Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentleman. Thank you for standing by. Welcome to Innergex Renewable Energy's 2017 Fourth Quarter and Year End Results Conference Call and Webcast. [Foreign Language] [Operator Instructions] I would like to remind everyone that this conference call is been recorded. I will now turn the conference over to Karine Vachon, Communications Director. Please go ahead.

[Karine Vachon]

Thank you. 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 front page of our website at www.innergex.com. This call contains forward-looking statements within the meaning of applicable securities laws. Although, the corporation believes that the expectations and assumptions on which forward-looking statements are based are reasonable under the current circumstances, listeners are cautioned not to rely unduly on these forward-looking statements as no assurance can be given that it will prove to be correct. Forward-looking information contained herein is made as of the date of this presentation, 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 financial review for more information. On the agenda today, our fourth quarter and year-end financial results, the 2017 financial performance and operating review, a follow-up on our 5-year strategic plan as well as our objectives and projected financial performance for 2018.Our speakers today will be Mr. Michel Letellier, President and CEO; and Mr. Jean Perron, Chief Financial Officer. I now turn the conference over to Mr. Perron.

[Jean Perron, Chief Financial Officer]

Thank you, Karine. Good morning. I am on the presentation of the webcast on Page 7. So our results for Q4 were 98% of the long-term average due mainly to the post-commissioning activities at the Upper Lillooet and Mesgi'g Ugju's'n project and some below-average water flows at most of the BC facilities. Also in France, there was also a below-average wind regime. That was partly offset by some above-average water flows in the hydroelectric sector in Province of Quebec and Ontario and above-average wind regime in Province of Quebec. Overall, compared to the last quarter of last year, the production increased 30% compared to Q4 2016, due mainly to the contribution of the recently commissioned Mesgi'g Ugju's'n wind farm, the Upper Lillooet and Boulder Creek projects and to the wind facilities located in France that were acquired in 2016 or 2017. They were partly offset by lower production at the BC Hydro facilities. The revenues for the quarter were $34.7 million higher than the same quarter in 2016. This 47% increase is attributable mainly to the contribution of the recently commissioned projects and the acquisition that we just mentioned. Adjusted EBITDA for the quarter was also $29.8 million higher due to the increase in revenue that we just explained, partly offset by some higher operating expense due to number of facilities that we have compared to last year. Finance cost contribution amortization were also higher because of the number of facilities, and this explained why the net result shows a $5.2 million decrease compared to last year. If we turn to the 12-month period, depreciation was 92% of the long-term average, due mainly to lower production of the same facilities operated with Mesgi'g Ugju's'n due to post-commissioning activities and below-average wind regimes in France, low water flows in British Columbia. That was partly offset by above-average water flows in Québec and Ontario. Overall, the production increased 25% compared to 2016, mainly due to the commission -- due to the contribution of the recently commissioned facilities, the wind farms facilities located in France and acquired in 2016 and '17 and higher production at some of the Québec and Ontario hydro facilities. That was partly offset by lower production at most of the BC hydroelectric facilities. Revenues for the 12 months were $107.5 million higher than in 2016. This 37% increase mainly as a result to the same new facilities that were put in service or acquired, partly offset by lower production at the BC facilities. While in 2016, if you remember, the BC facilities were well above-average. Adjusted EBITDA since the beginning of the year was $82.7 million higher compared to 2016 due to the increase in revenue just explained, partly offset by higher operating and G&A expense due to the higher number of facilities. The higher number of facilities also explain why finance cost and depreciation and amortization were higher than last year. The below-average production since the beginning of the year compared to an above-average production last year and some of the challenges we have seen for the Upper Lillooet and Mesgi'g Ugju's'n facilities explain the decrease in net earnings as opposed to the increase in revenues that we are seeing for the entire year. If we turn the page and we go on Page 8, the trailing 12-month free cash flow shows an increase compared to last year, and it reached $87.2 million compared to 2016. This is the result of adding more facilities but below-average production this year compared to above-average production last year. So the increase is maybe a bit lower than what was expected during the year but should be back to a more normal amount in the future. So our payout ratio still improved compared to last year, even though the dividends were increased, the increase in the free cash flow was more than sufficient to result in a better payout ratio. If we go to the next page, each year, we would make projections for the future, the following year. The actual projection that were made a year ago for 2017 were showing an increase in power generated revenue, adjusted EBITDA and free cash flow. The actual numbers are showing a very large increase but below what was projected, due to what I explained about the lower production overall this year and some challenging post-commissioning issues at Upper Lillooet and Mesgi'g Ugju's'n. So even though we have seen an improvement compared to last year, it was still maybe a bit below what we were expecting for the year. This concludes my review of the results. I will now turn it back to Michel for the next section.

[Michel Letellier, President, CEO & Director]

Well, thank you, Jean. Good morning, everybody. I will do a little bit of a review of last year. I know that it's old news, but it's always interesting to go back once a year on what we have done during the last 12 months, and then I'll talk a little bit about of our strategy and update you on our development activities. So if we look on Page 11, if we look on the first quarter what we have done in the last -- in last year. First quarter, we have commissioned Upper Lillooet River. That was, as Jean was saying, the commissioning of Upper Lillooet went okay, but we soon find out that we had some issue with sedimentation and sand in the machine that had a lot of delay or stoppage of production. I would say that, that we're quite confident now that what we have done in order to minimize those downtime will be successful in the next spring. The main issue was the shaft seal that were in Teflon, now we have ordered and installed -- we are installing actually the remaining shaft seal on the machine while the water is low to something much stronger and resistant to abrasion, it's ceramic-coated seal. So that was -- I would say representing 80%, 85% of the downtime we had experienced last year. So hopefully, that will solve the issue. We also had about almost 3 weeks of downtime to do some modification in the intake and near the intake to facilitate the sand evacuation. So hopefully, this will work also together with a modified environmental monitoring of the water, where we will be able to make some, what we call, quick flush. Meaning that we will have the ability to flush the sand by opening up the -- all the gates and hence, clean the upper pond in front of the water intake in order to minimize the sand coming into the intake. So that, together with the new seals, we're hoping that we'll have solved most of the issue in Upper Lillooet. To continue on the first quarter, remember that we have also made the acquisition of Yonne of 44 megawatts. We also had an opening in Lyon, France. Now we are getting close to about 10 people in Lyon, so getting ready to be able to do our own development as well and be more active in the M&A and obviously following up on our corporation now in France. On the second quarter, we also have commissioned the Boulder Creek. This is going very well. We also had an acquisition, the Rougemont-1 and Rougemont-2, also the Vaite project. So 36, 44 and 38 megawatt wind farm in France. Third quarter, we did also some acquisition in France, Plan Fleury and Les Renardières, 22 and 21 megawatt. We have commissioned Plan Fleury during the same quarter. It was not totally completed. And we also opened an office in San Diego. We are staffing that office, and together with the new people that is joining from Alterra, I think we'll be in better position to attack the U.S. market. I'll talk about it later on. And in the fourth quarter, we did also a commissioning of the newly acquired Rougemont-2 and the Les Renardières wind farm. We have also renewed St-Paulin and Windsor PPA with Hydro-Québec. And we also did the arrangement agreement to acquire all of the issued and outstanding shares of Alterra for about $1.1 billion. So it was a busy second part of the year, and to conclude with this acquisition, we were very happy on this outcome. Now, if we look back now with the strategic plan, we have that out there for a -- since a few years. Obviously, the acquisition of Alterra fits very well into that strategic plan. As we have explained in the past, we were focusing on going out of -- not going out, but going outside Canada in order to grow our footprint and grow our portfolio. So that was part of the plan. It was going also in the U.S. I think that in the last 2 years, we have been focusing on London, America and France. I'm very happy on the result in France. Now we have over 300-megawatt of operating facility. As I mentioned, we have now 10 people on the ground in Lyon. So I think that France is looking very promising for us. We will be still looking for M&A opportunities but also making sure that we will be developing our own projects. As you know, we have a small pipeline of over 100 megawatt of projects throughout France. Our intent is to grow this by joint venture and securing our own land. So these people on the ground are working hard to accomplish this, and this is definitely an objective that we want to pursue in 2018. Also, we said that we wanted to go in Latin America. We have, if you remember, looked a little bit in Mexico, and now we're focusing in Chile and Peru. The idea there is to find a good partner with some operating assets and some nice pipeline of development. We have met a lot of potential partners, and we're advancing on some leads. I think that the discussion are advancing very well with some people. So quite optimistic on an outcome in 2018 in South America. And of course, the big market south of the border of the USA was also a target for us in our strategic plan. The acquisition of Alterra is putting us now with operating asset and construction asset in a pipeline of very interesting projects to now grow the U.S. base. So I think this transaction is going to make us present in the U.S., and obviously, the idea is to grow this business and being profitable in the U.S. Important to say that we will be remaining exclusively in renewable energy. We've been 100% renewable energy and the intent is to stay 100% renewable energy. We want to maintain a diversification of the energy source, so that means that we want the hydro portion to still be material in our portfolio, obviously wind has a lot more possibility around the globe and solar is growing fast. But we want to make sure that we have a balanced portfolio with the 3 or 4 technologies that we have. Now we have introduced the geothermal asset in the mix in Iceland. We're getting acquainted with the -- with that technology. We have been in contact quite a bit with the management of HS Orka in Iceland. We're very happy to see how their professionalism and how good they are in managing the asset. They had a few challenges over the years, but so far, that beginning of the year, they're showing a good improvement on output in both plant. And they are advanced in terms of getting back to full production in Reykjavik projects. I'm very pleased on the outcome. Iceland, as I said in the past, is new to our portfolio, but we're getting much more comfortable with the assets as we get deeper a little bit with the operation and the potential development. Iceland economy is doing very well. At a minimum, prices have recovered, and there's all kinds of new opportunity in Iceland in order to grow the electricity base. So quite optimistic on the short-term output of Iceland these days. Of course, Canada is a big country. We said that we wanted to have more exposure outside of Canada, but there is still some opportunity in Canada, working hard in Saskatchewan, few opportunities with First Nation, partnership now in potentially RFP in Alberta. BC has a couple of potential activities for us in partnering with First Nation. So is Quebec, we have a small project in the north of Quebec called Inukjuak project. We're working with community there to replace diesel generation. So there's a few opportunities in Canada. We'll try to leverage our good relationship with First Nation. We've been focusing on that type of project long-term and win-win situation with First Nation. We've been successfully implementing some project across Canada, and the intent is to follow-up on those.So if we go back on Page 14, just a small wrap-up on Alterra acquisition. Just to remember that we acquired net 485 megawatt of operating and under construction projects. We also acquired 686 megawatt of advanced prospective projects. The 2 main one are Boswell and Fort City. Getting a little bit more focused on Fort City in Texas. This project is almost complete in terms of permitting, negotiation with potential PPA uptaker are underway. So this project is promising. We -- we're focusing our energy in 2018 to advance this project. Again, it's a 350-megawatt project, so quite a significant project and getting ready to advance that project aggressively in 2018. Now just to -- if we go to Page 15. If we look at the company now, we will have -- once Flat Top will be in operation -- Flat Top is under construction. As we have shown in our MD&A, the target date of mid-March is still a target. So by the end of March, we should be in operation with also the funding of the tax equity behind us. So this will be a busy 3, 4, 5 weeks in front of us to finalize all that and put Flat Top in COD. So the team is working hard in achieving that COD and funding of the tax equity. That would be a very nice addition to the operating portfolio. So having Flat Top in operation will bring the net operating assets of Innergex around 1,600 megawatts. And we'll have also quite a nice mix of energy. Wind and hydro in the high 40%, solar 3% and geothermal representing roughly 6% of the mix. So quite a diversified portfolio. I like this [ place ] and love to be able to maintain a big portion of hydro in our portfolio going forward. If we flip on Page 16. It shows a map of the operations, the footprint of Innergex around the world now. We could say that we are now an international company. We are in France, Iceland, U.S, obviously Québec, Ontario and British Columbia are our main market. In Canada, we have 63 facilities under operation and 2 under construction that you can see on the map. The 2 construction is Flat Top, as I just mentioned, and the 10-megawatt in Iceland, the 10 small -- the 10-megawatt hydro facility in Iceland. If we go back to Page 17 -- go forward, I'm sorry, on Page 17, what our objectives in 2018, and I think I mentioned a few of them. The first one obviously, the integration of Alterra activities. It's not a small task. We're -- we have to make sure that we achieve some administrative and operation, commercial synergies while making sure that we create value and focus on the development of the project. So working hard on this in 2018. We want to pursue growth opportunity. We have made this transaction, and we have made our objective to grow the portfolio of energetics. So like I said, we want to advance projects in the U.S., Fort City and Boswell are the 2 most important projects in the U.S. for us to advance. I'd like to also be on the lookout in the U.S. to develop our own project, take advantage of some of the pretty qualified PTC project to perhaps joint venture with other players. Obviously, there is a raise to put project in COD before the end of the PTC period in 2020. So a lot of activities are going to be happening in the U.S. and perhaps joint venture possibility could also arise to help us speed up this process. I spoke about Latin America market, focusing on Peru and Chile. Like I said, we are looking to find a good partner there to have a platform to grow in this market. Pursue France is also a big focus for us. As I said the team in Lyon is working hard developing our own portfolio as well. For sure, advancing construction project, I mentioned, Flat Top is a top priority and construction of the small hydro facility in Iceland should start in the second quarter and COD by 2020. There's something that we have not talked too much about, but I think that in Iceland there is a nice expansion on [indiscernible]. This site to add about 30 megawatt of, I would say, a low-pressure steam project. Most of the steam is there, and there's a, I would say, a lost (sic) [ lots ] of good energy there, which could be [ harvested ] in installing a new turbine of about 30 megawatts. The team there have been working on the design and permitting, most of that is done. So we're assessing the demand of electricity and securing some client in order to start the construction of this project. So that will be on the agenda as well in 2018. Now if we go back on Page 18, a little bit of a guidance for the year of 2018. Installed capacity, I just mentioned, now it's forecast to be just over 1,600 megawatt of net capacity. Revenue will be over $550 million. Adjusted EBITDA will be $380 million, a raise of 27% from the last year. But there's a new guidance that we would like to introduce, it's the adjusted EBITDA proportionate from the project that we don't consolidate in the financial statement. So this, I think, is showing a better picture of what the assets can generate. And this adjusted proportionate -- sorry, EBITDA will stand around $440 million. So that represents a rise of about 43%. And free cash flow should stand at over $117 million, just to remind that this free cash flow is after distribution of -- not distribution, after the payment of the sub debt, all of the sub debt, including the new sub debt from [indiscernible] and also after the price-shared dividend payment. So that would conclude my presentation, and we would welcome all the questions. Thank you.

[Karine Vachon]

Amanda?

[Operator]

[Operator Instructions] Your first question comes from the line of Rupert Merer from National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

Can we talk a little about the integration of Alterra? Can you talk about how the process is -- how it's going? What are the main activities you're looking at? And what's the schedule for completion?

[Michel Letellier, President, CEO & Director]

That's a completed question. But in main -- main driver is to reorganize our structure and to make sure that we're taking advantage of the best of both companies. The idea is making sure that we could take the best practices of both company and make a bigger and better team. So that being said, it's not so easy to achieve and make sure that everybody fits at the right place. But it's advancing quite well. We just -- as a small reminder that we closed only 2 weeks ago, it was on February 6, if I remember well. So obviously, we had some discussion prior to the closing, but we couldn't do too much before the closing. So it's happening quite fast right now. Just an update, I think that people have been aware that we needed some synergies. So in that aspect, we have concluded some decision regarding some senior management in Alterra. John Carson will give us a few months of consulting, making sure that they will be easing the transition between the integration and making sure that we keep information at bay if needed. So John is nice enough to have committed to stay with us as a consultant basis for a certain period of time. Lynda also, the CFO, will stay with us for a period of time, making sure the transition happens. Shannon, the same thing, the VP of Legal, the same thing. For the rest of the team, we're putting everybody in place. So obviously, the development and financing of the project are very important for us. So most of the rest of the team are focusing in integrating the -- both teams to make sure that we get all the firepower to accomplish what we are setting in our objective in 2018.

[Rupert M. Merer, Managing Director and Research Analyst]

So have there been any changes to your assumptions from when the transaction was originally made or any positive surprises or challenges so far?

[Michel Letellier, President, CEO & Director]

Challenges, no. I think implication, no. I think that the -- I would say the positive is how Iceland is -- Iceland economy and demand for energy is turning out. I think that you probably saw a few article in the paper regarding the blockchain and bitcoin mining activities being relocated around the planet, getting out of China and trying to find a new home. So here even in Quebec, hydro-Québec has had a lot of incoming demand. And in Iceland, it's happening as well. There are some already in place. We're selling electricity to an outfit already installed in Iceland. But Iceland climate and the fairly afFoardable electricity seems to attract also a lot of activities over there. And silica transformation or silica -- I would say, yes, a transformation project are getting traction as well. So we see -- I would say that this is probably a good surprise. Remember that Reykjanes had some difficulties in terms of production in the past. They went -- that satirically 100-megawatt facility that 2 years ago, was down to 65, 68. And management has introduced some new methodology to follow up on the resources and also drill some new wells that are producing very well. So we'd like to report that the production is now back to -- in the 90-megawatt range in advance of its, I would say, budget or forecast. So this is a very good news. And probably also Fort City in advancing well and discussions around PPA are ongoing. So potentially Fort City could a project that we might be able to start sooner than anticipated.

[Operator]

Your next question comes from the line of David Quezada from Raymond James.

[David Quezada, Equity Analyst]

My first question just on the France [ market treaties ], have you seen any changes or any evolution in the outlook for M&A on development-stage assets, given the change from the feed-in tariff to their contract for differences in France?

[Michel Letellier, President, CEO & Director]

There is definitely a lot of activities in France around M&A. I think that one positive outcome or you use in France is the French government trying to ease the environmental process and speed it up a little bit, of course, anything that would reduce the red tape around permitting and all that stuff is helping. And also probably smaller player understand that they have to, I guess, speed up the process in order to make sure that their project gets into the future queue or being applied to future RFP. So there's a lot of activities in France, and I think the last 2 years has shown that we are a potential good partner and a good company to potentially make some transactions with. So there's a lot of incoming calls in M&A in France, so quite pleased. We have to be careful also that those transactions have to be accretive to us. But it's a good thing that we see activity, so we have the ability to choose.

[David Quezada, Equity Analyst]

Okay, great. That's very helpful. And my only other question, just turning to the U.S. market. I know you had a project that was not PTC-qualified as part of the Alterra development portfolio, I believe it was in Colorado. I'm wondering if you'd had any initial conversation just in terms of potentially partnering on a provider of PTC-qualified turbines there?

[Michel Letellier, President, CEO & Director]

Well, it's a good question. The project is called [ Bizju]. We're in the process of securing future land and making sure that it's a project that could be attractive to present for a potential partnering with somebody that would have safe harbors some turbines. So yes, this is definitely a possibility. So that's why I was saying that we would be looking into potential joint ventures. So we're quite open to do something on projects, such as [ Bizju], and making sure that we create value before the end of the PTC period. Mind you that I said quite often that the PTC deadlines of 2020 is something that we're obviously, focusing on and trying to make a good on honing an investment that we have. But my view on the U.S. is a long-term one. And I think that the U.S. will still be an attractive market post-PPA, not for post-PPA, post PTC period. And hence, if we have good projects that have good wind resources, well situated for future interconnection. In my mind, those are good also asset to hold on the long-term potential development of the renewable energy in the United States.

[Operator]

Your next question comes from the line of Sean Steuart from TD Securities.

[Sean Steuart, Research Analyst]

Couple of questions. Michel, wondering if you can give us some more broad context on U.S. tax equity financing pools in the wake of tax reform and as it pertains to, I guess, from your perspective, opportunities in the U.S.

[Michel Letellier, President, CEO & Director]

Obviously, the tax reform has changed a little bit the economy. But I would say that people were kind of aware of this potential, let's say, new assumption or new rules. So at the end of the day, it's kind of surprising. The human brain is -- you get accustomed to something that you think could be worse, and then when that happens and it's so bad, and say, "Wow, okay. Everything's good now." So I think that was probably the case on tax equity provider. I think that they understand that this window will end, and I think that a lot of people have concluded that at the end of the day it's not a bad business for them at all. It's a good return. And frankly, the way they are structured, these things, the tax equity provider are not at risk so much. It looks a lot like project finance with less leverage, and the assumption to recuperate their return is based on 9, 10 years, and the life of the project can be 20, 25, 30 years. So at the end of the day, I think that people are waking up to understand that this is a good business for them. And what we are seeing and what we understand from also Alterra experience and relationship with some of those tax equity provider is that there's no shortage of capital to be deployed in that section of the industry.

[Sean Steuart, Research Analyst]

That's encouraging. And a couple of questions on the Alterra development opportunities. It sounds like Foard City is advancing pretty quickly. On Boswell Springs, can you give us any update on the transmission permitting process and where things stand there?

[Michel Letellier, President, CEO & Director]

Yes, Boswell is something that has a great asset in terms of the location. It's a good wind area, but we have to get into the interconnection. As it stands, right now the interconnection ability to interconnect on the PacifiCorp line is target to be after 2020. So all the team is working hard trying to find a solution to speed up that interconnection timeline. It's not necessarily that the permitting -- well, obviously, it's a challenge. But I think that there's a few opportunity of routing the transmission that would allow for a fairly straightforward permitting process on -- even though it's a big environmental process, but I -- it's not that, that I'm too concerned about. It's the timing before 2020 and our ability to interconnect at Boswell. That's why when we made the acquisition of Alterra, we haven't put too much emphasis on Boswell. For us, Foard City is a project that is, I would say, closer to being a project under construction than Boswell. But obviously, on the long run basis, Boswell has tremendous wind resources, a huge land owned by only a few landowner, and eventually, a good access to a grid that has a good outcome towards the -- California. So I think that it's a strategic project for us. We will be putting a lot of effort in 2018 to see if we can find a solution to have this project be in service before the PTC period and by 2020. But I think that Foard City has more chances to be a project -- a real project under construction sooner.

[Operator]

Your next question comes from the line of Nelson Ng from RBC Capital Markets.

[Nelson Ng, Analyst]

Just another kind of follow-up question on Alterra in terms of like first steps and I guess things on the checklist to work on over the first few months. Could you talk about potentially refinancing the holdco debt and whether that's a near-term focus or whether you're kind of happy with what you have now and you're going to be looking at that later on?

[Michel Letellier, President, CEO & Director]

Jean will answer that.

[Jean Perron, Chief Financial Officer]

Well, of course, there are some that are outstanding, that are pretty expensive, and the intention is really to -- as a first if we replace these debt with the lower debt that are available by Innergex. And that should be done pretty quickly. So basically, there's 2 debt that can be replaced in the very short term. One is close to CAD 20 million at the level of Alterra, and there's another one about USD 37 million that can be replaced also the -- one of the holding company owning the Icelandic asset.

[Michel Letellier, President, CEO & Director]

And remember that we have increased our line of -- it's not a line of credit, our credit facility with our bank of syndicate -- syndicate of banks, I'm sorry, to about $700 million. So we have quite a bit of room on that facility to repay this outstanding debt that are definitely more expensive.

[Nelson Ng, Analyst]

Okay. And then just moving on to Flat Top, you mentioned that you're going to be raising tax equity pretty soon. Have the tax equity parties fully committed to finding the funds and it's just more about finishing the project?

[Michel Letellier, President, CEO & Director]

Of yes, yes, yes. The funding has happened prior and has all kinds of, I would say, precondition before being funded. But yes, it's in place, it's firm and it's going to replace the construction financing that was put on the back of their initial commitment. So it's already done, and the mechanics to just fund that portion and repay the construction financing is in -- I mean, on its way. And it's concurrent with the COD of the plan. So the team has already started all the independent energy review, and all that stuff is underway. So there's no issue that we can think of that would prevent the divestment to be done. We just have to make the plant in the COD.

[Nelson Ng, Analyst]

Okay. And then just one last question. In France, I know you haven't been there too long, but have you advanced any projects to the point where you can start participating in the wind and solar RFPs? I believe, there was one round late last year, and obviously there's going to be rounds I guess every year. So are you at that point where you can start bidding?

[Michel Letellier, President, CEO & Director]

We will have 2 projects at the end of the year that will have -- we will have applied for the full permitting. So probably the year after that, we'll have the ability to maybe project -- apply for a contract for difference. Without being in RFP, those projects will qualify for contract for difference. So our strategy for the time being is to attack this contract for difference. We have potentially a bigger project that we might be able to put forward for future RFP. But for the time being, we're -- our strategy was to have the smaller project, the 6-turbine type of project being advanced to apply for the contract of difference. So right now, we have 2 that are fairly advanced, and by the end of the year, we should have applied for most of the permit.

[Nelson Ng, Analyst]

So it's more about bidding -- so do you need to have all the permits in place before you participate in the RFPs?

[Michel Letellier, President, CEO & Director]

No, the RFPs are a little bit different. You have more time. You just take the risk of putting an RFP out and not necessarily being able to deliver the project if you're not advanced enough. So it's always a balance of making sure that you are well advanced and not taking too much risk on the permitting side. But I think that the team over there are talking with local developer. We are always open to joint venture with some of them in order to bring their project into future RFPs. But like you're saying, we have not been on the ground that long in order for us to have these permit from our own portfolio. One has to remember that it takes anywhere between 3.5, 4 years, 4.5 years to get permits in France. So we're working hard, but we haven't been there for a long time either.

[Jean Perron, Chief Financial Officer]

And that's why also in France, the government is trying to put some things in place that will try to speed up this process. So in the future it might be a bit shorter to develop new projects.

[Operator]

Your next question comes from the line of Jeremy Rosenfield from Industrial Alliance Securities.

[Jeremy Rosenfield, Equity Research Analyst]

Let's start with Québec. I saw that you had signed some PPA renewals late in 2017, which is a positive note, I guess, but not necessarily material. Can you just talk about the -- if there was change in terms, whatever you can discuss on that side, and how that sort of guides your outlook for some of your larger projects that will have PPAs expire in Québec in the next 5 or so years?

[Michel Letellier, President, CEO & Director]

Well, I think that we're not allowed to disclose the pricing. Hydro-Québec has a few more PPA in negotiation. But the general idea is that the -- they have given us a price that represent their view on the avoided -- no, I wouldn't say the avoided cost, but their ability to sell the electricity on the northeast portion minus all the losses and some pain of transporting the energy. So it's an okay price and we're not so excited about it, but it has also some inflation built in.

[Jean Perron, Chief Financial Officer]

Full inflation, which is kind of unusual in the hydro energy sector, but we have full inflation. So it's -- yes.

[Michel Letellier, President, CEO & Director]

So over time, it will improve. And also it's a real take or pay type of contract, so they haven't changed anything in this. So we don't have any curtailment or anything of that nature. So it's still a very attractive long-term PPA without much penalty or what have you. But of course, a little bit lower than we had in our number. That being said, obviously, Hydro-Québec has a bit of surplus in its portfolio. Their wind in northeast of U.S. is helping to, I would say, bring down that surplus. So depending on how much success they will have. And actually, the blockchain and the bitcoin miners are coming and knocking on their doors. So who knows how fast these guys could implement some facility and perhaps help reduce the surplus in Québec. And once the Hydro-Québec would be out of surplus, then might have a different ability for us to negotiate for a bigger project. So I'm not so concerned in terms of economics or loss of economics on our project. I think that the project or the PPA will be still strong and desirable, but somehow a little bit lower than what we have now in terms of pricing.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. That's good. Turning to Alberta. So the Alberta government recently announced the round 2 and 3 of the Renewable Electricity Program. I'm just wondering how you're positioning yourself in light of those rounds and future rounds, I guess, specifically, partnerships that you may have in the province and your preference for hydro versus wind going forward?

[Michel Letellier, President, CEO & Director]

Yes. Alberta, as we've said in the past, was not our preferred place to try to do business because it was a merchant place, and obviously, people had been more, I would say optimistic about the potential future of RFP. So we unfortunately have not been too well positioned in Alberta, but very open to any type of joint venture to help especially First Nation. So we're extending our reach for potential First Nation partner in Alberta. Obviously, the Alberta last RFP was pretty competitive. But I guess that we definitely are not that afraid of that market. It's just that a lot of people have secured good site and were quite high in the queue. But very open to make any joint venture over there. So definitely, we're open to receive call and make some calls, but so far, we haven't secured any joint venture in Alberta. We have focused on Saskatchewan. We're advancing quite well. Actually, 1st of March is the deadline for us to deposit the price for projects. So quite active on that side. It will be competitive also Saskatchewan, but there's a component over there where the -- trying to ascribe some points for First Nation partnership, and we're working on that aspect as well.

[Jeremy Rosenfield, Equity Research Analyst]

When do you expect to receive a result back in Saskatchewan? Do you have a specific timeline?

[Michel Letellier, President, CEO & Director]

They're talking about September.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. Great. And maybe if I could just ask one more sort of cleanup question. With MU, the operations at MU in Québec, did you receive any compensation from the turbine supplier? Or do you expect to receive any compensation there?

[Michel Letellier, President, CEO & Director]

Yes, we have put some in our year-end, but we're still calculating the losses with Senvion and negotiating the outcome. So obviously, always a little bit cautious when we book some liquidity damage in our books. So we've been a little bit conservative there -- I think a lot conservative. We have a very strong case, we think, in terms of being compensated -- compensating -- well, whatever. And Senvion is has -- is scheduled to make sure that they implement some changes in the parameter, also change some -- a little bit of the software, working on bus board. So they're working hard in order to catch up, and we're giving them the chance to make sure that they do all their under control or their best shot in making sure that the project achieve their long-term forecast or long-term efficiency. So -- but we have a very strong contract where we believe that we'll be compensate for the losses and [Foreign Language] -- the lack of mobility of the machine. So it's still underway. I would say that very conservative numbers have been put in the numbers in the range of 2.5, I think.

[Jean Perron, Chief Financial Officer]

EBITDA, higher than that. but still probably below what we called receiving in the future. And also, that's why Senvion has an incentive to fix the machine and make sure that they're going to be up to what was expected because, otherwise, they have skin in the game.

[Michel Letellier, President, CEO & Director]

So I guess as a summary, Jeremy, we think that the economics of MU on the long run is protected. And we just -- hopefully, we would rather see Senvion achieving their expected performance so that everybody comes into a win-win and we don't have to take liquidity damages in exchange.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. And in the Q4 number, specifically, was there anything booked into EBITDA? Or was that just in earnings?

[Jean Perron, Chief Financial Officer]

Well, it was booked as revenue because it's a compensation for some revenues lost. So there was a compensation that was booked in the revenue line.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. So that does flow into the adjusted EBITDA number, okay.

[Jean Perron, Chief Financial Officer]

Yes.

[Operator]

Your next question comes from Ben Pham from BMO.

[Benjamin Pham, Analyst]

I wanted to ask, when you guys looked at your 5-year plan more recently, how do you guys think about the rise in interest rates and how it potentially benefits your portfolio through your inflation escalators? But also on maybe the negative sides on the refinancing risk to think about, is that a material risk to INE?

[Michel Letellier, President, CEO & Director]

Actually, as you know, most of our project financed are fixed rate. So for the existing facility, we don't see any downside of seeing the interest rate going up in terms of financing. Of course, we are adjusting our expected return. Whenever we're doing M&A or future RFP, we're taking into consideration the new interest rate. So hence, directly, future project that we would be bidding or acquiring, we take into consideration the higher cost of capital, both in terms of interest rate and directly also the return on equity should be a little bit higher. So we're obviously adjusting with that. In order to come back with the existing project that we have, as you know, a lot of hydro and Québec-based contracts have a lot of inflation built-in in the adjustment of future price of electricity. So any inflation, especially in hydro, is pretty good for us. So for the existing facility that have already project financed, any inflation is directly accretive to the cash flow because most of the rest of the cost are fixed. So any inflation for our hydro in Canada is pretty good.

[Benjamin Pham, Analyst]

Okay, that's enough. And can ask I you, how do you think about Blue Lagoon in your '18 guidance? And also, Upper Lillooet, are you assuming below average production in your '18 numbers -- or your '18 guidance?

[Michel Letellier, President, CEO & Director]

Blue Lagoon have not been incorporated in our number per se for -- meaning a potential sale. I know that the management of Alterra was a little bit upset with the failed process that have occurred last year. The Blue Lagoon numbers and the development of the new hotel -- and now, I'm trying to come out something that I don't know much about, hotel and spa. But what I gather, things are going very well for the Blue Lagoon, the hotel.

[Jean Perron, Chief Financial Officer]

They are expanding.

[Michel Letellier, President, CEO & Director]

Yes, they are expanding a 5-star hotel that's going to open up in a month or so. Construction has been going well, and apparently, it's going to be a success. They have pre-booking. It's a little bit crazy, that stuff, I mean. It's really beautiful and what have you, and people are crazy about going to the Blue Lagoon. It's just it's not our core business. So we would -- I'm not afraid of seeing the Blue Lagoon value erode, it's just that I think that our business is too -- going to Red Bull energy and deploying that capital into Red Bull energy. So we would pursue again in discussion with the local pension fund, our partner, on how we would be able to monetize the 30% that Orka owns in the Blue Lagoon. So it's an ongoing process for the next year or so. But the asset is probably worth more than last year because they just finished the hotel, things that's been done right on budget and on timing and the demand for the hotel seems to be as expected and perhaps even more so. Only, even a better time to get a better price for the Blue Lagoon in the next few months.

[Benjamin Pham, Analyst]

And on -- so to clarify, Blue Lagoon, it's in the $117 million free cash flow guidance?

[Jean Perron, Chief Financial Officer]

No, it's not there.

[Benjamin Pham, Analyst]

Okay. It's not. Okay. And then when will Upper Lillooet are you assuming until the spring it runs before the long-term average, and then it picks up the long-term average the last 9 months in the $117 million?

[Jean Perron, Chief Financial Officer]

No, no. we were -- we used the current or normal year productions because we're expecting the Upper Lillooet will be fixed by the springtime. And there is really small production in the winter time. So the effect on the number of January or February is minimal in any case.

[Michel Letellier, President, CEO & Director]

We may have in September or so a shutdown to repair and make a few poles stronger in the transmission line. But -- maybe some stop and go on some automation software. But other than that, we should see a much better production out of Upper Lillooet than what we have seen last year. In terms of initial production in January and February, actually, most of the places are over-budget. So January and up to now, every segment of our business is higher except for solar. It's been raining and snowing, and that's the only one that is suffering. For the rest, the big wind and hydro are doing just fine.

[Operator]

[Operator Instructions] Your next question comes from the line of Mark Jarvi from CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just wanted to go back to Foard City, which you guys sound been pretty optimistic in terms of getting a contract and proceeding through development. Wondering -- pretty large project, how you might think about financing that. Obviously, some tax equity, but would you do back leverage? Ultimately, just trying to figure out maybe how much equity you would have -- need to develop that project.

[Michel Letellier, President, CEO & Director]

Yes. Tax equity we'll be -- definitely seek because this project will -- is prequalified. And obviously, we will take advantage of the tax equity. Tax equity, in this case, will be anywhere between 70% and 75% of the cost that we're expecting equity contribution -- our equity contribution to be below the USD 80 million, so something around CAD 100 million based on the numbers. We've seen aggressive pricing for a balance of plan and turbine supply. So the economics of that project seems to be fairly solid. And the balance of plan has been a good surprise, which is, in this place, in Texas, we could theoretically work during winter time before some of the rush of 2019 and 2020 period for project to be, I would say, underway because a lot of people wants to get -- and rush to get their project before 2020. So I mean, it just seems to be just a good timing and people seem to be quite interested in putting their effort in order to help us make that project a success.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

That's good detail. And I wanted to go -- just on the proportionate EBITDA guidance for next year. Just to clarify, the geothermal assets, which you don't own 100%, but you're going to consolidate. Are you putting off the 100% EBITDA into that number, similar as you would do with Harrison and some of your non-fully owned assets, but things you consolidate?

[Jean Perron, Chief Financial Officer]

We're putting -- we're trying to minimize the number of adjustments that we're showing, so that's why -- whatever is shown in the financial statement under the IFRS rules. So if you technically have more than 50% of a project, you consolidate the entire project. So Iceland and Harrison Hydro are included in the adjusted EBITDA that would be actually the amount that you're going to see on the financial statement. And then we'd just make adjustments for the one that are non-consolidated in the financial statement for the proportionate amount.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And then just quickly on the disclosure in the MD&A around the proportionate contributions for some of those projects. That is taking into account the February 6 closing of the Alterra? Or is that run rate numbers, just to make sure?

[Jean Perron, Chief Financial Officer]

That's taking into account the actual date for closing.

[Operator]

Your next question comes from the line of Jeremy Rosenfield from Industrial Alliance Securities.

[Jeremy Rosenfield, Equity Research Analyst]

Just had one other question. I noticed in the MD&A you had some discussion around an interest in pursuing investments in energy storage that could enhance the business. And I was just wondering if this is a more sort of notional discussion over the potential for energy storage or if you had actually looked at or thought of implementing some storage capacity within some of your existing facilities.

[Michel Letellier, President, CEO & Director]

Existing facilities, perhaps, maybe we're looking into Texas and trying to understand if we could make a case there. Remember that we're looking into an RFP in Hawaii, where Hawaii has committed to be 100% renewable energy, so that could be a good place to start. Iceland also has some potential. Interesting possibility for that, so looking into this because HS Orka, as you remember, is -- it's almost a small utility. It can sell directly to residential clients. So obviously, the profile of the demand there is peak during the day and a slower demand during the night. So there's definitely a will at Innergex to try to get more knowledgeable about storage and what we can generate in terms of revenue, just not -- not only just the timing of the energy during the day, but can we find some places where we can be paid for ancillary services. Chile has some potential also on that end. So I guess the world is changing and we just want to make sure that we're following up and we keep up with the potential of innovation in our business.

[Operator]

Mrs. Vachon, there are no further questions at this time.

[Karine Vachon]

Thank you, and thank you, everyone, for your participation in today's call. We look forward to speaking with you at our next results conference call in May. Thanks.

[Michel Letellier, President, CEO & Director]

Thank you, everyone.

[Jean Perron, Chief Financial Officer]

Thank you. [Foreign Language]

[Operator]

Ladies and gentlemen, you may now disconnect your lines.