Earnings call: Innergex reported an 8% decrease in adjusted EBITDA

During Innergex (TSX:INE) Renewable Energy's (INE.TO) second quarter earnings call, President and CEO Michel Letellier acknowledged a challenging quarter with weak resource performance but highlighted strategic moves to diversify and strengthen the company's portfolio. The quarter saw the commissioning of the San Andres project in Chile under budget and progress on the Boswell and Aela carrier projects. CFO Jean Trudel outlined the financials, noting an 8% decrease in adjusted EBITDA proportionate to $184 million and an increase in free cash flow to $51.8 million. Despite lower wind and solar production and increased corporate expenses, Innergex reaffirmed its full-year guidance and remains optimistic about future growth, driven by new projects and legislative support for renewable energy investment in Canada.

Key Takeaways

• Innergex closed a transaction in Texas, improving liquidity and reducing portfolio risk.
• San Andres project in Chile completed $5 million under budget.
• Boswell and Aela projects expected to be operational by year-end.
• Innergex reported an 8% decrease in adjusted EBITDA proportionate to $184 million.
• Free cash flow increased to $51.8 million, with total debt reduced to $6.4 billion.
• A 25-year PPA for the Partner Fiber facility in Quebec was renegotiated.
• The company is tackling interconnection challenges in the U.S. and is optimistic about Canada's investment tax credit for clean power.

Company Outlook

• Innergex is focused on construction and bidding for renewable energy projects.
• They are confident in their growth strategy and ability to contribute to the economy's decarbonization.
• The company is working on several projects in Canada, including a 400-megawatt project in Quebec.
• Innergex is also developing projects in the U.S., specifically in Wyoming and the Midwest.

Bearish Highlights

• Lower production from wind and solar assets impacted financial results.
• Increased corporate expenses due to investment in greenfield activities.
• Concerns about the Texas market's lack of capacity payments and high volatility.

Bullish Highlights

• Innergex is optimistic about the new investment tax credit for clean power projects in Canada.
• The company aims to be a partner for large projects in Quebec, with a growing demand for renewable energy.
• Innergex believes in the potential of the Partner hydro portfolio and other upcoming projects.

Misses

• The company experienced higher O&M costs for BC Hydro assets due to erosion issues and is seeking a long-term fix.
• Innergex's financial results were below expectations, prompting a cautious approach to share buybacks.

Q&A Highlights

• Innergex is considering signing PPAs in Texas with favorable terms.
• They are interested in partnering with Hydro-Quebec on 1,000-megawatt mega projects.
• Portfolio management remains a key focus, with opportunities in various Canadian provinces.
• The company is applying a methodical approach to project development, assessing the probability of success for each.
• Innergex and its partners will retain 100% of the investment tax credits for MU2, totaling around $90 million.

Innergex Renewable Energy's second quarter demonstrated the company's resilience and adaptability in a challenging market. While production issues and increased expenses have impacted financial results, strategic portfolio management and a focus on growth through new projects and legislative incentives paint an optimistic picture for the company's future. Innergex continues to navigate the complexities of the renewable energy market with a clear strategy and a commitment to contributing to a cleaner economy.

InvestingPro Insights

Innergex Renewable Energy's (INGXF) latest quarter reflects a mixed financial performance, with strategic advancements counterbalanced by some operational headwinds. To provide a deeper understanding of the company's financial health and future prospects, we turn to InvestingPro for additional insights.

InvestingPro Data indicates a market capitalization of $1.44 billion, which positions Innergex as a significant player in the renewable energy sector. The company's gross profit margin stands at an impressive 73.87% for the last twelve months as of Q2 2024, showcasing its ability to maintain profitability in its core operations despite market challenges.

However, the data also reveals a negative P/E ratio of -14.43, suggesting that investors may be concerned about the company's earnings outlook. This is further emphasized by a forward P/E ratio of -164.93, indicating that analysts are not expecting the company to be profitable in the near term. Additionally, the company's revenue growth was 8.13% over the last twelve months, which, while positive, may not be sufficient to alleviate concerns about its future profitability.

InvestingPro Tips highlight a significant debt burden and a rapid cash burn rate for Innergex, which could be areas of concern for investors. Furthermore, the company's short-term obligations exceed its liquid assets, which could pose liquidity risks. On the positive side, Innergex has demonstrated strong returns over the last three months, with a 15.5% price total return, signaling investor confidence in its recent strategic moves and the potential for future growth.

For those seeking a more comprehensive analysis, InvestingPro offers a total of 9 additional tips on Innergex, accessible through the platform. These tips may provide valuable context for investors considering the company's stock, particularly in light of the challenges and opportunities outlined in the article.

Full transcript - Innergex Renewable Energy Inc (INGXF) Q2 2024:

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2024 Second Quarter Conference Call and Webcast. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded. I would now like to turn the conference over to Naji Baydoun, Director, Investor Relations. Please go ahead.

Naji Baydoun: Hello, everyone, and thank you for joining us today. I'd like to specify that this conference will be held in English. Members of the media are invited to ask their questions by phone after this call. A presentation supporting today's discussion is available as we speak on the homepage of our website at www.innergex.com. This call contains forward-looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions on which forward-looking statements are based are reasonable under the current circumstances, listeners are cautioned not to rely unduly on these forward-looking statements as no assurance can be given that it will prove to be correct. Forward-looking information contained herein is made as of the date of this call, and the corporation does not undertake any obligation to update or revise any forward-looking information, whether as a result of events or circumstances occurring after the date hereof, unless so required by law. During this call, we will refer to financial measures that are not recognized according to International Financial Reporting Standards. Please refer to the non-IFRS measures section of the MD&A for more information. On today's call, we will discuss highlights for the quarter, growth and development updates, our Q2 2024 results and highlights and our 2024 guidance and financial outlook. Our speakers will be Michel Letellier, President and Chief Executive Officer; and Jean Trudel, Chief Financial Officer. I will now turn the conference over to Michel Letellier.

Michel Letellier: Thank you, Naji. Good morning, everybody. Thank you for joining us. We had a little bit of a weak quarter regarding the resources, but we are concentrating ourselves in what we can control and on that, I'm happy to report that our team did a great job in maintaining the availability of the assets over 96% on a portfolio basis. So, thanks to them. This is what we can do, making sure that we can produce what comes to us and resources. As we always said, we want to make sure that we have a diversified portfolio, both in terms of geography and technology, and our effort of development is making sure that we are growing that diversification. In terms of maintaining our focus on discipline and sustaining growth strategy, as you all know, we're working hard on building our prospective portfolio and entering our RFPs, but we will stay focused and disciplined in the pricing. As an example, we did participate in the last Chilean disco RFP. We didn't win anything. There's one big winner there that went, I think, too aggressive in the pricing anyway below what we had won recently in the Codelco RFP. So, we will be maintaining our discipline, and we have plenty of opportunity of RFP. We are building our portfolio of prospective to give us some flexibility in that case. So, we'll remain disciplined in those great opportunities that we are seeing. Also, very focused on continuing executing on our priorities. A good example is the closing of the transaction in Texas. Jean is going to give you a little bit more detail about it, but very happy to have derisked the portfolio in Texas. As you all know, we had the power edge there. Our last power edge is now gone. So, pretty happy on this transaction. It's providing us more flexibility and enhance a little bit our liquidity. So, good outcome on this one. Next slide. Recent achievement in terms of quarter on the operation, very pleased you have commissioned the San Andres project in Chile. Also, in this world, it's good news to have been able to have a $5 million under budget. So, this is how we like them. And obviously, we'll try to focus on this going forward. So far, the operation in Sao Dadon-San Andres in terms of apricots doing great, the battery is doing what they were supposed to do, and we're pleased with that investment in the operation of the batteries in Chile. Development on construction, we are advancing very well on Boswell. We have now more than 60 turbine erected over 90. Very happy on the execution, even though it's kind of sad because we had a lot of win this spring that has slowed down a little bit the erection of turbines but that gives you a good idea that if we would have been in operation in this area, this summer or early spring, it would have contributed to the diversification. So, that's what I mean when we want to be more diversified in terms of geography and technology. So, it's a good segue towards saying that we want this project to be in service by the end of the year, and everything is working towards that goal. Working hard also on Aela carrier, a smaller project. Nonetheless, important for us to make sure that we put that in commissioning by the end of the year. It might be tight there, but we're getting very close to the commissioning of that pace of that project as well. Working hard on the Aela 182 megawatts of projects in development. You know that some of those projects are already having some PPA. So, we're working hard to create value there and advancing these projects to make sure that they're becoming under construction in the next few months and quarters. 2024 will be very busy in terms of RFP and PPAs. You all saw that we signed the 400-megawatt project in Quebec, both project, Lavinia and Pisuna, were signed, so great contract 30 years. Remember that this contract has also CPI built into them. So, we like this type of contract. Happy also to have re-extended or renegotiated the 25 years PPA for our Partner Fiber facility with Hydro-Quebec with full CPI. So, that's a good segue for -- Jean is going to give you some color on our initiative to refinance these 3 hydro facilities. We also have, as we said, portfolio management, we just talked about Texas, I think it's a good example of what we can do to improve our portfolio, both in providing more flexibility in financing and also de-risking when it's possible, our portfolio to enhance the total portfolio risk profile. Next slide. The visible growth on our secure project, we just saw that the operating asset has gone up by 35 megawatts. This is San Andres being now in operation, working as we just said on Boswell and alike for the 390 megawatts of projects under construction to be done by the end of the year. And we have the high visibility project of 882 megawatts. I'd like to perhaps stress Palomino. This is a 200-megawatt solar project, if you remember, in Ohio. We are still waiting for the final interconnection study and timing. But this apparently is getting to the end. We hope to have it by the end of September, beginning of October so that we can now secure all the scheduled for the contractor and the supply agreement. Happy to report that PJM capacity auction was much higher than we had anticipated. And the early discussion that we're having with the offtake for Palomino are very, very positive. The price for electricity in PGM is going up for renewable energy. So, that looks very promising for Palomino. So, we cannot wait to have this final study at the end and being able to go forward with Palomino. MU2 is entering in the last negotiation with the contractor and the supplier. This project should be going forward for 2026, with our partner, the Mac community of the Gaspe Peninsula. Also, I just mentioned that we have signed both [indiscernible] and Lavina project in Quebec and working hard, of course, to bid projects in the next RV we're getting to talk about it. Next slide. We have a large and diversified portfolio of Prosek project. As I said, we want to make sure that this portfolio is giving us flexibility and optionality for us to bid in different markets. We want to bid and be prepared to participate in RFP in all our markets. And the idea is to have optionality to make sure that we have the luxury to select the project we want to bid and make sure that these bids will be profitable for the future, give you a little bit of, I guess, just I would say a comment on the more than 9,000 gigawatts of project we have on development stage. When we say early mid in advance, that doesn't mean that an early project cannot be bid in RFP, especially in Canada. Early project, just a reminder, we all have when we entered this project in this category, we all have land secured and usually also some good visibility on the resources. So, that doesn't mean that we cannot have an early project being bid in Canada, as an example, could be Quebec would be also BC. So, we have a lot of projects in Canada, particularly to be able to use for bidding in Canada. We're happy also to say that Canada, as we mentioned, is prone or I guess, that we see this possibility to see the Canadian opportunity in the next decade to almost double the size of renewable energy. So, we will be very focused on all the markets in Canada, except Alberta, you know that we have some restriction in our strategy in Alberta. But for the rest of Canada, we will be very busy. Ontario will be a great market as well. So, we are improving and getting ready more and more on ground to make sure that we have a lot of prospective project also in all the different markets in Canada. All right. Thanks. Well, I just now I will pass to Jean presentation on the operating highlights.

Jean Trudel: Thank you, Michel, and good morning, everyone. So, starting with the operational highlights for the quarter. Production in the quarter was 91% of LTA similar to results in Q2 2023. In the quarter, generation was primarily impacted by below-average wind regimes in most of our markets as well as lower irradiance and economic curtailment in the U.S. and Chile and lower water flows in BC. These elements were partially offset by strong hydro generation in our Quebec and Chilean portfolios as well as higher wind production in the U.S. and Chile. As Michel mentioned, we remain extremely focused on controllable factors, such as maintaining a high asset availability. To this effect, we are pleased with the 96% overall asset availability in the quarter. We remain committed to our portfolio diversification strategy, which we believe will help us mitigate overall resource risk over time. Looking at our financial performance in the quarter, we reported adjusted EBITDA proportionate of $184 million, approximately 8% lower year-over-year. Although generation at 91% of LTA was similar to Q2, 2023 performance, our financial results were impacted by generation mix as some of our higher priced portfolios such as the Quebec, France wind assets and the BC Hydro assets generated lower production year-over-year. Our solar portfolio was also impacted by lower irradiance and curtailments in Chile and the U.S. This was partially offset by better generation at our Chilean and Quebec hydro facilities, which were above LTA for the quarter as well as improved production from our U.S. and Chilean wind portfolios. Our corporate expenses have increased year-over-year, mainly due to our increased investment in greenfield activities, which we believe will translate into profitable growth over time. We remain focused on maintaining cost discipline within the overall business and will prudently deploy our resources to generate accretive investments. Free cash flow during the quarter was $51.8 million or $0.26 per share compared to $0.09 per share in Q2 2023. The main drivers of the year-over-year change in free cash flow are the gain on disposition of non-controlling interests from the Texas transaction as well as lower finance costs paid mostly due to the timing of debt payments, partially offset by the same items that impacted EBITDA year-over-year. As of the end of Q2, the total debt amounted to $6.4 billion, down from $6.5 billion in Q1 2024. The quarter-over-quarter decrease is primarily due to the deleveraging of our Texas assets, concurrent with the sale of minority interest in our portfolio in the states. Overall, our debt profile remains highly fixed or hedged with minimal overall exposure to floating rates. With most of our debt being at the project level, we will continue to prioritize nonrecourse debt as the primary funding tool for new project development. We remain comfortable with our self-amortizing project debt structure with all of our existing project debt expected to be fully paid off in line with our remaining PPA terms. This is well below our estimated remaining portfolio useful life, as you know. So, it's providing Innergex with important refinancing and re-contracting optionality. From a liquidity standpoint, we continue to maintain adequate levels of available capital to fund our growth initiatives. In Q2 2024, we repurchased $2.5 million worth of shares under our NCIB. Going forward, the magnitude and timing of share buybacks will remain dependent on several key variables, including our funding needs, the future success on portfolio management initiatives and the trading level of our shares. Looking ahead of the rest of the year, we remain focused on executing on additional portfolio management activities to further strengthen our financial flexibility and increase liquidity. As mentioned, we recently signed a 25-year full inflation index PPA for the Partner hydro portfolio in Quebec. And with this important milestone now achieved, we are advancing with our second hydro refinancing initiative, and we expect to complete this by year-end with a target to obtain an incremental liquidity of around $80 million. We are also encouraged about the recent passing of legislation in Canada that implements a new 30% ITC or investment tax credit for clean power projects. We believe this program will provide significant benefits for renewable energy development, helping to accelerate the deployment of clean energy power capacity in Canada. As for our existing projects, we believe that our 3 Quebec wind projects under development, namely MU2, Levine and Pituvik, all stand to benefit from this program. This represents a total of 502 megawatts of capacity that could see upside from the ITC program as these projects were all bid without this benefit. For the remainder of 2024, our CapEx budget is fully funded from construction loans in place and/or our available liquidity, and there are no material changes to our full year CapEx outlook. We remain committed to managing our corporate leverage into our self-funded organic growth business model. So, given our performance so far this year and the outlook for the second half of 2024, we are today reaffirming our full year guidance for 2024. As previously discussed, we expect adjusted EBITDA proportionate to be in the range of $725 million to $775 million and free cash flow per share before prospective expenses to be in the range of $0.70 to $0.85 per share. Despite production in Q2 being below our expectations, we remain confident in our ability to achieve our guidance, and we'll continue to update the market on how we are tracking each quarter. As new projects come online in 2024, we expect to deliver more growth in 2025. Further success and development will also be a key driver of our longer-term success. We'll now give the floor back to Michel for an update on our 2024 corporate priorities and for closing remarks.

Michel Letellier: Thank you, Jean. So, of course, we will be focusing on construction activities. The 2 last project, as I mentioned, is paramount for us to make sure that our team are delivering these projects on budget and on timing. So, working hard on this. Development is definitely a big portion of our activities in 2024, and in the future. We said that we wanted to bid at least 500 megawatts in upcoming RFPs, and we want to win 400-megawatts. That ratio seems to be high. But on the other hand, I think that we wanted to be just a little bit conservative in the numbers of megawatts we are going to bid. We never like to say how many bids we put in our RFP, we're a little bit cautious of competition. But we already bid to our RFPs in Chile. As you know, we won on Codelco, roughly 125 megawatts. We have been also in Saskatchewan and Pensacola. Our intention is to be a big participant in the upcoming RFP for DC and obviously, always on the local to participate in Quebec. I think that Quebec this year will be tied to have a new RFP given the fact that Hydro-Quebec has also talked about being a very proactive deliver on big projects. I think that we're very well positioned throughout our experience and the knowledge of the market in Quebec, very good experience, as you all know, with First Nation participation. And we think that all these things will be considered in being a potential partner with Hydro-Quebec and First Nation for these mega projects. I think that we're going to be there in terms of a potential partner for all these big projects in Quebec, and we see that as a good opportunity. I think that Hydro-Quebec by demonstrating their willingness to have these big projects are committed to have more win in Quebec portfolio and are willing also to interconnect these big mega projects on high voltage line that we were not available in the past. So, I think that it's a commitment of Hydro-Quebec to make sure that there will be more win in Quebec, and it's all good for us. It makes more opportunity for us in the future for Quebec. I mentioned also that the remaining part of Canada is, for us, a great focus. We want to be also participating in all the market that we have. We have the U.S., we have France, we have Chile, but we have a little bit of a focus on Canada because as we all mentioned, they're a big opportunity in RFP, and we think we can be competitive there. Financing, as Jean is saying, we're advancing well. We're positioning ourselves to refinance some hydro. The transaction in Texas is also providing some flexibility and some de-risking of the portfolio. So, we're striving to enhance our portfolio profile, both in terms of flexibility, risk and reward metrics. Just as a little bit of editorial this morning, I was reading the La pass this morning and very interesting article about July 2024, was basically breaking a 13th month of record breaking record in heat in the last 13 months and July came and broke that record just being shy of July 2023. So, that makes me reflect a little bit on our mission, which is building a better world with renewable energy and decarbonizing helping decarbonizing the economy in terms of helping the planet, making sure that we are providing some good value for our shareholders, but always respecting the 3P, the planet, the people and sharing the prosperity both with our shareholders and our stakeholders. So, we are striving at Innergex to make sure that we're positioning ourselves for that growth and making sure that we'll be part of the solution to decarbonize the economy. I think that the demand for renewable energy is growing. I think that eventually, all the government will be focusing on having more and more opportunity to have more renewable energy in our different markets. So, very, very positive towards our future. So on this, I will open the floor for questions.

Operator: [Operator Instructions]. Your first question comes from Sean Steuart from TD (TSX:TD) Cowen.

Sean Steuart: Few questions. The Port of re-contracting, we couldn't find it on the Hydro-Quebec site. Can you give us a sense of price terms for the new contract?

Michel Letellier: What you mean the terms of the price? Well, they're not going to provide the price of these renewal of the contract, especially in the timing of RFP. But it's in line with what we have already shown in our last 3 years. If you remember, we had that contract ending in 2021. And we have been applying that rate in the Peninsula. What has been changed is the amount of megawatt. We have been able to tweak our equipment to increase the capacity by about 15%, well, 10% more capacity on the output. So, we will be receiving a little bit more production out of this. And, as Jean is mentioning, this contract has been part of the renewal of a portfolio that were put back into the early 1990, and they are now with 100% of CPI also indexed.

Naji Baydoun: And it's 25 years. And it's the prosperity also, Sean, is that the partner ever has been diverted. So, we received virtual revenue virtual payment from Hydro-Quebec for 15% to 20% of the water that should have run into that river. So, it's particular of that facility. So, it brings a lot of stability to that watershed, I guess, to that revenue line on.

Sean Steuart: Can you give us an update on Palomino interconnection. Can you give us a sense for the rest of your U.S. prospective pipeline behind Palomino. How things sit in interconnection queues for other projects you would hope to advance?

Michel Letellier: That's probably the biggest challenge we are facing in the U.S. It's tough to interconnect in the U.S., working hard on finding some area where we can accelerate these interconnections. We're working as an example, on atom, which is a 400 megawatt in the North West (TSX:NWC) side. We have bid that project in a few places, trying to find ways where it would be more competitive to interconnect. But the U.S. is always a little bit of a big question mark on interconnection. Mind you that in the U.S., we're working on big projects. And in our long term, well, in our forecast or goals in order to win a megawatt in the U.S., we don't need that many projects to meet the criteria that we need to build out our growth portfolio. So, we're selective. We don't want to make crazy assumption or being too aggressive in the U.S. We're waiting, we're patient. We're building our flexibility optionality. We have also some opportunities in Wyoming close to Boswell to expand. And we have also Wildmare project, which is in the range of 300 megawatts along the Boswell interconnection line. So, we have a few big projects working also in the Midwest to build out some portfolio as well. Potentially also, looking into smaller projects in the U.S. where we could probably interconnect on distribution voltage that could somehow free up and be quicker to interconnect. But interconnection in the U.S. is something that we're struggling. I think everybody is struggling a little bit to find the best way to interconnect in the U.S.

Operator: Your next question comes from Rupert Merer from National Bank.

Rupert Merer: I'd like to start with Boswell. You mentioned that the construction is on track. Can you talk about the milestones that remain to complete that project? I know there's some pending transmission work that needs to be done. How much visibility do you have on getting that done by the end of the year? What's your confidence level you'll hit COD by year-end?

Michel Letellier: Getting better, Rupert. There's one substation that has to be finalized by PacifiCorp. It's not us who's building it. So, it's a little bit more difficult for us to accelerate. But it was supposed to be done by July. Now, the latest update that we have and apparently, they're very confident that they'll be able to deliver is very early October. We, if you remember, said that in order to be more proactive in our ability to commission the wind farm, we have ordered some equipment bank of resistant to be able to be able to commission with generator and this equipment, the wind turbine so that we would be not slowed down in our commissioning process. So, everything is under our control, we're putting forward to make sure that we will be in service by December on Boswell. We also have made all the provision with the contractor to meet the payment of the --thank you. So, we have paid a little bit of extra to our supplier to make sure that we would be meeting this if ever we go beyond 2024 to make sure that we are fully compatible with the PTC (NASDAQ:PTC) requirement. So, I mean, we're very positive. We think we'll get there as long as the PacifiCorp gets us the interconnection work so that we can interconnect. But from our part, we're doing everything under control to be there and will be there in terms of being ready to interconnect.

Rupert Merer: And then on portfolio, no you gave us a little color on that process. How does that inform your view the re-contracting important of how does that inform your view on the upcoming negotiations you'll have for re-contracting your wind farms in Quebec over the next few years? And what's your view on the next stage of the life of those wind farms? Will it be re-contracting for a number of years? Or is there a potential for repowering in those projects? Any thoughts you have on that process?

Michel Letellier: Yes. I mean, I don't want to get to too much detail because we are starting negotiating with Hydro-Quebec in order to find the better solution. If Innergex would have its own way, I would prefer to be able to have a long-term renegotiation on this facility because, of course, we can have 5 years or 10 years' extension on this equipment. But I would rather, if it's possible, to have a longer 40 years PPA type so that we can plan the decommissioning of some of the old equipment will be with the repowering of these wind farms. And hopefully, that would be almost seen in terms of production. I think that Hale Kuawehi the long-term view also, you all heard them saying that they need more power in Quebec. I think that these projects are already embedded in the distribution system and the transportation system. So, I'm hopeful that we'll be finding a way to have this transition and be in a position to have a long-term view on all these projects. I'm very positive that Quebec needs this power and it's always a negotiation in terms of pricing, but they need that power. I mean I know Quebec, if you heard, is very concerned in making sure that they have enough supply to meet all the industrial and local demand. And since this project has been in operation for the last 10 years, I think that we'll find a way to create value for everybody and have a win-win.

Rupert Merer: If you do get to a point where you have a longer-term agreement like 40 years that contemplates some repowering, is there an opportunity to expand the capacity as well to grow the output?

Michel Letellier: Yes. The capacity will always be limited also on the interconnection capability in the gas Peninsula. But we were pleased to hear about the Minister of Energy, has said that they were positive or supportive to have a new transmission line to help get more megawatts out of the eastern part of Quebec, the Gaspe Penisula and Basel. We think that this would help us in the future to have more power getting out of the Gaspe Penisula. Remember that, that area, the east of Quebec is probably one of the windiest area and produce very good wind power. So, I think that over time, it might not be tomorrow, but we're anticipating a new upgrade on the transmission by 2032, 2033.

Jean Trudel: And Rupert, also just the new machines themselves with the same wind regime would produce a 25% to 30% more energy. And so, it's energy that's quite attractive also for Hydro-Quebec.

Operator: Your next question comes from Nelson Ng from RBC (TSX:RY) Capital Markets.

Nelson Ng: First question just relates to funding. I know in the past, you guys had a $80 million, roughly $80 million tranche of hydro debt that you were just kind of waiting to kind of pull the trigger on and wait for rates to go down further. With the, I guess, re-contracting of St. Poland, could you easily add that into those group of assets and increase the size of your refinancing?

Jean Trudel: Well, what we mentioned is the $80 million target was especially on those 3 power facilities that we were waiting for the PPA. So, now that we have the PPA in place, I'm keeping my target at $80 million, but we hope to beat it. So, obviously, rates going down, it helps provide more capacity because we can put more leverage. But also, the quality of the contract is good. And as Michel mentioned, we upgraded our equipment so that we have a bit more capacity so we can produce a bit more energy. So, all this translates into more revenue, which allows for greater financing conditions. So, I'm hopeful we'll do better. So, we should conclude this by the end of the year. So, we'll have more for you in the coming quarters.

Nelson Ng: And then just staying on the financing topic. So, you have some debt maturities maturing next year. I think your converts I think, $148 million or so, but you also have like $150 million of unsecured sub debt in February. What's your plan in terms of, I guess, financing or refinancing or repaying?

Jean Trudel: Yes. So, we have, as you said, this EUR 150 million sub debt that comes first. It's not a big puzzle. We could just repay this sub debt with the revolving capacity that we have in the meantime, so, there's no urgency, but we started the discussions with lenders to see what are the options to refinance the sub debt at the corporate level. So, that's ongoing. And then for the converts, I mean we have 2 converts. We have 2 converts coming one after the other. So, we started also it's a bit early, but we started to kick off some discussions to get a better understanding of the market conditions for renewing converts. But I mean it's a bit early again. So, we'll get to that probably closer earlier in 2025 to see how we go about with these 2 converts.

Nelson Ng: And then just switching to Texas. So, in Texas, now that you have a bit more merchant exposure. Like from your perspective, is the plan to keep the merchants? Or do you have an opportunity to look for like PPA-like contracts for those assets?

Jean Trudel: Well, I think that Pyxis out of every place is a place if you have an asset that don't have debt is probably the best way is to play the merchant. We have now our partners. We have only 50% of Griffin in PB. Remember also that our PowerEdge was limiting our ability to have the upside but was still limited in the downside. So, we're very happy to have got rid of that power hedge. Never again, at Innergex, we would end up having these type of contracts. So, we're happy for the time being to see how the market is going. I was surprised to read about the future potential demand in ERCOT. It's just crazy. We've seen some data center being implemented in the Houston area. And some reports are saying that in the next 10 years, ERCOT can double from 75,000 megawatt demand to something around 150. So, I think that we're happy to be there and have the ability to take advantage of volatility. We have no basis risk on those merchant neither business rig is a big issue also in our court we don't have basis risk anymore. So, for the time being, I think we're happy with what we have in Texas. Never say never. If we have a great opportunity to sign a PPE in the future, but it would be as produced and no basis exposure. So, if ever we have those opportunity, we might consider it, but we don't want to have this fixed obligation, and we don't want to have basis risk exposure in the future.

Nelson Ng: Just one last question. In terms of the BC Hydro assets, during the quarter, I think O&M costs were higher year-over-year. Can you just give a bit more color in terms of whether the higher O&M costs are kind of onetime in nature? Or do you expect --

Jean Trudel: The biggest one is offer a little with. I think that we're trying to find the best solution for having our turbine being more erosion-friendly. We're working also on potential solution to reduce the erosion on the sand to get into the tunnel. This is a little bit of a challenge. There's a lot of erosion that somehow where we were hoping to get rid of. But there's all kinds of metal surfacing that we can do on the turbine. So, the team has been trying to find the best scenario. And, in this case, instead of capitalizing on one-unit last year or one set of unit, we expense it. So, that's why you're seeing a little bit of a peak on these CapEx for BC. But in general, we don't see a big difference. It's only operate a little that has a little bit more challenged on erosion, and we're trying to find a long-term fix for it.

Operator: Your next question comes from Rob Hope from Scotiabank (TSX:BNS).

Rob Hope: I wanted to circle back on your commentary on the Hydro-Quebec renewed focus on development. That change in their strategy was announced about 2 months ago. How have you interacted with Hydro-Quebec? And have there been any initial discussions on how you could support them on the 1,000-megawatt mega projects? And how would you envision supporting them? Would that be potentially vending in land from your development pipeline or supporting the construction process?

Michel Letellier: Yes. I think that the public announcement was more focused on Hydro-Quebec being the initial developer or Marine Le Pen with the First Nation and local community. I think that they're trying to make sure that they have a good sense of the social acceptability of these projects. So, they want to make sure that they are leading the discussion with the communities and making sure also that they can feel comfortable that these big projects could be interconnected because if they start to work on the big substation of the 735 kV line, they want to make sure that the project will happen and the size of the project will be sufficient in order to sustain and amortize the expense to build a new substation on these big voltage line. So, I understand that they will be discussing with the communities and local stakeholders to make sure that they understand well the lay of the land. And they will be then together with their partner, go out and have some kind of an RFP to secure an IPP like us to help them develop. Criteria from what I gather will be based also on the knowledge of the land, the ability to build experience on building in Quebec and with First Nation. So, all these criteria fit very well in our ability. And that's why I think that there will be a serious potential partner with these mega project. I cannot guarantee that we'll be there, but we have known the land. We have some resource data on most of the projects that they have already spoken about. So, we'll definitely be a very, very important and serious contender to be a partner. They're talking about looking for 30%, 33% partners in these mega transaction. So, very, very important for us to be talking with the local community, making sure that we are a good partner also for First Nation, not only for Hydro-Quebec. And we have opened discussion with the different community in these areas.

Rob Hope: And then on another topic, just in terms of portfolio management, that was highlighted as a priority for 2024. Is that just referring to the hydro financings? Or as you're taking a look at either your development pipeline or your operating assets, do you see opportunities to further service value?

Michel Letellier: Well, the market in general is not that great. So, I think it's improving, obviously, we've seen some good numbers on the inflation. We've seen some volatility on interest rate going up and down lately. But I think that in general, the cost of capital for infrastructure is going down in general. And I think that if things are going the same way, we are hopeful that the interest rate will get down. I think that this is a good timing for us to start thinking, is there something that we can partner with people always open to the ID to lower our cost of capital, giving us a little bit more flexibility? But, of course, we were mindful that it has to create value. We're not in a rush. I think that's what the dividend reallocation has provided us some flexibility. And, of course, when you have a little bit more time to study and to take advantage of different opportunity, it creates, in my mind, more value. We're not in a rush to do something. So, this is what is important. But, we said that the U.S., when we have 100% of a project in the U.S., either on development, late development or early COD, we have always been open to the idea of creating value. Hawaii is not a secret that we only have one project in Hawaii. We want to make sure that we are getting focused to put it on COD. But if there is an opportunity to create value for us in that particular project in Hawaii, we would certainly be open to the ID.

Operator: Your next question comes from Nicholas Boychuk from Cormark.

Nicholas Boychuk: Coming back to the DC opportunity, can you guys kind of walk us through some of the projects that you are looking to develop the steps you're taking out to get them sort of RFP ready and time lines for when we should certainly expect to hear some updates on that specific area?

Michel Letellier: I'm sorry to disappoint you, but we never comment on projects that we're going to put right into the RFP. What I can say is that we'll have a large volume of projects that we will be ready to put by September 15. But I hate to give too much information, it's an RFP, and there's a lot of competition. So, for us, we're very encouraged with the result that we have. We already had a lot of interconnection study coming in, and we're positive. We're happy with what we received in many cases. All the team will be ready to have the project ready to be submitted. But I'm sorry, it's not that I don't want to give you some good potential for the future, but it's important for us to keep that information a little bit of secret before we bid.

Nicholas Boychuk: If we're thinking about the growth of that portfolio or any other areas within Canada, you mentioned that, obviously, some of the project development costs, operational costs are going to rise a little bit. Is the current run rate something that we should be expecting going forward? Do you have to add any people, any capabilities, any teams through the country in order to execute on that growth?

Michel Letellier: As you know we have a good team in Vancouver. I wouldn't say head office, but it's definitely an important office in Vancouver. So, we didn't have to beef up too much that that office for the benefit of that bid. But obviously, if we win projects, those projects, if you remember, the earliest you could deliver is 2028. So, if we win projects, we might have to beef up a little bit the construction ability as we grow. But early stage and early development, environmental studies and relationship with communities, we have a strong base in BC that we have taken advantage of.

Nicholas Boychuk: And then, sorry, outside of B.C., can you comment on what you're expecting for project prospective project expenses and other G&A costs as you try and organically expand the portfolio?

Michel Letellier: Sure. Saskatchewan is becoming more and more important for us. We've been bidding in Saskatchewan twice over the years, and now it's deter time. I think that we're getting to know quite a bit Saskatchewan. There are still a couple of thousand megawatts to be bid in the near future. So, Saskatchewan is becoming a good market for us. We have some rumors that Manitoba will be also an interesting market. So, these 2 provinces are getting more and more on our radar. So far, we don't have a regional office in these areas, but we may end up having a little bit more permanent people in those 2 provinces if we have a little bit more success. The other big market I would say other than BC and Quebec is Ontario. You heard me talking about Ontario a lot. We're putting a lot of effort in Ontario. We understand that wind in the south might not be that well received in terms of social accept. So, we're working hard on land and interconnection and getting with good relation with First Nation to develop the wind in the north. But there's still opportunity to do solar and battery project in the South. So, we think that Ontario is going to be a good market as well, and we're strengthening our team in that area. And then New Brunswick (NYSE:BC), we're seeing a little bit of activities here and there, but I think that we can cover New Brunswick from Quebec. We have a few folks that are working for us on a full-time basis in New Brunswick, but we're going to obviously beef up the construction ability as we're getting closer to the project that we have to deliver.

Operator: Your next question comes from Benjamin Pham from BMO (TSX:BMO).

Benjamin Pham: I had a question on Slide 9, when you break up your development projects. Can you remind us what does it take to move a project from mid to advance and how often do you actually go through the process of redefining those bucket? And I ask it from the perspective that one of your peers recently relooked at how to define advanced stage projects.

Michel Letellier: Yes, they were a little bit optimistic though. I'll let Jean answer that.

Jean Trudel: It's a full process, full comprehensive process that we have. So, when we identify a project, we screen it. So, we have a screening committee to accept it as a prospective project. So, it needs to have a certain number of criteria at the forefront to be called the prospective projects. For example, you need to have land rights or an access to land and interconnection capacity. And then it becomes a prospective project, and we build out the maturity table of each of our projects. So, we understand, obviously, very well all the steps that are required to bring this project to NTP. So, we qualify each project from a maturity point of view. So, that gives you an idea of the maturity of it's early, mid or advanced. But then we apply also a probability of success to become a project under development or to gain a PPA. So, in some instances, you have a project that's very well mature in terms of its development. But in a market where there's no RFP, for example. So, you could have a project that's quite advanced in terms of tests to be done, but with a low probability. So, it would fall back into an early or mid-stage. And you could also have an early-stage project that is quickly bid into an RFP and skips the mid and advanced stage and go straight to PUD and the example for this is the 2 projects we had in Quebec. We developed the project. They became prospective projects. We bid them in the RFP as early-stage projects, and we were awarded a PPA so they became a project under development. So, they came out of the prospective project buckets, if you want We apply a sort of mathematic to it. We revise every quarter. So, each project manager has its own development projects, our prospective projects, and they riveted every quarter. So, when we issue the table in the MD&A, it's fresh. It has been freshly looked at every quarter. And that's how you see the evolution of the prospective projects from early to mid to advance and eventually to the next stage, which is PUD and obviously then after that under construction. So, it's a well thought-through process that is actually helping not only internally but externally to explain where we're to qualify the prospective nature of our business. Is that helpful?

Benjamin Pham: Yes, Jean. Can you also talk about did that weighted average probability did that change post that 2021 boom in development? Have you always employed this method?

Jean Trudel: No, this hasn't changed. We started in Q2 2019, really, that's when we started to apply this methodology to internally. And then in the MD&A, I suppose it might have been a few quarters after that we started to bring this evolution to our MD&A.

Operator: [Operator Instructions] Your next question comes from Mark Jarvi from CIBC (TSX:CM).

Mark Jarvi: On the investment tax credits here in Canada, can you clarify in MD&A, you guys mentioned that you should get 100% for MU2. Can you clarify if that's 100% back to Innergex and what that would be? And then maybe going forward on the other projects, how you think about the ITCs, I assume you share that a lot with the off taker, but how that factors into the financing plan and upfront development financing costs.

Jean Trudel: Yes. So, on MU2, what we had is the confirmation that us and our partners would actually keep 100% of the ITC. So, that brings, about, trying to remember the number. But essentially, we would get 30%. It's about $300 million of CapEx and so roughly 90%, but you don't get all the eligible costs. So, there's a factoring in this. So maybe it's a bit below $90 million of ITC for both partners, for MU2. And then the other 2 projects for which we have won a PPA, we're not bid with the ITC. So, it's still uncertain how much of it we would capture. Right now, we assume that it could be 100% of ITC coming towards Innergex and our partners. So, again, if you want to use a rule of thumb at 3 million a megawatt, these projects were 400 megawatts in total. So, it gives you an idea of how much ITC we could benefit on our activity.

Mark Jarvi: So, it's a decent chunk of cash. Can you build that into your debt financing, construction financing and get lenders to sort of advance that and then pay them out after the receipt of that tax credit?

Jean Trudel: Absolutely. That's what we're looking into now at this moment, it's going to certainly be part of our structure, our financing structures. But as you know, we get this ITC once we file the returns and we ascribe CapEx to the right class and our tax returns, class 43%. So, once you get that, you get the actual credit. So you need to be a COD as well. So, the time difference would be certainly something financeable.

Mark Jarvi: And then, Jean, you made some comments about the criteria for the buyback. One of it was it the share price? Is that at a level right now where you see yourself potentially being active, given maybe you don't have a lot of big equity investment needs here? You've got some opportunities on portfolio optimization with the debt financing in the Porto facilities. Could you put a bit more capital work on the buyback right now?

Jean Trudel: Well, I'm trying to be very conservative here because we've had like below expectation results in the first 2 quarters. So, we need to manage carefully the liquidities. And we have a lot of growth ahead of us. So, at the same time, I'm conscious that we have liquidity needs to fund all our growth prospects. So, that's the comment I wanted to make. I said the same comment, I think it's one that we would act very carefully. So, we bought back $2.4 million in this quarter, $5 million in the first quarter. We'll see how the quarters go and be potentially active. It's obviously very nice to have this tool and to be able to act on it. But I think one needs to be careful about it as well.

Mark Jarvi: And with canceling the power hedge in Texas and just on the price dislocation congestion, is adding storage town or more assets in Texas makes sense at this point now, given your merchant exposure?

Jean Trudel: Well, it's very difficult market. We love Chile capacity payment. Remember that in Chile, you get to roughly $7 per kilowatt per month. That represents almost 45% of the total revenue you need to support your battery. In Texas, there's no capacity payment. There's potentially some originality reward payment, but it's very complicated. So, you rely on high volatility. And it's hard to base case on this in Texas. I know that there are some people that are coming to do it and then put battery in Texas. But we don't like that type of risk reward in Texas. We prefer to have a better long-term capacity payment. So, we have looked at it, but we couldn't come to a financial structure that would support that type of investment in our cost. I'm not saying that other won't, but for us, don't like it that much.

Operator: Mr. Baydoun, there are no further questions at this time.

Naji Baydoun: Thank you for joining us today and for your interest in Innergex, and we will look forward to updating you on our progress again next quarter. Thank you.

Operator: Ladies and gentlemen, you may now disconnect your lines. Thank you.

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