Energy Infrastructure Partners AG (BLX) Earnings Call Transcript & Summary

[Foreign Language] Good morning, ladies and gentlemen, and welcome to this Boralex conference call. [Operator Instructions] Following the presentation, we will conduct a question and answer session, in which financial analysts, shareholders and investors will be invited to ask the questions. [Operator Instructions] Please also note that the call is being recorded. [Operator Instructions] Finally, media representatives are invited to contact Boralex's Director of Public Affairs and Communications, Isabelle Fontaine. Her contact information is provided at the end of the quarterly press release. I would now like to turn the call over to Mr. Stéphane Milot, Senior Director, Investor Relations for Boralex. Please go ahead.

Well, thank you, operator, and well, good morning, everyone. Welcome to this special conference call to announce our exciting partnership in France. Joining me today from our head office in Montreal, we have Patrick Decostre, our President and Chief Executive Officer; and Bruno Guilmette, our Vice President and Chief Financial Officer. From our office in Paris, we have Nicolas Wolff, Vice President and General Manager, Boralex Europe, also on the line and other members of our management and finance team are also with us today. Mr. Decostre will begin with comments about the rationale of the transaction and a quick overview of opportunities in France. Afterwards, Mr. Guilmette will carry on with financial highlights, and then we will be available to answer your questions. As you know, during this call, we will discuss historical as well as forward-looking information. So when talking about the future, there are a variety of risk factors that have been listed in our different filings with security regulators, which can materially change our estimated results. So these documents are all available for consultation at sedar.com. So the press release and a copy of today's presentation are posted on our website at boralex.com under the Investors section. I wish -- if you wish, sorry, to receive a copy of these documents, so please contact me. It would be a pleasure to send you this information. So Mr. Decostre will now start with his comments. So please go ahead, Patrick.

Yes. Stéphane, thank you, and good morning, everyone. I'd like to begin by 2 preliminary remarks. Firstly, I would like to share my thought this morning go to the victims of Ukraine. I'm also angry of this aggression and my thoughts also go to the people of Russia who are taken on a dangerous and destructive adventure. War is never the right option. I would also like to take the time to thank the team who, for 20 years, have worked very hard to develop Boralex in France. Through successes and difficult times, even crisis, we have kept in line with the disciplined growth that set Boralex apart. These last few months have been very intense, as you can imagine, with your hand at the same times as working on the major transaction announced this morning. Thank you all and every one of you. I'm very pleased to present to you this morning the conclusion of a significant process we undertook a few months ago to find the ideal partner to pursue our growth in France and crystallize significant value for our shareholders. This partnership will definitely strengthen our position in the French market and enable us to accelerate our growth to meet the ambitious objective of our strategic plan. We are seeking -- we were seeking a partner with a long-term vision, able to invest in the company's future development in wind and solar power as well as storage. EIP, a global infrastructure fund based in Switzerland, has all the qualities needed for Boralex to continue to stand out in the French market. Since 2014, EIP has provided direct energy investment solutions and is steadily evolving with a group of over 60 sector specialists. They have an established platform for investments in the energy transition with a global footprint and reach. Energy Infrastructure Partner AG (EIP) is the manager of a collective assets focused on high-quality, large-scale renewables and system-critical energy infrastructure assets, with over CHF 4 billion under management, EIP leverages an extensive industry network, broad transaction experience and close partnerships with energy suppliers and the public sector in order to develop and manage investment solutions for institutional investors globally. The group has values and long-term vision similar to ours for the future of renewable energy, and we both believe we are at a turning point right now with shortage of offer to replace aging nuclear fleet and fossil fuel production. As you may have seen, French politicians made a lot of comments recently about their respective view of the energy transition in their election campaign. But let me draw your attention that a few -- to a few elements to take in consideration when analyzing our position in Europe and France and our potential to expand. Right here is the situation in France at present. Power price have increased from an average of EUR 60 last summer to over EUR 200 in the [ fourth ] quarter and forward price around EUR 240 for Q4 of this year. 5 nuclear reactor in France totaling 7.3 gigawatt of capacity were shut down because of corrosion problems detected in safety visit. Aging of French nuclear requires investing in all types of energy, including nuclear, but nuclear is costly and takes time to build. President Macron mentioned that the construction of the first nuclear plant could start in 2028 and be commissioned in 2035. Let's not forget that the commissioning of Flamanville, the most recent nuclear project in France, has been delayed by 10 years and is expected to cost EUR 19 billion instead of the initial estimate of EUR 3.3 billion. As mentioned before, RTE, the French transmission system operator, recently issue 6 different production mix scenarios for 2050, and all of them are highly promising for renewable energy. The most conservative scenario refers to a solar production 7x higher than today and onshore wind production 2.5x higher. The most ambitious scenario indicates a solar production 21x higher than today and an onshore wind production 4x higher. The Chairman of the French Nuclear Safety Authority, ASN, recently asserted the lack of margin to support contingencies and the difficulty the nuclear industry will have to achieve even the most conservative RTE scenario of 50% nuclear and 50% renewable energy. The ASN Chairman also insisted that margins need to be maintained in order to avoid facing a trade-off between security of supply and nuclear safety. Finally, France is not meeting EU targets in the energy transition and will, therefore, have pressure to accelerate the pace in coming years. Other elements outside of France are also influencing the French power market. Germany shut down 4 gigawatts of nuclear capacity in 2021 and will shut down its remaining 3 nuclear plants at the end of 2022, disconnecting another 4 gigawatt of capacity. Germany plans to close all of its coal-fired power station by 2030. This is 8 years faster than its initial plan. This is a lot of energy which will need to be replaced by other types of production. This is also one of the reason for the high price of electricity in France at present. Forward contracts are also showing indication of high price environment for the coming year 2023. Natural gas seems to be the short-term way taken to compensate for this significant capacity reduction, but with the high price of natural gas and CO2, this cannot be a viable alternative. Given all the above, I believe EIP have a reading of the market similar to ours, and this is certainly one of the reason why they want to partner with a team like Boralex. They strongly believe in the growing strategic importance of renewable in the French energy markets and a unique position Boralex is in. With 20 years of proven track records and a robust development plan over the next coming -- the next 10 years, Boralex today combines experience, skill development teams and high execution capabilities, all it takes to perform. This is why we want to accelerate our development in the French market and keep controlling 70% of the business in France. We strongly believe the transition will accelerate and demand for renewable energy will be significant for the years to come because other alternatives are not as flexible and cost-efficient. Another good news from France this morning is the confirmation that we have won 3 contracts for a total of 62 megawatts in the last RFP in November. A new 26-megawatt [ Moulins du Lohan ] project will be added to our growth path in Q1 as a secured project. This complete my part. I will now let Bruno cover the financial portion in more detail, and we'll be back later for the question period.

Thank you, Patrick. Good morning, everyone. As mentioned in our press release, this transaction creates strong value for our shareholders and highlights the strength of the unique platform created by Boralex in the past 20 years in France. Boralex has been a pioneer in developing, building, owning and operating renewable energy production sites through its unique model. We expanded to meet the French markets' growing energy needs and established ourselves as the largest independent producer of onshore wind energy in France since 2014. The price paid by EIP for the investment in 30% of the capital of Boralex France translates into a valuation of EUR 1.7 billion or CAD 2.5 billion for Boralex capital, a 20.3 multiple of EV to 2021 EBITDA. This is a healthy multiple considering Boralex trades at around 13x EV to 2021 combined EBITDA. It shows that we have developed unique and highly valuable platforms over the years, which do not appear to be fully reflected in our stock price. The transaction we announced today will bring EUR 532 million or CAD 766 million to Boralex. The proceeds will be used to realize our strategic plan by making accretive acquisitions and organic development in our targeted market. In a very short term, we will use a portion to reduce some of our debt carrying higher interest rates. Let's underline that our European targets are to move from a 1.1 gigawatt operating platform up to 3 gigawatt in operation in 2030 while diversifying the company both on technology and geography. As mentioned many times since June 2021, we are interested in expanding Boralex footprint in new geographies in Europe such as Spain and the Nordics and are also interested in expanding more into solar. This completes my part of the presentation. Thank you very much for your attention, and we are now ready to take your questions.

[Operator Instructions] We have the first question coming from the line of Nelson Ng from RBC Capital Markets.

Congrats on the transaction. This is a great outcome. So my first question just relates to France and the potential to expand into other countries. So my question is, I know Patrick mentioned, I think, yesterday that your French development team kind of helps other development teams in Europe, like in the U.K. and potentially in Spain. So does this arrangement like is it ring-fenced just to France? Or could this French business do work in other countries in Western Europe? Can you just talk about the expansion plans?

Nelson, thank you. Yes, the transaction is ring-fenced to France, so the value you have is for the French asset pipeline and development. But we have a development contract between our French company and the Boralex new market company, which will allow us to use, I would say, the French brains to develop outside France at a defined rate. And so we have access for development outside France within the agreement to our team in France. So I hope it's clear for you. If not, please ask a question or ask for more.

No, that's clear. And then in terms of your plans to increase the generation capacity in France to about 3 gigawatts, like are you looking to continue developing and potentially look at M&A? I know France, you've been growing organically, but with a partner. Does this open things up to doing M&A in France as well?

Yes. No, essentially, organic growth is the way we will develop in France. And we have, as I mentioned yesterday, we are -- we continue to develop our wind pipeline, but we already start to switch with more solar development with the team some years ago. And so we will, like 2 years ago. So we really are going this way. I do not exclude like a small local developer partnership, which is not the real M&A, could be more small partnership if we want to accelerate, but I do not expect presently to have large M&A in France.

Okay. And then just one last question. I know in the past, Boralex sold a 30% stake in their European business and then kind of bought it back several years later. Are there any rights or options to buy back the 30% stake at some later date? Or will that just be negotiated at some time if that's what you want to do?

No, it's a good point. The deal we did in 2009 and we bought back beginning of 2015 help us to go from 100 to 500 megawatts. And to a team of like probably 30 people to a team of 100 people and the pipeline of development. So it was really helpful, but it was with an infrastructure fund with just a 10-year duration. And so when you are working with fund like this, after 2, 3 years, they start thinking about the exit, because they have spent all the money or invest all the money they have. It's not the case here. EIP is a 25-year plus fund, and they are also raising other funds, and they don't have the problem within the governance of the fund to invest with the fund #2, #3. And their LPs are very long-term investors, Swiss pension fund, some European insurance company and a family office, too. So very long-term investors, long in cash, who are willing to take advantage of the energy transition in France and more broadly in Europe when you look to them.

We have the next question coming from Rupert Merer from National Bank.

Congratulations on the deal, some good news on a dark day. Can you give us more color on how you built up the price on the transaction and maybe how we should think about the allocation of purchase price towards operating assets and development assets?

Well, first of all, Rupert, we run a fairly disciplined and structured process and which showed a keen interest, as I mentioned yesterday, to participate with us in the future growth of the French business. So this is the outcome of that process. We believe that valuation is a strong testament to what the team built, a strong testament to the quality of this market. And as a reminder, we are keeping 70%, which also shows our commitment to that market in the long term. That valuation or that price will allow us to use the proceeds, as mentioned, for growth, growth in France, Europe and also growth elsewhere, along very much with the strategic plan. So it could be both for organic and -- sorry, it could be for organic and M&A. And there's a portion that, as you know, we're also pursuing the target to become investment grade, which certainly some of the proceeds could help us structure the capital in a slightly different way. So I don't know if it completely answers your question, but it's really...

Maybe you're not able to comment, I guess, on how much the buyer might allocate to development. But maybe a couple of quick housekeeping questions. Are there any tax considerations on the sale for Boralex?

There will be tax considerations. You mean the tax payments for some -- I mean there will be -- we believe there will be minimal in terms of cash tax, maybe some deferred taxes, but that's our take at the moment.

Great. And then one final one. Will the joint venture be paying distributions to the partners in the near term? Or will cash be reinvested into growth?

The plan is both actually to distribute proceeds on a regular basis. So we -- for both partners, it's agreed that we distribute excess cash flows, but we've also made commitments on both sides for -- to fund the future years in terms of growth. So it's really not to keep excess cash in the business, but really, it's net-net we provided for the cash needed for the growth for -- in terms of commitments from both partners.

We have the next question coming from Andrew Kuske from Crédit Suisse.

Maybe it's a bigger, broader question just on the deal structure. And how do you see Boralex positioned on a longer-term basis? Do you see yourselves being effectively an asset manager and becoming more asset light or transitioning away from the asset-heavy and asset ownership that you've got? Where are you going to land on a spectrum? Like this deal is fairly clear as to what you're doing, but just how do you envision it in the future?

Thank you. Yes, I'm not seeing Boralex as an asset-light company. What I see is that we are -- when you apply the disciplined growth and you do organic development, an organic development is not just to have new projects. It's also to optimize. It's also to find new customers. It's also to manage the power market and the price that you can get. Then it's interesting to crystallize a part of the value, and we clearly stay at 70%, because we think there is still a lot of value to create in France. Otherwise, we should have said for the like 49% or more like some others are doing. But we think it's an interesting way of managing the capital allocation and the different possibility to finance the company. So essentially, that's my view even on -- not even, also on the long term.

Okay. I appreciate that. And then when you think about just the growth opportunity set that you have ahead of you, with this new flexibility with the announcement this morning, do you anticipate greater acceleration of activities and then maybe replicating this model in other jurisdictions?

The first point is we postponed completely any equity issuance for organic growth and the development of our strategic plan, that the execution of our strategic plan, this is the first point. As Bruno mentioned, the second point is this transaction will also help us for -- to obtain, within the time frame of our strategic plan, our investment-grade rating. And then there is -- that's the way I think we are. I don't see another partnership for existing assets and pipeline in the near term. But obviously, I don't think we have to exclude any partnership for the long term as well.

We -- in terms of partnerships, there's something to add. In terms of partnerships, as I think we've discussed in the past, we have different types of partnerships. So partners can come along with us on specific assets, and that we'll continue to do. This kind of transaction, the approach is really, we create value and then we bring in a partner, and by the type of value we create is obviously taking development risk, the types of risks that we're used to and that financial players, financial investors usually prefer not to take but are happy to come along with us at a more mature stage and allows us to crystallize the value. So that needs -- requires from us that we build that value in different parts of the business, and then we bring in financial players, financial investors. So there's -- but again, we could bring in financial investors along with us on a specific transaction or specific assets.

Okay, Bruno, that's great. And then maybe I didn't think I'd get to build upon my question from yesterday and the results call so quickly. But if I can, just on the investment grade rating, does this -- how much closer does this get you to that objective?

Well, that will depend on how we allocate the money and how quickly we entertain those future discussions with rating agencies and how they react to it. So I'm not going to speak on their behalf. But certainly, as you can see, by just applying some of the proceeds to simplifying, rebalancing our debt, that certainly gets us closer. And we'll see if it gets there -- if it gets us there at this time. And in terms of M&A, the only point I would add is, I think I also mentioned it yesterday, it's disciplined M&A. It's really along the lines of other types of transactions, accretive transactions we've done in the past.

We have the next questions coming from Nick Boychuk from Cormark.

On the first part, just the structure of the investment, can you please confirm, Stéphane -- or sorry, Bruno, what is EIP required to do for the development pipeline CapEx? Do they have a 30% obligation to fund that?

Yes. It's 30% of the business and the future CapEx.

Okay. Perfect. And then they also seem to have solar assets in Italy and Slovakia as well as wind projects in the Nordics. Is there any potential where you guys could become partners in other new markets or where they might need your expertise to maybe develop projects that they've identified?

Yes. The answer is yes. There is the first -- this partnership is limited to France, but obviously, one of the reason why we have decided to partner with EIP is the fact that it's a specialized partner. It's not -- they're not -- as they say, they are just doing energy, but they are doing it well. So they have -- it's people who have invested in the Nordics with some project with corporate PPA or merchant exposure. So it's financial investors, but with very sophisticated in energy, and that's a good partner for us in France and maybe a good partner outside France, if we're -- if the partnership is going well. So clearly, the answer is yes.

[Operator Instructions] We have the next question coming from the line Mark Jarvi from CIBC Capital Markets.

Congratulations on the deal. Maybe just coming back to the participation on future funding from EIP. Bruno, how far, with the capital they provide today, does this take them? Like when will be the next time EIP would be sort of obligated to maybe contribute capital?

Well, we've essentially gone a few years to basically according to our plan, obviously, and things can change along the way. But certainly, with the numbers we know, we've made sure that within our agreement, it was clear how much money we needed on both sides, I insist on that, to commit for the future growth. So I believe we went to 2026 in terms of those sums of money. So it's not all prefunded, but it's all understood and committed.

I understand this comment. I'm just trying to understand like to Rupert's question about how much was for the current operating versus how much is of your sort of growth or secured growth pipeline of this capital that's coming in, so this -- some of the capital, I assume, the equity that they're contributing is for projects under development. That's fair to assume.

Sorry, your question is, is this money going to...

Well, some of the money coming in is for operating assets but also to support ongoing investments or for them to participate in those investments that are happening this year and next year. So I'm just trying to understand with the cash that you get today or on closing, how far does that sort of equity deployment take EIP in yourselves?

So the cash that we're getting today essentially EUR 500 million of the EUR 532 million, EUR 515 million, EUR 516 million is for us, then the rest is essentially a EUR 55 million commitment. That's the short-term commitment to fund and to engage in the business. So our share of the EUR 55 million is committed, their share of the EUR 55 million is committed. That's for the short-term portion. And then we have another commitment for the following years, which is again beyond 2023, 2024 and to get us to 2026, and that's another amount of money. Just do not want to go into the details of that additional sum of money, but essentially, this is also committed. So is that clear.

Yes, that's exactly what I'm looking for, the breakdown of sort of the bulk of it for assets already in operations before. So that's perfect. And then have you landed on how the accounting for your distributable cash or free cash flow is going to work? Like is it -- are you just going to remove 30% of the free cash flow from the France assets that you allocate to EIP or some other accounting [ treatment ] when we're thinking about sort of pro forma AFFO or free cash flow?

At this point, we believe that will be -- if that's your question, at this point, we believe that we'll be consolidating still the business. And that's the...

Like distribution to noncontrolling interest to EIP or something like that, like a cash outflow in that number, what you're just going to report?

Yes.

Yes. Okay. And then just on your comments about the investment-grade credit rating. Are you implying that there's a plan to do a little bit of deleveraging to get that rating? Or is it just where that's going to sit in terms of project level versus corporate? Just if you can clarify that.

No, I've always mentioned that we want to increase our corporate debt and on a relative basis, reduce our project debt just on a relative basis, meaning we'll continue to grow it, but maybe not to the same level. So it's just a rebalancing between both. So if we want to rebalance, I made -- I believe I made the comparison between this and turning a boat in a way. And so it takes time to -- if you want to repay some of the corporate debt to increase -- repay some of the project debt to increase some of the corporate debt. So essentially, if we have the possibility to reduce some of the project debt with some of that -- the money we're getting, then we would use that opportunity. We need to take into account [ Michels ] and all the likes, but that's how we look at it. And now we see...

Is the net EBITDA sort of pro forma going forward be similar, it wouldn't change, just where the debt sits is what's changing?

In the short term, it could change if we're repaying some of the debt. It could be slightly lower total debt. And then depending on the outcome of our M&A activities and depending on the split we use for and the rating, future rating, then we could increase our corporate debt. So it's not -- it might not get done at the same exact time. In the short term, I expect the debt would be slightly lower.

Makes sense. And my last question is just with the run-up of spot power prices and maybe higher clearing prices on corporate PPAs, like how do you think that's factored into the ultimate sale price? You think that's factored in versus where indicative bids were a few months ago, maybe you can comment on that?

The answer is we don't know. We ran a competitive process, very transparent with -- at the beginning, more than roughly 10 bidders. We selected 4. There was transparent and in-depth due diligence by specialized people. We obviously shared this information transparently to all the bidders. So I presume they have taken that into consideration and make their own view. So I cannot answer for them. But what I can answer and confirm is that we have shared this information and be sure that they understand this mechanism, which is complex and a little bit new, and price it.

There are no further questions at this time. I hand back the conference to you for any closing comments.

All right. So well, thank you, everyone, for your attention again today, and stay tuned for another call tomorrow. I'm just joking.

Thank you.

So if you have an additional question...

That was a joke.

Do not hesitate to tell me if you have additional questions. So our next call, seriously, will be to announce first quarter results, Wednesday, May 11. So have a good day, everyone, and talk to you soon. Bye.

Thank you. Bye-bye.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your lines, and have a great good day.