Innergex Renewable Energy Inc. (INE.TO) has detailed its capital allocation strategy and financial targets for the upcoming year during its 2023 Fourth Quarter and Year End Results Conference Call. The company underscored its commitment to self-funding significant greenfield development opportunities in the renewable energy sector, leveraging its diversified global portfolio.
With a focus on optimizing its asset portfolio and maintaining a conservative debt approach, Innergex aims to achieve double-digit returns and sustainable free cash flow per share growth. The company reported a 30% year-over-year increase in adjusted EBITDA proportionate for Q4 2023 and provided a positive outlook for 2024, expecting adjusted EBITDA proportionate to be between CAD 725 million and CAD 775 million.
Key Takeaways
- Innergex will focus on self-funding its organic growth, leveraging internal capital sources.
- The company aims to secure 400 MW of new capacity annually by 2030.
- A conservative debt service coverage and amortization strategy is prioritized to maintain an investment grade rating.
- Innergex reported a 30% increase in Q4 2023 adjusted EBITDA proportionate YoY.
- Financial guidance for 2024 includes adjusted EBITDA proportionate of CAD 725 million to CAD 775 million.
- The company plans to use excess cash for maintaining its investment grade rating and potential share buybacks.
Company Outlook
- Innergex is confident in executing its growth plan and creating shareholder value.
- The focus will be on Canada, the U.S., France, and Chile for development efforts.
- The company aims for double-digit target returns and a dividend payout ratio between 30% and 50%.
Bearish Highlights
- Innergex took a prudent approach to its 2024 financial guidance, adjusting long-term average production downward to reflect historical production.
- The company took a write-down on the Hale Kuawehi project due to increased costs and issues with the power purchase agreement.
Bullish Highlights
- Innergex sees strong potential and government policy support in its prioritized markets.
- The company is working on refinancing initiatives and may announce more in the future.
- Innergex's diversified portfolio and operational expertise are viewed as strengths.
Misses
- No specific misses were mentioned in the provided context.
Q&A Highlights
- The company may consider asset recycling to generate funding.
- Innergex has a good amount of liquidity and does not foresee the need for additional capital.
- Share buybacks are an option if the company has excess cash.
Innergex Renewable Energy Inc. has laid out a robust strategy for capitalizing on the growth opportunities presented by the global shift towards renewable energy. The company's focus on internal capital allocation and its conservative approach to debt and amortization reflect a disciplined strategy aimed at securing long-term profitability and shareholder value. With a solid performance in the fourth quarter of 2023 and an optimistic outlook for 2024, Innergex is poised to continue its trajectory as a leading diversified global renewable independent power producer.
InvestingPro Insights
Innergex Renewable Energy Inc. (INGXF) presents a mixed financial landscape according to the latest data from InvestingPro. The company's market capitalization stands at a substantial 1.16 billion USD, indicating a significant presence in the renewable energy market. Despite operating with a significant debt burden, as noted in one of the InvestingPro Tips, Innergex maintains impressive gross profit margins, with the last twelve months as of Q4 2023 showing a gross profit of 589.91 million USD, and a gross profit margin of 75.04%. This high margin suggests efficient cost management relative to revenue, a positive sign for investors looking at the company's operational performance.
InvestingPro Data further highlights the company's revenue growth, with a notable 19.65% increase over the last twelve months as of Q4 2023. This growth is consistent with the company's focus on self-funding significant development opportunities and optimizing its asset portfolio. However, the P/E ratio stands at -15.14, reflecting market skepticism about future earnings, and analysts from InvestingPro do not anticipate the company will be profitable this year, which aligns with the P/E ratio.
Moreover, Innergex pays a significant dividend to shareholders, with the dividend yield as of the latest data point being 9.02%. This is an attractive feature for income-focused investors, especially in the renewable energy sector where such high yields are not always common. Yet, it's important to note that the stock has fared poorly over the last month, with a price total return of -12.52%, and has taken a big hit over the last six months, with a total return of -34.59%.
Investors interested in a deeper analysis of Innergex Renewable Energy Inc. can find additional InvestingPro Tips that may provide further insights into the company's financial health and future prospects. For those looking to subscribe to InvestingPro for a more comprehensive analysis, they can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are six more InvestingPro Tips available for Innergex, which could be crucial for making a well-informed investment decision.
Full transcript - Innergex Renewable Energy OTC (INGXF) Q4 2023:
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2023 Fourth Quarter and Year End Results Conference Call and Webcast. [Foreign Language] At this time, all participants are on the phone and Internet are in listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts and institutional investors and instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now 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 on reasonable assumptions 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 at 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 our updated capital allocation strategy, which we announced via a separate press release yesterday evening, our Q4 and fiscal year 2023 results, and our 2024 guidance. 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, and good morning. Thank you for joining us. As Naji mentioned, yesterday evening, in addition to our earnings release, we announced an updated capital allocation strategy. After much consideration and comprehensive analysis, we have made the decision to focus our capital allocation strategy to support our growth. Specifically, we are establishing a target dividend payout ratio between 30% and 50%. Jean will provide detail in his section. Two key messages I would like you to take away are, we are shifting our focus to execute on significant greenfield development opportunities that we see ahead, which I'll detail in a moment. We will be in a strong position to primarily self-fund our organic growth going forward. Next slide, we are providing our strategy toward accelerated growth by updating our capital allocation policy. We are positioning ourselves to seize the unprecedented growth opportunity in our industry. We have never seen this level of growth for renewable energy development in the past. The strong market growth we are experiencing in our core market is creating a window of opportunity to capture new capacity driven by both government and corporate decarbonization goals. This is due to the deficit in energy needs and increasing demand for clean power. We see a substantial runaway for significant and durable growth ahead. We are excited about the future of Innergex as we have multiple ways we can win in our market. By pursuing profitable project and delivering consistent free cash flow per share growth, we believe we can create value and deliver strong return for our shareholders. Next slide, we believe we are well positioned as a leading diversified global renewable IPP with scale. Our diversification and unique portfolio characteristic provide us with a solid foundation to execute on strong growth that we see ahead in our four-core markets which is Canada, U.S., Chile and France. Given our expertise, we are uniquely positioned to develop projects across all our existing technology of hydro, wind, solar and battery energy storage. Overall, our exposure to low-risk hydro market position us well to capture new opportunities while remaining a North American business. Next slide, we want to take a moment to clearly state our key strength at Innergex, which will continue to support our success going forward. We have a well-seasoned leadership team with deep industry and market knowledge. We possess the expertise of a full lifecycle project developer that allow us to originate, develop, finance and commission project across various technology and geography and efficiently execute projects of all type and size in our varied geographies. Our experience in forging enduring partnership with First Nation and local community is a unique advantage that makes us a leader in our space. We have repeatedly been chosen as partner of choice for developing and operating clean energy project. We have developed a strong track record in this domain which will remain critical to our success going forward. We are leveraging our experience working alongside partners to develop project while respecting their right and advancing economic reconciliation. We are leveraging our longstanding approach of balancing the people, the planet and prosperity. We propose projects that are beneficial to all. We also have extensive experience as assets operator. We self-operate most of our projects. We have the know-how to efficiently operate our asset and the ability to quickly correct operational issues when they arise. Core to our expertise is also our top tier portfolio of hydro assets. This perpetual asset class provide long-term cash flow, support our balance sheet and distinguish Innergex as a leading power producer. Next slide, our balanced growth strategy is focused on organic opportunities and is based on three key areas. First, we want to continue to develop accretive project at a sustainable pace. We will ramp up our development activities, primarily focusing on wind and solar assets in our core market as well as complementary storage capacity. Hydro development also remains attractive as we are one of the few players who have the expertise to capitalize on future opportunities in this sector overtime. Second, we are going to remain focused on our key markets. We are prioritizing our development effort in Canada and in the U.S. where we have established operating asset, development portfolio and significant operating experience. We see strong development potential, favorable environment for construction and development, and strong government policy support. We also continue to capture opportunities in France and in Chile where we have established great development teams. Third, we will focus on optimizing value for our existing portfolio. This active portfolio management approach allows us to renew expiring PPA and potentially repowering certain assets. This will extend the cash flow profile of our existing portfolio and will also allow us to refinance certain assets, hence giving us more flexibility. Our team will find and secure profitable investment opportunity that will enhance our current portfolio and contribute to delivering additional value to our shareholders. Next slide, now we'll detail our approach to each of our key market. Canada, our home base, represents a large, rapidly growing and highly attractive market for renewable energy. We have all the ingredients to be successful in Canada like we did in the past. We see tremendous growth opportunity in the country over the next ten-plus years which will make this region the primary growth engine for Innergex. Our teams are actively developing projects to be submitted in upcoming RFPs to secure profitable greenfield opportunity and capture this wave of growth. We have significant experience developing project and are a market leader. We will leverage our expertise to capture growth supported by our strong relationship with First Nation communities and utility customers. These elements will allow us to execute on significant opportunities in Canada backed by long-term high quality off take agreement. Several provinces have taken meaningful step to plan new RFP and increase overall procurement of renewable energy. Hydro Quebec is leading the way with its ambitious 2035 action plan. British Columbia, Saskatchewan and Ontario have also established impressive target to further deploy renewable energy solutions. Innergex owns and operates assets in most of these regions, positioning us for continued growth. Next slide, in the U.S., we have construction projects in Wyoming and Hawaii, while also looking at compelling renewable energy opportunity in selected market. The passage of IRA has driven increasing investment into renewable sector. Our focus is optimizing our footprint to concentrate on high potential area where we can leverage our greenfield capabilities. Our development approach and learn experience will allow us to selectively pursue accretive project including in the large corporate PPA market. The market in France and in Chile also feature very attractive opportunities for Innergex. We intend to continue bringing greenfield projects to life in both markets. In France, our growth is supported by our new strategic long term partner Cité Agricole and the strong growth outlook in the market for wind, solar and battery storage. In Chile, our main strategy since we entered the market was to have a diversified portfolio that can respond to capacity and energy call for both utility and corporate customer. We are in a strong position to offer 100% renewable energy production on a 24/7 basis from a diversified fleet of asset with a strategic market footprint. Our recently commissioned storage project coupled with the upcoming COD of our second best facility will help us manage generation requirement and curtailment while also capturing a healthy capacity payment and arbitrage on the market price. We also recently renewed our corporate PPA at the Pampa Elvira thermal solar facility with Cadelco and we expect to be able to sign new off take agreement with the strong Chilean mining industry. Our market diversification allow us to capture complementary and accretive growth opportunity while remaining disciplined in our project selection. Next slide, we are very active in securing development options. We have a large and diversified prospective portfolio over 10,000 gigawatts globally which provide us with opportunity to be selective in capturing accretive growth. We will continue to expand this portfolio supported by our highly experienced team. I am extremely confident in our ability to execute on this plan supported by our new capital allocation strategy. I will now ask Jean to elaborate on financial aspect of our outlook. Jean?
Jean Trudel: Thank you, Michelle, and good morning everyone. So, at Innergex, our approach is based on a multi-step framework with rigorous controls to manage all aspects of the development cycle. Our guiding principles on risk management help us to understand and mitigate risk from project origination and assessment all the way through commissioning and ongoing operations. Being a long-term asset owner and operator is a key part of our success in greenfield development and this approach to organic growth is core to our core strategy. As for our overall investment proportion, it is based on three key pillars; firstly, double-digit target returns. We target achieving double digit after tax levered IRS on our invested capital. Secondly, sustainable free cash flow per share growth. We can best create shareholder value by focusing on self-funded organic growth at high returns, although it takes time for upfront greenfield investments to translate into growth because of the funding lag in infrastructure projects, we are increasing our development activities to have a steady pace of project development, deployment overtime. This should support a sustained pace of long-term growth on a per share basis and thirdly, a 30% to 50% dividend payout range. We are providing an explicit target payout range within which we expect to continue rewarding our shareholders with a healthy dividend. Furthermore, we believe that this range is aligned with our organic growth strategy and should allow us to have enough retained free cash flow to reinvest in the significant growth we see ahead of us. Our goal is not only to build megawatts, but to execute on projects where we see the best risk adjusted return potential and where we feel confident in successfully delivering projects with a margin of safety. We will focus on quality over quantity in the disciplined pursuit of projects that meet our strict risk adjusted return criteria. Next slide, please. We also want to take some time to discuss our balance sheet management principles which are based on three factors; firstly, prioritizing nonrecourse project debt. This important funding tool not only allows us to manage project risks, but also optimizes cost of capital and is backed by the quality of our long-term contract. Secondly, a conservative debt service coverage and amortization. We maintain high levels of debt service coverage. Most of our project debt is amortized over the remaining life of our PPA contracts. This conservative approach allows us to manage our debt in a prudent manner and aligns our debt repayments with our cash flow profile. This should allow us to capitalize on refinancing opportunities in our fleet as the amortization schedules of our hydro debt is well below the useful life of the assets. We have demonstrated our ability to do so in 2023 and we will do so again in 2024 with additional hydro refinancing. And thirdly, maintaining our investment grade rating, we remain committed to managing our corporate leverage to do so. Furthermore, we think it's important to discuss our leverage profile. Although it's easy to compare us to industry metrics at a high level, we believe that leverage should be based on specific portfolio mix. In Innergex's case, given our elevated exposure to high quality perpetual hydro assets, we can optimize our cost of capital and put incremental fixed-rate, low-risk project-level debt on our balance sheet. This key advantage represents an attractive funding tool for us and supports our portfolio leverage. Overall, our approach allows us to prudently manage our debt. We have a balance sheet that is appropriate for our unique long-life asset mix and that supports further growth. Next slide, please. Going forward, our funding strategy will prioritize internal sources of capital to increase our capacity to self-fund organic growth. By revising our capital allocation priorities, we are choosing to emphasize greenfield development activities. It is important for us to be clear about this. The decision to realign our capital allocation strategy was not based on affordability. As you will see, when we cover our 2024 guidance, we have the capacity to fully cover our actual dividend using cash flow from existing operations and the long-term outlook is positive. In the context of the significant growth we see ahead, as highlighted earlier by Michel, we have taken bold and decisive action to increase our financial flexibility and accelerate our greenfield investment while also reducing our reliance on externalities, both external issuances and/or acquisitions of operating assets. Based on these updates, we expect to largely self-fund our growth investments from retained cash flows. While we strategically leverage capital recycling and refinancing tools, our guiding principles on portfolio management activities are as follows. First, value creation, in 2023, we crystallized value from our portfolio in France and brought in a strategic partner. This process allowed us to increase our investment economics. We see value in selective capital recycling and we will look to reinforce our track record to value creation by pursuing further sell-down opportunities. Secondly, the risk management and portfolio high grading, we also see capital recycling as a tool to manage exposure and risk, allowing us to recycle capital for certain regions or assets into new accretive growth. We could look to utilize capital recycling to exit noncore markets or divest low performing assets, thus high grading our overall portfolio quality. And thirdly, funding, we see this type of initiative as supporting our self-funding ambitions, allowing us to continue to reinvest in new projects overtime. In conclusion, we will continue to expand on our capital recycling successes. By realigning our dividend policy in support of our strategic priorities, we are increasing our financial flexibility, freeing up around CAD75 million per year to support sustainable and self-funded growth. As an example, over a 10-year period, this additional and growing excess capital could enable 1500 megawatt plus of incremental development on a 100% self-funded basis. Next slide, please. If we think about our stated goal of securing 400 megawatt per year of new capacity and we look out to 2030, we see a potential path to deliver on this goal. Here, we illustrate how by just taking our under construction and under development projects coupled with the recent awarded Quebec wind projects, we are approximately at 46% of the way towards adding 400 megawatt per year through 2030. If we think about this goal in the context of our existing 10.9 gigawatts and growing portfolio of identified projects, we believe that we have a highly visible organic growth outlook. Next slide, please. In conclusion, our revised capital allocation strategy will enable us to provide balanced returns to our shareholders, a dividend of CAD0.36 per share within a 30% to 50% target payout range, growing free cash flow per share from accretive greenfield opportunities, an opportunistic buyback of share and strategic capital recycling to create additional value. We will be focused on selectively developing high quality projects in our core markets. Our disciplined approach and large pipeline of prospective projects mean we can be patient and monitor market conditions to maximize value creation. We will not invest in projects until we have a high visibility of being able to achieve our target returns. By focusing on self-funded growth and quality over quantity, and given the time it takes to develop and construct projects, our organic growth strategy will require some time before it can translate into free cash flow per share flow. Having said that, we are confident that this is the right path for Innergex going forward. Our recent successes in Quebec gives us confidence that we can continue to create sustainable value for shareholders over the long-term. Next slide, please. So, with that announcement, let's turn to our fourth quarter 2023 results. For the quarter, we post stood good results with adjusted EBITDA proportionate of CAD186 million, representing a 30% increase year-over-year. This growth was primarily driven by improving generation trends, particularly in our hydro portfolio where we saw generation improve to 104% of LTA versus the anomaly of 70% of LTA experienced in the fourth quarter 2022. Despite coming in 6% below LTA, our adjusted EBITDA was in line with our expectation. This is because we had a favorable generation mix with higher production at facilities with higher pricing, which mitigated the impact of lower than LTA production. It's important to reinforce that our diversification strategy is working well and that generation is not the only driving force of our results. We also experienced healthy growth of 12% year over year for adjusted EBITDA proportionate, which reached CAD735 million on a full-year basis in 2023. This increase was mainly driven by recent acquisitions, improving production trends in our hydro segment as well as contributions from newly commissioned assets. As for our cash flow, on a normalized basis, we would have generated between CAD197 million to CAD212 million of free cash flow for the year. The major drivers of this increase compared to 2022 are similar to the previously noted elements, partially offset by higher principal debt repayments, maintenance CapEx and free cash flow attributed to non-controlling interests. On a normalized basis, our payout ratio would have been between 69% and 75%. So far in Q1 2024, we are seeing good generation from our assets, which are performing in line with our expectations. Separately and of note, yesterday we also announced an NCIB program. This will allow us to opportunistically buy back up to 5% of our outstanding shares. Next slide, please. So, based on recent macroeconomic trends and previously communicated elements impacting our path forward, we believe it is prudent to withdraw our 2025 targets at this time. Looking ahead, we want to provide an update on our financial targets, but in the meantime, we are introducing guidance for 2024. For this fiscal year, we expect adjusted EBITDA proportionate to be in the range of CAD725 million to CAD775 million and free cash flow per share before prospective expenses to be in the range of CAD0.70 to CAD0.85 per share. The key assumptions behind our 2024 guidance include production expectations in line with LTAs and asset availability of approximately 95%. Overall, we expect to deliver moderate growth in 2024, with more pronounced growth in 2025 following the commissioning of our projects under construction. I will now give back the floor to Michel for our 2024 corporate priorities and closing remarks. Michel?
Michel Letellier: Thank you. Jean. Before we conclude the presentation, I would like to reinforce our focus area for the month ahead. We will advance our under construction project, the largest among them being the 330 Megawatt Boswell Spring wind project which we expect to be commissioned by the end of 2024. We are also focused on building Hale Kuawehi in Hawaii. Meanwhile, in the development, we will participate in RFPs across the various markets in which we operate. We expect to bid well over 500 megawatt of project into several RFPs in 2024. We are targeting capturing 400 megawatt of new capacity award from our bid this year just like we did in 2023. Finally, we will continue to strengthen our financial flexibility. Next slide, I would like to highlight why we believe Innergex is a unique investment opportunity and why we are confident in our ability to continue to win in the renewable energy market and deliver shareholder value. First of all, Innergex is 100% renewable energy project developer and operator. We have a high-quality complementary portfolio of assets that are diversified across hydro, wind, solar, and battery storage. Our base of premium hydro assets provide a unique advantage. Our assets are also well balanced across geography with operations in Canada, the U.S., France, and Chile. This diversifies our exposure to the resources, customer, and contracting opportunities. Our assets are predominantly supported by highly quality PPA that are indexed to inflation and generate long-term cash flow. Finally, our disciplined execution on our growth strategy will enable us to deliver good long term shareholder return. Next slide, I will close with our key takeaways from today's strategic update. As we announced last night, we are taking strong action to pursue disciplined sustainable growth. We have made the decision to recalibrate our dividend payout ratio to allow for additional greenfield organic growth. Our updated capital allocation strategy includes prioritizing our self-funded model and increasing financial flexibility. Finally, we will also look to optimize our existing portfolio of asset to create value. As we begin to capture unprecedented growth opportunity in front of us, we will remain disciplined on executing on profitable projects that will generate sustainable cash flow per share growth. I'm confident in our ability to create value for our shareholders supported by our solid track record of success that we'll continue to build on in the coming years. With over three decades of industry experience and strong commitment to sustainable development through 100% renewable energy, Innergex is primed to pursue greenfield development opportunities and deliver compelling risk adjusted return on investment capital. With that, we'll now move to the Q&A session. Thank you.
Operator: [Operator Instructions] Your first question comes from David Quezada with Raymond James. Please go ahead.
David Quezada: Thanks. Good morning everyone. Maybe a question just on your refinancing initiatives. I know that you have the three that you've already delivered, and then another three that you've got for 2024, and I, but I think that leaves you with about eleven. I'm just curious, you know, is there a level where you want to keep a certain number of unleavered assets, or how many more tranches of that could you do, if any?
Michel Letellier: Yes, good question. And at the present time, we have one initiative ongoing and it's the refinancing of three additional hydro projects that are based in Quebec. So, we're working on this initiative in 2024, so, we expect to have, you know, to have something to announce on this later on. That's the, that's at the moment, the only initiative we have. But of course, we have other, as you pointed out, we have other unlevered assets and so as we may see fit, we may actually enact other initiatives in the future to fund our activities.
David Quezada: Okay, excellent. Thanks for that. And then maybe just one more from me, just with your comments around asset recycling, I'm just curious if there's any color you can provide in terms of what your priorities might be there. I know that you've got a lot of development stage projects in the U.S. I'm wondering if any of those, you know, in certain regions in the U.S. might be considered non-core or what, you know, what kind of would be the most likely assets that you could look to monetize and what are the markets looking like today for those kind of assets?
Jean Trudel: Yes, we will - I guess, you know, there are several assets that we have as you pointed out. So our guiding principles, I guess, when we think about capital recycling is to first the value creation. So, it needs to bring value, as we've done in France, you know, as we've done in France in 2023. And then, as I mentioned earlier, we - we are trying to look at risk management, so high grading the value of our portfolio, as we've done when we sold Iceland, for example, or Kokomo and Spartan last year, and, and some development assets in Hawaii that we sold as well. So, there are opportunities in our asset mix to do this again in 2024 or future years. And the third guiding principle is really funding. So, it needs to be substantial and needs to bring us funding, as we did in Iceland and France for example. So, you're right, there are other assets and we're looking at this in - with this angle.
David Quezada: Thanks, Jean, I appreciate that. I'll turn it over.
Operator: Your next question comes from Sean Steuart with TD. Please go ahead.
Sean Steuart: Thank you. Good morning. Just want to follow up on David's --
Michel Letellier: Hi, Sean.
Sean Steuart: Thank you. Good morning. Just want to follow up on David's. Good morning. Follow up on David's question with respect to liquidity position. So, you ended the year with available liquidity of around CAD630 million and you've articulated the under construction pipeline, the advanced development pipeline, and I guess the target of 400 megawatts to 500 megawatts of year - per year of development. What do you think the right liquidity needs to be quarter to quarter to have comfort that you can advance those opportunities and, and I guess I'm just trying to gauge that with, you seemingly have a reasonable liquidity cushion now, especially with the lower dividend. You know, is there a potential that you can delay some of these refinancing opportunities or asset recycling opportunities to wait for better market conditions? What - and how does that play into sort of an optimal liquidity target quarter to quarter for the company?
Michel Letellier: Yes, it's a very good question. So, this is exactly fundamentally the reasons for our new capital allocation. We want to have flexibility. And this brings us additional flexibility to actually allow us to time refinancings or asset selldown or no, so that we're not actually stuck in a, in a, in a space where we have to, to do something, so where we can be more patient, we can be more flexible. And right now, we try to self-fund all our operations and we don't foresee the need for additional capital. As you point out, we have a good amount of liquidity right now. So, with this additional portfolio of hydro refinancing, we'll be in a good spot.
Sean Steuart: And I think that the last update was CAD80 million in incremental proceeds from hydro refinancing. Is that still the right number.?
Jean Trudel: Yes, that's, that's still a good proxy.
Sean Steuart: Okay. Next question, the NCIB, I presume that's not just there as a placeholder and your shares are reacting positively out of the gate this morning. But can you give thoughts on your assessment of intrinsic value versus where the shares are trading now and commitment to the NCIB at these levels?
Michel Letellier: It will be also a decision of the board. We have established the NCIB to be opportunistic in, in taking the investment on our share. Obviously, we, as you, you, you can understand, we see a lot of growth opportunity. But obviously, if we can have the opportunity to buy back some of our shares, this is going to be accretive right away on the cash flow per share basis. So, we will be, monetize the evolution on the market and be in contact with our board of director to see how aggressive we can be with that program.
Sean Steuart: Understood. Okay. That's all I have for now. Thank you very much.
Jean Trudel: Thank you, Sean.
Operator: Your next question comes from Nick Boychuk with Cormark. Please go ahead.
Nick Boychuk: Thanks, good morning.
Michel Letellier: Good morning.
Nick Boychuk: Please provide a bit of extra clarity on your overall growth objectives. Is the self-funding mechanism of, say, 400 megawatts of gross capacity per year the ultimate goal, or are you guys also going to be looking at other opportunities and considering those? And if so, I guess a little bit more color on the, the funding of that further out?
Michel Letellier: Yes, I'll, I'll, I'll take the first half and perhaps Jean will, will contribute the - to the funding part. But we have put this 400-megawatt of opportunity or goal. I think that there's more opportunity in, in all the market. You heard me talking about Canada, U.S., Chile and France. What we have also said is that we want to be disciplined. We want to win projects that are profitable. So, that's why we're limiting our goal today at 400. That doesn't mean that we will not pursue more, but we'll be selective. We want to make sure that the project that we will be winning will be profitable. Now, in terms of financing these opportunities, if we have success, you heard Jean, we will be looking toward recycling. We have more flexibility with the dividend. But having good project with good return has never been an issue to get funding by partner or sell down piece of that. So what we are focusing is making sure that the project we will be winning will be profitable.
Nick Boychuk: Okay, that's great. Thanks. And on that profitability, my follow-up was going to be about how you're prioritizing those. Are you seeing a different return profile by region or asset type? And if you can explain how you're thinking about ranking those priorities, I think that'd be good, good color?
Michel Letellier: Yes. I, I think that we have a very special position in, in, in Canada. I think that we have proven in the past that Innergex has been very successful developing in Canada. You know that most of the project in Canada will require to have some form of a partnership with First Nation and communities. That's something that we have done in the past and we are very good at doing, this is giving us, I think, a leadership position and an unique ability to create value in Canada. That doesn't mean that we will not be active in the other market. I think that we have a better, I guess, hedge in Canada to create value for our shareholders. U.S. has great opportunity. France, as you have seen, we have created quite a bit of value in our portfolio has been shown with the sell down to Credit Agricole (OTC:CRARY). Chile is on, on a good path. We stick to our strategy of having a portfolio, I'm confident that we will be winning RFPs in Chile in the next few months. There's some great opportunity going down there as well. So, but to your point, I think that where we can create more value perhaps is in Canada and the quality also of the PPAs are great, they're 25, 30, 35 years index PPA take or pay. So that's the type of PPA we like as well.
Nick Boychuk: Okay, so to clarify, I guess an opportunity, a wind opportunity in Quebec, like for like would have a higher potential return profile or more favorable characteristics to you guys than say Boswell wind expansion or some new form of asset in the U.S., generally speaking, is that a fair assumption to make?
Michel Letellier: It's a fair assumption. I think the quality of the PPA with the Canadian utility are more flexible, although in the U.S., I think that the inflation-linked PPA will have to be the norm. It has been in the past, long-term PPAs with utility have very little inflation embedded in them, and this is something that we don't like. I think that this, this, this way of signing PPA in the States will have to change because it's not fair for IPP to take the full risk of future inflation for the next 30 years.
Nick Boychuk: Got it. That's perfect. Thanks so much, Michel.
Operator: Your next question comes from Rupert Merer with NBF. Please go ahead.
Rupert Merer: Hi, good morning.
Michel Letellier: Good morning, Rupert.
Jean Trudel: Good morning.
Rupert Merer: I'd like to start by asking you a little about your bridge to 2024 EBITDA. It looks like it's up only 3% at the midpoint, actually down at the low end, but your guidance says you're basing it on LTA production. So, given we had such big weather headwinds in 2023, can you walk us through that bridge on how we could see this basically flat EBITDA in 2024? And, I mean, you've got some growth, too, I imagine?
Jean Trudel: Yes. So, we took a prudent approach. There are a few things in 2023 that will not be true to 2024. So, for example, we've adjusted the LTA of some of our assets downward to reflect, you know, the, the historical production of certain assets that needed to be adjusted. So, that represents about CAD20 million of revenue down year-over-year, just that aspect. And I think it's important to be prudent right, right now. So, we've put some contingency in our numbers to reflect that prudence. So, we're comfortable with that guidance, now we - Rupert, as you know, we will have calls every quarter, we'll update potentially this guidance if we see fit in the coming year. We really believe that the LTA that we have today are, are real. I mean, we believe in that number that we've just adjusted down slightly and we - so that's why the guidance is based on that LTA.
Rupert Merer: Just a quick note on that. You've reviewed the financial statements and the LTAs in your Q4 reporting are the same as they were in the previous quarter. So, is this a - quarter…
Jean Trudel: Yes. Well, we adjusted in two steps. When we did the transaction in France, we adjusted the French portfolio down, so that was reflected in Q3 and Q4. And for 2024, we're adjusting down five hydro assets in BC. So it's an additional 110-gigawatt hour of adjustments in 2024. So, in total, it's 170-gigawatt hour adjustment to LTA, 60 was done in Q3 and 110 done now in, in 2024.
Rupert Merer: So, just put that in perspective, what, what percent revision would that be on the --?
Jean Trudel: So, that's about 1.6%, 1.7% down on LTA. But you have to realize, we're taking down the LTA out of two areas where our pricing is actually more elevated than the average. So, the revenue impact is a bit greater when you adjust these LTAs versus other LTAs. So the total impact of this adjustment, France and BC, is CAD20 million on a yearly basis of revenue.
Michel Letellier: And also, Rupert, we've been prudent also, in our assumption on spot merchant pricing. We could be proven to be wrong in the sense that we're seeing strong merchant pricing emerging after the summer in Chile. So, and ERCOT has been pretty good last year, so, we'll, we'll, we'll see. But I think the message that Jean is providing you is that we want to be prudent. We're putting a, a forecast for 2024, while we just took out the 2025. So, I think that we want to be prudent. We want to perhaps under promise and overachieve in the future. So, this is the reason. I agree with you that when we look at what we have done in 2023, based on 90% LTA, our guidance seems to be very prudent.
Rupert Merer: Great. Thanks for that color. And if I could ask, secondly, if you can give a little more color on the impairments, in particular at the Hale Kuawehi, a [CAD93.5 billion] impairment, can you give us color on why you're taking that impairment, but also a little more color on how much more you have to invest in that project and how much has been invested so far?
Michel Letellier: Yes. So, at HK, the impairment, it's a bit of an academic process, right. It's an impairment testing every year that we do and, you know, there's a couple of factors that impacted the value on our book. Firstly, the yield environment is increasing. So, these assets that were with a thin margin of error are impacted. So, Hale Kuawehi, as you know, has been seeing some difficulties. So, this - the, the return on that project was actually challenged. And now with yielding environment going up, it's, it's, it's hard to keep the book value. The other thing as well is that HECO, the difficulty of HECO makes it more difficult to put debt on the project at competitive rates. So, when you look at the project on a standalone basis, the cost of capital for that project has increased as well. So, it was, I think, very prudent, it's very conservative to take such impairment on HK. At the moment, we have about CAD110 million invested in HK. There's about, you know, the - about CAD90 million left to invest to build the project to COD. So, so that's on HK.
Rupert Merer: Great. I'll leave it there. Thanks for color.
Michel Letellier: Thanks.
Jean Trudel: Thanks.
Operator: Your next question comes from Mark Jarvi with CIBC. Please go ahead.
Mark Jarvi: Yes, thanks, everyone. So, Jean, Michel, you've talked about the 400 megawatts in development pipeline. Just trying to understand what holds you back from providing the medium term targets. You kind of seem like you're close to having a framework for it, but what would you need to see, is it the RFP results, and when would you be able to provide something to the market where they can kind of really see where the growth is going over the next three to five years and sort of back into the self-funded model I guess?
Jean Trudel: That's a fair question, Mark. I think that we will be coming to the market explaining a little bit more. We just wanted to take a little bit more time making sure that we have a better view on what's going on in, in all the RFPs that we are going to participate. We didn't want to rush to give you guys a guidance that was not based on actual numbers that we are seeing in the marketplace. We're very, very bullish, as you can hear me saying amongst the ability for us to be successful in future bid, but we wanted to take a little bit of more time to make sure that the guidance that we will be providing will be more, I guess, informed with actual data from the existing activities, development activities that we're doing.
Mark Jarvi: So, is that something you think happens in 2024? Is that more 2025 when you have a sort of formal plan?
Jean Trudel: I don't want to commit right now. 2024 will be very busy, we will be answering RFPs in Canada in at least three provinces, if not, four, France and Chile, if something's happened, it's probably going to be the end of 2024 or very early in 2025.
Mark Jarvi: Got it. And then the retained cash from the dividend being lower and getting back to sort of normalized generation kind of implies you should have cash flow retained of, you know, around CAD100 million annually, maybe a bit more. How, how do you see the equity deployment in 2024 and 2025 shaping up like, do you actually have the projects in line to deploy that amount of equity every year or as you said, maybe, Jean, there's a bit of a lag in the development projects and the equity deployment might not really start to move until later in '25,;26 time frame?
Michel Letellier: Yes, right now, we're fully funded on our construction activities. So, these projects, that's the focus we're on, to those are self-funded. As we gain new projects, we, you know, we intend to self-fund as well. So, it really depends on how successful we are. As you know, now we've won the last two RFPs in Quebec, we've won every project that we've bid at very good return proposal. So, if it keeps, if it keeps - if we keep delivering that way, I mean, we'll start, you know, looking at the way to fund these activities in 2025.
Jean Trudel: But I guess that, Mark, one question is really clear. We're not going to use that cash to acquire existing operating facilities. We're moving away from that strategy. We're going to focus on greenfield organic growth.
Mark Jarvi: Got it. So, I'm just trying to - with MU2, you got a couple other projects, but I'm not sure you have two years of, of, you know, clear equity needs, I'm just - I'm wondering whether or not there's actually some excess cash that will be there and what do you do with that? Does that just pay down more of the credit facilities, I am trying to think of the right way to think about that retained cash over the next two years?
Jean Trudel: Yes. So, we always we manage - first of all, we manage always to keep our investment grade rating right. So, if we have excess cash, then maybe share buying back is, is an optionality that we have as well now that we've put the NCIB back. We need to be prudent. We want to manage to keep our flexibility, optionalities, maintaining our investment grade rating. So, that's the guide rails we have, I guess.
Mark Jarvi: And just one sort of follow up, just, so what would be the equity, expected equity investment for 2024 this year on the projects you have in hand?
Michel Letellier: Well, we -
Mark Jarvi: Given the fact that Boswell is fully funded, yes, yes.
Michel Letellier: Yes, yes, yes, so our activities are fully funded. We're looking at eventually putting the, the, the debt instrument on MU2 that we've recently won, and, but that - that's it. I mean, we don't have equity need at the moment, not in the short term.
Mark Jarvi: Got it. Okay. Thank you both.
Michel Letellier: Thank you.
Jean Trudel: Thank you.
Operator: Your next question comes from Nelson Ng with RBC Capital Markets. Please go ahead.
Nelson Ng: Great. Thanks and good morning, everyone.
Michel Letellier: Good morning, Nelson.
Nelson Ng: Good morning. So, just a few follow-up questions. So you talked about, I guess, the 2023-2024 bridge with Rupert, and you flagged that it was relatively conservative and prudent, I presume, I guess one factor that could be pushing the EBITDA down is higher prospective project costs given that sounds like you're going to be pretty busy this year, could you just comment on what you've - what you've budgeted for prospective projects this year because I think it was about CAD27 million in 2023?
Michel Letellier: Yes, it, it will - it should be close to CAD40 million at what we have in the budget. It's ramping up, and that's a good question, Nelson, in the sense that our team has been built up. You don't build overnight the team. We've been increasing our prospective expenses in the last five years, going from roughly CAD10 million to last year, as you mentioned, CAD27 million. Now we're focusing close to CAD40 million for this year. One has to understand that this has to be kind of in line with the amount of team that we have on the ground. And this is why we're also pretty optimistic is that we are building the team. So we have now more boots on the ground that can deliver more, more projects and you will see increased activities in prospective project, getting in into early stage and then mid and advanced. That's the strategy-wide as you're going to see more projects being chipped in, in those categories. The advanced bucket, which is obviously the one that has more probability to get into development project and in eventually under construction. This is what you have to focus is our ability to create more and more prospective project pipeline and certainly focusing more on advanced sector. The early stage is always early stage. Those are the incoming project that will have to go through the development activities, but what we are going to focus is to see the third bucket, the advanced projects. They're going to be ready to bid into RFPs. And like I said, there will be a lot of activities in Canada, but the three other markets are very active as well.
Nelson Ng: And in one of your slides, you mentioned that you'll be biding over 500 megawatts, but you expect to win about 400 megawatts, so that's close to an 80% success rate.
Michel Letellier: I would say that the 500 is very, very prudent.
Jean Trudel: And that's just for 2024.
Michel Letellier: Yes.
Jean Trudel: As the RFPs come, we may bid a much greater number of megawatts as well in the future years.
Nelson Ng: Okay, got it. And then I just also had another follow-up question on Hawaii, so, just so that I'm understanding it correctly, so, the HK project will cost about CAD200 million in total, of which CAD110 million has been invested, but you've written down CAD94 million so far?
Michel Letellier: That's right.
Nelson Ng: And is that mainly due to like unforeseen costs, or is it, or was it more of that - of academic exercise you're talking about like --?
Jean Trudel: Yes and my auditors won't like me if I say academics like this, but it's a mix of things, Nelson. Of course we've seen increased costs, and as you know, we were successful in renegotiating our PPA with HECO to capture a better price, to actually mitigate some of that increased cost, but not all of it. And then the effect of interest rate rising, the, the, the quality of the PPA being, I guess, diminished with HECO's issues, makes the cost of capital on that project different than what we originally anticipated. So, it's harder to put construction debt, or long term debt, or tax equity as well, is a bit more demanding in these circumstances. So, it affects the economics of the project. And so we took the write down. We took a conservative write down I have to say. So, we prefer to be, you know, to be more conservative in that regard, so hence the end result.
Nelson Ng: Okay, and then just one last question. The drip is still in place. Was there a reason why you chose to kind of keep that in place? Because obviously it's a bit dilutive, but you also have your NCIB that could offset that drip? Any color on that would help?
Jean Trudel: Yes. So the drip is a service to our shareholders, really, that we provide. If you look in the financial statements of 2023, it's been used only to the tune of CAD2.5 million. So, it's very marginal and we're going to be looking at, you know, the options to actually use the drift by buying on the market, market shares on the market instead of issuing from the new shares. So, the effect is, is really minimal at the end of the day.
Michel Letellier: Yes, we considered taking it out, but like Jean is saying, it's a little bit of a service to small investor that, you know, sometimes when they have is a small position, it's kind of hard to track checks being, not everybody has their investment ability. But like Jean is saying, we decided to keep it because it's so very marginal. And the idea of buying on the market is probably what we're going to do.
Nelson Ng: Great. Thanks, everyone. I'll leave it there.
Jean Trudel: Thank you, Nelson.
Operator: [Operator Instructions] Your next question comes from Ben Pham with BMO. Please go ahead.
Ben Pham: Hi, I had a question --. Good morning. I had a question around maybe the timing of your decision to, to recalibrate and change in capital allocation. Could you comment on when you or the board internally started to seriously look at recalibration? And then can you also comment, was there anything, anything else the board might have considered to, to surface value in your stock outside of a dividend reset?
Michel Letellier: I think that, I will not comment on when, it's always something that the board is concerned about always trying to have the best allocation of capital. And I guess that, you know, the payout ratio is a little bit of a vestige of the, the, the, the income trust era. It doesn't fit very well. I think that what's we, we decided where we have this great possibility of growth, and we have had some challenge in terms of long-term average in the last couple of years. So, the payout ratio was always a little bit of a pressure given the state of the production. So, we basically take the view that the - it's the best strategy for us, is to focus on taking that dividend and put it into work in our organic growth opportunity. This is definitely what has been driven into the decision of taking this new policy, is the unprecedented opportunity that we see in our marketplace.
Jean Trudel: Yes. If I may add, it's really a value creation exercise that we went through here. We saw the opportunities ahead and we thought about how to maximize value to shareholders and capturing that growth, having more flexibility to do so, was the best course of action.
Michel Letellier: But that doesn't mean that we will be freeing and then spending that, that, that money. I think that we are very clear. We want to focus and create value with these initiatives, and that's what we're going to be. We want to be disciplined. We have a lot of opportunity. We will be cherry picking the project that we want to win.
Ben Pham: And can you comment, did you - did you consider anything else beyond a dividend, maybe an asset sale on the hydro side, or an accelerated partnership of a pension plan for capital, was there other areas that you, you had evaluated?
Michel Letellier: The board is always looking and asking management to provide alternatives, but I think that given the low market or challenging market these days in terms of value of asset, of renewable asset, we thought that creating our own greenfield organic growth was the best way to go.
Jean Trudel: On the long term as well, right. So, it's a decision that will survive just a single asset sale for example. This is giving us flexibility for the coming decade and not just a one year, one-time event as an asset sale would represent. Asset sales recycling, we've talked about this, we'll look into this to self-fund ourselves. But strategically speaking, the decision we just took now is, is for the long duration profile.
Ben Pham: Okay. Maybe last one for me. You mentioned accelerated growth and there's comments around self-funding the growth, but I think you've added an even capital recycling too if you have growth exceeding the self-funding model, I think that seems to be the message you're having, but what if growth exceeds those two buckets? Do you put a lid on CapEx and pull back projects if you reach a decision where you may need to issue equity?
Michel Letellier: Well, we're not saying that we'll never issue equity, Ben. But I don't think we have any need for the near future to issue equity. That's the message we're saying. If we're super successful and we have a lot of great project with great accretive growth, we may consider down the road eventually to issue equity, but being a public company, that could happen. But what we're seeing, is that we will not use equity as we did in the past to finance existing and mature projects. We will be focusing on our ability to create accretive growth per share in our organic pipeline of development. If we're too successful --.
Jean Trudel: And it'd be a good problem.
Michel Letellier: That's a good problem. Usually it's not a big issue to sell down or sell project that have good cash flow profiles.
Ben Pham: Okay. All right. Thank you.
Michel Letellier: Thank you.
Operator: Mr. Baydoun, there are no further questions at this time.
Naji Baydoun: Thank you for joining us everyone today and for your interest in Innergex. We look forward to updating you on our continued progress next quarter. Thank you.
Michel Letellier: Thank you, everybody.
Jean Trudel: Thank you very much.
Operator: Ladies and gentlemen, you may now disconnect your lines.
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