Good morning, ladies and gentlemen, and welcome to Boralex second quarter of 2022 financial results conference call. Note that all lines are in listen only mode. Following the presentation, we will conduct a question and answer session in which financial analysts, shareholders and investors will be invited to ask their questions. To ask a question, please slowly press star one and then one on your telephone. Please also note that this conference is being recorded. For webcast participants, you can also ask questions during the conference, but they will be answered by email after the call. Finally, media representatives are invited to contact Camille Laventure from Boralex. Her contact information is provided at the end of the quarterly press release. I would now like to turn the conference over to Mr. Stéphane Milot, Senior Director, Investor Relations from Boralex. Please go ahead.
Well, thank you, operator, and good morning, everyone. Welcome to Boralex second quarter results conference call. Joining me today on the call, Patrick Decostre, President and Chief Executive Officer, Bruno Guilmette, our Vice President and Chief Financial Officer, and other members of our management and finance teams. Mr. Decostre will begin with comments about market conditions and the highlights of the quarter. Afterwards, Mr. Guilmette will carry on with financial highlights and then we'll be available to answer your questions. As you know, during this call, we will discuss historical as well as forward-looking information. When talking about the future, there are a variety of risk factors that have been listed in our different filings with securities regulators, which can materially change our estimated results. These documents are available for consultation at sedar.com.
In our webcast presentation document, the disclosed results are presented both on a consolidated basis and on a combined basis. Unless otherwise stated, all comments made in this presentation will refer to combined basis figures. Please note that combined is a non-GAAP financial measure and do not have standardized meaning under IFRS. Accordingly, combined may not be comparable to similarly named measure used by other companies. For more details, see the non-IFRS and other financial measure section in the MD&A. The press release, the MD&A, the consolidated financial statements, and a copy of today's presentations are all posted on the Boralex website at boralex.com under the investor section. If you wish to receive a copy of this document, please contact me. Mr. Decostre will now start with his comments. Please go ahead, Patrick.
Thank you, Stéphane. Good morning, everyone. It's a pleasure for me to present our results and achievement for the second quarter. As you have noticed, we continued to vigorously execute our growth and diversification strategy during the quarter. 177 MW of wind and solar project, as well as 26 MW of storage project, were added to our pipeline. Sorry. We are also selected for 540 MW of solar project and 77 MW of storage in the latest New York RESRFP. We grew consolidated operating earnings by 89%, CAD 61 on a combined basis, and EBITDA by 15%, 14% on a combined basis, even despite lower production than last year. The main drivers of this growth were the effect of high market prices in France and to a lesser degree in the US.
We continued to optimize our operations and our capital structure during the quarter. The reduction of our debt level will have a favorable annualized effect of CAD 19 million on AFFO. Finally, we got confirmation at the end of July for early termination of three power purchase agreements, representing a total of 58 MW in France. The termination will be effective on October 1, 2022. The electricity will be sold on the market from the effective date of termination. Market conditions continued to evolve rapidly by region during the quarter. In the U.S., positive news came last week with regard to measures potentially harmful to the realization of projects, in particular solar. Indeed, the Senate Majority Leader Chuck Schumer and Joe Manchin, both senators, announced an agreement on a package including roughly $370 billion in energy and climate spending.
If approved by the U.S. Senate and House over the next weeks, the bill would restore federal ITC tax credit to the full rate for renewable energy projects completed in 2022 or later. It would remain at this level for at least the next 10 years. In Canada, the Canadian government has planned new investment of around CAD 9 billion and specific measure for electrification and decarbonization of electricity and the transition to renewable energies and storage, including an investment tax credit specific to battery storage. In Ontario, new power needs confirmed as early as 2025, and in the years that follow are prompting the Independent Electricity System Operator, IESO, to develop supply mechanisms to meet them. Tenders are expected shortly. Turning to Europe now. The geopolitical context continues to reinforce the need to ensure security of energy supply and sovereignty.
In France, problems with nuclear reactors causing historically low level of production are still going on and are pushing electricity prices to very high levels. France lacks local production and has become a net importer of electricity during the energy crisis. On July 28, the Minister of Energy Transition in France published a press release indicating a first set of emergency measures that to favor the acceleration of renewable energy development. The following measure should positively impact our development in the short and mid-term. The first measure is to allow renewable energy projects to sell their electricity on the market during 18 months before the start of their feed-in premium contract. Second measure is to integrate inflation in cost of materials between awards and start of construction for all future renewable energy projects.
The final measure is to allow all renewable projects already selected in RFPs to increase their capacity by up to 40% before the end of construction. We will provide more info on our next call regarding these measures, as the criteria are not yet precise enough to give us an idea of the expected effect on our development and the positive financial impact. Please note also that the legislative project is under discussion in the Parliament in France to share the revenue generated beyond the contract price on certain feed-in premium contracts, for which we recorded additional revenues since the beginning of the year. As a result, we may be required to repay a portion of the amounts collected in 2022 if the legislation is passed and is effective on January 1, 2022.
I will now rapidly review the main variances in our portfolio of projects and growth path. The 307 MW increase in the early stage came from the addition of two wind projects and a solar project totaling 66 MW in Europe, following the acquisition of Infinergy. The addition of two new wind projects and three new solar projects totaling 71 MW in Europe, and the change in the expected capacity of a solar project in Europe and two solar projects in North America for a total of 176 MW. Projects in the mid and advanced stages continue to progress with no material changes to report. In total, our pipeline now comprises projects totaling 3.9 GW, up 298 MW from the end of the first quarter of 2022.
The wind project segment is totaling 2.3 GW, up 49 MW from the previous quarter. The solar power segment pipeline includes projects totaling 1.6 GW, up 249 MW from the previous quarter. Let's review the change to the growth path now. As shown on slide 11, we had assets in operation with 2.5 GW of installed capacity as at June 30, 2022, down 14 MW from March 31, 2022, following the disposal of two small power stations in April 2022 and the commissioning of three facilities in May and June 2022. Commissioning of secured facilities and projects under construction is expected to bring our capacity to 3.2 GW. As you can see on slide 12, we're pursuing the execution of our strategic plan and are making good progress on all four strategic orientations.
I won't cover in detail our progress as I already have highlighted our main achievement. One last point from my part. As alluded earlier in my comment, we have contracts maturing in the next five years for which we have been doing analysis on optimal strategies. Given the highly favorable pricing environment in France, we're being very agile and looking to all possibility to create maximum value. As mentioned earlier, we received confirmation of early termination for some contract, and we are expecting additional answers in the coming quarter. We are also continuing to evaluate potential repowering where it makes sense. In the past three years, we have put important efforts to create our expert team to commercialize electricity. We knew this trend was to accelerate and are very happy to have this team helping us to take the most optimal decision in the current situation.
To conclude, as mentioned in the previous quarter, solar and onshore wind farms can be commissioned quickly and at low cost. We're increasing our efforts and discussions with the various levels of government to accelerate our development and offer sustainable, renewable energy supply solutions in the region affected by the energy crisis and those targeted for our growth in Europe. However, this acceleration must be done in a win-win setting for the countries and producers who invest while inflationary conditions result in a higher level of overall risk. This completes my part. I will now let Bruno cover the financial portion in more detail, and we'll be back later for the question period. Bruno?
Thank you, Patrick. Good morning, everyone. I will start with a review of the progress made in light of our 2025 corporate objectives. As mentioned by Patrick, capacity decreased slightly following the sale of two small plants. Total capacity now stands at 2.5 GW of 100% renewable energy. Our last twelve months EBITDA and AFFO increased due to strong results reported earlier today for the second quarter. Our reinvestment ratio stands at 60%, which is in line with our 50%-70% target. About our CSR strategy, we continue to make good progress on the environmental, social, and governance fronts. We improved our ranking with EcoVadis from silver last year to gold this year and made good progress on the assessment of physical impacts of climate change.
Following the closing of our partnership in France with EIP, our balance sheet is very solid, with more than CAD 900 million in available cash and authorized financing facilities to continue implementing our growth plan. Taking a look at our debt objective now. Our corporate debt to total debt ratio decreased compared to the previous quarter due to early repayment of project debt and a significant reduction of the amount drawn on our corporate credit facility. We are pursuing the work toward our objective to obtain an investment-grade rating and increase the proportion of corporate debt in due time. I will now cover the financial results for the quarter, starting with production. Second quarter wind conditions were good in Canada but weak in France. Wind production in Canada was in line with anticipated production and equal to the same quarter last year.
In France, wind production was 13% lower than anticipated and 12% lower than in the same quarter last year. Overall, total wind production for the quarter, combining Canada and France, was 5% lower than anticipated production and 5% lower than last year. Turning to hydro production now. In the US, production was 11% lower than anticipated production, but 28% higher than in the same quarter last year. Canadian Hydro had production 5% lower than anticipated, but 15% higher than last year. Total production for the hydro sector was 8% lower than anticipated but 20% higher than last year. Finally, production from solar assets was 4% lower than anticipated, but equal to the same quarter last year with the commissioning of solar assets in France.
In summary, total production for the quarter was 6% lower than anticipated and 2% lower than last year. Second quarter revenues were up 12% compared to last year, mostly due to the high pricing level in France and to the increase in hydro production. For the second quarter of 2022 on a combined basis, operating income was up 61% and EBITDA at CAD 133 million compared to CAD 117 million for the same quarter of 2021, a 14% increase. Please note that the CAD 5 million increase in administrative costs is mainly related to an increase in the number of employees and market adjustments in the administrative functions to support our development and an adjustment for performance share units due to the good performance of our stock price.
On a consolidated basis, we generated CAD 97 million of consolidated net cash flows related to operating activities, compared to CAD 84 million in the second quarter last year. Cash flows from operations was CAD 86 million in the second quarter, a CAD 20 million or 32% increase over the same quarter last year. The AFFO was CAD 13 million compared to -CAD 7 million in the same quarter last year. Our financial position is very solid, with our net debt to total market capital ratio of 35% on June 30 compared to 48% on December 31, 2021. In conclusion, we continue to generate strong results. The increase is mainly attributable to high electricity sales prices on certain feed-in premium contracts in France, for which a legislative project to share with the French state the revenues generated beyond the contract prices is under discussion in Parliament.
Several initiatives were implemented with respect to the growth and diversification orientations of the 2025 strategic plan. We have favorable conditions for project development and acquisitions in our target markets. The optimization of the capital structure and the transaction with the EIP puts us in an excellent financial position to pursue growth. Finally, we have successfully promoted employees and recruited new talents in development and administrative support functions. Thank you very much for your attention. We are now ready to take your questions.
Thank you. As a reminder, to ask a question, you will need to slowly press star one and then one on your telephone and wait for your name to be announced. Once again, it's star one and then one on your telephone. Please stand by while we compile the Q&A roster. This will take a few moments. We are going to proceed with the first question. Our first question comes from the line of Sean Steuart from TD Securities. Please ask your question.
Thank you. Good morning, everyone. I want to start with France. Can you give us an indication of how much strong merchant power prices there contributed to either Q2 adjusted EBITDA or AFFO? Any context you can provide there?
You want me to go or? Yeah, the upside from the price is CAD 15 million for Q2 and CAD 15 million for Q1, for a total of CAD 30 million.
Okay. Just so I understand the process going forward, all of the assets that have the contract structure that allows you to participate in the upside, at least until potential legislative changes, that's all going to be merchant power prices. For the contracts that are expiring, is the intent to sell to establish corporate PPAs for all of that capacity, or will it be a hybrid merchant exposure and corporate PPA exposure for those assets?
Yeah. Good morning, Sean. Yes, the intent is to have a global portfolio with a part of merchant, a part of utility PPA, which are not EDF PPA, corporate PPA, and then the EDF classical PPA or contract for different feed-in premium contracts. We will be flexible on that depending on the market condition and be sure that we take the opportunity when the market is high to fix contract and keep a merchant exposure.
Okay. Thanks for that, Patrick. Last question for me. It doesn't look like you participated in the Québec RFP, where there was some recent closures. Can you give us a sense of the strategy there? Are you content with the Seigneurie de Beaupré projects you already have with Énergir and Hydro-Québec? Any context on what. It doesn't appear you participated in the RFP. Can you give us some details there?
Yes, indeed. We are very happy with our three projects of 400 MW with Énergir and Hydro-Québec, for sure. We were expecting it would be especially competitive because the volume was smaller. There is another tender that will come for 1,000 MW of wind and 1,300 MW of capacity from renewable resources by the end of the year. We will look for two bids of projects in this tender. We are always also looking to any alternative idea of selling the electricity.
Oh, okay. That's all I have for now. Thank you very much.
Thank you.
We're going to proceed with the next question. Our next question comes from the line of David Quezada from Raymond James. Please ask your question.
Yeah, thanks. Morning, everyone. Maybe a question for me on New York. I understand there's some updates to NYSERDA's REC procurements. Just curious how you see those changes affecting your strategy for upcoming RFPs.
Patrick, you want to go on?
You're speaking about the legislation that will come from former Build Back Better idea on tax credit, David?
My understanding is that there was, I guess, some Buy American provisions.
Yes.
Some heightened standards, environmentally, from NYSERDA specifically.
There is also, you know, a general trend to have to try to reshore production. There is also a provision in the agreement between Manchin and Schumer of last week. What I can say today is that we have still to evaluate these things, and we have still to be sure how the market will react and what will be the cost of panel produced in the US compared to other options.
Since the agreement was announced last week, it's not yet in full force because it has to go through the Senate, back to the House and then confirm. I cannot tell you exactly what is the impact today. We are again looking to all the potential options, and what is important is we have, you know, we have time in front of us on our contract because we have no short-term cliff date.
Okay, excellent. Thank you for that. Maybe just one more from me, moving back over to France. I'm just curious how your discussions with corporate buyers of renewable power have been developing, just given the potential legislation and the revenue sharing that could come into place in France. Or do you get the sense that buyers of corporate PPAs are waiting to gauge any changes there before moving forward?
No, not really, because it's different contract. The change in legislation we mentioned would affect the feed-in premium contract, which are the contract we put in service and in force since 2019, so it's young contract. We are more discussing on corporate PPA, where there is a lot of, you know, demand, strong demand coming from corporation, for the contract we are terminating or the contract which are under corporate PPA and will come to an end, typically by the end of next year. Finally, also for new project, we are discussing some greenfield project like we have done with METRO, because there is a strong interest, beyond ESG view to have a stable price of electricity for the long term.
We're discussing with different corporations when it's an interesting alternative to go to a tender.
Excellent. Thank you for that. Now I'll turn it over.
Thank you.
We will proceed with the next question. Our next question comes from the line of Rupert Merer from NBC. Please ask your question.
Hi. Good morning, everyone. Patrick-
Hey, Rupert.
You've terminated contracts for 58 MW of of wind in France, but it sounds like you're looking to terminate more, but may need some approvals for the termination. Can you walk us through that process and and what limits your ability to terminate contracts?
Yes. Good morning, Rupert. Yeah, we're expecting other answers by the end of the quarter on remaining contract. We send a notice of termination. There is no reason that it's not terminate, but to be just purely factual, it's not. We don't have the acknowledgement of acceptance. We have the acknowledgement of receipts, but not the acknowledgement of acceptance from the counterparty. We're just monitoring that, and we'll inform you next time about this.
Okay. Typically, is it about a three-month lag from the acknowledgment to the actual termination of the contract?
No, it's three months from the notice we send.
I see.
We're not losing time, because we have done the work in June and have the acceptance of the lenders also on this project. We're in the middle of the summer, and we need to have the counterparty sending us back the letter.
I see. Do you anticipate any penalties for the contract terminations?
No, there is no penalties in the contract. We send notice.
All right, very good. What could be the total MW of generation? Let's say, how many have you submitted?
As you have seen, we have more than 400 MW where the contracts will come to an end before 2026. A significant part of them, we have gone through this process, specifically the contracts where there is no penalty.
Okay. All right, very good. Just one other question. Bruno, I think you touched on this briefly. You have or had more than CAD 700 million cash on the balance sheet at the end of the quarter. I understand a little bit's gone to debt reduction and you're saving some cash for growth. Give us more color if you can on what you plan to do with the cash on the balance sheet. How long will it sit there?
Yes. Thank you, Rupert. We are clearly monitoring, as I mentioned, M&A opportunities.
We continue to do that and funding our pipeline, our growth are the two key priorities. We've used some of our cash, approximately just above CAD 130 million to reimburse some project finance debt that was more expensive. The rest of it will be mostly for growth.
Excellent. Thank you very much. I'll get back in the queue.
We are going to proceed with the next question. The next question comes from the line of Mark Jarvi from CIBC. Please ask your question. Mark Jarvi, your line is open. Hello, Jarvi, your line is open. You may ask your question.
Hi, this is Mark. Can you hear me?
Hey, Mark.
Yeah. Sorry about that confusion here on the titles here. Wanted to come back to the proposed legislation, just clarify that the profit sharing is only on the feed-in premium, the sort of contracts that you have with EDF and not would apply to any of your merchant or corporate PPA agreements you might put in place.
Yes. Yes, Mark. Exactly. The point is the following. We are coming back close to the business model of the project when we build them. Okay? This is the idea. The French administration at the time of signing the contract was not expecting the price we're seeing today. We're in a different situation. That's only the things. They're not cutting our price. They are changing a clause which were very interesting to us, and that's where we think they're going. It does not affect. It's not a windfall tax. It's not something like this. It's just on the specific contract.
Can you clarify then, you talked about a threshold price. Relative to the strike on the contract for difference, is that higher? At what point do you start to share? Is it 50/50 on any of the excess profits?
No, it's I don't have figures, factual figures today. There is this will go through potentially a process with the regulator that will give his advice to the minister, and then the minister will say, but it will not be 50/50 to my expectations. It will be less for us than that.
Okay. Then around these early terminations and some of the projects that you'll have opportunity to either do a corporate PPA or go spot or even repower, given where power prices are right now, would it make sense to defer repowering and just make sure the assets are operating and you're capturing these really high spot prices that, you know, you have at least in the near term? Like, so I guess the question is, given the spot price dynamic, what's your sort of updated views on timelines for repowering?
Yes, that's exactly what we are doing for the moment. We are looking to the different flexibility we have. One of the flexibility is to continue to operate at the present price. Another flexibility is due to the measure I mentioned. It's very important. It's not yet a decree from the minister, but it was announced through a press release last week, and it depends on the ministry itself. The fact that we can be merchant 18 months before starting the contract for 20 years is an important point. You know, in the past, there was like a rule to say, okay, 3 months is the maximum time of commissioning, and since the price was low, we were trying to reduce this period as much as possible.
There was confirmation, discussion with the government to increase it. The reason why the government bring that, it's an incentive for us to accelerate construction. We are also looking to accelerate construction to start as early as possible the merchant exposure for the 18 months. We're looking to everything and trying to adapt to the situation of the market. For the contract which are early terminated, we are also, as I mentioned, looking to. We will not sell everything day one to say, okay, we sell the electricity for the next two years at the price of today.
We think there is a strategy for the end of this year, a strategy which is similar, but with different metrics for next year, for 2024, 2025, and 2026, because the market curve price is in backwardation, so it means it's very high today, but it's going down in 2025, 2026. We are managing everything every day. That's why we need experts internally, and we have these experts internally.
Okay. That's great. Bruno mentioned the fact that he has some cash there for growth, also M&A. Maybe you can just give us an update in terms of what you're seeing out there in the market. Others have said that transactions and the prices are becoming a bit more rational. Just in terms of the core markets you're looking, is the priority more on development pipelines, a mix of operating development, and just maybe sort of updated views on how you see the M&A market right now?
Yes, Mark, thank you. We're continuously analyzing different types of opportunities. Certainly, more so in the US and Europe as we mentioned in terms of our expansion markets, 'cause the key targets. We continue to look for a combination of good cash flows but also development pipeline. It's really a case by case, on a case by case basis, whether the opportunity makes sense from a financial perspective, but also from a strategic perspective where we can add value. If it's an operating asset, we're gonna look to assets where we can clearly add value and create additional opportunities there.
We're looking to some more sizeable opportunities given the amount of money that we currently have on the balance sheet.
Can we infer the fact that you didn't retire any more debt right now and you're keeping the cash that you're quite active and something, you know, you could transact at some point this year?
Opportunities are hard to qualify in this market, changing conditions and so on. As I mentioned, we're certainly active and looking at things, whether we can close something this year. It remains to be seen due to changing market conditions. Certainly, we're in a good position. Changing market conditions certainly have affected some other players in the industry. Relatively speaking, I think it's better for us. These changing conditions today puts us in a better position than some of our counterparties.
All right. Thanks, Bruno. Thanks, Patrick.
Thank you.
We are going to proceed to the next question. Our next question comes from the line of Nelson Ng from RBC Capital Markets. Please ask your question.
Great. Thanks, and good morning, everyone. Just one follow-up question on France. Can you just remind us how much, how many MW currently have merchant exposure today and how you expect that to change over the coming, I guess, or what do you expect it to be by the end of this year and next year?
Okay. Today.
Nelson. Okay, go ahead, Patrick.
Yeah, there is different thing. There is the feed-in premium contract with the market exposure, and it's 208 MW, if I remember correctly. Then we have a small exposure of long-term contract in wind that has come naturally to an end during the last years, and this is roughly 20 MW. Then we have an exposure which is due to the delayed start of contract with EDF, because we have anticipated the 18 months I mentioned earlier to bring it to 3 months or more with some idea of our team. Typically we have some assets which are presently. For example, we just repowered Louville-la-Chenard and put in service Bois des Fontaines. This is fully merchant, so this is the 52 MW we have put in service.
All in all, you have these different kind of things. Okay?
Mm-hmm.
To your question, by the end of the year, come back to my answer to Rupert, we have signed for a significant part of the contract that would come naturally to an end before 2026. Today we have obtained 58, so by the end of the year you will have to add this 58 today and more to come, waiting for the acceptance of termination by EDF.
Just on this.
Okay.
If I may add, Nelson, that is, this will be applying starting in Q4, so for the 58.
Okay. Just to summarize, like, as of today, it's the 208 plus the 20 plus the 52, and then next, in Q4, it's another 58 plus you're trying to terminate additional projects which would increase that amount. In terms of the 208 MW, the FIP contracts, I think last quarter you guys mentioned how if you're. If the market price is high enough and you don't receive any. Like, it takes time for some of the 208 MW to be effective in terms of the merchant exposure because there's a timing difference in terms of subsidies received from the government versus subsidies paid to the government.
Is all of the 208 merchants, like, do you benefit from the merchant price today, or does some of that benefit kick in later in the year?
No, it's. I'm sorry, it's 201 MW, and it's completely. We have passed through the break-even point of the contract for 201 MW.
Okay. To clarify, that revenue sharing applies to that 201, plus the delayed start projects and not the expired projects, right? Also, the projects that you're terminating.
Sorry, the revenue sharing applies only on the 201 MW because it's the modification of the specific contract to come back to the idea of the clause that the government has in 2018. It will not apply to the 18 months. From what the minister has released last week, the 18 months there is no sharing. The idea is the following is, if we have the benefit of the 18 months, we are really incentivized when you look to the present price in France, and specifically the price for Q4, which are north of EUR 800 a MW hour, to accelerate construction as much as possible when it's possible to be online for the next winter and not, say, at the end of the spring.
We are working on that too, but there is no revenue sharing on this contract.
Okay. There's no revenue sharing on the terminated contracts.
No
as well, right?
No.
Assuming you get more terminated contracts, will you try to lock in some of that upside through hedges? Like, obviously this, I think pricing this winter is very high.
Yeah. No, no classical hedges with commitment of volume. Yes, lock price, but with no commitment of volume. This is very important.
Okay.
We have a counterparty without commitment of volume.
We maintain our structure of pay-as-produced.
Yes. The risk is similar. We remain pay-as-produced, but with a more interesting price.
Okay. Got it. Then just one last question on France. In terms of those projects you're trying to terminate, like they are obviously they're all the kind of older projects. Does that imply that some of the newer contracts you can't terminate or you're just making a decision to terminate older contracts from a risk perspective?
Yeah. We don't want to terminate all the contract because the younger the contract is, the more it's bearing debt. Exactly. We need also to have the approval of the lenders through the project finance, and that's what we got. We think in terms of risk, it's not the time to go 100% merchant. I think in portfolio management is very reasonable way to benefit from this upside without taking too much risk for the company.
Okay. That's great. That makes sense. I'll leave it there.
Thank you, Nelson.
We are going to proceed with the next question. Our next question come from the line of Nicholas Boychuk from Cormark Securities. Please ask your question. Your line is open.
Thank you. Good morning. I was wondering if we could get an update on the timing of some of the U.S. solar projects under development, specifically 200 MW of solar in New York that were previously pushed from about 2023 COD to 2024, last quarter? Are you seeing any change in the ability to get those developed a bit faster?
It's a very good question. The good news is, with the new agreement of last week, and I understand that this agreement could come into force in the next, say, 3-6 weeks, depending on the Senate and House availability. As I mentioned, we need to really see how the market for the suppliers will settle down and what will be the impact of this on the electricity price, on the financing price, because there is some interesting points, not the direct pay, but there is an interesting point to say that you can sell your advantage to somebody, so avoiding tax equity financing.
We need to see where the model is, and then if the planets are aligned, our projects are well advanced to go ahead, and there is no clear date for us in front of us which are dangerous to keep our contract.
Okay. Understood. Thanks. Just looking at the pipeline and backlog, I'm wondering if you can clarify for me, please, the 540 MW that you just recently were awarded in the New York RFP, where do those sit, and when do you think we'd get a timeline as to when they could be operational?
As I mentioned earlier in another call, when we are bidding in a RFP, we have the best price on the more major projects, most advanced projects. The different projects are at different stages of advancement. We bid 800 MW and we won 540. This 540, we are working to continue development. It is interesting because we will have a bigger volume of projects to attract suppliers and find some economies of scale. We will come back, I think, in potentially six to nine months. We will have a better view of when this project would be able to be in service.
Also, on that front, we normally don't move the projects in the pipeline before they are signed. We've been selected for these contracts, but the contracts have not been signed yet. We wait for the signature or the official signature before moving them into the pipeline.
Okay. Understood. Thank you. Coming back to an earlier comment about the corporate PPAs and the strength in the French market. The MD&A also seemed to mention that you might be looking at corporate PPAs in the UK. I'm wondering if you could please expand on the dynamic that you're seeing in that market and how that might be impacting your growth strategies in new markets. Like, could that potentially expedite your entrance into new markets since you no longer have to wait for a government regulated auction?
Yeah, the answer is yes. The UK market was typically importing 2 gigawatts from France since almost ever, since the 1980s. I know the flux is in the opposite sense, feeding France because of the lack of production in France. There is, as you have seen, some announced delay by EDF on the construction of Hinkley Point C. All this is putting pressure on the electricity price. For example, tomorrow the price is almost GBP 250 a MW hour.
Typically there is the same trend of people saying, "I want to buy long-term electricity from somebody who has a real project." The good news is we have obtained the extension of the Limekiln project, 6 new turbine, and we have obtained also the increase of the size of the blades and the turbines on the Limekiln project too. The extension is also the same size, a big size. The LCOE, the cost of production is reduced on our side, everything equal. We are in negotiation of corporate PPA, and we have a strong demand on that in UK too. I think this is also an advantage. It would not change drastically the way we are developing the company.
The fact that we have built this team in France and that we have already signed five corporate PPA, we have some bit of discussion. We have already. You know, when you sign a corporate PPA, you have to the different clauses are specific. So we have this expertise also on the legal side of our people, of the legal team. I think we have an opportunity to commercialize our electricity in another way than in the past, which is a good option for us. Not all the companies are Hello?
Bruno?
Did we lose?
Okay. I hope you
I think we lost connection for a while.
Okay. I think I finished. I was saying that it's good to have the team internally being able to negotiate the corporate PPA. For sure there is demand and we will continue to work on this because nobody knows how long the crisis will last, but there is no good sign of when you look to the future, there is no good news on the nuclear side in France. There is no good news on the nuclear side in the UK. Germany will be struggling the next months with the situation with the gas from Russia.
There is a lot of client customers who are thinking it's good to sign for a significant part of their demand to have the bulk of their electricity from renewable on an economical basis instead of just ESG and CSR basis.
Got it. Excellent. Thank you. The last from me, Bruno, you mentioned that the administrative costs kind of crept up a little bit to fund some of the development teams, but that part of it was related to performance share units. I'm wondering if you could please kind of give us a sense of what the run rate administrative and corporate G&A costs are now and whether or not you need to continue to invest in that further.
I think we've made a significant push on that side, so I think that the impact is certainly mostly reflected. We'll see a similar, relatively speaking, a similar increase for the rest of the year. Relatively speaking, the same percentage increase. I'm just not sure if it answers all of your question.
Yes, that's okay. Thank you. Thank you everyone for the time.
Thank you.
We are going to proceed with the next question.
The next question comes from the line of Benjamin Pham from BMO. Please ask your question.
Hi. Thanks. Good morning. I wanted to go back to some of your commentary around the merchant side of things in France and looking to add on contracts or keep a mix merchant in them. I'm wondering, when you do decide on that mix of contracted versus merchant, are you comparing it to the current forward price, or are you looking at your models pre-COVID and presuming you would have had a post-contract price in there to see, like, where the relative differences are?
No. Yeah, the idea is the following: if we look to the next end of 2022, then 2023 to 2026 cash flow for a single project and with the contract, and we say, "Okay, if we terminate the contract, we can be exposed to the price." As I mentioned, since we have the right counterparty, we can fix in a pay-as-produced contract our price for the next quarter at the end of the year or the next years when there is fluctuation in the market. When we look to this, we say, okay, when is it interesting to sign, for example, 100% and 600% with the forward curve of today for from 2022 to 2026?
The answer is no, because if you look to 2025 and 2026, we think that the market is a little bit optimistic of the solutions that we'll be bringing in Europe, for nuclear and the German fossil fuel exposure. Then we think it's good to have a certain amount fixed in 2023, a lesser amount in 2024, and maybe nothing fixed today in 2025, and just wait that the market will come with a reasonable price of electricity, which will be higher than what is today. When we do this calculation, we are sure, we want to be sure we are north of the expected contracted cash flow from the existing contract.
We have, like, a free option to make more money, and then we have a middle case, base case, and then an upside case, and then another case where we say, okay, if the price is going down for any reason, we don't know today, and that's not my view, but if the price is going down, we can fix at that time. Yes, it will be lower than today, but it will be higher than the contract that we have today. In any case, this is a move that will create value for the company, and we think that the best way is to be not 100% contracted for the next four years today.
As close as we will be from 2025, we will fix price with the counterparty when it will be interesting and on an opportunistic basis.
Okay, that's great. Looks like you have a lot of detailed models looking at. Maybe to also ask, what do you think is a sweet spot for you? You know, whether you take, you know, let's say 2025 mix of contracted versus merchant, where you think you maximize cost of capital and you got the credit rating initiation feedback from project lenders. Like, what is the mix there that you think is ideal?
This is Stéphane, Ben. I don't think we have a specific target for that. You know, we're analyzing all the options that are out there with the kind of a portfolio analysis view, and we try to optimize as much as we can and, you know, taking risk, but not too much because we want to remain contracted. It's very difficult to give you a number at this point.
Yeah.
We remain focused.
An important point, Ben. Sorry. An important point is this will move in the time. If you say, okay, 2025 today, we can be a little bit more exposed than in 2023 for 2025 and 2024 for 2025. We would not be a lot exposed there ahead. We have very different products in the market. We can buy your baseload, we can buy peak. We can sell baseload, we can sell peak load, we can sell quarterly, monthly, weekly. So we have all this and we have the analysis. So it's very difficult, as Stéphane mentioned, to say but we don't want to take a risk to be too much exposed to the merchant on a day-ahead basis.
We are thinking that the market is a little bit looking to the 2025, 2026 with pink glasses.
Okay. That's very helpful. Thank you.
We are going to proceed with the next question. The next question comes from the line of Justin Strong from Scotiabank. Please ask your question.
Hi, guys. Thanks for taking my call. Just, firstly, just quickly, the 58 MW of early
Contract termination that goes into effect beginning of Q4. Is that part of the 201 MW that you guys have been speaking about with EDF?
No. The 201 are the contracts with which we commission the assets from 2019 to today, okay?
Mm-hmm
Today, but okay. It's young contract with long remaining duration.
Right.
The contract we are terminating is the contract with a small tail from some months to 4 years. Less debt attached to this contract in the lenders model, because when we have done our refinancing 3 years ago in 2019, there is a debt or cash flow attached to each contract. We have worked around this and negotiate with our lenders pool to have the best risk-reward approach.
Okay, great. Yeah, that makes sense. Just on a little bit more on that. These are revenue shares of the 201 MW is revenue share above a certain premium, but the French government is kind of looking at those and not exactly sure what that will be. Is that about right?
It's really.
Yeah, I can take that one, Patrick, if you want. Just want to clarify on this, that these are the contract for difference, the 201 and the sharing, we don't know exactly what will be the formula that will be used in the future. Like, but it's sharing the upside between the market price and the price of the contract. But we cannot tell you at this point what will be the exact number, because we don't know where will be the bar. You know what will be the cap or the price where we'll give the extra above this specific price to the state and where we will keep the rest. That will clarify-
No, that's perfect.
in the future.
Yeah. Great, thank you. Just quickly on with the reconciliation bill in the U.S., how do you see that impacting competition and, more importantly, your development strategy in the U.S.? Like where do you land, net net? Now that the ITCs and PTCs are back in full force, can you maybe just give us some color on how that impacts your kinda return profile?
Essentially, in terms of strategy, we're still looking to the same market. Mean markets where we are creating value when developing projects. When it's not so easy to develop projects, New York, Illinois, Pennsylvania, that's the targeted market in the U.S. for greenfield development. The energy crisis, which is specifically European, but which is for the world, is something which confirmed to us that the fundamentals have not changed. If we develop the right project in the right place, we will make a correct return for the company and its shareholder. That's the point. It doesn't change the level of return expectations from the project on our side.
Does it change your kind of priorities at all in terms of capital allocation?
I'm sorry, could you just repeat the question? No, it doesn't change our strategy on capital allocation. We've always believed in the U.S. market, we've continued to win nice projects and we'll continue to grow there.
All right. Thanks for taking my call.
Thank you.
Thank you, Justin.
We are going to proceed with the next question. The next question comes from the line of Andrew Kuske from Credit Suisse. Please ask your question.
Thanks. Good morning. I guess if you sort of step back and look at the big picture, you've got pretty ambitious goals, but very achievable. You know, the market for renewables continues to grow at an accelerated fashion. I guess the question really is: What are the challenges you see yourself facing on potentially accelerating some of the development activities that you can do? I guess what are the roadblocks or just internally or externally, what are the main challenges that you're facing at this stage in time?
The challenge are different from one market to the other, but it's essentially in Europe, it's obtaining authorization for project. Generally speaking, in France or the UK, they're markets where we are active, the limitation is the delay of authorization. The good news is that considering the present situation, the government really need the system really need more power. There is this is the REPowerEU plan, and this is the French plan to accelerate and to incentivize us to accelerate and also to say to the administration. Because if you look to France, in the last years the financing to wind was, in 2015, it was EUR 1 billion. In 2020, it was almost EUR 2 billion, okay? That was financing the subsidy to wind.
In 2023, it's -EUR 3.3 billion, EUR 3.5 billion. Economically, it's changed completely. The government is now incentivizing, the main industry is understanding that renewable is reducing the bill and not increasing the bill. That's one thing. In the US, the situation which is limiting for the moment is the unknown around the ITC, the solar panel. But we are pursuing developing projects in the right market because we think it's good. I think we have shown that with the tender in New York. We went from 200 to 540, and we will be able to bid on the project for the next quarter. The team is working hard on this. In Canada, we are organizing this also.
In Quebec, it has restarted. In Ontario, it will restart, so we are organizing this to play this specific market where we are good. If we can use a little bit of the extra money that we will make through the good situation in Europe and the good EBITDA in the next months to accelerate the organic development, we will do it in a reasonable way, okay? I mean, there is. We have a budget every year of greenfield development, and we think we have to look to that and to keep it reasonable also for the company.
That's very helpful color in context. Sorry.
Sorry, I just wanna say, if I may add one point on that, is that I think in the current context that is changing so rapidly, keeping our agility and being able to size opportunities, having our balance sheet so strong will be key. I think it's a very important competitive edge that we have right now. Just my two cents.
Well, maybe more than two cents worth. When you think about the value of the euro now, does that give you this dynamic of maybe pushing farther ahead in your European exposure? There's an interesting duality that you may be able to invest on a value basis, given where the euro is. Do you worry a little bit about just the FX risks on the front end with the devaluation of the euro on the cash flows coming out of Europe into your business?
We've integrated that risk in our hedging strategy on the euro.
Okay. I appreciate the time. Thank you.
Thank you.
Matt?
We are going to do the next question. We have our next question is coming from the line of Naji Baydoun, from iA Capital Markets. Please ask your question.
Hi, good morning. You've been more active in the corporate PPA market in Europe now for some time. Now that you're seeing this evolving power price dynamic and maybe taking a more dynamic approach to sort of balancing merchant versus contracted exposure, do you think you have the right talent or the right team in place, or do you need to build out a broader power marketing group in Europe?
Yeah, thank you, Naji. You know, we start working on this in 2017, 2018, really with very good people internally who have typical experience in the Spanish market before, and were part of the Enel team. We have people internally. We have hired people from Engie, and also data scientists and data engineers, because it's a lot of data management and algorithms. We have built the right team in France for this part. We have also increased, during the last 3 years, the commercial part, you know, selling electricity, going to a customer, listening to a customer. It's crazy, but we were not really listening to our customers. It was a utility-imposed contract.
Now we are thinking about what energy solutions we can bring to them, how it works, if they have land to do something behind the meter and all those things. We have real sales people working for us. That's where we are specifically in France, because it's the situation of the market, and we are using and leveraging that in the UK for the moment, too. We can do everything in Europe from the French platform, except say, selling to a corporation, but which is more specific. All the market understanding is just managing data that we can do from beyond France.
Okay. Got it. Just wanted to get maybe your thoughts on the nationalization of EDF, how you think that could impact either your position in the country going forward or just the potential pace of new capacity build-out in the country?
Yeah, it's difficult to say because, you know, the nationalization is announced, but it will not solve the EDF problem. You know, the problem on the nuclear side. Because essentially, the idea of the nationalization is to take to the taxpayer the problem of EDF on nuclear. Will it change anything? I don't think so. What it could be is that EDF make a spin-off of the whole or a part of the EDF Renouvelables. Big company, like, probably EUR 15 billion value. But it will not change our situation because this is already our competitor, so I don't think it has a real impact.
The main point is the fundamental of the market is the system need more electricity, and the only way to bring more electricity is renewable. That's the only possibility to bring more electricity in Europe in the short term.
Appreciate it. Thank you.
Thanks a lot, Naji.
Thank you.
We have no further questions at this time. I hand back the conference to you for closing remarks.
Well, thanks a lot. Thanks a lot, everyone, for your attention and all the good questions. It's a forty-five minutes call, so it's not forty-five minutes, an hour and fifteen minutes call. Thanks for the questions. If you have additional questions, please call me at 514-213-1045. It will be a pleasure for me to answer your question quickly. Our next call to announce third quarter results will be on Thursday, November 10, at 11 A.M. I hope you enjoy the rest of your summer. We do. Have a nice day, everyone.
Thank you.
Ladies and gentlemen, today's conference call. Thank you for participating. You may now disconnect your lines.