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Pattern Energy Group Inc (PEGI)
Q1Â 2019 Earnings Call
May. 10, 2019, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen. Welcome to Pattern Energy Group's 2019 First 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. (Operator Instructions) 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 statements. For more information on Pattern's risks and uncertainties related to these forward-looking statements, please refer to the Company's 10-K, which will be filed later today and available on EDGAR or SEDAR.
Now, I'd like to turn the call over to Mike Garland, Chief Executive Officer of Pattern Energy Group Inc.
Michael M. Garland -- President and Chief Executive Officer
Thank you, operator. Good morning and thank you for joining us today. Earlier this morning, we released our 2019 first quarter results, which you can find on our website at patternenergy.com. You can also download a copy of the presentation that accompanies today's call from our website by selecting Invest then Events on our webpage.
Turning to slide 3 of the presentation. But before I start the presentation, let me just make a personal note, I been fighting off a cold, so if you hear a little less energy in my voice today, it's not because of our business. We're still very excited and positive about the quarter and our outlook, but I have a little less personal energy this morning.
So, the first quarter was good from a financial and operational perspective. We reported $53 million in CAFD, cash available for distribution, up 23% from the prior year period and in line with our expectations. As a result, we are reconfirming our 2019 CAFD guidance in the range of $160 million to $190 million this morning. We are now providing segmented accounting as (inaudible) has been will discuss in a moment.
Our adjusted EBITDA, included $113 million from operations and a loss of $12 million from our investment in Pattern Development and after other adjustments totaled $98 million. Revenue was $135 million, up 21%. Production was 92% of our long-term average, LTA in the quarter included compensated curtailment, primarily as a result of lower wind in the Eastern US. Our production shortfall was fully mitigated at the CAFD level by a combination of higher average power prices, other revenues and improved debt service costs.
Today, we announced our second quarter dividend of $0.422 per share unchanged from the prior period. We are committed to maintaining our dividend and have a clear path that we laid out on our last call to drive down our payout ratio, through growth without requiring the use of new common equity. This morning, we will highlight the continued growth opportunities we have in front of us. Specifically, one; distribution outlook from our investment in Pattern Development. Two, opportunities for continued optimization of our assets like the repowering the Gulf Wind, and three visibility into our dropdown acquisitions.
Moving on to Slide 4, we view our investment in Pattern Development as a clear differentiator for our business compared to our peers. We continue to believe that well done development offers to best risk-reward profile in the renewables value chain and one of the few ways to get more attractive returns than simply acquiring assets from third parties. Our total investment in Pattern Development now stands at $190 million, with an additional $7 billion invested in Q1. We target investment returns that Pattern Development of 15% or more on an IRR basis and 2 times on an MOIC basis. As we outlined on our year-end call in March, we anticipate reporting gains on sale of assets in 2019 and receiving initial distributions from Pattern Development in fiscal 2020. We are confident and on track to achieve these objectives. As a reminder, Pattern Development already booked its first project gain on sale of the Stillwater project in 2018, the Grady project represents the second in a series of opportunities to realize a gain on sale in New Mexico.
Grady is nearing the end of construction and is scheduled to commence commercial operations in the third quarter, similar to our existing broad view project, Grady will sell electricity to the California markets. Pattern Development is also constructing three projects in Mexico, which we are expected to commence -- which are expected to commence commercial operations in the fourth quarter. Pattern Development will sell these projects to a third party as I've described in earlier calls. This is another benefit of investing in the development business as it provides an upside to us even in the cases where we believe select assets are not a good fit for our portfolio. Pattern Development also has more than 300 megawatts of the 100% PTC eligible projects, which are scheduled for construction in 2019 and 2020. These projects include the ones where we expect to utilize 100% PTC qualifying turbines in addition to other development projects in US including solar.
In April, Pattern Development agreed to sell to the sale of the Western Spirit transmission project, it's developing a New Mexico to PNM upon the projects completion next year. There's a 145 mile transmission project is designed to enable 800 megawatts of renewable capacity developed by Pattern or possibly other developers. In Japan, the development business continues to be very exciting. We have 200 plus megawatts in Japan on our iROFO list today, consisting of Sumita and Ishikari. These two projects are being prepared for financing, which we expect to close in early 2020. In addition to our growth prospects at Development, we also continue to pursue opportunities to optimize and improve our existing assets.
Moving on to Slide 5. Gulf is a great example. As you are aware, Gulf Wind was coming off and it attractively priced hedge agreement in April of this year and with the expectation that we would be selling power into the spot market for the balance of the year. This morning we announced that we have executed a short-term hedge agreement for Gulf Wind that takes advantage of the strong forward price curves we are seeing for the summer months. The hedge runs from April to August and includes a very good price. Close to the hedge price that terminated in April, which represents a very positive improvement of our expected revenues from the Gulf Wind project. And the hedge provides greater certainty on the cash flows from the project in advance of repowering. As to repowering, we expect to finalize the development of a financing in 2019 with construction commencing in Q1 2020 and completion scheduled for Q2 2020. We have invested approximately $19 million to date and expect to commit a total of $50 million in permanent equity in the completion of the project. We expect to receive Development like returns from the investments or 6 times to 8 times CAFD multiples versus the 10 time multiple at which we typically drop in operating assets.
We have a couple opportunities to contract for the power from the repowered Gulf Wind project that we are currently evaluating and we will decide soon how we will proceed. our existing assets in Japan performing well as we build a portfolio scale in that market. Our Tsugaru project is on budget and schedule, and scheduled to commence -- commercial operations in the second quarter of 2020. All civil and electrical work has resumed from the winter with foundation scheduled to be completed in the next couple of months and the electrical complete in fall. We have just started turbine erection and we have our first project turbine in the air. As we've mentioned in the past, a 100 megawatt project in Japan is comparable to a 300 megawatt or larger US projects based on the cost to construct and the power prices which are many times higher than the US prices, resulting in very attractive returns.
As a result, we believe that once Tsugaru reaches COD, we will have an operating portfolio of scale in Japan. Additionally, the opportunity exists to monetize a significant portion of our Japanese portfolio with low cost domestic capital in Japan. Assessing permitted capital at a more attractive cost in Japan will provide us with the flexibility to fund new growth either in Japan based on our robust opportunities or even into worth America.
On Slide 6, we outline our iROFO list as it stands today, we have a series of opportunities in 2019 and '20 including Belle River, North Kent, Henvey and Grady. We did remove one project from the iROFO list -- the Crazy Mountain 80 megawatts Crazy Mountain project. The project was subject to a court challenge and we decided to put the project on hold while disappointing, it is only one project from a portfolio of candidates on the iROFO list. Without Crazy, our iROFO list currently stands at over 1.3 gigawatts and we expect it to continue to grow with additions this year, which will significantly increase our opportunities. This list provides visibility into our potential drop-downs in the growth available to us. Prior to turning it over to Esben to discuss our financial results, I'd like to review our production for the quarter.
Production was 1,116 gigawatt hours, which was we reported on -- we report on a proportional basis. The production result was primarily driven by good performance in most markets except in the Eastern US, where we saw a lower than expected win. In Q1 2019, there wasn't developing Central Pacific based El Nilo that was declared officially by NOAA in February 2019. What is interesting is the impact this event had in different regions of North America. With this type of El Nino, there is a southern jet stream that tends to reduce the strength of the storms that typically are brought down by the polar jet stream during the winter months. The Eastern region depends largely on the polar jet stream in the winter for its resource. As a result of these interactions, the West wasn't impacted as much as our Eastern fleet, which is dominated by our Texas projects but also includes Kansas, Indiana and Missouri.
And that bore out into our portfolio as you can see in Slide 7. The impact was greatest in the Eastern US region, wind resource in Western US, Canada, and Japan was essentially at our long-term average, LTA. We are in the business of managing for wind variability and we anticipated a lower than normal Q1 for wind and we have demonstrated that a consistent track record of being able to manage these situations.
At this point, I'd like to turn it over to Esben to review the financials in more detail.
Esben W. Pedersen -- Chief Financial Officer
Thank you, Mike. Let's start with the review of how we did in the first quarter relative what we had expected when we outlined our 2019 guidance. As Mike mentioned, we remain on track for our CAFD guidance, our CAFD for Q1 2019 was $53 million and the guidance range for the year remains $160 million to $190 million with the midpoint of $175 million. Our 2020 guidance is $185 million to $225 million, with a midpoints of $205 million. This represents CAGR of approximately 10% on a CAFD per share basis over our 2018 result. We believe we can achieve these growth targets without issuing new common equity. To provide some background on our overall results, revenues of $135 million were lower than expected due to lower LTA but was partially offset by higher average prices and contingency included in our original forecast. In particular, our new assets in England (ph) Japan and MSM outperformed expectations.
Our revenues also included compensation for lost production in one project of approximately $2.7 million, which will be paid to our tax equity partner in a later period. Our project and corporate costs were largely unchanged relative to our expectations but we realized better than expected debt service costs. I want to highlight a change we made in our prior filings. In our 10-K, we began segment reporting in two primary segments. The Operating segment and the Development segment. We view these two areas of our business as distinct and our primary performance measure in evaluating each segment's adjusted EBITDA in addition to CAFD for our overall business.
Starting with our Operating segments. We recorded $113 million in adjusted EBITDA, which is modestly lower than expectations and largely reflective of the operational performance, I have just described. At our Pattern Development segment, our adjusted EBITDA included a $12 million loss primarily due to increased development costs, G&A and write down. We had no sales of development assets in Q2 to offset these expenses, which is consistent with our plan. In addition to the Operating segment and the Development segment, we have corporate and other activities, which resulted in the total adjusted EBITDA of $98 million. It is important to note here that the Development business is a separate investment from our normal operating business and it has already been funded through capital calls. The reported losses are ordinary course business for Development as Pattern Development continues to invest in opportunities which will be offset over time as the portfolio matures and assets are monetized. Our confidence in the Development business is based on our medium and long-term view of what Development can deliver through growth and CAFD starting in 2020.
As Mike mentioned this morning, we declared our second quarter dividend of $0.422 and it's 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 10, we review the year here -- year-over-year changes to our results.
First, revenues were up 21% compared to the same period in 2018. The primary drivers were increased revenues from our existing portfolio that improved $14 million, compared to Q1 2018, mainly due to lower congestion curtailment and per cot (ph) higher average prices and better performance in our US Western region. As part of this increase, approximately $6 million is due to lower unrealized losses at Gulf Wind as the heads terminate -- as the hedge terminates. In addition, revenues from new projects were $18 million higher than Q1 from our acquisitions of the Japan portfolio MSM and Stillwater. These improvements were partially offset by the sale in El Arrayan which accounted for $8 million. Adjusted EBITDA was $98 million, reflecting income from our Operating segment and losses of Pattern Development which is overall down 6% compared to the same period last year.
First, our performance from existing operations was up slightly at $2 million compared to Q1 '18 and our project -- our new projects contributed $16 million to our performance. These improvements were offset primarily due to higher equity earnings losses of $10 million in Pattern Development as well as the sale of K2 and El Arrayan, which accounted for $13 million. CAFD was up $53 million, up 23% compared to the same period in 2018, the improvements in CAFD is due to the items I mentioned earlier, I want to mention that the pickup between adjusted EBITDA and CAFD is primarily due to project level debt service being lower year-over-year and better performance out of our JVs in terms of distributions received compared to the net income reported, which impacts our adjusted EBITDA. In addition, Pattern Development impacted adjusted EBITDA but not CAFD.
Moving to Slide 11. As of March 31, 2019, our available liquidity was $677 million, which consisted of $93 million of unrestricted cash on hand, $15 million of restricted cash, $170 million of available under our revolving credit agreements and $223 million available un-drawn capacity under certain project debt facilities and $176 million of post-construction project facilities. Our corporate rating outlooks remained unchanged BB-/Ba3 and we ended the quarter with corporate debt to corporate EBITDA in the mid-3s, which is consistent with our financial policy. We believe we have flexibility to access cost effective capital to fund growth without requiring us to issue new common equity. The new capital could take a variety of forms including monetization of the portion of portfolio Japan. As Mike discussed, recycling additional assets, giving the success we achieved in the sale of K2 and El Arrayan, the consideration of hybrid equity options, making use of available capacity at the project level, to add or consolidate debt at certain projects including refinancing of our Canadian portfolio. And making use of the available capacity at the corporate level, either by expanding our convertible debt issuing additional unsecured notes or separately expanding our revolver facility. We remain -- we maintain a conservative capital structure, which provides us an opportunity to access additional capital, while maintaining our stated financial policy. In short, we believe there are multiple options available to us that demonstrate the flexibility of our balance sheet prior to returning to the Capital Markets. We have effectively positioned the Company to maintain our commitment to the current dividend level and to fund growth opportunities we have in the near term.
Thank you. And I will now turn it back over to Mike Garland.
Michael M. Garland -- President and Chief Executive Officer
Thanks, Esben. We have a clear path to execute on our continued growth opportunities through our investment in Pattern development, the management of our existing operations to optimize assets in our captured wind resources and our robust opportunity set on the iROFO list which consist of near-term opportunities in 2019, as well as projects we can transact on through to '21 and '22. We delivered strong CAFD in Q1. With this result, we remain on track to meet our 2019 guidance, which we reaffirmed this morning. We are still on a path to grow our CAFD per share approximately 10% on a CAGR basis through 2020, without the requirement of new common equity and driving down our payout ratio. We believe our opportunities in New Mexico and Japan, together with our investment in Pattern Development will continue material growth in the business in 2020 and beyond. And our material ownership interest in Pattern -- the Development business is a clear differentiator to our other players in the market.
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 the developed countries, while respecting the communities in the environment where our projects are located.
Now, we'd like to turn it over to your questions. Operator?
Questions and Answers:
Operator
(Operator Instructions) And your first question comes from the line of Nelson Ng of RBC Capital Markets. Please go ahead. Your line is open.
Nelson Ng -- RBC Capital Markets -- Analyst
Great, thanks. Good morning, everyone.
Michael M. Garland -- President and Chief Executive Officer
Hey, Nelson.
Nelson Ng -- RBC Capital Markets -- Analyst
In terms of Pattern development, can I just confirm that adjusted EBITDA included a negative $14 million contribution from Pattern Development?
Michael M. Garland -- President and Chief Executive Officer
That's correct, Nelson.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay. And I think $4 million of that relates to writing down Crazy Mountain project. So $10 million be like a normal rate per quarter, if Pattern Development doesn't sell any assets?
Michael M. Garland -- President and Chief Executive Officer
It's lumpy. It'll be different, every quarter last year. I can point you to, it was approximately $40 million] for the year. So that would average out at $10 million a quarter, but I just expect it to be variable quarter-over-quarter.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay, got it. And then, you talked about the revenue -- the year-over-year revenue increase. I think one of the drivers was receiving some reimbursement for loss PTCs at broad view due to an outage, do you remember roughly what that amount was? Whether that was a large amount or not?
Esben W. Pedersen -- Chief Financial Officer
It was $2.7 million.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay. So it's not that material. And then more on Pattern Development. I think Mike mentioned that, so there's the three projects in Mexico that Pattern Development would be divesting roughly what's the total size of those projects in terms of megawatts?
Michael M. Garland -- President and Chief Executive Officer
The two of them were solar projects for a total of 300 megawatts. And then, I think it's a 23 megawatt wind project.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay, got it. And then just one last question on financing. I know that last year you guys fully repaid the Spring Valley debt, can you just give a bit more color as to why it was fully repaid and whether you're looking to raise new debt at that project?
Esben W. Pedersen -- Chief Financial Officer
First of all, part of what we continue to do is look at where can we balance the overall mix of debt between corporate and project debt as we are trying to consolidate into more simple capital structures and not have debt spread over multiple places as we had cash from proceeds of K2, it was a logical thing to pay the Spring Valley debt down, we have mentioned before, we have other project refinancing opportunities in the works and that could result in a dividend recap getting us basically back to potentially the same levels of total indebtedness. But we just continue to look at how to mix the overall capital structure.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay. Thanks. I'll get back in the queue.
Esben W. Pedersen -- Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Brian Lee of Goldman Sachs. Please go ahead, your line is open.
Brian Lee -- Goldman Sachs -- Analyst
Hey guys, thanks for taking the questions. I guess, first off on the Eastern US fleet here where you saw the production weakness. Was that weak throughout the quarter or was it concentrated and part of the quarter and has that seen any change in the early part of 2Q?
Michael M. Garland -- President and Chief Executive Officer
I don't know how -- it depends on your sensitivity. I'd say generally it was across the quarter, it's close enough. It was depending, both in the east and the west for example, on the western area, we saw February was very strong out west, so it did have variations. I don't think it's that critical to distinguish and for example, Spring Valley was like 200% LTA for the quarter or for the month in February but -- and so if you look out East, I think you really -- it's in the Central US, it was pretty much over the quarter, there was few good weeks and a few bad weeks that around those. We don't really talk about current arrangements or situations for the coming quarter or the current quarter, because we haven't announced anything on it. So I'd rather not speak to what's happened this last month.
Brian Lee -- Goldman Sachs -- Analyst
Okay, fair enough. And then just a second question from me and I'll pass it on -- the better CAFD performance year-on-year, it seems like part of that was the smaller drag from unconsolidated investment earnings, if I'm reading the financials correctly? I know this is lumpy and it can move around from quarter-to-quarter, but can you speak to that a little bit more in detail what drove the year-on-year change and is that kind of the sustainable trend level for that line item going forward in terms of the CAFD calculations for this year? Thank you.
Esben W. Pedersen -- Chief Financial Officer
Yeah, Brian. It was part of it was just the difference between how it gets picked up in adjusted EBITDA versus CAFD kind of the CAFD level, it wasn't materially different than what the expectations were. But, and it does move around and as you know, it comes in as cash comes in, so it tends to be a little bit more lumpy. So I think that there wasn't anything extraordinary in those results.
Brian Lee -- Goldman Sachs -- Analyst
Great. Thanks, guys.
Esben W. Pedersen -- Chief Financial Officer
Thank you.
Operator
Your next question comes from the line of Colin Rusch of Oppenheimer. Please go ahead, your line is open.
Colin Rusch -- Oppenheimer -- Analyst
Thanks so much. Can you talk a little bit about your propensity for taking an outside capital for the terms fee attractive. Certainly, there's been a lot of money looking at different opportunities in the space and some recent deals, would love to take your temperature on that.
Michael M. Garland -- President and Chief Executive Officer
Yeah, I think generally, there is very healthy appetite for really capital coming into the renewable space and that really exist at all level. So at the project level we find, there's a lot of appetite and portfolios or at the corporate level, there is just a lot of people trying to deploy capital. So we have seen over the last year, a lot of increase to find ways to invest with people like ourselves and some of the deals that have occurred in the market that you may have seen is very indicative of that. So that is certainly the case, I think the project debt and tax equity markets remain very robust and healthy and we have really no issue continuing to find ways to optimize cost of capital along all of those lines.
Colin Rusch -- Oppenheimer -- Analyst
And then obviously you guys have been among the best in the business in terms of being able to predict production on these facilities. Are there areas where you're seeing opportunities for investment to improve those capabilities and how should we think about refinement of projections on an ongoing basis?
Michael M. Garland -- President and Chief Executive Officer
You should hear our discussions internally Colin. They're quite robust around that. We do use particularly, these days, we will use four or five different modeling techniques to search for variations and primarily anomalies in the modeling techniques. We also use outside advisors that are kind of cutting edge, Ph.D. think tank types that are constantly looking and in particular trying to look ahead, pretty good a few weeks -- especially few days for our short-term trading activities. And as you mentioned that we've been trying to get better at looking ahead in the coming years like for example, we did anticipate first quarter being a bit weak and that helps us manage the business a bit and really it's just an ongoing exercise of its kind of the science of climate is very complicated, as you know and there are a lot of people working on it now because of climate change modeling and other things, new techniques are coming online. But we haven't seen any radical change but again the most radical change that we've seen in the last five years has come around modeling wake effects and how do you manage wake effects? And then on the weather side, it's just refining as we go based on real-time data that is the most recent data, not relying on historicals from two, three years ago. So I can't give you a whole lot more specifics today of what we do because we -- in some ways a proprietary exercise, but I can tell you that we are constantly looking and using outside advisors to keep us on top of the industry.
Colin Rusch -- Oppenheimer -- Analyst
Alright, I appreciate it. Thanks so much, guys.
Michael M. Garland -- President and Chief Executive Officer
Thank you.
Operator
(Operator Instructions) Your next question comes from the line of Ben Pham of BMO. Please go ahead, your line is open.
Ben Pham -- BMO -- Analyst
Okay, Thanks. Good morning. Just on your -- you provide update on liquidity, capital structure, can you remind us the overall financing needs through 2020 in terms of debt and equity that trigger Gulf Wind to work out to needs -- I guess a sense of how much potential like asset monetization that maybe in a bucket?
Esben W. Pedersen -- Chief Financial Officer
Yeah. So we have the Subro (ph) construction ongoing and it has been fully financed through COD. At COD there is a -- there are two payments due, there is approximately $100 million payment due to Pattern Development and then there is a loan that is not the project loan, but it's a effectively a secondary loan or or maze loan that sits behind the project loan that totals a little under $100 million. So that's about $200 million. The loan does not come due, it has a maturity date, well beyond the COD date. So we have a well past 2020 to get that financed but we will have to finance that out and would expect to do that. And then, we have the Gulf Wind project, which as we've indicated, we have invested about $20 million. We don't expect that through the construction period, we would need a lot of additional capital, but on the term out when tax equity comes in, we would need to end up at about a $50 million total investment. Those are the primary investments outside of expansion year growth buying new assets. We also have refinancings of the convert that we have to plan too, so we're evaluating that, but that's obviously a separate product at a minimum could just be a rollover.
Ben Pham -- BMO -- Analyst
Okay. So it looks like the secured projects, there is $115 million of equity, where you could just simply just put on your credit facility. And then you got to look at terming net credit facility or paying it down. And then the convert then when you have to kind of attack that, I mean I know it's a 2020 but how do you think about that and is there any sort of indication of what's the best capital that could refinance that at? This moment?
Esben W. Pedersen -- Chief Financial Officer
In terms of the exact product that we will use is something that we're still evaluating -- rolling the convert is -- entering into a new convert is one option, using unsecured notes at the corporate level is another option. So I think we have the option of balancing it out with the project debt as well. So I think we'll look at total consolidated leverage and corporate leverage when we make that decision. It is largely dependent on capital market strength and evaluating obviously the option value -- that's embedded at the convert relative to the unsecured debt. So that is a ongoing evaluation of those products and we have until mid 2020 to deal with it, but we think that it's something that we don't want to deal with at the very end obviously, so we want a plenty of runway before we -- in order to get that resolved.
Ben Pham -- BMO -- Analyst
Okay. And the only last thing I wanted to check it you talked a little bit about the development EBITDA drag during the current quarter. I was just trying to follow, how that flows into CAFD? And again it's your CAFD through the Development expense, it doesn't or sorry Development EBITDA doesn't flow into CAFD? That's what I heard you said.
Esben W. Pedersen -- Chief Financial Officer
Yes. So we pick up the equity and earnings in the EBITDA. And then for CAFD, it would be, the cash received from the investment just like the other EMIs.
Ben Pham -- BMO -- Analyst
Okay. I got you. So you're stripping out the equity loss, but there is no distribution. So it's not in there.
Esben W. Pedersen -- Chief Financial Officer
Correct.
Ben Pham -- BMO -- Analyst
Okay. Alright. Thank you.
Operator
Your next question comes from the line of Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Hey, good morning. Can you guys hear me?
Michael M. Garland -- President and Chief Executive Officer
We can hear you, Julien.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Excellent. So, I wanted to follow up a little bit on financing options here. How do you think we're conceptually about balancing debt versus equity? When I say that obviously the spectrum here of equity-like options like you just talked about with respect to converts, how do you think about rating agency treatment of various tools here and how do you think about the right balance over time. You've obviously articulated the sort of aggregator growth leverage metrics, when do you get to that next point and how do you think about deferring those options right now. Because it seems obviously like you've got a litany of tools before you -- you can spell out sort of in aggregate what those tools are that would be helpful if you don't mind?
Michael M. Garland -- President and Chief Executive Officer
Okay. And maybe I'll start with the first one. I think the key feature how we construct all this is looking at what our financial policy is and I think just to restate it. We generally ensure that our project capital and that's project debt and tax equity is fully amortized and paid down over the life of the PPA or contract that we have at the project level. So we really don't have amortization or third-party capital beyond the contract and we are really just dealing with residual and Gulf as an example of that, it's an unleveraged project today. And that we finance things at the project level, really to an investment-grade quality and generally at standards that are better than what our more conservative than what you see in the market. So that means the capital that comes up at the corporate level is really an investment grade quality cash flows and our policy at the corporate level is to target 3 times to 4 times leverage at the corporate level. So those constraints remain the same. Part of what we have today is an investment in Pattern Development, which you can almost think of as having been funded out of corporates and capital. And so we know we have flexibility around our financial policy to go over our leverage targets, at least in the short term, because we know we have a way to deleverage through proceeds coming out of Pattern Development. Notwithstanding that our policy is really 3 times to 4 times. I just want to point out that we have flexibility. What we look at is now what is the right capital source and where do we optimize the cost and project debt remains somewhat the cheapest source of capital. So we continue to make sure that we put capital to use their or raise capital there. And so that's a good option, so that we have opportunities and projects that are unleveraged and also projects that we can upsize the leverage in the projects. Then at the Corporate level, we have unsecured notes, converts, preferred equity, the former -- the two former ones are obviously going to get 100% debt treatment, whereas the hybrids can get anywhere from 100% equity treatment to 50% equity treatment, depending on the structure of the hybrid and then behind that is obviously equity.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Excellent. And then if you don't mind, can we turning to the DevCo side of the business, obviously you're going to be pivoting on that from '19 into '20. How should we think about the evolution through the course of this year of your Development company EBITDA, our financial metrics to make sure that you're on track to be able to take distributions. Right. So for instance that at present, I see a small negative number in the DevCo EBITDA where should that be pointing to as we think about being able to take distributions that of that company next year and or whatever -- other metrics you would be thinking about right, just conceptually into '20?
Michael M. Garland -- President and Chief Executive Officer
I would just lead with what we've said, which is we will through 2019 report that we've monetized some assets and have created gains on sale as the first indicator that we're on track to be recycling capital enough to where we'll be able to make distributions. And the second element I guess is just looking at our pipeline as to what looks like it could be available for monetization in 2020 and 2021. And then the only thing that I'd say is that's not going to be apparent is what's the demand if the demand is lumpy as we've talked about in the past in terms of need for capital for new projects. The good news is that we need more capital, it's probably, because we got a lot more opportunity if it stays within the current schedule, we probably don't need much funding and if it slows down, we need even less. And so we will try to give some indication of whether we're on track or not as we go forward into -- end in 2019 and early 2020. But it is a private business and we have the ability to manage it a bit in terms of when we use capital, and when we distribute capital but I think you'll get some indications from us as we go through 2019 and in 2020.
Esben W. Pedersen -- Chief Financial Officer
And Julien, can I just maybe add what we did layout is a couple of projects that are in construction Grady, some of the stuff in Mexico as we go through the year, those projects may be monetized so that's one thing to start looking at when they get monetized that's not to say that, just because they hit COD, that they will be monetized, but that is the logical place to start thinking about monetization for those projects. And that should show up in financial performance of P2. The other thing I will say is, you should expect to continue to see expenses incurred on a consistent basis out of the Development business, as it happened last year and that will continue to happen through this year. And the realization, the moments for realization are going to be lumpy as we've been saying. But, so you can look at the projects that -- we're sort of telling you that are already under construction and obviously, we'll look to monetize those.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
And just to clarify EBITDA on a cumulative annual basis inclusive of gain should be positive in '19 and '20 or should flip positive?
Esben W. Pedersen -- Chief Financial Officer
We haven't made-that we've not said that would be one way or the other. I think it is a very complex set of mechanics that would tell you whether that will be the case. So I don't think I would go that far.
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Okay. Alight. Fair enough. What was that?
Esben W. Pedersen -- Chief Financial Officer
Yeah, that's OK.
Operator
Your next question comes from the line of Adnan Waheed of National Bank Financial. Please go ahead. Your line is open.
Adnan Waheed -- National Bank Financial -- Analyst
Thank you. Good morning. I'll be speaking on behalf of Rupert. And to start off, can you give us an update on the regulatory developments in the Japanese offshore wind market? There has been some partnership announcements very recently between various Pattern Development in Japan. I was wondering PEGI is also planning to partner in this market. Could you just give us your thoughts overall with respect to your rents in Japan?
Michael M. Garland -- President and Chief Executive Officer
Sure. On the regulatory side, we haven't seen too much change on the offshore size of things or even on the onshore in the last six months. And the probably the most active thing that's going on is that Hukou (ph) auction and the results of that. I think they've announced publicly that they have given a short window for people to withdraw their bids, if they want to, and that they are -- they have seen one project drop out separate from the open window, which we love, because we have the opportunity to potentially to see some real step up in our award in that that area in the Tahoka auction area because we were right on the cusp of a number of projects being eligible previously. So we're hoping in the coming months, we'll be able to tell you some good news around Tahoka auction. There have been a number of announced joint ventures and it's not clear to us yet what they include. Some of them sound like they're very narrow and limited and other sound like they're more broad-based and with people that we think are modest players or have modest opportunities in their area, in one case electric utility that joined up with European that doesn't have a lot of opportunity for offshore in their province and we are looking at opportunities to team up. We are not committed to it yet, but we are in discussions with a whole number of folks, who have a strong interest in our portfolio. We are really only looking at this point at partners that can provide additional if you will strategic value to our business. We have one of the strongest pipelines in Japan. I think we are now, if we are not the largest -- the second largest developer. We have probably the largest number of fit contract qualified projects in Japan. And so, we're getting a lot of inquiries. We're mostly interested in what partners makes sense for the Japanese market. And may be teaming up with a few folks on that have the expertise in the offshore if you remember our first offshore project Ishikari is a shallow shore, if you will, it's like 20 meters or 30 meters. So it's not like building a project in the North Sea. It's a fairly a much more manageable type of transaction for our first project, which is terrific. But we will find partners who are a lot of -- who have a lot of experience in building offshore and have the talents to help us build that project. We are not looking at self-building or anything like that. So I can't give you any specifics because we haven't executed on any relationships. But we are in constant discussions, we're not feeling we have to execute on anything currently. But we think it will add strategically to our opportunities there, if we do in certain areas, team up with some important strategic Japanese partners.
Adnan Waheed -- National Bank Financial -- Analyst
Okay, that's great. I appreciate the color. And then my second question is on the New Mexico transmission line. The Western Spirit project that's being built at Pattern Development. Can you give us some more color on the transaction? Are you expecting any gains that paid you for your ownership and (inaudible)
Michael M. Garland -- President and Chief Executive Officer
Well all it is as it sale to PNM. Uf you're talking about the Western Spirit line. Sorry about my voice, I mentioned earlier that I'm fighting off cold and starting -- I hope it doesn't sound too bad. That transaction, we hope we'll have some profit in it. It is we have to construct it for PNM. But our main driver for those transactions are the wind projects that connect to it. And so while we will see some -- we hope to see some realizations on the transmission line. We really are looking forward to the opportunity to building out a significant number of megawatts as I mentioned I think, it's upwards of 800 megawatt, 850 megawatt capacity line and we're taking the majority of that for wind development that we are going to be doing at Pattern Development. So I hope that responds to your question.
Adnan Waheed -- National Bank Financial -- Analyst
Yes. That's helpful. I think, that's all I have for now. I'll get back in the queue. Thank you.
Michael M. Garland -- President and Chief Executive Officer
Thank you.
Operator
And our next question comes from the line of Anthony (inaudible) of Bank of America. Please go ahead. Your line is open.
Anthony -- Bank of America -- Analyst
Hey guys, how are you?
Michael M. Garland -- President and Chief Executive Officer
Good. How are you?
Anthony -- Bank of America -- Analyst
Good. Just a very quick question, maybe more for Pattern Development. But Talen was talking about developing -- jointly developing a solar project on the side of one of its coal plant Montour. Just curious if you can discuss that a little bit more and if there are also opportunities for projects like that?
Michael M. Garland -- President and Chief Executive Officer
I guess what we can say is we are doing a joint development with them. I can't say too much more about the project. We think it's a really a great opportunity as you know, a big coal plant has strong interconnection rights and it's a good transition away from coal. And we think it's a starting point of demonstrating to the coal industry that we can come in and help them make the transition from coal to renewables and where we're looking to potentially partner with other coal own project owners that could do something similar to Talen.
Anthony -- Bank of America -- Analyst
Got it. And you expect that to remain a development or would you potentially drop that down at the YieldCo?
Michael M. Garland -- President and Chief Executive Officer
Yeah, depending on the economics mix and the benefit, we could drop it down to the YieldCo to Peggy. But as you know, we don't make a decision about that until the time that Pattern Development determines that it's going to be selling the asset. And at that point, we'll look at Peggy's situation with capital, what are the returns, what are the risks associated with the project to make a determination of Peggy wants to make an offer that could be attractive to Pattern Development, go through the same normal process that we have for conflicts. And so on with the independent members of our Board, reviewing and analyzing the decision on what we should propose.
Esben W. Pedersen -- Chief Financial Officer
Given the structure there -- I think it's unlikely that I'll be an opportunity for us.
Anthony -- Bank of America -- Analyst
Got it.
Esben W. Pedersen -- Chief Financial Officer
That it will be -- I think it's unlikely that will be an opportunity.
Anthony -- Bank of America -- Analyst
And just quickly in terms of timing -- what should we expect for that 100 megawatt project?
Esben W. Pedersen -- Chief Financial Officer
For Talen portfolio?
Anthony -- Bank of America -- Analyst
Yes.
Esben W. Pedersen -- Chief Financial Officer
It's still in, I would say in early stage development -- we haven't really indicated the date for MTP at this point.
Anthony -- Bank of America -- Analyst
Got it. Okay. Thank you, guys.
Operator
There are no further questions in the queue. I turn the call back over to the presenters for final remarks.
Michael M. Garland -- President and Chief Executive Officer
Thank you, everyone. I appreciate your time and questions and interest in the Company. Looking forward, the rest of the year. Have a good day.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 54 minutes
Call participants:
Michael M. Garland -- President and Chief Executive Officer
Esben W. Pedersen -- Chief Financial Officer
Nelson Ng -- RBC Capital Markets -- Analyst
Brian Lee -- Goldman Sachs -- Analyst
Colin Rusch -- Oppenheimer -- Analyst
Ben Pham -- BMO -- Analyst
Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst
Adnan Waheed -- National Bank Financial -- Analyst
Anthony -- Bank of America -- Analyst
