What I see is [indiscernible] financial investors [indiscernible] renewable power market. And then I think it's good to have this partner with us and there could be some opportunity in the future. It's good for us to work with a sophisticated investor in this field a little bit like we are doing within Europe. It's -- they understand the risk [indiscernible] risks. So here, we are more alongside with them, [indiscernible] partner in operation. The relation, we start with them are, to say, [indiscernible]. And on the EDF -- for sure, EDF is looking to, say, divest some assets in the world. So we had a constructive negotiation with them for some months bilateral discussions. So potentially, there is an opportunity to discuss together. But before we would take some holiday.

No, it's not exactly like the IP partnership, but I understand that it could lead to more co-investment in the U.S. Just one final question for me on sort of the cash on hand. Just to clarify, Bruno. So the remaining cash and ongoing cash generation, that's for the existing projects, does that mean that you're no longer active on the M&A front? Or are you still looking at other acquisitions?

All I said is essentially that we have cash, the cash available for this transaction, and we have our line of credit as well, which is not much used at this point, which is going to be available for -- to fund the equity needed for construction projects during 2023. If there are additional M&A opportunities that we do not have knowledge of at this point or not advanced at this point. Then we would see, depending on the size and so on, but I'm only speaking that we can't foresee right now short-term other short-term M&A opportunities. But certainly, we'll keep looking -- we do look at the M&A opportunities all year long. We've looked at many this year in 2022. And to finally decide to do this fairly significant acquisition. But we've looked at many during the year. So it's important to understand that we're always looking at potential opportunities. This one is at a very reasonable price being bilateral discussion, and it fits well with our ambition to grow in the U.S.

I'm currently showing no further questions at this time. I'd like to hand the call back over to Stephane Milot for closing remarks.

Just -- if I can intervene, just one answer to a question that was previously asked was the merchant percentage in 2023 is expected to -- sorry, the merchant portion of 2023 is about 30%. So 70% contracted for 2023. Thank you.

All right. So thanks, everyone. So before leaving the call, I will ask Patrick to do closing remark, and then we'll go back to vacation.

Yes, thank you Stephane. Just to emphasize the work of our team until the [indiscernible] of the year. That's important [indiscernible] that is also to underline that this transaction is exactly in line with our strategy. We saw the part of the French [indiscernible] reinvest at lower multiple in the U.S., [indiscernible] significance action. It's a bilateral transaction. We probably look to north to 150 potential transaction [indiscernible] half in the U.S., half in Europe. And this -- so we have chosen this because of this significant size because it's a potential optimization follow-up [indiscernible], as Bruno mentioned, is very important. Because it will create the reputation in the U.S. have already in Canada and in France of being a good operator. And this is very important to have partner along as -- like Axium, like tax equity investors [indiscernible] U.S. And obviously, the [indiscernible] as we have explained. So I think it's a very good transaction for the company. So thank you very much. And we have no other news to announce before the end of year. So I wish you a good [indiscernible] new year and all the best to you and your team for next year. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.