Innergex Renewable Energy Inc
TSX:INE
Earnings Call Analysis
Q4-2023 Analysis
Innergex Renewable Energy Inc
The company has showcased a strategic focus on market diversification, enabling it to capture growth through complementary and beneficial projects. With over 10,000 gigawatts of prospective opportunities in its portfolio, the company exercises selective judgement to engage in the most accretive projects. The team’s experience and a new capital allocation strategy fuel confidence in the company's execution capabilities.
Innergex's financial framework is constructed on three pillars designed to enhance shareholder value: aiming for double-digit after-tax levered internal rates of return (IRRs) on capital invested, driving sustainable growth in free cash flow per share, and adhering to a 30% to 50% dividend payout range. The company's investment philosophy stresses quality over quantity, ensuring projects meet strict criteria for risk-adjusted returns. With a conservative balance sheet management—prioritizing non-recourse project debt and maintaining investment-grade corporate leverage—the financial outlook is poised for responsible growth and risk management.
The realignment of capital allocation is a strategic move, not driven by affordability, but rather to boost financial flexibility and fund growth investments predominantly from retained cash flows. This approach will be complemented by value-creating initiatives such as capital recycling, which involves selling down stakes in certain assets to reinvest the proceeds into new accretive projects. This method will concurrently manage risk exposure and improve portfolio quality, enabling continual reinvestment and self-funding of future projects.
The company has pledged to deliver balanced returns to shareholders, with a dividend of $0.36 per share falling within the targeted payout range of 30% to 50%. This disciplined strategy, coupled with the patient development of high-quality projects, aims to optimize value creation. Free cash flow per share is expected to increase from greenfield opportunities, along with strategic share buybacks and capital recycling. However, the translation of this organic growth strategy into free cash flow per share will necessitate time as the company refuses to compromise on achieving its set target returns.
Innergex concluded the fourth quarter of 2023 on a solid note, with an impressive 30% year-over-year increase in its adjusted EBITDA proportionate, reaching $186 million. This rise was attributed mainly to enhanced generation trends, especially within the hydro portfolio. Despite the fact that actual generation was below long-term average, the effective generation mix and higher production at facilities with elevated pricing aided in balancing out the effects of reduced production.
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy's 2023 Fourth Quarter and Year-End Results Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Naji Baydoun, Director, Investor Relations. Please go ahead.
Hello, everyone, and thank you for joining us today. I'd like to specify that this conference will be held in English. Members of the media are invited to ask their questions by phone after this call. A presentation supporting today's discussion is available as we speak on the homepage of our website at www.innergex.com. This call contains forward-looking statements within the meaning of applicable securities laws. Although the corporation believes that the expectations and assumptions on which forward-looking statements are based on reasonable assumptions under the current circumstances. Listeners are cautioned not to rely unduly on these forward-looking statements as no assurance can be given that it will prove to be correct. Forward-looking information contained herein is made as of the date of this call, and the corporation does not undertake any obligation to update or revise any forward-looking information, whether as a result of events or circumstances occurring after the debt hereof unless so required by law. During this call, we will refer to financial measures that are not recognized according to International Financial Reporting Standards. Please refer to the non-IFRS measures section of the MD&A for more information. On today's call, we will discuss our updated capital allocation strategy, which we announced via a separate press release yesterday evening, our Q4 and fiscal year 2020 results, and our 2024 guidance. Our speakers will be Michel Letellier, President and Chief Executive Officer; and Jean Trudel, Chief Financial Officer. I will now turn the conference over to Mr. Letellier.
Thank you, Naji, and good morning. Thank you for joining us. As Naji mentioned, yesterday evening, in addition to our earnings release, we announced an updated capital allocation strategy. After much consideration and comprehensive analysis, we have made the decision to focus our capital allocation strategy to support our growth. Specifically, we are establishing a target dividend payout ratio between 30% and 50%. Jean will provide details in his section. Two key messages I would like you to take away are: we are shifting our focus to execute on significant greenfield development opportunity that we see ahead, which I'll detail in a moment. We will be in a strong position to primarily sell funds for our organic growth going forward. Next slide. We are providing our strategy toward accelerated growth by updating our capital allocation policy. We are positioning ourselves to seize the unprecedented growth opportunity in our industry. We have never seen this level of growth for viable energy development in the past. The strong market growth we are experiencing in our core market is creating a window of opportunity to capture new capacity driven by both government and corporate decompensation goals. This is due to the deficit in energy needs and increasing demand for clean power. We see a substantial runway for significant and durable growth ahead. We are excited about the future of Innergex as we have multiple ways we can win in our market. By pursuing profitable projects and delivering consistent free cash flow per share growth, we believe we can create value and deliver strong returns for our shareholders. Next slide. We believe we are well positioned as a leading diversified global renewable IPP with scale. Our diversification and unique portfolio characteristics provide us with a solid foundation to execute on strong growth that we see ahead in our 4 core markets, which is Canada, U.S., Chile, and France. Given our expertise, we are uniquely positioned to develop projects across all our existing technology of hydro, wind, solar, and battery energy storage. Overall, our exposure to low-risk, high-growth markets position us well to capture new opportunities while remaining a North American business. Next slide. We want to take a moment to clearly state our key strength at Innergex, which will continue to support our success going forward. We have a well-seasoned leadership team with deep industry and market knowledge. We possess the expertise of a full life cycle project developer that allows us to originate, develop, finance, and commission projects across various technologies and geographies, and efficiently execute projects of all types and sizes in our varied geographies. Our experience in forging enduring partnerships with First Nation and the local community is a unique advantage that makes us a leader in our space. We have repeatedly been chosen as a partner of choice for developing and operating clean energy projects. We have developed a strong track record in this domain, which will remain critical to our success going forward. We are leveraging our experience working alongside partners to develop projects while respecting their rights and advancing economic reconciliation. We are leveraging our long-standing approach of balancing people, the planet, and prosperity. The proposed projects that are beneficial to all. We also have extensive experience as assets operator. We self-operate most of our projects. We have the know-how to efficiently operate our assets and the ability to quickly correct personal issues when they arise. Core to our expertise is also our top-tier portfolio of hydro assets. This perpetual asset class provides long-term cash flow, support our balance sheet, and distinguish Synergex as a leading power producer. Next slide. Our balanced growth strategy is focused on organic opportunities and is based on 3 key areas. First, we want to continue to develop accretive projects at a sustainable pace. We will ramp up our development activities, primarily focusing on wind and solar assets in our core market as well as complementary storage capacity. Hydro development also remains attractive as we are one of the few players who have the expertise to capitalize on future opportunities in this sector over time. Second, we are going to remain focused on our key markets. We are prioritizing our development efforts in Canada and in the U.S., where we have established operating assets, development portfolio, and significant operating experience. We see strong development potential, favorable environment for construction and development, and strong government policy support. We also continue to capture opportunities in France and in Chile, where we have established great development teams. Third, we will focus on optimizing value for our existing portfolio. This active portfolio management approach allows us to renew expiring PPA and potentially repowering certain assets. This will extend the cash flow profile of our existing portfolio and will also allow us to refinance certain assets and giving us more flexibility. Our team will find and secure profitable investment opportunities that will enhance our current portfolio and contribute to delivering additional value to our shareholders. Next slide. Now we'll detail our approach to each of our key markets: Canada, our home base represents a large rapidly growing, and highly attractive market for renewable energy. We have all the ingredients to be successful in Canada like we did in the past. We see tremendous growth opportunities in the country over the next 10-plus years, which will make this region the primary growth engine for Innergex. Our teams are actively developing projects to be submitted in upcoming RFPs to secure profitable greenfield opportunities and capture this wave of growth. We have significant experience developing projects and our market leader. We will leverage our expertise to capture growth, supported by our strong relationship with First Nation communities and utility customers. These elements will allow us to execute on significant opportunities in Canada backed by long-term high-quality offtake agreements. Several provinces have taken meaningful step to plan new RFPs and increase overall procurement of renewable energy. Hydro-Quebec is leading the way with its ambitious 2025 action plan: British Columbia, Saskatchewan, and Ontario have also established impressive targets to further deploy renewable energy solutions. Innergex owns and operates assets in most of these regions, positioning us for continued growth. Next slide. In the U.S., we are a construction project in Wyoming NOI, while also looking at compelling renewable energy opportunities in selected markets. The passage of IRA has driven increasing investment into the renewable sector. Our focus is optimizing our footprint to concentrate on high-potential areas where we can leverage our greenfield capabilities. Our development approach and learning experience will allow us to selectively pursue accretive projects, including in the large corporate PPA market. The market in France and in Chile also feature very attractive opportunities for Innergex. We intend to continue bringing greenfield projects to life in both markets. In France, our growth is supported by our new strategic long-term partner, Crédit Agricole, and the strong growth outlook in the market for wind, solar, and battery storage. In Chile, our main strategy since we entered the market was to have a diversified portfolio that can respond to capacity and energy call for both utility and corporate customers. We are in a strong position to offer 100% renewable energy production on a 24/7 basis from a diversified fleet of assets with a strategic market footprint. Our recently commissioned storage project, coupled with the upcoming fit of our second-best facility will help us manage generation requirements and curtailment, while also capturing a healthy capacity payment and arbitrage on the market price. We also recently renewed our corporate PPA at the Pampa via terminal solar facility with Codelco, and we expect to be able to sign a new offtake agreement with the strong Chilean mining industry. Our market diversification allows us to capture complementary and accretive growth opportunities while remaining disciplined in our project selection. Next slide. We are very active in securing development options. We have a large and diversified prospective portfolio of over 10,000 gigawatt logo, which provides us with an opportunity to be selective in capturing accretive growth. We will continue to expand this portfolio, supported by our highly experienced team. I am extremely confident in our ability to execute on this plan, supported by our new capital allocation strategy. I will now ask Jean to elaborate on financial aspects of our outlook.
Thank you, Michel, and good morning, everyone. So at Innergex, our approach is based on a multistep framework with rigorous controls to manage all aspects of the development cycle. Our guiding principles on risk management help us to understand and mitigate risk from project origination and assessment, all the way through commissioning and ongoing operations. Being a long-term asset owner and operator is a key part of our success in greenfield development, and this approach to organic growth is core to our core strategy. As for our overall investment proportion, it is based on 3 key pillars: firstly, double-digit target returns. We target achieving double-digit after-tax levered IRRs on our invested capital. Secondly, sustainable free cash flow per share growth. We can best create shareholder value by focusing on self-funded organic growth at high returns. Although it takes time for upfront greenfield investments to translate into growth because of the funding lag in infrastructure projects, we are increasing our development activities to have a steady pace of project deployment over time. This should support a sustained pace of long-term growth on a per-share basis. And thirdly, a 30% to 50% dividend payout range. We are providing an explicit target payout range within which we expect to continue rewarding our shareholders with a healthy dividend. Furthermore, we believe that this range is aligned with our organic growth strategy and should allow us to have enough retained free cash flow to reinvest in the significant growth we see ahead of us. Our goal is not only to build megawatts but to execute on projects where we see the best risk-adjusted return potential and where we feel confident in successfully delivering projects with a margin of safety. We will focus on quality over quantity in the disciplined pursuit of projects that meet our strict risk-adjusted return criteria. Next slide, please. We also want to take some time to discuss our balance sheet management principles, which are based on 3 factors: firstly, prioritizing non-recourse project debt. This important funding tool not only allows us to manage project risks but also optimizes the cost of capital and is backed by the quality of our long-term contracts. Secondly, a conservative debt service coverage and amortization. We maintain high levels of debt service coverage. Most of our project debt is amortized over the remaining life of our PPA contracts. This conservative approach allows us to manage our debt in a prudent manner and allow our debt repayments with our cash flow profile. This should allow us to capitalize on refinancing opportunities in our fleet as the amortization schedules of our hydro debt is well below the useful life of the assets. We have demonstrated our ability to do so in 2023, and we will do so again in 2024 with additional hydro refinancing. And thirdly, maintaining our investment-grade rating, we remain committed to managing our corporate leverage to do so. Furthermore, we think it's important to discuss our leverage profile. Although it's easy to compare us to industry metrics at a high level, we believe that leverage should be based on a specific portfolio mix. In Innergex's case, given our elevated exposure to high-quality perpetual hydro assets, we can optimize our cost of capital and put incremental fixed-rate, low-risk project-level debt on our balance sheet. This key advantage represents an attractive funding tool for us and supports our portfolio leverage. Overall, our approach allows us to prudently manage our debt. We have a balance sheet that is appropriate for our unique long-life asset mix and that supports further growth. Next slide, please. Going forward, our funding strategy will prioritize internal sources of capital to increase our capacity to self-fund organic growth. By revising our capital allocation priorities, we are choosing to emphasize greenfield development activity. It is important for us to be clear about this. The decision to realign our capital allocation strategy was not based on affordability. As you will see when we cover our 2024 guidance, we have the capacity to fully cover our actual dividend using cash flow from existing operations, and the long-term outlook is positive. In the context of the significant growth we see ahead, as highlighted earlier by Michel, we have taken bold and decisive action to increase our financial flexibility and accelerate our greenfield investments while also reducing our reliance on externalities, both external issuances and our acquisitions of operating assets. Based on these updates, we expect to largely self-fund our growth investments from retained cash flows. While we strategically leverage capital recycling and refinancing tools, our guiding principles on portfolio management activities are as follows: First, value creation. In 2023, we crystallize value from our portfolio in France and broaden our strategic partner. This process allowed us to increase our investment economics. We see value in selective capital recycling and will look to reinforce our track record to value creation while pursuing further sell-down opportunities. Secondly, the risk management and portfolio high grading. We also see capital recycling as a tool to manage exposure and risk, allowing us to recycle capital for certain regions or assets into new accretive growth. We could look to utilize capital recycling to exit noncore markets or divest low-performing assets, thus high-grading our overall portfolio quality. And thirdly, funding, we see this type of initiative supporting our self-funding ambitions, allowing us to continue to reinvest in new projects over time. In conclusion, we will continue to expand on our capital recycling success. By realigning our dividend policy in support of our strategic priorities, we are increasing our financial flexibility, freeing up around $75 million per year to support sustainable and self-funded growth. As an example, over a 10-year period, this additional and growing excess capital could enable 1,500 megawatts plus of incremental development on a 100% self-funded basis. Next slide, please. If we think about our stated goal of securing 400 megawatts per year of new capacity, and we look out to 2030, we see a potential path to deliver on this goal. Here, we illustrate how by just taking our under-construction and under-development projects, coupled with the recently awarded Quebec wind projects, we are approximately at 46% of the way towards adding 400 megawatts per year through 2030. If we think about this goal in the context of our existing 10.9 gigawatts and growing portfolio of identified projects, we believe that we have a highly visible organic growth outlook. Next slide, please. In conclusion, our revised capital allocation strategy will enable us to provide balanced returns to our shareholders, a dividend of $0.36 per share within a 30% to 50% target payout range, growing free cash flow per share from accretive greenfield opportunities, and opportunistic buyback of share and strategic capital recycling to create additional value. We will be focused on selectively developing high-quality projects in our core markets. Our disciplined approach and a large pipeline of prospective projects mean we can be patient and monitor market conditions to maximize value creation. We will not invest in projects until we have a high visibility of being able to achieve our target returns. By focusing on self-funded growth and quality over quantity and given the time it takes to develop and construct projects, our organic growth strategy will require some time before it can translate into free cash flow per share for. Having said that, we are confident that this is the right path for Innergex going forward. Our recent successes in Quebec give us confidence that we can continue to create sustainable value for shareholders over the long term. Next slide, please. So with that announcement, let's turn to our fourth quarter 2023 results. For the quarter, we posted good results, with adjusted EBITDA proportionate of $186 million, representing a 30% increase year-over-year. This growth was primarily driven by improving generation trends, particularly in our hydro portfolio, where we saw generation improve to 104% of LTA versus the anomaly of 70% of LTA experienced in the fourth quarter 2022. Despite coming in 6% below LTA, our adjusted EBITDA was in line with our expectations. This is because we had a favorable generation mix with higher production at facilities with higher pricing which mitigated the impact of lower than LTA production. It's important to reinforce that our diversification strategy is working well and that generation is not the only driving force of our results. We also experienced a healthy growth of 12% year-over-year for adjusted EBITDA proportionate, which reached $735 million on a full-year basis in 2023. This increase was mainly driven by recent acquisitions, improving production trends in our hydro segment as well as contributions from newly commissioned assets. As for our cash flow on a normalized basis, we would have generated between $197 million to $212 million of free cash flows for the year. The major drivers of this increase compared to 2022 are similar to the previously noted elements, partially offset by higher principal debt repayments, maintenance CapEx, and free cash flow attributed to noncontrolling interest. On a normalized basis, our payout ratio would have been between 69% and 75%. So far, in Q1 2024, we are seeing good generation from our assets, which are performing in line with our expectations. Separately, and of note, yesterday, we also announced an NCIB program. This will allow us to opportunistically buy back up to 5% of our outstanding shares. Next slide, please. So based on recent macroeconomic trends and previously communicated elements impacting our path forward, we believe it is prudent to withdraw our 2025 targets at this time. Looking ahead, we want to provide an update on our financial targets. But in the meantime, we are introducing guidance for 2024. For this fiscal year, we expect adjusted EBITDA proportionate to be in the range of $725 million to $775 million and free cash flow per share before prospective expenses to be in the range of $0.70 to $0.85 per share. The key assumptions behind our 2024 guidance include production expectations in line with LTAs and asset availability of approximately 95%. Overall, we expect to deliver moderate growth in 2024 with more pronounced growth in 2025, following the commissioning of our projects under construction. I will now give back the floor to Michel for our 2024 corporate priorities and closing remarks. Michel?
Thank you, Jean. Before we conclude the presentation, I would like to reinforce our focus area for the months ahead. We will advance our under-construction project, the largest among them being the 330-megawatt Boswell spring wind project, which we expect to be commissioned by the end of 2024. We are also focused on building Alico NOI. Meanwhile, in the development, we will participate in RFP across the various markets in which we operate. We expect to bid well over 500 megawatts of project into several RFPs in 2024. We are targeting capturing 400 megawatts of new capacity award from our bid this year, just like we did in 2023. Finally, we will continue to strengthen our financial flexibility. Next slide. I would like to highlight why we believe Innergex is a unique investment opportunity and why we are confident in our ability to continue to win in the renewable energy market and deliver shareholder value. First of all, Innergex is a 100% renewable energy project developer and operator. We have a high-quality, complementary portfolio of assets that are diversified across hydro, wind, solar, and battery storage. Our base of premium hydro assets provides a unique advantage. Our assets are also well balanced across geography with operations in Canada, the U.S., France, and Chile. This diversifies our exposure to resources, customers, and contracting opportunities. Our assets are predominantly supported by highly quality PPA that are indexed to inflation and generate long-term cash flow. Finally, our disciplined execution on our growth strategy will enable us to deliver good long-term shareholder returns. Next slide. I will close with our key takeaway from today's strategic update. As we announced last night, we are taking strong action to pursue disciplined, sustainable growth. We have made the decision to recalibrate our dividend payout ratio to allow for additional greenfield organic growth. Our updated capital allocation strategy includes prioritizing our self-funded model and increasing financial flexibility. Finally, we will also look to optimize our existing portfolio of assets to create value. As we begin to capture unprecedented growth opportunities in front of us, we will remain disciplined on executing on profitable projects that will generate sustainable cash flow per share growth. I'm confident in our ability to create value for our shareholders, supported by our solid track record of success that will continue to build on in the coming years. With over 3 decades of industry experience and a strong commitment to sustainable development through 100% renewable energy, Innergex is prone to pursue greenfield development opportunities and deliver compelling risk-adjusted return on investment capital. With that, we'll now move to the Q&A session. Thank you.
[Operator Instructions]. Your first question comes from David Quezada with Raymond James.
Maybe a question just on your refinancing initiatives. I know that you have the 3 that you've already delivered and then another 3 that you've got for 2024, but I think that leaves you with about 11%. I'm just curious, is there a level where you want to keep a certain number of unlevered assets or how many more tranches of that could you do, if any?
Yes. Good question. And at the present time, we have one initiative ongoing, and it's the refinancing of 3 additional hydro projects that are based in Quebec. So we're working on this initiative in 2024. So we expect to have to have something to announce on this later on. That's at the moment, the only initiative we have. But of course, we have other -- as you pointed out, we have other unlevered assets. And so as we may see fit, we may actually enact other initiatives in the future to fund our activity.
Okay. Excellent. And then maybe just one more for me. Just with your comments around asset recycling. I'm just curious if there's any color you can provide in terms of what your priorities might be there. I know that you've got a lot of development-stage products in the U.S. I'm wondering if any of those in certain regions in the U.S. might be considered non-core Or what kind of will be the most likely assets that you could look to monetize? And what are the markets looking like today for those kind of assets?
Yes. I guess there are several assets that we have, as you point out. So our guiding principle, I guess, when we think about capital recycling is to first the value creation. So it needs to bring value as we've done in France, as we've done in France in 2023. And then as I mentioned earlier, we're trying to look at risk management. So high-grading the value of our portfolio. As we've done when we sold Iceland, for example, or [indiscernible] last year, and some development assets in Hawaii that we sold as well. So there are opportunities in our asset mix to do this again in 2024 or future years. And the third guiding principle is really funding. So it needs to be substantial and needs to bring us funding as we did in Nice in France, for example. So you're right, there are other assets, and we're looking at this with this angle.
Your next question comes from Sean Steuart with TD.
I just want to follow up on David's question with respect to the liquidity position. So you ended the year with available liquidity of around $630 million, and you've articulated the under-construction pipeline, the advanced development pipeline and I guess, the target of 400 to 500 megawatts of year per year of development. What do you think the right liquidity needs to be quarter-to-quarter to have comfort that you can advance those opportunities? And I guess I'm just trying to gauge that with -- you seemingly have a reasonable liquidity cushion now, especially with the lower dividend. Is there a potential that you can delay some of these refinancing opportunities or asset recycling opportunities to wait for better market conditions, and how does that play into sort of an optimal liquidity target quarter-to-quarter for the company?
Yes. So a very good question. So this is exactly fundamentally the reason for our new capital allocation. We want to have flexibility. And this brings us additional flexibility to actually allow us to time refinancings or asset sell-down so that we're not actually stuck in a space where we have to do something. So we can be more patient, we can be more flexible. And right now, we try to self-fund all our operations, and we don't foresee the need for additional capital. As you point out, we have a good amount of liquidity right now. So with this additional portfolio of hydro refinancing, I mean, we'll be in a good spot.
And I think that the last update was $80 million in incremental proceeds from hydro refinancing. Is that still the right number?
Yes, that's still a good proxy.
Okay. Next question. Just the NCIB, I presume that's not just there as a placeholder, and your shares are reacting positively out of the gate this morning. But can you give thoughts on your assessment of intrinsic value versus where the shares are trading now and a commitment to the NCIB at these levels?
It will be also a decision of the Board. We have established the NCIB 2B opportunistic in taking the investment on our share. Obviously, we -- as you can understand, we see a lot of growth opportunities. But obviously, if we can have the opportunity to buy back some of our shares, this is going to be accretive right away on the cash flow per share basis. So we will monetize the evolution on the market and be in contact with our Board of Directors to see how aggressive we can be with that program.
Your next question comes from Nick Boychuk with Cormark.
Please provide a bit of extra clarity on your overall growth objectives. Is the self-funding mechanism of, say, 400 megawatts of gross capacity for a year the ultimate goal? Or are you guys also going to be looking at other opportunities and considering those? And if so, I guess, a little bit more color on the funding of that further out.
Yes. I'll take the first half and perhaps Jean will contribute to the funding part. But we have put this 400-megawatt of opportunity or gold. I think that there's more opportunity in all the markets. You heard me talking about Canada, U.S., Chile, and France. What we have also said is that we want to be disciplined. We want to win projects that are profitable. So that's why we're limiting our goal today at 400. That doesn't mean that we will not pursue more but will be selective. We want to make sure that the project that we will be winning will be profitable. Now in terms of financing these opportunities if we have success, you heard Jean, we will be looking toward recycling. We have more flexibility with the dividend. But having good projects with good returns has never been an issue to get funding by a partner or sell down a piece of that. So what we are focusing is making sure that the project we will be winning will be profitable.
And on that profitability, my follow-up was going to be about how you're prioritizing those. Are you seeing a different return profile by region or asset type? And if you can explain how you're thinking about ranking those priorities. I think that would be a good color.
I think that we have a very special position in Canada. I think that we have proven in the past that Innergex has been very successful developing in Canada. You know that most of the projects in Canada will require to have some sort of a partnership with First Nation and communities. That's something that we have done in the past, and we are very good at doing. This is giving us, I think, a leadership position and a unique ability to create value in Canada. That doesn't mean that we would not be active in the other market. I think that we have a better, I guess, hedged in Canada to create value for our shareholders. U.S. has a great opportunity. France, as you have seen, we have created quite a bit of value in our portfolio has been shown with the sell-down to Crédit Agricole. Chile is on a good path. We stick to our strategy of having a portfolio. I'm confident that we will be winning RFPs in Chile in the next few months. There's some great opportunity going down there as well. But to your point, I think that where we can create more value, perhaps is in Canada and the quality also of the PPA are great, they're 25, 30, 35 years index BPA, take or pay. So that's the type of PPA we like as well.
Okay. So to clarify, I guess, an opportunity, a wind opportunity in Quebec like-for-like would have a higher potential return profile or more favorable characteristics to you guys than, say, Boswell wind expansion or some new form of asset in the U.S., generally speaking, is that a fair assumption to make?
It's a fair assumption. I think the quality of the PPA with the Canadian utility are more flexible, although in the U.S., I think that the inflation-linked PPA will have to be the norm. It has been in the past, a long-term PPA with utility has very little inflation embedded in them, and this is something that we don't like. I think that this way of signing PPA in the states will have to change because -- it's not fair for IPP to take the full risk of future inflation for the next 30 years.
Your next question comes from Rupert Merer with NBF.
I'd like to start by asking you a little about your bridge to 2024 EBITDA. It looks like it's up only 3% at the midpoint, actually down at the low end. But your guidance says you're basing it on LTA production. So given we had such big weather headwinds in 2023, can you walk us through that bridge on how we could see the basically flat EBITDA in 2024? And I mean you've got some growth, too, I imagine.
Yes. No. So we took a prudent approach. There are a few things in 2023 that will not be true to 2024. So for example, we've adjusted the LTE of some of our assets downward to reflect the historical production of certain assets that needed to be adjusted. So that represents about $20 million of revenue down year-over-year, just that aspect. And I think it's important to be prudent right now. So we've put some contingency in our numbers to reflect that prudence. So we're comfortable with that guidance now. part, as you know, we will have calls every quarter. We'll update potentially this guidance if we see fit in the coming year. We really believe that the LTE that we have today are real. I mean we believe in that number that we've just adjusted down slightly. So that's why the guidance is based on that LTA.
We've reviewed the financial statements and the LTAs in your Q4 reporting are the same as they were in the previous quarter. So is this a say quarter--
Yes, well, we adjusted in 2 steps. When we did the transaction in France, we adjusted the French portfolio down. So that was reflected in Q3 and Q4. And for 2024, we're adjusting down 5 hydro assets in BC. So it's an additional 110 gigawatt hour of adjustments in 2024. So in total, it's 170 gigawatt hour adjustment to LTA. 60 was done in Q3 and 110 done now in 2024.
So just to put that in perspective, what percent revision would that be on the--
So that's about 1.6%, 1.7% down on LTA, but you have to realize we're taking down the LTA out of 2 areas where our pricing is actually more limited than the average. So the revenue impact is a bit greater when you adjust these LTAs versus other LTAs. So the total impact of this adjustment, France and BC is $20 million on a yearly basis of revenue.
And also, Rupert, we've been prudent also in our assumption on spot merchant pricing. We could be proven to be wrong in the sense that we're seeing strong merchant pricing emerging after the summer in Chile. So in ERCOT has been pretty good last year. So we'll see. But I think the message that Jean is providing you is that we want to be prudent. We're putting a forecast for 2024, while we just took out the 2025. So I think that we want to be prudent. We want to perhaps under-promise and overachieve in the future. So this is the reason. I agree with you that when we look at what we have done in 2023 based on 90% LTA, our guidance seems to be very prudent.
Great. And if I could ask secondly, you can give a little more color on the impairments in particular on the Holly $93.5 million impairment. Can you give us color on why you're taking that impairment, but also a little more color on how much more you have to invest in that project and how much has been invested.
Yes. So at HK, the impairment, it's a bit of an academic process, right? It's an impairment testing every year that we do. And there are a couple of factors that impacted the value on our book. Firstly, the yield environment is increasing. So these assets that are with a thin margin of error are impacted. So Eric OE, as you know, has been seeing some difficulties. So the return on that project was actually challenged. And now with the yielding environment going up, it's hard to keep the book value. The other thing as well is that -- the difficulty of ERCOT makes it more difficult to put debt on the project at competitive rates. So when you look at the project on a stand-alone basis, the cost of capital for that project has increased as well. So it was, I think, very prudent. It's very conservative to take such impairment on HK. At the moment, we have about EUR 110 million invested in HK. There's about EUR 90 million left to invest to build a project to CVD. So that's on HK.
Your next question comes from Mark Jarvi with CIBC.
So Jean-Michel, you talked about the 400 megawatts and development pipeline. Just trying to understand what holds you back from providing the medium-term targets. You're commenting like you're close to having a framework for it. But what would you need to see? Is it the RFP results? And when would you be able to provide something to the market where they can kind of really see where the growth is going over the next 3 to 5 years and sort of back into the self-funded model, I guess.
That's a fair question, Mark. I think that we will be coming to the market, explaining a little bit more. We just wanted to take a little bit more time, making sure that we have a better view on what's going on in all the RFPs that we are going to participate. We didn't want to rush to give you guys a guidance that was not based on actual numbers that we are seeing in the marketplace. We're very, very bullish, as you can hear me saying amongst the ability for us to be successful in future bids. But we wanted to take a little bit of more time to make sure that the guidance that we will be providing will be more, I guess, informed with actual data from the existing activities, and development activities that we're doing.
So is that something you think happens in 2024? Is that more 2025 when you have a sort of formal plan?
I don't want to commit right now. 2024 will be very busy. We'll be answering RFPs in Canada in at least 3 provinces, if not for France and Chile. If something happens, it's probably going to be the end of 2024 or very early in 2021.
Got it. And then the retained cash from the dividend being lower and getting back to sort of normalized generation kind of implies you should have cash flow retained of around $100 million annually maybe a bit more. How do you see the equity deployment in 2024 and 2025 shaping up? Do you actually have the projects in line to deploy that amount of equity every year? Or as you said, maybe Jon, there's a bit of a lag, the development projects in the fact deployment might not really start to move until later in '25, '26 time frame.
Yes. Right now, we're fully funded on our construction activities. So these projects, that's the focus we're on to -- those are self-funded. As we gain new projects, we intend to self-fund as well. So it really depends on how successful we are. As you know, now we've won the last 2 RFPs in Quebec. We've won every product that we bid at a very good return proposal. So if we keep delivering that way, I mean we'll start looking at the way to fund these activities in 2025.
But I guess that Mark, one question is really clear. We're not going to use that cash to acquire an existing operating facility. We're moving away from that strategy. We're going to focus on greenfield organic growth.
Got it. So I'm just trying to -- with MU2, you've got a couple of other projects, but I'm not sure you have 2 years of clear equity needs. So I'm just wondering whether or not there's actually some excess cash that will be there. And what do you do with that? Does that just pay down more of the credit facilities? So trying to think of the right way to think about that retained cash over the next 2 years?
Yes. So we always manage -- first of all, we manage always to keep our investment-grade rating, right? So if we have excess cash, then maybe share buying back is an optionality that we have as well now that we've put the NCIB back. To be prudent, we want to manage to keep our flexibility optionalities, maintaining our investment-grade rating. So that's the guide rails we have, I guess.
And just one sort of follow-up just so what would be the equity expected equity investment for 2024 this year on the projects you have in hand? Well, it's fully funded.
Yes. So our activities are fully funded. We're looking at eventually putting the debt instrument on MU2 that we've recently won, but that's it. I mean, we don't have equity needs at the moment, not in the short term.
Your next question comes from Nelson Ng with RBC Capital Markets.
So just a few follow-up questions. So you talked about, I guess, the 2023, 2024 bridge with Rupert and you flagged that it was relatively conservative and prudent. I presume, I guess one factor that could be pushing the EBITDA down is higher prospective project cost, given that it sounds like you're going to be pretty busy this year. Could you just comment on what you've budgeted for prospective projects this year? Because I think it was about $27 million in 2023.
Yes. It should be close to 40%, what we have in the budget. It's ramping up. And that's a good question, Nelson. In the sense that our team has been built up. You don't build an overnight and the team. We've been increasing our prospective expenses in the last 5 years, going from roughly $10 million to last year, as you mentioned, 27%. Now we're focusing close to $40 million for this year. One has to understand that this has to be kind of in line with the amount of team that we have on the ground. And this is why we're also pretty optimistic is that we are building the team. So we have now more boots on the ground that can deliver more and more projects, and you will see increased activities in prospective projects getting in into early stage and then mid and advanced, that's the strategy, why -- as you're going to see more projects being chipped in those categories, the advanced bucket, which is obviously the one that has more probability to get into development project and then eventually under construction. This is what you have to focus is our ability to create more and more prospective project pipelines and certainly focusing more on the advanced sector. The early stage is always early stage. Those are the incoming project that we'll have to go through the development activities. But what we are going to focus is to see the third bucket, the advanced projects. They're going to be ready to bid into RFPs. And like I said, there will be a lot of activities in Canada, but the 3 other markets are very active as well.
And in one of your slides, you mentioned that you'll be bidding over 500 megawatts, but you expect to win about 400 megawatts. So that's close to an 80% success rate.
I would say that the $500 million is very, very prudent. And that's just for 2024. So as the RFPs come, we may bid a much greater number of megawatts as well in the future years.
And then I just also had another follow-up question on Hawaii. So just so I'm understanding it correctly. So the HK project will cost about $200 million in total, of which $110 million has been invested, but you've written down $94 million so far. And is that mainly due to like unforeseen costs? Or is it more of that academic exercise you're talking about?
Yes, my auditors won't like me if I say academic like this. But it's a mix of things, Nelson. Of course, we've seen increased costs. And as you know, we were successful in renegotiating our PPA with ERCOT to capture a better price to actually mitigate some of that increased cost, but not all of it. And then the effect of interest rate rising, the quality of the PPA being, I guess, diminished with ERCOT's issues makes the cost of castle on that project different than what we originally anticipated. So it's harder to put construction debt or long-term debt or tax equity as well is a bit more demanding in these circumstances. So it affects the economics of the project. And so we took the write-down. We took a conservative write-down, I have to say, so we prefer to be more conservative in that regard. So hence, the end result.
Okay. And then just one last question. The DRIP is still in place. Was there a reason why you chose to kind of keep that in place because it's obviously it's a bit dilutive, but you also have your NAV that could offset that trip. So the DRIP.
Yes. So the DRIP is a service to our shareholders, really that we provide is -- if you look in the financial statements of 2023, it's been used only to the tune of $2.5 million. So it's very marginal. And we're going to be looking at the options to actually use the trip by buying on the market shares on the market instead of issuing from new shares. So the effect is really minimal at the end of the day.
Yes. We considered taking it out, but like Jean is saying, it's a little bit of a service to a small investor that sometimes when they have a small position, it's kind of hard to track checks being not everybody has their investment ability, but like Jean's saying, we decided to keep it because it's so very marginal. And the idea of buying on the market is probably what we're going to do.
[Operator Instructions] Your next question comes from Ben Pham with BMO.
I had a question around maybe the timing of your decision to recalibrate and change in capital allocation. Can you comment on when you or the board internally started to seriously look at recalibration? And then can you also comment, was there anything else the Board might have considered to surface value in your stock outside of a dividend reset?
I think that I will not comment on when, it's always something that the Board is concerned about always trying to have the best allocation of capital. And I guess the payout ratio is a little bit of a vestige of the income trust era. It doesn't fit very well. I think that what we decided where we have this great possibility of growth. And we have had some challenges in terms of long-term average in the last couple of years. So the payout ratio was always a little bit of a pressure given the state of the production. So we basically take the view that the best strategy for us is to focus on taking that dividend and put it into work in our organic growth opportunity. This is definitely what has been driven into the decision of taking this new policy is the unprecedented opportunity that we see in our marketplace.
Yes. If I may add, it's really a value-creation exercise that we went through here. We saw the opportunities ahead, and we thought about how to maximize value to shareholders and capturing that growth, having more flexibility to do so was the best course of action.
But that doesn't mean that we will be seeing and spending that money. I think that we are very clear we want to focus and create value with these initiatives, and that's what we're going to be. We want to be disciplined. We have a lot of opportunities. We'll be cherry-picking the project that we want to win.
And can you comment -- did you consider anything else be on a dividend, maybe an asset sale on the hydro side or an accelerated partnership with a pension plan for capital? Was there other areas that you had evaluated?
The Board is always looking and asking management to provide alternatives. But I think that given the low market or challenging market these days in terms of the value of assets of renewable assets, we thought that creating our own greenfield organic growth was the best way to go.
Yes. On the long term as well, right? So it's a decision that will survive just a single asset sale, for example. This is giving us flexibility for the coming decade and not just a 1-year one-time event as an asset sale would represent. Asset sales recycling, we've talked about this. We'll look into this to self-fund ourselves. But strategically speaking, the decision we just took now is for the long-duration profile.
Okay. And maybe a last one for me. You mentioned the accelerated growth, and there are comments around self-funding the growth, but I think you've added an even capital recycling too with you have growth exceeding the self-funding model, I think that seems to be the message you're having. But what if growth exceeds those 2 buckets? Do you put a lid on CapEx and pull back projects if you reach a decision where you may need to issue equity?
Well, we're not saying that we'll never issue equity, Ben. But I don't think we have any need for the near future to issue equity. That's the message we're saying. If we're super successful, and we have a lot of great projects with accretive growth, we may consider down the road eventually to issue equity. But being a public company, that could happen. But what we're saying is that we will not use equity as we did in the past to finance existing and mature projects. We'll be focusing on our ability to create accretive growth per share in our organic pipeline of development. If we're too successful, that's a good problem. Usually, it's not a big issue to sell down or sell projects that have good cash flow profiles.
There are no further questions at this time.
Thank you for joining us, everyone, today and for your interest in interest. We look forward to updating you on our continued progress next quarter. Thank you.
Thank you, everybody. Thank you very much.
Ladies and gentlemen, you may now disconnect your lines.