Q2 2019 Earnings Call
Welcome to pattern energy group's 2019 second quarter results conference call.
At this time all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Instructions will be provided at that time for you to queue up for questions. If anyone has difficulties hearing the conference you May press star zero for operators assistance at any time.
I would like to remind everyone that today's discussions may contain forward looking statements that reflect current views with respect to future events.
Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking statement.
For more information on patterns risks and uncertainties related to these forward looking statements.
Please refer to the Companys 10-Q, which was filed earlier today and available on Edgar foresee Dar.
No I'd like to turn the call over to Mike Garland, Chief Executive Officer of pattern Energy Group, Inc.
Thank you operator.
Good morning, everyone. Thank you for joining us today.
Earlier. This morning, we released our 2019 second quarter results, which you can find on our website at pattern energy Dotcom you can also download a copy of the presentation that accompanies todays call from our website by selecting Investor then events on our web page.
For those of you that have the presentation. Please turn to slide three.
It was a good quarter overall for the sector and for pattern the night macro environment for environmental for renewables in our core markets remain strong.
In the U.S. there are several positive indicators the cost curve renewable technology continues to improve and the most recent trade tariffs are not expected to have a major impact on the sector.
Interest rates have softened with the recent fed fund rate reduction, which is helpful to capital intensive sectors like ours.
Demand is strong with windows installations, a year to date more than 50% higher than the U.S. compared to last year.
Corporate customers are continue to be a growth driver with more than 50% of the new contracts signed in the U.S. year to date coming from corporate versus utility off takers.
In Japan. The market is also very strong with the T. Rowe, who called interconnection auction and the offshore siting process moving forward well. Additionally, we saw the cancellation of a major new coal plant that has been in the planning stages for many years.
These fundamentals support our performance and the business plan at pattern development, which continues to see robust growth in the U.S. in Japan.
This mornings results and announcements put us on track for our 2019, and 2020 growth targets delivering cap the per share growth without issuing new common equity and driving down our payout ratio.
We reported a $53 million Kathy cash available for distribution, which is strong outcome and in line with our expectations. As a result, we are reconfirming. Our 2019 kept the guidance in the range of $160 million to $190 million.
We are maintaining our 2020 Kathy guidance of 185 to 225 million.
That we announced in the fourth quarter call in March.
Which would be an annual 10% cap the growth per share.
Through 2020.
Our adjustment adjusted EBITDA was 102, which included contributions of 112 for more operating business.
And a contract contribution loss of $5 million from our investment in pattern development revenue was at 140 million flat to last year.
Today, we announced our third quarter dividend of 42.2 cents per share unchanged from the prior period, we're committed to maintaining our dividend and driving down our payout ratio towards our targeted level of 80% by the end of 2020 without the requirement to issue new common equity.
This morning, we also announced a series of transactions that demonstrate our continued execution of our business plan objectives.
Specifically, we have entered into an acquisition of investor interest totaling 57 megawatts in North Kent, and Belle River for $45 million $44 million.
That have been both projects have been on our IPO list and a $250 million bank loan to fund the growth as well as expand our liquidity.
Moving to slide four production was 2114 gigawatt hours, which we reported on that which we brought on a proportional basis.
Resource in productions.
Production were each 91% of LPTA or long term average. However, we are seeing the benefits of our diversity for example, previously.
And it applies in this quarter as well we've indicated that in ERCOT.
Low wind often corresponds to higher spot prices and lower basis offsetting much of the lower revenue caused by low in this quarter. We saw the average power price paid for our output offsetting over half the production shortfall the balance of Caf. The improvement came from routine physical activities, such as lower debt service than expected as such.
We want to reinforce that our business performance is driven by more than just wind resource levels.
To be more of a specific our wind resource levels were around or above the LTA and western us, Japan, and Puerto Rico and below the LTA and eastern Us and Canada.
As I previously mentioned the wind resource impact on the cash flows was materially offset by the price improvement in nerd cod, including our short term hedge at Gulf wind as well as by Japan.
We have consistently demonstrated a track record of managing for wind variability and still delivering on our business objectives.
Moving to slide five this morning, we announced the acquisition of interest in two facilities totaling 57 megawatts of operating capacity, specifically north counted Belle river facilities, each of which are about 100 megawatts of operating capacity.
These assets are similar to our existing portfolio strong assets with years of onsite data long term power contract agreements with high quality Offtakers.
And best in class equipment.
They are in operation today, and move US one step closer to completing our build out of the portfolio in Ontario.
The final Io grow FFO asset remaining in Ontario, which is in the final stages of construction is the 300 megawatt Hanby Inlet wind project.
The purchase price of our interest in.
The two acquired projects is approximately $44 million, which represents a 10 time 10 X multiple of the five year Kathy from the two projects.
The facilities have more than 17 years remaining PPA life with an a plus rated counterparty the Ontario ISO I.
So.
The North Canada Belle River acquisitions put us on track to meet our 20 2022 019 2020 growth targets.
Based on our.
Identified ROFO list. The next two projects available for dropdown are the 220 megawatt Grady project in New Mexico in 150 megawatts of the 300 megawatt NV Inlet project.
These two projects will form a significant contribution of the new investments portion of our 2019 in 2020 guidance.
Together with the expected distributions from pattern development in 2020, we are well positioned to deliver on the 10% cap the per share per year growth through 2020.
That growth gets us to our targeted 80% payout ratio. The result of this growth would be in line with our historic performance over the past five years.
Moving to slide seven.
Last week, we also raised $250 million to fund growth with a three year bank loan price to take advantage of the recent softening in the interest rate environment.
This facility offered us a great way to enhance liquidity at a low price ahead of future acquisitions. The facility does not amortize and remains flexible to be repaid in anticipation of further corporate capital optimization.
The funding expands our pro forma available corporate liquidity post they acquisitions that I mentioned to two $331 million.
As been will highlight the detailed capital outlook in a moment in short the debt transaction enhances our liquidity substantially and as a supplement to what we expect to be a series of capital raises to fund our growth, which we expect to achieve without raising common equity.
Most importantly, our ongoing funding obligations are limited and with our increased liquidity and capital funding options. We are confident we can manage our maturing obligations, including the 2020 convertible notes and the Subaru earn out payment.
As you can see on slide eight after the two acquisitions Belle River in North Kent, Our Irofo list stands at 845 megawatts or 30%.
For the next phase of growth at this point I would like to turn it over to as been to respond to review the financials in more detail.
Thank you Mike.
Let's start with a review of how we did in Q2 relative to what we had expected when we outlined our 2019 guidance. This is on slide 10.
As Mike mentioned, we remain on track for our cap to guidance, our Cathy for Q2 2019.
It was $53 million and our mid year results for Kathy is $105 million based on these results. We are reconfirming the guidance range for 2019 at a 160 to 190 million with a midpoint of $175 million.
Our 2020 guidance is $185 million to $225 million with a midpoint of $205 million, which represents a CAGR of approximately 10% on a CAFD per share basis over our 2018 results. We believe we can achieve these growth targets without issuing new common equity through a combination of acquisition of projects and distributions from pattern development.
To provide some background on our overall results revenues of $140 million were lower than expected due to production being below our LTA.
But were partially offset by wind reese's, no near or above LTA in regions with higher average power prices in particular, our Japanese portfolio and Gulf Summer heads.
Continued to outperform our expectations. We're also made reserves in our budget in anticipation of potential short falls in production.
Our net expenses, including project in DNA activities were modest deposit it relative to our expectations and our fleet continues to run at high levels of availability.
We had lower cash flow a class flows out of our unconsolidated investment, which combined with the net revenue.
Resulted in a slight shortfall in the operating and corporate segments of adjusted EBITDA.
And our pattern development segment, our adjusted EBITDA included a $5 million loss, primarily due to development costs. The sale of a project located in South Dakota positively impacted gross margin and offset development expenses. The project did not have an off take agreement.
And we did not exercise our ROFR rights.
It is important to note that the development business, it's a separate investment from our normal operating business and it has been funded through capital calls.
While future calls could be required to reported losses, primarily reflect investments in development activities. We expect that these investments will offs will be offset over time.
As the portfolio matures and assets are monetized.
Our confidence in the development business is based on a medium to long term view of what development can deliver through growth and Kathy starting in 2020.
Next our financing activities impact on Kathy produced results and better than expected due to lower debt service costs release of reserves and other cash items that impacted our cash fee, which ended up at $53 million for the quarter year to date, we are now $105 million.
Kathy compared to the midpoint of our full year guidance range of $175 million.
Finally, this morning, we declared our third quarter dividend of 42.2 cents unchanged from the previous period without any additional dividend increases for the year at the midpoint of our guidance, we would end the year with a 95% payout ratio.
Moving to slide 11, we will review the year over year changes to our results.
Revenues were flat at a $140 million in Q2 compared to the same period in 2018.
Production from our new facilities, MSM, and Stillwater increased revenues by $8 million and mitigated the impact of the divestitures in 2018 of L. already on.
Adjusted EBITDA was $102 million down 6% compared to the same period in 2018.
The variance is due to changes to the portfolio and equity in earnings from pattern development and specifically adjusted EBITDA from the existing operations was.
$3 million lower due to a lower cost than the 2018 period and the divestiture of fail already on.
And K, two down $11 million, which were offset by lower pattern development expenses of $3 million in new projects acquired up $5 million.
As mentioned Kathy was $53 million in Q2 that was down 10% compared to the same period in 2018, the $6 million decrease was primarily due to $4 million reduction because of divestitures, a $2 million reduction from projects fully operational in both periods and partially offset by a $1 million contributed from new projects acquired.
While our capacity was lower in Q2 of 2019 relative to the same period in 2018, our year to date Caf de of $105 million compared to $102 million in two in 2018, the portfolio changes were unevenly distributed through the quarters.
And our overall target for growth and Cathy for 2018 remains in line with expectations.
Moving to slide 12 as of June Thirtyth 2019, our available liquidity was $615 million, which consisted of unrestricted cash restricted cash revolver availability undrawn capacity under certain project debt facilities and post construction project facilities.
Subsequent to the end of the quarter, we secured a $250 million bank loan on a pro forma basis at June Thirtyth and assuming the loan had been in place at that time, and we had funded the two acquisitions and $44 million. Our total available liquidity to would have been $825 million.
We expect to use the remaining proceeds from a loan to repay a portion of the revolving credit agreement, which makes.
$331 million available under that revolver on a pro forma basis after payment of the acquisitions.
We expect our corporate.
Ratings outlook to remain unchanged, a double b minus the athree and we ended the quarter with corporate debt to corporate EBITDA of just under four times, which is consistent with our financial policy.
In addition to the bank loan we remain focused on expanding capital access the gradient Henry projects are nearing completion and would be candidates for acquisition in the same way, we purchased purchased Belle in North Kent.
We have the capacity to raise an incremental $3 million to $500 million and new corporate capital from project refinancing activities monetization, Japan local financing efforts in hybrid equity securities.
The timing and execution strategy of these financing is something we are carefully assessing.
We also anticipate that we will raise $2 million to $300 million in corporate debt or convert to address our $225 million or convertible note maturity again to ensure that the financing activities carefully line up with acquisitions and other activities so as to maximize shareholder return and minimize negative carry.
I also want to make a note of the status of the two projects, we have under construction, namely Gulf Repowering and the Super Wind project.
The Gulf Repowering project is well advanced and is expected to be financed in Q4, primarily with nonrecourse debt and tax equity commitments.
The remaining pattern energy corporate funding obligations are estimated at up to $40 million.
The Super Reconstruction project is now ahead of schedule and remains on budget.
The capex for the projects has been fully financed at start of construction with non recourse debt as a result, the only near term obligation. We have is the approximately $100 million earn out payment, which we expect to pay a term conversion of the project late in Q1 2020.
Finally on slide 13, I'd like to take a moment to highlight the details of the bank loan the loan is a $250 million.
Of senior secured debt with a three year term, we view this loan as a flexible financing attractive terms from a syndicate of four banks, which we have positive long term working relationships.
And demonstrate the continued faith that our corporate lenders have in our business and our ability to attract low cost capital.
We believe we maintain a conservative cap and capital structure, which provides an opportunity to access additional capital while maintaining our stated financial policy.
We do not envision issuing new common equity at the current level to fund growth, we have effectively positioned the company now to maintain our commitments to the current dividend level fund growth and reduce our payout ratio to approximately 8% in 2020. Thank you and I will now turn the call back over to Mike Garland.
Thanks Evan.
In March we established Kathy guidance for 2019 and 2020.
That level of visibility demonstrated our confidence we have in our ability to execute fund growth and drive our payout ratio back to our targeted 80% level by the end of 2020.
We have a path to growth.
And our CAFD per share of approximately 10% on a CAGR basis through 2020, which we have shared with you.
The progress I have highlighted this morning point positions us to deliver on each of these goals.
Two new acquisitions put us on track to achieve our 2019 and 2020 growth objectives.
We expanded capital access to capital to fund growth, including all the existing project obligations through 2020 without issuing any new common equity.
And we continued.
Progress at pattern development with significant achievements of our activities and advancements of our activities in Japan, and New Mexico, which we hope to discuss in more depth in the coming months on that front pattern development continues to advance its pipeline of exciting opportunities in July it transacted on its first third party asset sale and 103 megawatt project located located in South Dakota.
This transit transaction signal signifies the suit second phase.
Pattern development's evolution that we highlighted last year the monetization of individual projects grew transaction gains that can be reinvested into development business for continued growth.
We view our investment in pattern development is a clear differentiator for the business compared to our peers.
It's a strategic investment that secures us access to continued growth opportunities as well as material and durable returns that we anticipate will begin next year.
In closing, we believe we are stronger and better positioned today to capitalize on the exciting renewable opportunities in our core markets than ever before we have scheduled our investor day for Thursday September Fiveth in Midtown New York City. The event will be webcast live for all interested parties and we will be inviting investors individually to attend.
We are excited to share more details with you.
At the event.
About the progress at pattern development and the growth opportunities, we see in the us in Japan, and our strategy to execute on them.
At the event, we will be launching our first SG report, which the team is quite excited to share with you.
I'd like to thank our shareholders, we have a plan for creating long term value for investors changing the way electricity is made and transferred in developed countries. While respecting the communities in the environment. We are where our projects are located with that I'd like to turn it over to your questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the culinary roster.
Your first question comes from the line of Brian Lee from Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks, Thanks for taking the questions.
Hi, Mike.
Good morning, Mike just wanted to clarify I think you had.
I mentioned Grady and the inlet as the next two potential dropdowns are those required to achieve that 2020 targets I thought maybe you had referred to that but I wanted to clarify and then just from a timing perspective.
Would would those be in 19 are we thinking more like the first half of 2020.
Yes, they'll they'll impact 2020 more than 2019, there may be a little bit of benefit in 20.
19.
You know.
We haven't closed yet we haven't acquired yet Grady just went into cod yesterday, I believe and envy is on track.
To go into it.
Full operations. This month, so even if we executed in September there wouldn't be that much cash impact on this year will be primarily in 2020.
Okay and those two are part of the.
I guess the bridge to the 2020 crafty.
Gross growth target yes.
Yes, okay.
Great and then.
Just on the.
The North Kenton Belle River acquisition, both of those for minority interest is this some yes.
New normal strategically or maybe you can just walk us through why those deals are struck that way and maybe simple.
Capital preservation, but.
I thought the goal is.
Generally to be a majority interest in investor where possible. So just.
Let down.
Yes, Thats that continues to be the case keep in mind, we have.
And the issue there we are.
We're still in a joint venture with Samsung 50, 50, and then the local community.
Chatham Kent.
Elected when we got our permit they have to be able to participate so they own a piece of the action as well. So by definition, we are maximizing our ownership position in both of those projects, but they limited because of the arrangements we had to make at at during the development period.
Okay.
Our approach hasn't changed at all it was just circumstances.
And then we did.
Do the goal the Belle River transaction with PSP under the obligation under the arrangement we created in 2017, they didnt participate in in North Kent. So we took out all the.
Available ownership in North Ken So our strategy is still is to own as much as we can of the assets. We go into but there will be occasions, where we take a smaller percentage.
Okay. That's helpful. I appreciate the clarification I'll pass it on thanks guys.
Hi, guys. Thanks for your next question comes from the line of Nelson Ng from RBC capital markets. Your line is open.
Great. Thanks, good morning, everyone.
Good morning.
My first question relates to you mentioned that pattern development divest today I think it was a wind development in South Dakota could you just give a bit more color as to I think did pattern development get involved in that project two years ago.
And why.
Did it choose to divest the asset rather than I guess push it further along and potentially could it potentially be a dropdown candidate like one or two years from now.
Yes, it could have potentially on it didnt have a offtake agreement and as we've talked about with pattern energy, we are going to be.
Looking at potentially recycling capital like we I think highlighted the Mexico.
On business, we're not taking an ownership position Peggy is not taking ownership position is so so they are selling those assets and getting the cash from it and reinvested in development opportunities, which benefits us Peggy in this sense.
On less capital demand.
The is required because theyre effectively self funding a portion or all of the development activities. So it's in the business plan I think we described it in the past two that we anticipate selling down some of the project opportunities that we have that pattern development.
On keep in mind the.
Our sense is the market does not want us to raise a lot of capital.
Common equity and so we have more opportunities than we can invest in at the moment, given our debt limitations and and our goals, but it was primarily.
A goal to.
On not expand on our merchant activities.
Pattern development could have held it.
And run it as a merchant facility and.
Hope to get a PPA someday to use it as a dropdown, but we felt it was more appropriate to go ahead and sell it down and help defer capital calls.
Through the the profit of the sell down.
Okay, and just to clarify stunt remember sorry, Nelson that you that at least this is an opportunity for us to we get the benefit through our ownership and pattern development whenever these activities occur and so in that way I think the alignment I just want to remind you that that that's one of the reasons, we set the business up the way we have.
Okay, and just to clarify that project was still in advance development stage.
Correct, yes.
Okay got it and then just a related question.
In terms of pattern development doing are developing projects. So weve touched on solar in the past in terms of I think pattern development was as looking at solar and I think Texas, but its probably earmarked for.
A third party sale, but.
From I guess big picture should we could we see Peggy.
Do some dropdowns or or do some acquisitions on the on the solar side and in the us or should we assume that pattern most of pattern development's solar activities would be divested to third parties.
Yes in the near term I think you can assume that were going to divest it to third parties.
The solar market, while we would add diversity and in some way stability of cash flows the returns are well underway.
What Peggy.
Requires for example on the when the wind project can gets on the wind projects and so we have been low to to buy solar because the returns are so low now if we can get an opportunity where the returns are more attractive we would absolutely execute on it but right now the market is so strong that it's driving down.
Returns still.
Even further so I don't anticipate this year or next buying solar assets.
But if the opportunity comes up we'd love to.
Okay, and then just one last question probably for Aspen.
I know what happens occasionally and also in this quarter. So it looks like 6 million.
The capacity relates to release of restricted cash could you just provide a bit more color in terms of what it relates to.
Yes, we had a couple of projects.
Post rock and spring Valley, where.
We had cash that had been sitting in the business.
Related to.
Activities for it.
Basically operating activities and they got released out of those projects.
In recent months.
Let's drop it okay.
Got it thanks pretty consistent with what we've done in the past.
We probably so seeing that Nelson.
Yes for sure.
Okay. Thanks, I'll get back in the queue.
Your next question comes from the line of Robert Merer from National Bank. Your line is open.
Hi, good morning.
Hey on on.
Pattern development wondering if you could give us some color on how the earnings should develop from the portfolio over the next few quarters.
From operation of assets, you've got Radian, Hendi moving to Cod, and then potentially additional sell downs to third parties from that portfolio.
Yes, I think what we've said and I think it's still the case that this year will be reporting on gains such as Willow Creek will.
And other assets that are in the sale process from pattern development, that's not assets that we don't consider that appropriated for Peggy.
So that will be purely on a reporting basis, we anticipate next year.
So no net distributions coming out or distributions coming out in the next two quarters of actual cash next year. We anticipate there will be distributions out of pattern development modest distributions I think in our forecast, we assume $17 million of.
Distributions were falling into our caf the numbers over the the year.
We don't specify what quarter because development as you know is lumpy and sometimes it gets delayed and so we'd rather not specify exact timing and which specific projects will.
Create some of that Kathy.
On or distributions so that's really.
On what our game plan is currently.
And has been for the last year, maybe a reminder, Robert is the our our adjusted EBITDA.
Incurs, it's impacted by the expenses that are occurring at pattern development.
We had funded that investment.
Previously the last capital call, we made with it wasn't in the first quarter of this year.
This is the recognition of the cost of the investment activities that are some of them. Some of them are capitalized and some of them are expensed at the pattern development business segment.
And they are not reflective of new cash outflows on an ongoing basis.
At the coffee level, we recognize the income when cash distributions are received out of that investment.
So there there that's the.
Really the first time, you'll see.
Positive inflows into Kathy level.
Right understood, but from the perspective of looking at your reported.
EBITDA would you expect though that you should see.
CA.
Less of an EBITDA loss in the back half of the year with contribution from these new projects.
We don't.
Provide guidance on adjusted EBITDA that the general comment we can make is that these earnings impact from pattern development will be lumpy, though.
Sometimes they'll be.
Modest like this quarter other times, there will be more significant.
The.
What we really are focused on is ultimately the realizations that we get out of the overall business and the distributions that were going to start seeing from the investment as opposed to predicting the specific earnings that that come out of that and the reason it's difficult to do that because of the expensing policy around development assets really very much relates to.
Specific circumstances that eats asset and it's not.
It's not it's not something that we were going to forecast.
Okay Fair enough and then secondly.
You may not want to answer here in too much detail, Kevin you may want to front run the Investor day, but I was just wondering if you can give us a little more color on.
Development activities at pattern development.
And what we might expect to see for.
The next day ROFO projects as far as the location of the projects and technology you can give us just a little bit of a preview. Thank you.
Yes in terms of IRO folk projects, you can anticipate they'll probably come from Japan, and our activities and use those as a in our greatest activity in the US right now is on in new Mexico. So those are the two markets that are probably the most exciting from an investment standpoint.
And will there be projects that are going to reach cod.
Save in 2021, 2022, or how should we think about that.
Yes, it's probably more spread out as Youve heard Japan is.
Longer lead time than the U.S., both construction as well as development lead times, so they tend to spread a little bit longer between when you qualify for an off take agreement and when you actually become operational.
On and the new Mexico projects that I mentioned on our.
Our really is our large scale projects down there that we've talked about on its possible that we might see some of that happen putting in service and 21.
Very good thank you very much.
Your next call comes from the line of Ben Pham from BMO. Your line is open.
Okay. Thanks, good morning.
I just want to clarify your.
Your comments on.
No need for a common equity is that that also include your ATM as one that definition.
Hi, Yes, we know correct.
Okay.
Alright.
And then the other thing I wanted to check and as.
Going back to envy and and Grady.
I'm just looking at the megawatts and rough math on Capex needs and then equity I just wanted to check is there any sort of.
Our partners that could.
That could step in and communities or or PSP that to think about there.
I'm sorry.
As the question again.
Yeah sure on on Hanby Inlet and Grady.
It is about.
350 megawatts or so so I mean, thats that looks like a 300 mile and our equity check or so so I just I just wanted to check.
Is there any is there any sort of.
At our Investor is our community is like on that Ben and reduce that just like Chatham. That's step then.
No you know that heavy inlet is a 50 50 partnership with the new gig.
Band and so that that's the partner we have there we pattern development owns 150 megawatts and and the new gig band owns effectively owns the other 150 for the 300 megawatts Grady there are no other partners.
We still have our joint venture arrangement with PSP, which.
They will.
There will be a potential participants as well.
Okay, that's great and my last one on I know you I know you talked about this the three to 5 million.
Capital.
That's available to you.
Could you refresh us on on the ranges in terms of what's what's driving that doing amount already range.
I think your question got a little garbled there was something in the line could you just the $3 million to $500 million was big additional capital available that we could raise is that would be yes. Im just im just wondering whats when you guys built this.
Range.
What was what was driving going from 300 to 509, I mean is that.
Is that really you guys you guys are thinking Farnham nine made and then.
I take it the five its its capital that is a hybrid for example of that.
You may not need.
We are looking at.
What the opportunity set is for raising capital.
That includes project finance activities at our existing projects that we can either.
Rick Finance projects that are not currently financed or changed to financing profile of existing projects Refinancings for example in Canada.
We're looking at our monetization strategy in Japan.
We're looking at our.
The potential for raising.
Our corporate hybrid securities as we have talked about in the past.
When we look at all of those together and we are considering and not by the way in monetization potentially other assets.
And we're we believe that a $3 million to $500 million range is a reasonable range. Among all those options for us to bring our corporate capital that can be used to.
Reinvest in these opportunities that we just talked about.
And then you may have read in the.
Some of the trade rags scenes that we and Samsung we've already started and you're seeing some efforts in Canada around refinancing. So this is.
These are.
Activities that are right in front of us have been available to us. These aren't just a theoretical listed.
As Vince.
Giving you there there are real opportunities to raise funds, if we want we want or need them.
Okay. That's right as for help I know you guys do a lot of detailed analysis and whatnot, but thanks, thanks for the answers.
Thank you.
Your next question comes from the line of.
Julien Dumoulin Smith from Bank of America. Your line is open.
Hey, Good morning can you hear me.
Yeah, we can hear you Julien good morning excellent. Thanks, Thanks for the time guys.
Maybe to follow up on some of the last series of questions. Here. If you can I would be curious.
How do you think about the scale of the development business going forward for the two point and structure I don't want to get too specific as alluded to already with the San Jose but.
When you think about a 29% stake in the business in a consistent $17 million of distributions.
How do you think the scale required not thinking about like what you have in backlog right now or what have you, but like on an ongoing basis. We've seen a lot of a lot of your peers scaling up the renewables businesses. I mean is this a half gig annual again, you will more than a gig annually.
So when development I'm, just kind of getting trying to get a sense of the scale here that you guys are contemplating as you as you think about this new 2.0 structure, and especially post PTC pivoting into the new solar world.
I'll start there.
Yes, as you know development as lumpy and particularly when these larger projects. When we talk about Japan, I think Weve mentioned some of the new projects tend to be 100, 200 megawatts. Those are three or four times the scale of say US project the cost and so on in the.
And if you look at the offtake arrangements they are even much better than that so.
They tend to be really lumpy in the U.S., our big projects in new Mexico are extremely lumpy and so when we look out and say okay for the next five to 10 years, what do we think I mean, the thing Thats extraordinary in our pipeline right. Now is we're looking at five and 10 years out not just one and two years out I think in historically in our past, it's always been one to three year horizon with a vision of where we should be to take advantage of three to five years three to 10 years out, but never had an actual pipeline that.
<unk> is expected to materialize in the five to seven year period. So if you look at out over five to seven years, it's a little over a gig a year.
If everything goes right, we haven't decided.
Yet, whether we're going to partner on some of it or whether we're going to go it alone.
But if you just looked at our announced strategy in Japan, and our announced strategy in new Mexico not counting the.
Projects like Willow Creek, and the solar projects and all that sort of stuff it would be over a gig a year over the next five to seven years.
Excellent and just following up real quickly if I can on the financing decisions. How do you think about sort of the longer term capital structure, and I'm thinking specifically towards opportunities to refinance an upsize the convert as well as preferred that's something you've talked about or contemplated before how do you think about that to pay down revolver versus term loan and how did you decide on the latest course of action if Kevin as well.
Yes, I mean, maybe we can start with the 259 all along we just raised that was a relatively straightforward opportunity too.
Term out our revolver, while we're waiting for distributions to start coming out of the pattern development business. So that was it.
Relative to discrete very low cost and attractive capital raising opportunity.
Beyond that we continue to optimize our project financings that is where we think the cheapest capital continues to come from.
Those opportunities exist.
First and foremost in Canada, and so we're working on those.
The second set of really project like opportunities is what we're doing in Japan.
And trying to raise equity there from institutional capital investors and so that would be the second place, where we think we can get really well priced capital and in that case high equity content and then at the corporate level, we're really balancing.
The financial policy that were very careful to not put too much leverage on the business.
With the cost of the funding and so we think that we have a little room to raise corporate debt, but predominantly we're looking at project cash flows coming up to support it through these financing activities or some sort of a hybrid product that will.
Be high in equity content.
So thats the prioritization, we have and that's how we're thinking about it.
Got it and just quickly elaborating the timing of some of those pieces, especially the Japanese piece here. So Canadian financings, just understand that relative to the timing of the convert sorry to fixate too much here.
The the timing this is all.
The sequencing of this is really around.
What acquisitions, we have we will not go raise the capital until we need it and so the opportunities. We've talked about are the dropdown opportunities those would be available here in the fourth quarter.
The convert we have three quarters of the year to address that.
We are thinking about the proper timing for that and the earn out payment thats due for Subaru as in the first quarter of next year.
So as we look at funding obligations, we are really trying to make sure. We have time to capital raisings around when our funding obligations are going to come up.
Excellent. Thank you.
Thank you. Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open.
Thanks, so much guys.
Can you talk about what you need to see to revisit the dividend policy.
Hey, Collin, you're kind of Buffalo, it's hard to hear you can you, let let me try it again.
Could you.
Just let us know what you need to see to revisit the dividend policy.
[laughter].
That's a great question.
I wish you would call My Board chair.
The I think our priority is to get our payout ratio down so when we start getting down in the eighties. You know say 85, we can start talking to the board about.
On you know.
Let's start growth outlook look like and could we start.
Raising the dividend again, and our board has just been pretty fixated on not draw lowering the dividend and then secondly, they think that the market is concerned about.
Our payout ratio last year, we felt like there was a lot of pressure around.
We were at a 100% payout ratio and I think there are a number of people, saying Gee whiz.
Bump in the road you could you could die.
Have to cut your dividend, we demonstrated I think pretty well that we manage our business so that can't happen or won't happen, but the board is just concerned about that that we the message that we want to convey is that we're going to create a payout ratio daylight between our dividend on our cash flows. So that we can have more flexibility and we can reinvest in our business and so my guess is that as I said is mid eightys to the 80% will start once we get down to 80%.
You know, it's up to the board that that would be the logical time to think that we might start growing the dividend back to the way we were on.
So.
That's the answer that's Super helpful. Thank you. So much and then this is maybe that's a kind of an adjacent there a technical question around.
The your underwriting capabilities, but you guys have always been a leader in terms of predictability of wind resource and looking at site evaluation.
Are there areas for material improvement in terms of that capability and what sort of investments would be required to improve that capacity.
Sorry. This is our I'm not sure I fully understood. The question, but is your ability to predict when the resource and performance of the assets.
Yeah Okay.
Right. This is the way I would answer it is the science of resource assessment.
Has come to a point, where it's really quite good if we look back 10 years ago, where the industry was.
I think that the.
The changes that have happened, especially with large wind farm.
Analysis and wake effect has been.
Really changed quite a bit I think we are coming to diminishing returns in understanding that there are big cyclical changes in wind resource.
Performance of seasonal as well as also multiyear.
Impacts that that are hard to predict when and how they come about.
But we feel very confident that most of our science is based on 20 to 30 years of.
Historical analysis, that's correlated to the onsite wind farms, which tend to have five plus years of on site data. So the statistical side of that is really quite good and then the incremental improvements that have happened on the science side in terms of how wind farms perform both individual of wind turbines, but also the overall wind farm on itself has seen tremendous improvements in the last four or five years. So we think we have come to a point, where we as an industry and in particular the pattern understand very well.
How these these wind patterns they impact production.
The the near term and the medium term changes to the wind profile long term average is something that.
Really is dependent much on larger.
Global climate factors that that can can like I said cost long term longer term medium term variations in the performance against the average daily other color I would add is.
We spend a lot of time and effort analyzing.
When the results and so on and I think we've mentioned to you that we use.
Even in our analysis, we probably use I don't know what it is five or six different modeling techniques to look at each one of our projects and we have special.
Proprietary forward looking modeling I wouldn't say the forward looking modeling that's six months a year is that well develop compared to the onsite long term data that that has been described but it tells us something about how the weather patterns are going and what we've tried to do is.
We anticipate some of these things in managing our overall business and reserves and thinking about the volatility in a different way than we had five years ago and so I think it's a little more in the background sophisticated business model not just a win prediction models that we're trying to manage to and it's on.
It's a very interesting business right now our diversity as I mentioned in the comments is a very helpful.
For us and was intentional and how relocated some of our projects and.
We think that's adding some benefit to us I think the Japanese business.
Overtime will be extremely helpful.
In that diversity, so it's more than just a prediction business now it's also a much more of a prediction that.
Coupled with a business strategy that that I think really allows us to maintain our objectives.
Perfect. Thanks, so much guys.
Thank you. Your next question comes from the line of David Quezada from Raymond James Your line is open.
Thanks morning, guys.
My first question here just on the cost side of the business I'm wondering if you can just remind us.
Where you are in terms of cost savings on your self perform initiatives and how much more runway you see there.
Yeah, it's going very well. Thank you for asking I was thinking about that this morning. When we went through our script is the one area, we didnt really address than we usually do.
On.
The self perform has been terrific, we have driven down cost and.
The secondary benefit, which we haven't talked too much about is that.
It has driven down the cost of the Oems, we have last year con.
Signed a contract for an OEM.
At levels that were more competitive with our self perform than in the past.
So the five I think we have five projects or six under self perform currently there are all doing very well.
We are anticipating I think in 2021 or two more going into self perform and as they roll off the short term.
Agreements with the all in it and we'll make a decision whether we ought to be re upping those with the Oems or going to self perform.
The market is doing some very interesting things around.
Self perform we're not the only ones, but there are some.
So very interesting.
Our approaches if you can.
Manager business in a way that.
You can actually lower on.
Staffing at some and not in terms of eliminating staffing is just so my friends at the sites don't get worried.
We're talking about how do you optimize around.
Join staffing efforts, where you can move people around or were you have people go and help where you have maintenance and can you kind of maintenance in a more sophisticated way.
So there is some really interesting aspects of the business.
The data analysis is coming out of what's important things around.
Meantime between on.
ER visits were.
That seems to be a really a powerful measure and and driving down costs. We are you know people have a tendency to go out and check things out and when they do they have to shut down turbine. So you you try to drive up your mint meantime between visits.
And that we're seeing some very good changes in that area and over the next coming years. We still are believers that technology improvements are going to be retrofitted, where there is a lot of talk about it in the last couple of years we've had.
Three different demonstration projects I think it was on new technologies that didnt prove out at our sites and so.
On talk is is a little too easy in some cases were but.
We're still very optimistic that you're going to see some pretty significant cost reductions in overtime in terms of.
Results from technology, I think we've talked in the past about even things like.
Our our.
Use of drones now to inspect not just the blades outside we're working with manufacturers to talked about even doing drone inspections inside the blades.
On theirs.
Just a lot of technologies that are coming on you just have to be very disciplined about making sure you are choosing the right ones that are putting real dollars.
In your pocket, the Kevin Devlin, who heads up our operations and construction activities kicked off and.
Business. This year called every megawatt counts, which I think is a clever way of saying, it's not just a cost saving it's a it's an evaluation of how do you produce more for less and Kevin.
In the data analysis, we went back and have discovered that a couple of our sites well below the power curve and nobody anticipated that so he is he and his team are really looking at ways to.
The production because obviously.
Producing more kilowatt hours is just as important as saving costs. So we have a two prong activity of reducing costs, but also increasing production.
That's great color. Thank you very much and that's all the questions I had.
Thank you.
Your final question comes from the line of Jerry Rosenfield from Industrial Alliance. Your line is open.
It was a good trade, Jeremy but thats okay.
So let me let me just a cleanup.
You know the Caf de range here for the full year unchanged, it's still relatively wide and your.
Yes, so more than seven months through the year six months reported but you have a pretty good idea is July as well.
What do you see as the major variables other than wind.
That really could be impacting.
Where you come out within that range, because it looks to me that.
In your minds at least it probably is a tighter range what do you think.
I'll give you the quick answer then.
And can give you the more sophisticated anything it's winded and price right I mean.
Congestion is always an issue in Texas, but we're.
Seemingly understand that right now enough to that.
It shouldn't be hopefully it won't be a big variable, but its really wind and spot prices.
Yes, we've done well so far this year, we are as we've said we are.
In line with expectations, we still have.
Another six months to go and.
We we haven't changed the range that were.
Guiding to at this point.
The variables that Mike mentioned is predominantly on wind variability and then secondarily on the growth and the timing.
The dropdowns and the terms of the financings from those I just might remind you that what we had us suggested.
In our.
In our guidance was about.
5 million.
Kathy coming from new new investments for the year and then the rest is really operating performance on our existing portfolio.
And we haven't really seen any change to that but we still need to see see our way through the rest of the year before.
We know where we're going to end up.
Okay, that's perfect and maybe just one other question.
In terms of the asset sale, South Dakota, maybe not that assets sales specifically because you are probably low to speak about one sale, but just in terms of the returns that you're earning or that you are seeing or that you anticipate maybe on asset sales either in terms of acasti multiple in terms or in terms of percentage return something like that just so you can give us an idea relative to.
The dropdown that you're you're making between pattern development and pattern energy and between what you're seeing and.
The market when you go out and sell to third parties.
Yes, I think on the South Dakota project, you have to think of it as more of a.
Two twofold one is.
Profit.
Issue not a captive multiple in that.
It helps fund the development activities.
On the second is.
It was a merchant trend project that was.
It wasn't contracted it wasn't completed in its development and so.
You have to weigh the cost and the returns are that profitability against the.
The risks and.
And so I don't know quite how to answer your question. It is a judgment call. When we look at these things to say is it better as somebody I think it was then earlier asked why not hold onto it.
And.
He was Nelson.
Verse.
Selling it.
It's a judgment call at the time.
I think we still believe that our development activities create about.
Kathy multiple if your contract in decent at about a six day seven times and.
We buy the assets at Peggy at around to attend to high multiple and so that that continues on.
Our belief in the two businesses so.
No Thats very helpful that is when you have some thoughts.
The one just to step back from it the overall business objective of pattern development is to really get two times, our money back and up 15 plus percent return.
Every project that we do needs to be contributing to that overall investment.
Return profile and so we've invested $200 million today.
That doesn't mean that every project has to return two times, it's money that really what we're looking at is how much capital we have at risk for every project.
And how much we can we think we can sell it for sometimes that project might give us.
You know 1.25 times the money, we have invested sometimes a two and a half three times it really depends on.
The riskiness of the projects.
And what ultimately you can think of as yield compression between.
The buy and hold return that the asset has and what it can be sold to a third party whether it be Peggy.
Where somebody else and we look at where do we think we can maximize return in this case.
Given the the capital we had invested in South Dakota, South Dakota project.
And the opportunity that somebody else presented us with in terms of taking the project now before we had to put construction capital in and then sell it at Sidoti.
It was deemed to be a more optimal case than than the alternative.
But every asset it is evaluate in that way, but answering your question Sir.
Yes, I know that the combination of the six seven times and I think just to what has been said in terms of 15% plus and that's very very useful that's exactly what I was looking for thank you guys thats it.
Okay. Okay. Thank you much.
There are no further questions I'd turn the call back over to Mike Kerlan for closing remarks.
Well again, thank you everyone for joining us today, we look forward to updating on our progress next quarter and at Investor Day, So have a good day and.
Feel free to call us if you have further questions.
That concludes today's conference call you may now disconnect.