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Executives Marie-Josée Privyk – Director, Communications and Sustainable Development Michel Letellier – President and Chief Executive Officer Jean Perron – Chief Financial Officer Analysts Rupert Merer – National Bank Financial Sean Steuart – TD Securities Nelson Ng – RBC Capital Markets Ben Pham – BMO Capital Markets Jeremy Rosenfield – Industrial Alliance Securities Innergex Renewable Energy Inc. ( OTC:INGXF ) Q3 2015 Earnings Conference Call November 10, 2015 4:00 PM ET Operator Good day, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call for the Third Quarter 2015 Results. [Foreign Language] [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Tuesday, November 10, 2015 at 4 p.m. Eastern Time. I will now turn the conference over to Marie-Josée Privyk, Director, Communications and Sustainable Development. Please go ahead. Marie-Josée Privyk Thank you. [Foreign Language] Good afternoon, ladies and gentlemen. I am here today with Mr. Michel Letellier, President and CEO of Innergex and Mr. Jean Perron, Chief Financial Officer. Please note that the presentations will be in English. However, you are welcomed to address your questions either in French or English. [Foreign Language] I would also like to point out that journalists are invited to call us afterwards if they wish to address any questions. In a minute, Mr. Perron will provide some details on our financial results for the third quarter ended September 30, 2015. Mr. Letellier will then provide an overview of our operating activities and outlook and we will then open the Q&A session. The financial statements and the MD&A have been filed on SEDAR and are readily accessible via the Internet. You may also access the press release, financial statements and the MD&A on the Innergex website in the Investors action. During this presentation, we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratio that are not recognized measures according to IFRS as they do not have a standardized meaning. Please be advised that this conference call will contain forward-looking information that reflects the corporation’s expectations with respect to future results or developments. For explanations concerning the principal assumptions used by the corporation to derive this forward-looking information and the principal risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the company’s MD&A as well as its Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Marie-Josée. Good afternoon. The quarterly results for Q3 2015 show production of 91% of the long-term average due mainly to below average water flows at the six 50% owned facilities of the Harrison Hydro entered partnership in British Columbia. Production for the first nine months stands at 99% of long-term average. Revenues for the quarter were $3.7 million lower than in 2014 due to the BC facilities. Revenues for the nine months were $17 million higher than last year. The increase is due to higher water flows in Québec and BC, higher wind regimes and to the acquisition of SM-1 in June 2014. Adjusted EBITDA was $3.2 million lower compared to Q3 2014. Adjusted EBITDA for year-to-date was $14.1 million higher than in 2014. The increase is mainly due to the higher production since the beginning of the year. Finance cost for the quarter were similar to Q3 2014 while since the beginning of the year, they are down $2.8 million compared to last year due to the lower inflation compensation interest. During the quarter, the $27 million loss was realized on derivatives financial instruments resulting from the settlement of the MU bond forwards contracts upon closing of $311 million financing of the project. Similar loss were incurred in the previous quarters for the Big Silver, Boulder Creek and Upper Lillooet River bond forwards upon closing the financing of the projects. The realized losses are a result of the decrease in benchmark interest rates between the date the bond forwards were entered into in late 2013 and the settlement dates. It will be compensated by lower restricted fixed interest rates ranging from 2.41% to 4.76% for up to 40 years term loans compared to higher interest rates set at the time of the hedges. These losses were funded with proceeds from the project financings and do not impact the free cash flows. The corporation recognized unrealized gains on derivative financial instruments of $24 million due mainly to the reversal of the unrealized loss accrued upon settlement of bond forward contract of MU. Together with the settlement of the Big Silver, Boulder Creek and Upper Lillooet River, bond forwards in previous quarters resulted in a $79 million unrealized gain since the beginning of the year. The $311 million MU financing was closed in September and was the last one for all of our projects on the construction. In March of this year, we closed the Boulder Creek and Upper Lillooet River $491 million financings and in June, we closed the Big Silver $197 million financing. In August, we issued a new convertible debenture for $100 million bearing interest rate of 4.25%. We used $42 million of the proceeds to repurchase the former convertible debenture bearing an interest rate of 5.75% while $38 million of debenture was converted into 3.7 million common shares. As a result, a total of $1.1 billion of financing was completed since the beginning of the year. We do not need any additional liquidity to complete the construction of our firefight projects. An amount of $160 million remains unused and available on our revolving corporate credit margin of $425 million. We also bought back 700,000 shares as of September 30 and an additional number of 460,000 since then. Overall, the slightly below average quarter combined with a very strong first quarter allowed us to basically be on target since the beginning of the year. As a result and combined with a very good fourth quarter in 2014, our trailing 12 months free cash flow ending on September 30 reached $84 million compared to $51 million for the same period last year and our payout ratio improved to 74% from 113%. Since the beginning of Q4 2014, our production has been somewhat below the long-term average, mainly at our hydroelectric facility in Québec. We remain confident in our ability to reach our long-term average production figures year-over-year. This concludes my review the results. I would be happy to answer your questions later on during the call and I will now turn it back to Michel. Michel Letellier Good afternoon. Thank you, Jean. So, as you learn we have been busy doing our project finance, but we are also quite busy in continuing the construction activities. Very glad to report as of yesterday, we released a press release that Tretheway Creek in BC has been commissioned in the date of the October 27, which we were just waiting for the BC Hydro confirmation and they did that last Friday, so quite happy and also very happy to report that we managed to build it on time and this time under budget. We are basically $7 million under budget. So, that’s about 6%. So, very glad, and I am very proud of the team that managed to do that in BC. On the – still in BC, Upper Lillooet and Boulder, as you remember, we have had the fire this summer. So, we have been quite busy restarting the construction in September. We are engaging with the insurance company to make sure that we are covered for the losses, both material and also some possible delay. So, we are still working the schedule to catch up the loss of time that we had experienced this summer. We wrote in the MD&A that we may slip a few months. Upper Lillooet and Boulder were supposed to be put in COD late in the fourth quarter of next year. So, we may slip a few months either on Upper or Boulder, but we are working very hard in trying to catch up. So, we don’t have a definitive date. And mind you that we are covered for the losses resulting of the fire. So, we don’t think we will have any material financial aspect for any delay. The construction has resumed and is doing fine. We are basically working hard on the tunnel. This is the tunnel or I guess the critical date to finish the projects. Powerhouse in the line, are going very well. Mechanics are being delivered. So all-in-all, the project is going very well, just the silly fire was slowing down – have slowed down the construction during the summer time. Still in BC, we have Big Silver Creek as well. We have been very active this summer in the last few months. A matter of fact, more than 90% of the civil work is done in Big Silver. Tunnel is done, penstock is done. Powerhouse is done at almost 90%. Intake bypass is done as well. All in all, we are quite in advance in terms of civil works, but we still have to receive the mechanics pieces and also finishing the transmission line during winter and spring. So Big Silver looks very good in terms of schedule and also in terms of capital costs along budget. And the project, the MU project, the – if we come back in wind in Quebec, the Gaspé Peninsula the 150 megawatt wind farm is doing very well as well. We have completed all the base, all the road and we have advanced also on the collector system. So everything we had planned to do this year has been done and the contractor will finalize some work during the next few weeks. But then, we will leave the site for the winter and we will reconvene next spring in order to start the installation of towers and blades and obviously focusing on putting the date for December next year. We have also completed the financing of MU as Jean has spoken and we are very proud of that financing. It helped and we did get a little bit better terms and quite happy with our partner on the financing of MU. If we look towards the post 2016 date, if we look into the international market, I don’t know if you have read our press release, but we are happy to report that we have had a letter of intent with the CFE, which is the federal electricity commission of Mexico. That letter of intent is very interesting in terms of future potential with CFE and trying to develop small hydro. When we say small hydro, the letter mentioned a project 200 megawatt. Again, I think that I have been saying in the past that we have an angle there in Mexico that focused on small hydro. We think it’s interesting because there is not that many player that are present in Mexico for hydro development. So hence, the letter of intent with CFE is a good proxy on what we can try to do in Mexico. Obviously, it’s still a lot of work before having any project done with CFE, but I am quite happy to have been able to sign such a letter. It shows the – I guess, the commitment towards developing hydro from CFE, which is a good thing. We are definitely looking into other possibility in Mexico. We have been traveling quite a bit. We have been meeting with quite a bit of potential partner in Mexico. So we are confident that Mexico will be a good turf for us to develop both hydro and maybe wind as well and solar, so very enthusiastic about Mexico. We are waiting also to learn from the government in the next few weeks what type of RFP there will be coming up. I think one RFP is coming very soon. So we will be watching and we will be trying to take advantage of future RFP definitely in Mexico for 2017. We have been busy also in France mainly, trying to develop contacts and future partnership with local developer. There too, I think we have been successful in meeting with a good potential, still a little bit of work to do in France for us. The market seems to be positive there for the wind development. So our focus will be mainly internationally, again Mexico and France. We are not changing our priority in terms of market. And I guess, giving the project finance that we have done and as Jean has mentioned, we don’t need more equity. We are maintaining the forecast for 2017 of $105 million worth of cash flow. I think that we feel very comfortable with our development progress and construction. It’s important to – for us to deliver those, but they are very advanced. So we feel very comfortable now to focus on the growth and being very active in terms of international development. So on that note, I will take any question. Marie-Josée Privyk Thank you, Michel. So this completes our presentation. We now invite you to ask your questions. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from Rupert Merer with National Bank Financial. Your line is now open. Rupert Merer Good afternoon everyone. Michel Letellier Hello Rupert. Rupert Merer Can we have a little more color on Mexico and the CFE, how many sites do you think you will analyze with them initially and how long do you think that process would take to come up with a site and if you do come up with a site or some interesting sites, how long do you think it will be before you could have some under construction or even reaching COD? Michel Letellier Well as you know, hydro development project, either in BC or in Mexico takes more time than hydro, a little bit quicker, I guess in Mexico. Development period and then permitting can take let’s say, 18 months to 3 years in Mexico. And construction depending on the complexity of the construction, if we have to make tunnels and anything between 2 years and 3 years is usually how long it takes to build. So if you had those plus a few months to study and so forth, it would be difficult to think that we would have anything in operation in less than 5 years from now. So it’s a long game, but once you have built hydro, I guess you have been for a long time. The nice thing about Mexico is that many places you can own the land. So you then own the facility for eternity. So it’s something we like to have in our portfolio, this type of project, private project versus land, rent. To answer your question how many, there is – it is not limited by I would say, the amount of good potential there. So a lot of hydro potential in Mexico, but we have to focus on project that will be competitive. Hydro, as you know is becoming a little bit more expensive or the reverse being more positive. I guess that wind is becoming more competitive and less costly. So in order to be successful in hydro, we have to be creative. We have to find good sites and also we have to find sites with some potential capacity in terms of pounding or small reservoir. So we are focusing on those. And obviously, that limits the amount of project that we can focus, but there is a lot of potential in Mexico in terms of hydro, certainly enough for us to be happy and grow. But I guess that we have to focus on a few and the perfect size for us is anywhere between 30 to 100 to 125 megawatts. Those are the sweet spot, especially if we can find a little bit of head pond or reservoir. Those would be perfect target for us. Rupert Merer And this first, this stage of the process of your LOI, where you are looking at sites, how long do you think that first stage of the process takes before you are successful in identifying a location? Michel Letellier Well, CFE has already some kind of a list of project that they would like to prioritize. They have shared with us a few watersheds that they think are of, I would say, a best interest. So, we are right now in the process of I guess studying those. It can easily take 6 to 8 months to do a good job in trying to establish priorities and do a little bit of engineering. Rupert Merer Okay, excellent. I will get back into queue. Thank you. Operator Your next question comes from Sean Steuart with TD Securities. Please go ahead. Sean Steuart Thanks. Good afternoon, everyone. Michel Letellier Hi, Sean. Sean Steuart A follow-up question on Mexico, I am wondering if you can just go into a bit more detail on the procurement framework there. I gather it will be competitive RFPs. Are you anticipating these will be hydro-specific procurements or is it more of a general renewable procurement, of which you will submit hydro projects? Maybe just a bit more detail on the procurement framework. Michel Letellier It will be quite, I would say, extensive, the type of possibilities. One will be CFE coming up with RFPs, specifically for what they could describe as clean energy and high efficient combined cycle will probably be accepted in those definition of clean energy but there will be a minimum amount of renewable energy in those call. So, we will know soon how much, but that will be meaningful what I am gathered. So, this is the first, I guess, wave. There will still be the ability for developer to make venture with big customer, local industrial that wants to secure their long-term supply of electricity. We will still be able to go and invest or co-invest or sign the collateral EPA with developers. So, that’s another possibility. And of course, there will be the wholesale market with a system, where you will have green credit attached to the renewable energy component, which is a little bit more difficult to forecast, because the rules are not completely clear yet, but those will be basically the three what is to participate in the Mexican market. Sean Steuart Okay, understood. And as recently as I think a couple of quarters ago, you had mentioned Peru as a country of potential interest. I gather that’s off the table now. Is that the correct assumption? Michel Letellier For the time being, we want to consider more Mexico and France. It doesn’t mean that we wouldn’t come back to Peru, but Peru is a smaller market, has some very good feature of having EPA with – in U.S. dollar, but – and having active small RFP going on. But what we have been doing in Mexico has been proven to so far being I would say of a better interest for the time being. Sean Steuart Okay, thanks for the detail. That’s all I have. Operator [Operator Instructions] Your next question comes from Nelson Ng with RBC Capital Markets. Please go ahead. Nelson Ng Great, thanks. Just one follow-up question on the Mexico opportunities, so can you just clarify is the Mexico potential RFP completely separate from the letter of intent with the CFE or after you identify like attractive hydro sites, would those sites get RFPed or do you have an exclusive arrangement with the CFE to kind of develop and own those assets without a competitive process? Michel Letellier Twofold. One doesn’t preclude the other meaning that CFE could, theoretically, bid its own project into an RFP or could decide to develop in – I mean in a joint venture for their own needs, because CFE will still be the prime, I guess, supplier for mainly the small industrial individual and small commercials. So, CFE will eventually need its own production as well. So, both, they can supply in – they can submit project together with us in future RFP or they can decide to develop their own project and joint venture to supply their demand for themselves in terms of utility as well, so both can be done, Nelson. Nelson Ng Okay. So, just to clarify, with this letter of intent, you are kind of working with the CFE to assess various sites and then after you determine that those sites are attractive, I guess hydro development opportunities, what you are saying is they might do it on their own or they might work with… Michel Letellier No, meaning that – no, if we work together, we can decide to either submit the project together into an RFP or that the project will be dedicated for CFE own delivery of kilowatts, because CFE has a portfolio that is basically aging and they have all diesel plant that are – will be decommissioned soon. So, they will have to replenish that as well. So, they will do it by RFP and also by own – their own supply. Nelson Ng Okay, got it. And then just moving on to France, I guess, could you just elaborate on the strategy there? I guess, given that some of the wind farms in France are pretty small like how are you going to get critical mass? And I was just thinking if you are successful on one or two wind facilities in France, they might not kind of hit your critical mass if you only own like one or two sites? Michel Letellier Yes, that’s a good point. What we said in the beginning is that we want a foothold there and probably an attractive acquisition for us of some size would be probably the best strategy to enter the market and then after that trying to take advantage of small developer to help develop the market in terms of joint venture. We have seen few interesting proposals. There is an active M&A market in France, which like I said could range from 50 megawatt to 150 megawatt type of volume, where you would have 5, 6 or 7 small 10, 15, 20-megawatt projects. And those are attracting obviously some attention, but not necessarily a huge attention from all the big players that – or the type of attraction we have seen in North America, especially with the yieldco in the U.S. Now, it might change, mind you, but I don’t want to say too much, but we have been active and we have been missing couple of opportunity, but not by far. So, we are adjusting our aim and I think that we will be busy in France. There is project that seems to make sense in terms of acquisition to be accretive for us and to basically provide us with a minimum foothold that would make sense from us to start from there. Nelson Ng I see. And then just in terms of your balance sheet, can you give us an idea of I guess what size of acquisition or development you can potentially do without having to go to the market with equity? Michel Letellier Well, Jean just mentioned that we have a little bit more than let’s say $150 million worth of free margin in our credit line and mind you that soon in 2017, we will have anywhere between $35 million and $40 million so worth of free cash flow from our operation. So I mean, we definitely we cannot do a huge acquisition, but we can certainly start a small acquisition or contribute to commit to you construction project. As we mentioned if we start the construction in Mexico in hydro, we won’t have to put all the money upfront, it’s going to take a few years to build up. So just with our free cash flow from 2017, we can invest the seed money and the early equity money in project development. So unless we find a bigger acquisition, we don’t intend or we don’t have to go to that right away. Nelson Ng Okay, thanks. Just one last question, in terms of MU wind, the project cost is $340 million, does that include the amount that would be refunded from Hydro Quebec? Jean Perron Well, it is net of this amount. Nelson Ng Sorry. It’s net of the amount. Okay, thanks. Operator Your next question comes from Rupert Merer with National Bank. Please go ahead. Rupert Merer Hi. So looking now to 2017, you talked about $35 million to $40 million of free cash flow and that can help support your growth, can you talk us through your current dividend policy and what we can expect to see for target payout ratios for next few years and how are you going to balance between your future investment needs, your dividend policy and maybe your NCIB as well? Michel Letellier Yes. It’s always same question and trying to answer the same way all the time. It’s – I said we have initiated an increase in the dividend in the last 2 years. I am hoping that we can maintain a growth in the dividend. I don’t think that jumping the dividend to a big amount in 1 year would create a trend and would be rewarded right away by the market. But I think that if we can find home for our equity in the development and creating value for our shareholders, my view is trying to raise the dividend on a steady course and increase it over the years, always by providing accretive development to our shareholders. But obviously, by – it’s something that we never had in the recent years. We will have a payout ratio. We will have room in 2017 to take those decisions. Obviously, if we don’t find good home for that equity, we will reward our shareholder by raising the dividend. But I think that if we can find a good growth that creates value for our shareholders, we will balance that. We said that a long-term payout ratio of 80% is maybe a good ratio. How fast are we getting to that 80%? Obviously by 2017, without giving you the right – the exact amount of payout ratio, you guys can calculate it fairly well. We are saying that we are going to have $105 million of free cash flow. And right now, we are paying a little bit over $63 million – let’s say, $63 million of dividend, so quite easy to make the calculation. I think it’s a good problem to have and it’s a – I guess it’s a strategy that we are discussing at the Board all the time. But definitely growing the dividend is very important to us. We understand that for shareholders, it’s important as well. The important thing for us is to grow and to have it sustainable and to show the growth that will be also sustainable. So we have been prudent in the last few years even though our payout ratio was still fairly tight. We have increased the dividend twice by $0.02. Hopefully, we will try to do the same thing going forward and maybe increasing the rate of dividend. But I am still very positive about future outcome. Like I said, we have been focusing in the last few years on delivering our growth portfolio. And I think we have done a good job in doing it. We finalized all the project finance. So $1 billion, a little bit more than $1 billion of financing last year and project finance was taking quite a bit of our internal time. So that once this is done, I think that we will focus and I cannot promise, but we are definitely focused on delivering growth for 2017. Rupert Merer Great. Thanks for the color. Operator Your next question comes from Ben Pham with BMO Capital Markets. Please go ahead. Ben Pham Thank you. And I have a couple of cleanup questions for me. On the payout ratio the last 12 months, pretty low number that you reported, are you expecting to be below 100% for this year? Michel Letellier Yes. On the forecast, yes. Ben Pham Yes. Jean Perron Yes. But I think we need to remember that Q4 2014 was something really above average for production. So the effect, that’s the reason why the payout ratio was so low for now because we are including this next quarter, we are going to be using this Q4 2014 results. Ben Pham Okay. That’s what I was really trying to ask indirectly. The – and I was wondering your buyback program, how should we think about that, is that more to mitigate the DRIP dilution? Michel Letellier Well, the DRIP dilution is a lot less. If you remember, we killed the discount in last quarter. So now the DRIP participation is less than 5% roughly. No, I think it’s – given the fact that we had done the debenture and the conversion and the price was fairly weak, so we thought that it was a good timing to buy some shares. Ben Pham Okay. And I am just wondering you had some early comments about the Mexican hydro strategy in terms of the timing being maybe 3 years to 5 years and that really potentially gives you some visibility in the 2020 timeframe. So I am just wondering what are you guys thinking about ‘17, ‘18, ’19, you have got a lot of cash generation coming up. I mean is that – are you guys banking on a French wind acquisition near-term to really get some growth in that period? Michel Letellier That can certainly be of interest, Ben. But I answered the question for brand new hydro with CFE, meaning that no development whatsoever have – would have been made. But there is some possibility of being partner in Mexico or somewhere else where project have been advanced and maybe it’s only construction periods, so maybe 3 years. So you end up being maybe in 2019 or even in 2018 if we are talking about wind somewhere else. So I mean, it’s a mix of that. But definitely existing facility in France with a decent accretion for us could be of an interesting strategy to fill up 2017 growth, Ben Pham Okay, I appreciate the answers. Thank you. Operator Your next question comes from Jeremy Rosenfield with Industrial Alliance Securities. Please go ahead. Jeremy Rosenfield Thanks. Good afternoon guys, just there is a lot of focus I think, on the interim period as Ben was just alluding to the 2017, ‘18, ‘19. What about the possibility of potentially consolidating some ownership interest, where you own maybe 50% or so of an asset, is there an opportunity or do you think that you could look at that type of strategy with maybe more, I would say aggressiveness than you might have looked at in the past? Michel Letellier There is couple of projects as we definitely have a potential partner. Upper Lillooet and Boulder are owned by Creek Power. Our partner is Ledcor. We have options once those projects are ensued the need to buy them back. So, this could be a possibility. Our First Nation partner, we don’t want to buy them back. Well, if they wish to we are always welcome to try to help them, but we strongly believe that having the First Nation on long-term basis is important, especially with the community-based projects. So, the other big partner is Trans-Canada in Québec, who knows if Trans-Canada wants to sell some part of those assets would be welcome – will be certainly interested, but there is plenty, plenty of M&A around small project here and there. And we are seeing all kinds of things. And I think that last year was very difficult for M&A, especially in the U.S. with the yieldco, and it’s difficult to see and to predict how the yieldco will behave, but we certainly saw some reaction right away with some developer that thought that they had a deal and then suddenly the deal is disappearing and they are kind of reaching out. So, I think that there will be a little bit more opportunity in M&A or when we see M&A, small developer that wants to have a partner to start with their construction, because for some reason, they don’t necessarily have all the equity. And I think we have a good reputation to be a good partner in many ways. So, I am not worried about being in 2017 or ‘18. We will find a way. It’s just – maybe that message and it’s still I guess that you guys are concerned that we don’t have anything in the pipeline in those years, but we have been focusing so much on delivering and making sure that the project were online and on time. I think that Innergex is a different company now in terms of cash flow and its ability and I guess our ability now to take a little bit more focused on getting outside Canada will payout soon. We have been very successful in Canada in the past. We have shown that we have been able to compete with many other competitors. So, I don’t see why we cannot compete somewhere else especially that we have a philosophy of being open book with partners. And so far the first contact we had in Mexico and in France have been very, very positive in this way. And we have been very – we have been welcomed in Mexico and France. So, I am very positive about finding the ways and I am not concerned about filling the gap. We are focused, but we are not concerned. Jeremy Rosenfield Okay, good. That’s my only question. Operator And Ms. Privyk, there are no questions at this time. Marie-Josée Privyk Thank you. Thank you everyone. We appreciate this opportunity to provide an update on our company and please don’t hesitate to contact us if you have any other questions. [Foreign Language] Operator Thank you. Ladies and gentlemen, that concludes our conference call. Please note that a replay of the conference call will be available on the Innergex website. The press release, financial statements and the management’s discussions and analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect your lines.