Innergex Renewable Energy Inc

TSX:INE

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2018 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 being recorded.I will now turn the conference over to Karine Vachon, Communications Director. Please go ahead.

[Karine Vachon, Director – Communications]

Thank you, Simon. Hello, everyone, and thank you for joining us today. I'd like to specify that this conference call will be held in English. Members of the media are invited to ask their questions by phone after this call. A presentation pertaining to this discussion is available as we speak on the page of our website www.innergex.com.This call contains forward-looking information 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 MD&A 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 Annual Report for more information.Our speakers today will be Jean-François Neault, Chief Financial Officer, who will present Q4 and year-end results; and Mr. Michel Letellier, President and Chief Executive Officer, who will review our main achievements of the past months and provide guidance on our 2019 results.I'll now turn the conference over to Mr. Neault.

[Jean-François Neault]

Thank you, Karine. Good morning, everyone. I am pleased to report strong financial results for the year stemming in most part from the numerous acquisitions achieved in 2018.Starting with the fourth quarter results. Total generation was 58% higher than in 2017, while we achieved 102% of the overall long term average. Our hydro activities were at 91% of the long term average due to below average water flows in most regions and to post commissioning activities at the Upper Lillooet River and Boulder Creek facilities in BC, which were also impacted by a windstorm that hit our transmission line, causing 16 days of outages at both facilities.Our wind facilities produced 106% of their long-term average. Here, above average wind regimes in Quebec combined with the compensation received from a manufacturer for low availability of equipment at a Quebec wind farm, explain most of the favorable variance. Our consolidated solar operation now includes the Spartan and Kokomo facilities in the U.S., previously accounted as joint ventures.Solar irradiation was well below average in the past quarter, resulting in an 82% performance compared to long term average. Finally, geothermal operations reached 110% of their long term average.Revenue rose to $166.2 million, 54% above last year, mainly due to the acquisition of Alterra and Cartier, higher generation in France from the facilities acquired in 2017 and higher generation at the Upper Lillooet River facility following progress made to address the challenging post commissioning activities.Adjusted EBITDA increase 41% from $80.1 million to EU 113.2 million. Adjusted EBITDA margin stood at 68.1% for the quarter compared to 74.1% in 2017. Our margin decrease is mostly due to the addition of geothermal activities in our mix of resources as this particular segment have greater operational and SG&A expenses in relation to revenues than hydro, wind and solar activities. The adjusted EBITDA proportionate reached $133 million compared to $83.2 million, an increase of 60%.Now reviewing our results for the full year 2018. Total generation was 43% higher than 2017. As you can see on Page 8, contribution of the geothermal activities and the addition of the remaining 62% of the Cartier Wind Farm along with the 2017 French acquisition are the main contributors to the increase.In terms of revenues, Innergex achieved $576.6 million compared to $400.3 million in 2017, representing a 44% increase. Again, our acquisition of the past 2 years were the main contributors to the rise.On Slide 10. Our adjusted EBITDA reached $385.1 million compared to $298.7 million, a 29% increase on the back of geothermal and wind segments.Turning on to Page 11. Before commenting, I would like to remind you that we added new joint venture this year with the acquisition of Alterra and Energía Llaima in Chile, which we can better appreciate their contribution with the non-IFRS adjusted EBITDA proportionate measure. In fact, adding up the $74 million contribution of joint ventures to the $385 million of adjusted EBITDA bring us to an impressive $459.1 million adjusted EBITDA proportionate, a significant increase of $150 million over 2017.Our net earnings for the year stood at $25.7 million compared to a little over $19 million in 2017. Here the main variants are higher adjusted EBITDA, increase share of earnings of joint ventures and associates, which include a one-time noncash gain of $10.1 million on financial instruments, partly offset by higher finance cost, depreciation and amortization.Looking at our financial position. Total assets and total liabilities increased due to our recent acquisition, as did the non-controlling interest and the equity attributable to owners. Total debt now stood at $4.47 billion compared with $3.15 billion a year ago. This $1.3 billion increase can be explained by the $621.5 million for the acquisition of Cartier, $473.2 million for the acquisition of Alterra, $204.3 million for the acquisition and the construction of the Phoebe solar project, and the $131 million for the investment in Energía Llaima in Chile.As illustrated on Page 15, while our free cash flow increased by $18 million to $105 million, our payout ratio stood at 86% compared with 82% a year ago.Before I give it away to Michel, I'd like to comment on our 2018 financial projection made at the beginning of the year, where we surpassed most of them. The acquisition of Cartier, which was not accounted for in the projection, help us achieve such strong results.On that note, I will give the floor to Michel for the operational review of the past quarter and year. Thank you.

[Michel Letellier, President, CEO & Director]

Well, thank you, Jean-François. Well done. And first of all, I'd like to thank all the employees and all the contractors and people that helped us last year. I guess it was a very busy and historical year in terms of number of acquisitions and activities. I'll mention it in my presentation. But it's quite important to take a moment to reflect on all the team. They have worked tremendously. I'm very proud of them.So based on that, I would like to just to go back and start with the operational highlights on Page 18. As mentioned by Jean-François, we have made some good advancements in Upper Lillooet, making sure that the project will be producing on a long term average basis in the future. As you recall, we had to manage a lot of sedimentation in the upper river. So we have now tested and successfully tested what we call the quick flush procedure together with the minister of environmental assessment in BC. So we have now a path forward to manage the sedimentation in the upper part of our water intake. So that will be quite useful going forward.But just to remind you that BC hydro in general has been below the long term average. And Upper Lillooet being a little bit north and having its water intake depending on a higher elevation, was more hit to some degree by the availability of hydrology. And also we had in BC a lot of strong wind during the fall that had made unavailable some of our facility, including Upper Lillooet at the end of the year. So hopefully, BC weather will be more favorable to us going forward next year.We also have worked on the integration of the Cartier team and the operation on Cartier is progressing very well. We're very happy to welcome all these new employees and I am sure that we'll benefit from the operational expertise that this team is bringing for us in the future.In terms of construction, quite a busy year also. We are working on Phoebe solar project. The project is on track and on budget. It's a humongous undertaking in terms of manpower and the rapidity of the work there. We are now standing with more than 400 workers at site. It's huge in terms of the amount of panel that we're putting down there. Things are going very well for solar, as our EPC contractor, they are behaving very well. So the project is still on budget and on timing. So I'm glad to report.A little bit more clarification I guess on Foard City. We have, as you know, been discussing with the different Air Force base in the area and we now have an area where we all agree on where we can put the turbines. So the cautiousness that we have provided in guidance is mainly driven by the fact that we have theoretically 2 phases that we can do in Foard City. We have 94 locations where we will have the FAA permit in a very -- I guess in a very short term period. And we will be able to build those in the next few months.And then we have 36 other machines that we have the ability to place into the area where we have an agreement. It's just that it's going to take a bit more time to get the full release of the FAA permits for those. So we might have to finish those late, during the Q3 or Q4 in 2020. So we still are quite optimistic to finalize the project in Q4. It could track -- perhaps some of the turbines could be finalized in January, but quite positive towards the end of the year. So it's not a big miss in the sense that if the 95 -- well, 94 first machines will be done in the same time frame that we had hoped for in the beginning.So going forward into the development. As you know, we have signed 2 PPAs in Hawaii with storage capacity. We were glad to see that our pricing was well in the group of bidders. So quite positive on this new segment of our development. The battery I think, as I said many times, will play a key role in the future in our industry. So quite happy to have this foothold in Hawaii in this new great segment of our business.We also acquired Hillcrest solar project in Ohio. Everything is progressing very well. I'll talk about it in our 2019 focus. And in terms of acquisitions, as you know, we have had quite a bit of a busy year. The last one was the acquisition of Cartier, as I mentioned. So everything is getting in place. As you know, we knew the assets very well. Just making sure that every employee now fits very well in our structure and looking forward to take advantage of their great experience in self-operating wind farm.If we switch in term of achievements in 2018. So just to make sure that people remember that we were quite busy in that particular year. We signed a 12 years PPA for Foard City. That was the kickoff to start that project. We also through the acquisition entered 2 new countries: Iceland through Alterra and Chile through Energía Llaima. We also signed or renewed 2 PPAs for 40 years in BC: Walden and Brown. They are still in front of the BCUC, but quite confident that those will be finalized in the coming months.We also in terms of acquisition -- just to have a quick rundown of what we have achieved, we have done Alterra, Ledcor participation in Creek Power. If you remember, Ledcor had 33% of the common shares of Upper Lillooet, Boulder, Fitzsimmons Creek. So it was a good acquisition there to hone 100% of these facilities.We have bought the Phoebe solar project. We have made the investment in Energía Llaima. And with Llaima, we have made the acquisition of the Duqueco hydro project, a 140-megawatt facility. Acquired Hillcrest solar project and we did the transaction with TransCanada to acquire the remaining portion of the Cartier Wind Farm that was owned by TransCanada. So in a way, we just grew our installed capacity by about 1,200 megawatts this year. So quite an achievement for our team.Now if we focus on 2019. There's definitely a big focus on making sure that we will be selling an asset or part of an asset to repay the $228 million bridge facility that was put in place for the acquisition of Cartier. On this, I can just say that it's progressing very well. We'll be in a position in the next month or weeks to give you more clarity and more guidance on what we're going to do. But I'm pretty pleased on the advancements.As we mentioned, I think that Iceland was focused in many of you as a potential asset for sale. Like we said, it could be a target, it could be something that we undertake in the year. As we remember, our cost is around $340 million and we think that asset has a greater value than this. So no official change in our position, but we can say that we are pleased with the process.The construction. We will be focusing on making the COD on Phoebe, the solar project. Like I said, this is going very well. Just talked about Foard City. Foard City was initially advertised as a 353 megawatt. It could be 325 megawatt. We think that we have room to put about 130 machines on the site. So like I said, quite optimistic on our ability to complete the project by the end of the year.In terms of development, obviously we'll be busy also this year. We have acquired the Hillcrest in Ohio and other solar project in the U.S. I think that Hillcrest is the next project that we will be able to start construction on. We have all the permits. We have all the interconnection agreement and construction agreement for the interconnection. So getting really, really close to have the ability to start the construction on Hillcrest.We're also wanting a strategy to make sure that we were going to focus on solar project in the U.S. The idea is to create our own greenfield project. We've been working with the team on the ground in Texas and other part of the United States. The idea is to create our own greenfield and to potentially have a partner to develop those because this is the next wave of development in the U.S. as the PTC that is usually used for wind is slowing down. The ITC for solar is still alive and kicking for the next few years, so we want to make sure that we have a good part in that development in the next few years in the solar industry in the U.S.We will be focusing on solar and battery storage. As you know, we're developing the 2 projects in Hawaii. And I'm glad also to report that we have secured another good site on Maui in order to be even more competitive in the future RFP that are projected to happen in the next few years in Hawaii. So Hawaii is still a focus of the company, not just to finalize the 2 projects that we have, but to further our presence in Hawaii. This is something that we will be active also in 2019.Project in France. We haven't talked about France too much. We have not been too active in acquiring facility in France, but we've been very focusing on developing our own greenfield project in France. Glad to report that we have about 68 megawatt of project that are getting ready this year to be filed for construction permit. And usually it takes about 12 months to have the full green light after that. So next year will be a interesting year for us to start applying these projects either in RFP or for the contract of the -- open contract in France.We also have grown our prospective development in France now to 260 megawatts and still working on acquiring other land in France. So France is still quite important. We have now focused our development towards our own project and perhaps doing joint venture with smaller player to advance their project.In terms of activities in Chile, of course we have Frontera and El Canelo. Those 2 hydro facilities are still part of the development in Chile. We're working hard to find ways to finance these projects on a project finance basis. We're advancing slowly on that aspect, but still are focused on it. We would also like to increase our portfolio in Chile in terms of solar and wind. And the idea is to have a diversified portfolio so that we have a good offer to the corporate offtaker in Chile.Opportunity in Canada, we're still focused on finding some small opportunity in Canada with First Nation. We have a few leads that I think will be announced during the year. So Canada is still a potential for development in hydro and wind with First Nation.And also for the acquisition, we'll definitely complete the integration of the Cartier and Alterra team. And we'll be continuing to assess some good acquisitions in all our markets, Chile, USA, Canada if any good assets are coming into our radar screen.And France, we're still open, but the cap rate in Europe are quite challenging for us to think that it's worth the effort to acquire existing facilities, especially solar is very expensive in France.So in order to give you a little bit of a guidance. I think we came up with the 2019 forecast, where we hope to have about 20% increase in our generating capacity. Revenue should be increasing by 15%, adjusted EBITDA by 15%, adjusted EBITDA proportionate by about 12% and free cash flow by 10%.I think that on the basis of free cash flow, we are quite conservative on that approach. I think we have put quite a bit of prospective expenses in those numbers and we've been -- somewhat been conservative also in our JV distribution. So I think that 10% is, like I said, quite conservative, but nonetheless it's still a good increase over year.So on this, I think I will open up the question. And again, thank you for listening.

[Operator]

[Operator Instructions] Your first question comes from the line of David Galison with Canaccord Genuity.

[David Galison]

So my first question is just on -- I know you can't talk much about the process for divesting HS Orka assets. But can you talk about the landscape maybe of the interested parties and if there are multiple parties or is there one main person that's showing the interest?

[Michel Letellier, President, CEO & Director]

The only thing I can say, David, is that we're getting closer and we have very good interest with very serious parties. So that's -- and the only thing I can say is I'm very confident and very pleased with the discussion we're having.

[David Galison]

Okay. And then, now that you've had the Alterra assets under your wing for a good -- a bit of time, have you had an opportunity to sort of look at the and reevaluate the long term generating potential from those assets?

[Michel Letellier, President, CEO & Director]

Yes, we're maintaining the long term forecast. I think that when we made the acquisition, we made our due diligence and put the long term average according. I would say that the one that's been a little bit of a challenge is Shannon. Flat Top has just been put in commercial operation. And in terms of -- we had a little bit of a availability issue with Vistra. It's under warranties. Those have been worked on and advanced. On Shannon, we have had also a very productive I would say renegotiation of the service agreement of GE. They've been working also on some warranty issues on blades. So I think that going forward in 2019, those little things will be behind us and I think with the GE new contract we will have some very good availability on Shannon. The wind in Texas has been somehow a little bit weaker than the long term average. I think that on Shannon, we had mentioned that when we bought the Alterra that Shannon -- our own long term average was a little bit lower than the previous long term average that was put forward, Alterra. But other than that, we're pleased with the hydro, we're pleased with the solar. So no, I think that we're okay. We're working towards making sure that the availability on the machine are there, and this is quite important. And if the wind is there, we'll be able to be taking advantage of it.

[Operator]

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

[Nelson Ng, Analyst]

Just a quick one on Foard City. You mentioned that the facility size might reduce to 325 megawatts from 353. Does that result in any issues with your hedges? Like are you over hedged and would you have to kind of scale back some your hedges?

[Michel Letellier, President, CEO & Director]

No. If you remember, we have a contract, a PPA with Vistra for 300 megawatts. So we had actually about 50 megawatt of un-hedged that we were looking to sell under a PPA or putting a long term hedge on it. So I guess even with 25 megawatt, we still have some room to sell it directly on spot or to sign another hedge. But we only had 300 megawatt of PPA. So there's no issue there. And Vistra is working very well with us in order to have potentially a 2 phase COD, I would say, system. So like I said, we are very confident that we will have in the next weeks the permit, the full permit for 94 turbines that we have located in the previous FAA permit application. And we have to relocate the 36 left. And this is why it might take a little bit more time on those 36 depending on how fast FAA can proceed. But there is no argument with the base on the location on these. We have now negotiated a area where we can place these machines. It takes the processes time to get them finalized and get it through the administrative steps.

[Nelson Ng, Analyst]

And just to clarify, are both phases expected to be completed this year or is Phase 1 this year and Phase 2 sometime next year?

[Michel Letellier, President, CEO & Director]

No, no, I'm hoping that the Phase 2 will also be done for December. Like I said, it's hard to put a hard date. And that's why I said it might slip to January. But we're working hard, making sure that our contractor and all the team will be in a position to react fast in order to -- as soon as we have all the permits on those -- the remaining 36, we will be able to execute on them fast.

[Nelson Ng, Analyst]

Okay, got it. And then just switching over to Quebec. I think in the commentary, you mentioned that there is some PPA expirations and you've just kind of given notice to extend the term of that PPA. Generally what has happened in the past in terms of PPA expirations and extensions? Like has there generally been a small haircut in the PPA price before the term has renewed?

[Michel Letellier, President, CEO & Director]

Yes. As you know, most of the PPA that we have in Quebec came from one RFP called the 91 RFP, [Foreign Language]. This is the vintage of these initial contract. We have so far negotiated 2. And Hydro-Québec has initiated also discussion on the project that we -- we have Chaudière and SM-1 that are our coming due in the next year. So everything is going smoothly. But yes, we have a little bit of a haircut. I think that we mentioned that the pricing is somehow a little bit lower. But I think that you've seen what had happened in Saint-Paulin and Windsor. So these are the same range or roughly the same range that we are negotiating with Hydro-Québec these days. But there's no issue on availability to renew. It's just finalizing the price.

[Nelson Ng, Analyst]

Okay. Just one last question. Moving to France, you mentioned that you're working on your own developments with that focus. Are any of those projects advanced to a stage where you can submit them to any of the French wind RFPs that are coming up?

[Michel Letellier, President, CEO & Director]

Yes, like I mentioned, we have about 67, 68 megawatt that we'll be in a position to submit for or apply for construction permit. And usually it takes anywhere between 9 to 12 months to get the full release. And then -- so something -- at this time next year, we'll be in a position to apply for a contract for difference or to submit into the future RFP. So it's getting there. I know it took a bit of time, but as we -- as you know, developing your own project in France can take 5 to 6 years. And as we started about 3 years ago, so we're in line. So this is the first phase or the first wave of project that have been developed by our own team that will be in a position to get developed. So I'm quite excited about it. And like I said, we're growing the remaining. So we have another 200-and-something megawatt that are starting into the process and are at different stages. So from now on, I guess every year we'll have a next wave and next wave so that we will see our own greenfield portfolio being put to work.

[Nelson Ng, Analyst]

And this is all wind, no solar yet, right?

[Michel Letellier, President, CEO & Director]

All wind, yes. So...

[Nelson Ng, Analyst]

Or a little bit of both?

[Michel Letellier, President, CEO & Director]

We're still open to look into solar. But solar in France is really, really, really competitive. So -- but we're looking also in solar, but I would say the main focus was wind, onshore wind, yes.

[Operator]

Your next question comes from the line of Rupert Merer with National Bank.

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

So looking back to potential asset sales, it sounds like you're quite well advanced on some discussions for recycling capital. Is there reason why you're not holding any assets on your balance sheet as -- classified as held-for-sale?

[Michel Letellier, President, CEO & Director]

Well, that's a good question. Yes, I think we had an interesting discussion throughout the year-end with our auditor. But until we have a firm offer, it's always difficult. Even though we have some good discussion and we're confident in the process, it's never a sure thing. So until we have finalized some firm documentation, we took the -- I would say the conservative approach in making sure that we're not putting -- we're not acting too fast in terms of accounting methodology.

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

Okay, great. And there does seem to be a couple of changes on the accounting methodology. I see you're now consolidating the solar assets and reporting the EBITDA from the Blue Lagoon. Can you walk us through the changes you've made on how you're accounting those assets?

[Michel Letellier, President, CEO & Director]

Yes, Jean-François will help you. But that was something that -- the 2 solar assets, if you remember, we had a small partner there that we changed. So -- but Jean-François, go ahead.

[Jean-François Neault]

So just -- we practically reviewed the contract now with Kokomo and Spartan that you're referring to. And clearly, it is an asset that we can now consolidate looking to the contract with KPMG, our auditors. So we were able to reclassify them in our books as fully consolidated. So that was a review, part of the 2018 fourth quarter. And your other question in terms of Blue Lagoon. You have to remember, Blue Lagoon is -- we're consolidating HS Orka, which -- HS Orka is 100% in our books and HS Orka owns 30% of the Blue Lagoon. So part of that -- since we consolidated 100% of HS Orka, we need also to account for the share of joint venture of Blue Lagoon. So it's in our joint venture notes...

[Michel Letellier, President, CEO & Director]

Yes. I think, Rupert, that -- as you know, Blue Lagoon has shown and has some very good financial reporting. So I think it was hidden in the -- in all the financial reporting. So it was I think important to take it out and show the people that Blue Lagoon has quite of a strong financial result. So it was important. And it's into a joint venture. Also, I guess that as we are getting more active in the U.S., this tax equity structure is very complicated for people to understand. So Jean-François and our auditor will work hard towards trying to find ways to give you a little bit more color in terms of EBITDA and the amount of PTC that these projects are generating to I guess help our investor and the financial community to understand the magnitude of the financial activities related to these assets.

[Operator]

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

[David Quezada, Equity Analyst]

My first question here is just on your U.S. wind business. I think you have some sites like Boswell and Jawbone. I believe you have just a land stake in Colorado. Just wondering if there's any update on any of those projects.

[Michel Letellier, President, CEO & Director]

Yes, good point. Jawbone is a challenge one. As you know, we never really put it forward as a super active project. We still hold it and see if we find some financial way to create some value there. But the most important one is Boswell. As you know, we have 4 PPA totaling 320 megawatt in Boswell. The biggest issue is that we have an interconnection date of 2024 as an embedded producer, so -- and we have these PPAs that theoretically have a COD date of 2020. So this is the issue we're having with PacifiCorp, is that we have this conflict of trying to advance the interconnection date, which they try to, I would say, not agree. And we're in the process of challenging them in the public commission. It's a, I would say, complicated process. If we win, I think it's a big win. On the other hand, we might open up in any discussion to find financial benefit for both sides. We could end up having a win-win discussion with them. So working hard -- the team is working hard to advance this project. If we missed this date and we have not the possibility to advance to the interconnection date, we'll be focusing on permitting the interconnection. It's very well advanced. We only miss a few step. And then we would have a 320-megawatt great location, only one land owner, a huge space, and the ability to interconnect on the highway towards California. So I think that there is value in Boswell. But like we said in the past, we made the acquisition of Alterra based on either Foard City or Boswell being a successful development. And I'm happy to report that Foard City, like I said, is going well. We're happy with the type of return we're going to get with Foard City. And if we can get something out of Boswell, we'll be even more happier with the total transaction we did with Alterra.

[David Quezada, Equity Analyst]

Okay, great. Thank you. That's helpful color. And then maybe just a kind of a more general question. Now that your footprint -- you cover several different geographies, I'm wondering if you could just maybe give us some broad thoughts on capital allocation and how you prioritize the various geographies?

[Michel Letellier, President, CEO & Director]

No, that's a very good point. I think that U.S. -- like I said, we still have a few windows for win in the US, but the next big thing in the U.S. will be solar and taking advantage of the remaining few years of ITC. We're getting ready in Texas. We've been looking at about 12 locations. We now have 4 or 5 very good locations that we're working to extend the land holding. And all those were based obviously on good interconnection possibility. So -- and each of them are anywhere between 150- to 250-megawatt type. So the idea is to create value by our own greenfield development team. And perhaps obviously it will be difficult to do all those in a few years. If we 3 or 4 200- or 300-megawatt solar development, it will be a challenge to develop them all at once. So once we would have created value, I think that we'll be looking to joint venture with potentially some partner to develop those. But the idea is to take advantage of the ITC. We know how it works. We know the tax equity folks. We have a very good presence in Texas and in Ohio now. So the idea is to have some greenfield development in places where the market is liquid and attracts a lot of attention. The idea is to create greenfield development return in order to take advantage of this wave. France, as I mentioned, for us is a great market, but the increments on each project is small. But when you develop your own, those are profitable. So France, the idea is to have our team there to be autonomous and work into their own development. We now have about 13, 15 people in France, in Lyon, and they are focusing, like I said, on greenfield. Canada is always interesting, but has little opportunity. We'll be still focusing on the future RFP in Saskatchewan. We have land there that we can recycle and try to be I guess focused on what the utility wants. We've seen that they want price, and I guess we'll be refocusing on our approach to provide what they want. Chile is still a big focus for us through Llaima. The idea is to build, like I said, a portfolio. So those are the main drivers that we'll be looking and focusing on in 2019.

[Operator]

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

[Jeremy Rosenfield, Equity Research Analyst]

Just a couple of cleanup questions. First on the financial outlook assumptions for 2019. Are you assuming anything in the numbers from Foard City or is Foard City completely excluded from the sort of year-over-year changes for output and EBITDA, free cash flow, et cetera?

[Michel Letellier, President, CEO & Director]

It is excluded.

[Jean-François Neault]

Yes, it is.

[Jeremy Rosenfield, Equity Research Analyst]

Okay.

[Michel Letellier, President, CEO & Director]

So if we get to have a little bit of a quicker [ put ], that might be a plus.

[Jeremy Rosenfield, Equity Research Analyst]

Okay. That's what I was getting for. And then can you just sort of talk a little bit more about Foard City in terms of what that might look like if you would start the PPA for a portion of the total capacity? Are you able to get some of that fixed pricing for the initial 90-some-odd turbines and then the remainder goes for a second COD? Or how does that work?

[Michel Letellier, President, CEO & Director]

Yes, it's -- well, it's been finalized with Vistra, but the initial drafting that we had was quite flexible and had a very little -- actually, a little financial liquidated damages built in. So it's very friendly to the development. Obviously, they knew the a project could have a little bit of a setback depending on how fast you can build it and permit it. So that was already put in the original language in the contract. So very flexible on having the firm price for the first phase. And as soon as the other would be coming, it would be seamless to have them being introduced in the original 300 megawatt PPA. So I would say that we will try to have as fast as possible the 300 megawatt that the contract entitled -- or is entitled for. And the remaining megawatt would be then negotiated on in other terms. But we'll be definitely focused on delivering on the 300-megawatt Vistra long-term contract.

[Jeremy Rosenfield, Equity Research Analyst]

Okay, so just to clarify. You wouldn't have sort of merchant exposure for those initial turbines until everything is in place? You'll get the fixed pricing for the first 90 turbines or whatever it is?

[Michel Letellier, President, CEO & Director]

Yes, that's the way the discussion are ongoing right now. Yes.

[Jeremy Rosenfield, Equity Research Analyst]

Okay, I understand. And then I just had maybe just 1 or 2 other questions. There was a note around redesign to the Frontera project. And I'm just curious if there -- if you had a timeline or if you had an idea as to when that may be concluded?

[Michel Letellier, President, CEO & Director]

Guys are working -- obviously, when we came in -- it's a -- and 110 megawatt hydro is not -- well, it's hard to be meaningful. It's just that this is a low head hydro. So a lot of concrete volume, big machine and also big gates to pass the sheer amount of water. So there's definitely a lot of engineering and value added there that we're trying to put in place. It's advancing well, together with the possibility of finding a way to have a project finance put in place. So we're working hard with the guys in order to minimize the cost and not necessarily minimize -- or certainly not minimizing the quality of the work. But when you have so much concrete and dealing with a lot of volume of water, there's a little bit more room to add value in terms of engineering. So we just wanted to make sure that before finalizing the documentation for construction negotiation, we wanted to work still a little bit on this. Hopefully, it should be done in a few months. And like I said, the challenge there is to get a decent financing.

[Operator]

Your next question comes from the line of Mark Jarvi with CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just wanted to go -- in the outlook, you guys talked about the potential for some acquisitions into new markets. Given that you've got lots of opportunity in the U.S., projects in Chile and the stuff at Hawaii, what would be the motivation to add a new region?

[Michel Letellier, President, CEO & Director]

Not so great in a way that it's not a top priority. But in our business, you never know. If something comes that makes a lot of sense -- we're not saying never, but it's not a focus. I guess that the focus is making sure that we take advantage of the existing market where we are. Peru is still also on our radar, if something comes in Peru that makes sense. We have looked at Peru a lot. So we're comfortable with Peru, Chile. France is definitely. But if something comes up near -- something in France, near Europe, we might consider it. But we're not aggressively trying to develop a new market. Like you said, the U.S. in itself is a huge market and has a lot of potential. So definitely we'll be focusing on the existing market for this year. I think that our team has worked very hard in 2018, so I think it's time to focus a little bit in 2019 on our existing market, yes.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then just moving to Hawaiian projects. What do you guys think in terms of the financing structure for those projects and how much equity comes from Innergex?

[Michel Letellier, President, CEO & Director]

We'll give a little bit more guidance there. We're finalizing the construction cost and the supply of the panel. And also we will be initiating some discussion with the tax equity. It's a little bit early to be going for or giving guidance on the total financing packages there. But we -- and it's a 2022 COD date. So I think that we have time to get the best design and the best pricing on all the suppliers. So I don't want to dodge the question. It's just I think it's a little bit early to finalize the capital structure there.

[Operator]

[Operator Instructions] Your next question comes from the line of Jeremy Rosenfield with Industrial Alliance Securities.

[Jeremy Rosenfield, Equity Research Analyst]

Just one final question maybe on France and on the France market and this is something that's been talked about often in the past in terms of wind resources and capacity factors. Just in terms of your development prospects as you look forward, do you think turbine improvements with some of the future projects that you have could allow you to capture some of the lower wind resources in France? In other words, could you have higher capacity factors with better machines as your development projects move forward?

[Michel Letellier, President, CEO & Director]

That's a very good question, Jeremy. Of course we're learning from the operating experience that we're getting in France. I think that obviously we bought some assets. We haven't developed yet our own. So we have learned quite a bit what -- in English a double negative -- we have learned what not to do and we will be focusing on better development on the future development in France. I think that one thing that a lot of developers had fallen into a little bit of a difficult situation is the noise study in France. The law there is very and rules are very, very strict and a lot of curtailment and sound study can be triggered by a local resident that feels that they have a right to -- well, not feel -- but feel that they have an impact from the noise. So this has to some degree reduced our output. It's not only wind. It's also curtailment because of noise and also a shutdown for noise study to make sure that we understand the problems with local residents. And in some cases, we also have proposed some investment in some residences in order to minimize their noise impact. And so far that program has proven to be very well received in communities and it will help in the future to reduce our curtailment in wind. But this is probably the place where our development team in France and our experienced technical team will be managing for the future. So our own greenfield project or our own project will have that in mind. Plus, you're right. In some places, there's a little bit less wind in France that triggered, I would say, a non-start of the turbine. So definitely working with turbine manufacturer and their new machine perhaps will be better suited for their very low regime that sometimes happen in France. But all these things are getting into our black book of what to do and what we should be doing to develop the market in France. And we have taken very good note. And obviously, we'll try to have our own project to be best-in-class in France.

[Operator]

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

[Sean Steuart, Research Analyst]

Just one follow up question. Michel, you mentioned that with respect to the free cash flow guidance, it's for 2019 potentially conservative because you have higher development spend assumptions embedded in that figure. Can you give us an idea of year-over-year how much more those development assumptions might be in that guidance?

[Michel Letellier, President, CEO & Director]

Yes. We had -- this year we had about $19 million of prospective expenses. In that, you have about $3 million out of Iceland. For some degree, I don't want to be too specific. And the budget is to be discussed obviously on those prospective and the justification has to be put forward during the year. But in those projection, I think we have close to $24 million, $25 million of prospective expenses in that guidance. I'm not so sure that we're going to get there in terms of total spend. We'll be focused definitely to spend that money at -- in a way that will create value of course. So -- but that's why I'm saying it might be a little bit conservative. And also Foard City was not put into those numbers. I think that this is also a little bit conservative. And we have been also not putting distribution from Chile, although Chile is generating cash in terms of operating. Since Chile is developing, that cash is reused in the development in Chile. So theoretically as a joint venture, we haven't had a dividend distribution. So it's difficult to put it into the cash since we're not consolidating Chile. So that part also should be understood that Chile is generating cash in the existing facility. But the Chile operation are reusing that cash to continue the development of the projects.

[Operator]

Ms. Vachon, there are no further questions at this time. Please continue.

[Karine Vachon, Director – Communications]

Well, thank you, everyone. We look forward to speaking with you at our next results conference call in May.

[Michel Letellier, President, CEO & Director]

Thank you, everyone, and thank you for your support. We're looking for a great year in 2019 again. Thank you.

[Jean-François Neault]

Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you.