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Pattern Energy Group Inc (NASDAQ:PEGI)
Q2 2019 Earnings Call
Aug 6, 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 Second Quarter Results Conference Call. [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-Q, which was filed earlier 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 Garland -- Chief Executive Officer

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 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.

For those of you that have the presentation, please turn to Slide 3. It was a good quarter overall for the sector and for Pattern. The macro environment for environmental -- for renewables in our core markets remained strong. In the U.S., there are several positive indicators. The cost curve for renewable technology continues to improve and the most recent trade tariffs are not expected of 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 wind installations year-to-date, more than 50% higher than the U.S. compared to last year. Corporate customers are continuing to be a growth driver with more than 50% of the new contract signed in the U.S. year-to-date coming from corporate versus utility offtakers.

In Japan, the market is also very strong with the [Indecipherable] interconnection auction, and the offshore site in 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. and Japan.

This morning's results and announcements put us on track for our 2019 and 2020 growth targets, delivering CAFD per share growth without issuing new common equity and driving down our payout ratio. We reported a $53 million CAFD cash available for distribution, which is strong outcome 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. We are maintaining our 2020 CAFD guidance of $185 million to $225 million that we announced in the fourth quarter call in March, which would be an annual 10% CAFD growth per share through 2020.

Our adjustment -- adjusted EBITDA was $102 million, which included contributions of $112 million from our operating business and a 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 $0.4220 per share, unchanged from the prior period. We are committed to maintaining our dividend and driving down our payout ratio toward our targeted level of 80% by the end of 2020, without the requirement to issuing 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 interest, totaling 57 megawatts in North Kent and Belle River for $45 million -- $44 million. That have been on -- both projects have been on our eyebrow for rest. [Phonetic] And a $250 million bank loan to fund the growth as well as we expand our liquidity.

Moving to Slide 4. Production was 2,114 gigawatt hours, which we reported on -- which we reported on a proportional basis. Resource and productions -- production were each 91% of LTA 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 have indicated that in ERCOT, low wind often corresponds to higher spot prices and lower basis, offsetting much of the lower revenue caused by low wind. This quarter, we saw the average power price paid for our output offsetting over half the production shortfall. The balance of CAFD improvement came from routine fiscal 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 specific, our wind resource levels were around or above the LTA in Western U.S., Japan and Puerto Rico, and below the LTA in Eastern U.S. and Canada. As I previously mentioned, the wind resource impact on the cash flows was materially offset by the price improvement in ERCOT, 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 5. This morning, we announced the acquisition of interest in two facilities totaling 57 megawatts of operating capacity, specifically through North Kent and Belle River facilities, each of which are about a 100 megawatts of operating capacity. These assets are similar to our existing portfolio, strong assets with years of on-site beta, long-term power contract agreements with high-quality offtakers, and best-in-class equipment. They are in operation today and moved us one step closer to completing our build-out of the portfolio in Ontario.

The final iROFO asset remaining in Ontario, which is in the final stages of construction is a 300 megawatt Henvey Inlet wind project. The purchase price of our interest in -- with the two acquired projects is approximately $44 million, which represents a 10 time multiple of the five-year CAFD from the two projects. The facilities have more than 17 years remaining PPA life, with an A-plus rated counterparties, the Ontario IESO. The North Kent and Belle River acquisitions put us on track to meet our 2020 and -- 2019 and 2020 growth targets.

Based on our Identified ROFO rest, the next two projects available for drop down are 220 megawatt Grady project in New Mexico, and a 150 megawatts of the 300 megawatt Henvey Inlet project. These two projects will form a significant contribution of the new investments portion of our 2019 and 2020 guidance. Together, with the expected distributions from Pattern Development in 2020, we are well positioned to deliver on the 10% CAFD 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 7. Last week, we also raised $250 million to fund growth with a three-year bank loan priced 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 has not amortized and remains flexible to be repaid in anticipation of further corporate capital optimization.

The funding expands our pro forma available corporate liquidity post the acquisitions that I mentioned to $331 million. Esben will highlight the detailed capital outlook in a moment. In short, the debt transaction enhances our liquidity substantially, and is 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 Tsugaru earn-out payment.

As you can see on Slide 8, after the two acquisitions, Belle River in North Kent, our iROFO list stands at 845 megawatts, or 30% of our existing owned capacity, which is approximately 3 gigawatts. With the capital invested in Pattern Development over the past two years, we have a number of exciting opportunities on the horizon that will replenish or expand the iROFO list, and set the stage for the next phase of growth.

At this point, I'd like to turn it over to Esben to review the financials in more detail.

Esben Pedersen -- Chief Financial Officer

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 CAFD guidance. Our CAFD for Q2 2019 was $53 million and our mid-year results for CAFD is $105 million. Based on these results, we are reconfirming the guidance range for 2019 at $160 million to $190 million with the midpoint of $175 million. Our 2020 guidance is $185 million to $225 million with the 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 resources near or above LTA in regions with higher average power prices. In particular, our Japanese portfolio and Gulf summer hedge continued to outperform our expectations. We've also made reserves in our budget in anticipation of potential shortfalls in production.

Our net expenses including project and G&A activities were modestly positive relative to our expectations, and our fleet continues to run at high levels of availability. We had lower cash flow -- 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. At our Pattern Development segment, our adjusted EBITDA included a $5 million loss primarily due to development cost.

The sale of a project located in South Dakota positively impacted gross margin and offset development expenses. The project, did not have an offtake agreement and we did not exercise our lawful 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, the reported losses primarily reflect investments in development activities. We expect that these investments will be offset over time as the portfolio matures and assets are monetized. Confidence in the development business is based on a medium to long-term view of what development can deliver through growth and CAFD starting in 2020.

Next, our financing activity's impact on CAFD produced results better than expected due to lower debt service costs, release of reserves and other cash items that impacted our CAFD, which ended up at $53 million for the quarter. Year-to-date, we're now $105 million of CAFD compared to the midpoint of our full year guidance range of $175 million.

Finally, this morning we declared our third quarter dividend of $0.4220 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 $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 El Arrayan. 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 lower cost in the 2018 period and the divestiture of El Arrayan. And K2 down $11 million, which were offset by lower Pattern Development expenses of $3 million in new projects acquired up $5 million.

As mentioned, CAFD was $53 million in Q2. That was down 10% compared to the same period in 2018. The $6 million decrease was primarily due to a $4 million reduction because of divestitures, a $2 million reduction from projects fully operational in both periods, and partially offset by $1 million contributed from new projects acquired. While our CAFD was lower in Q2 of 2019 relative to the same period in 2018, our year-to-date CAFD of $105 million compared to $102 million in 2018. The portfolio changes were unevenly distributed through the quarters and our overall target for growth in CAFD for 2018 remains in line with the expectations.

Moving to Slide 12. As of June 30, 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 30. And assuming the loan had been in place at that time, and we have funded the two acquisitions of $44 million, our total available liquidity would have been $825 million. We expect to use the remaining proceeds from the 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 at BB-/Ba3, 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 Grady and Henvey projects are near in completion and would be candidates for acquisition in the same way purchased Belle and North Kent.

We have the capacity to raise an incremental $300 million to $500 million in new corporate capital from project refinancing activities, monetization, Japan local financing efforts and hybrid equity securities. The timing and execution strategy of these financing is something we are carefully assessing. We also anticipate that we will raise $200 million to $300 million in corporate debt or convert to address our $225 million convertible note maturity, again to ensure that the financing activities carefully 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 Tsugaru wind project. The Gulf repowering project is well advanced and is expected to be financed in Q4, primarily with non-recourse debt and tax equity commitments. The remaining Pattern Energy corporate funding obligations are estimated at up to $40 million. The Tsugaru construction project is now ahead of schedule and remains on budget. The capex for the project has been fully financed and started 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 at 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 $250 million of senior secured debt with a three-year term. We view this loan as a flexible financing, attractive terms from a syndicated four banks, which we have positive long-term working relationships. And demonstrate the continued faith that our corporate lenders have in our business in our ability to attract low-cost capital.

We believe we maintain a conservative 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 80% in 2020. Thank you.

And I will now turn the call back over to Mike Garland.

Michael Garland -- Chief Executive Officer

Okay. Thanks, Esben. In March, we established CAFD 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 to 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, they transacted on its first third-party asset sale, a 103 megawatt project located in South Dakota. This transaction signifies the second phase of Pattern Development's evolution that we highlighted last year, the monetization of individual projects with transaction gains that can be reinvested in development business for continued growth.

We view our investment in Pattern Development as 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 strong 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 5, 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 U.S. and Japan, and our strategy to execute on them.

At the event, we will be launching our first ESG 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 transfered in developing countries, while respecting the communities and the environment where our projects are located.

With that, I'd like to turn it over to your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Brian Lee from Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys, good morning. Thanks. Thanks for taking the questions.

Michael Garland -- Chief Executive Officer

Hey, Brian.

Brian Lee -- Goldman Sachs -- Analyst

Mike -- good morning. Mike, just wanted to clarify, I think you had mentioned Grady and Henvey Inlet as the next two potential dropdowns. Are those required to achieve the 2020 targets? I thought maybe I'd referred to that, but I wanted to clarify. And then just from a timing perspective, would those be in '19, or are we thinking more like in the first half of 2020?

Michael Garland -- Chief Executive Officer

Yes. They'll impact 2020 more than 2019. There may be a little bit of benefit in 2019. We haven't closed yet. We haven't acquired them yet. Grady just went into COD yesterday, I believe, and Henvey is on track to go into full operations this month. So even if we execute in September, there wouldn't be that much CAFD impact this year. It will be primarily in 2020.

Brian Lee -- Goldman Sachs -- Analyst

Okay. And those two are part of the -- I guess the bridge to the 2020 CAFD growth growth target?

Esben Pedersen -- Chief Financial Officer

Yes.

Michael Garland -- Chief Executive Officer

Yes.

Brian Lee -- Goldman Sachs -- Analyst

Okay, great. And then just on the North Kent and Belle River acquisitions, both of those were minority interest. Is this a 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 was generally to be a majority interest investor where possible. So just -- or in what?

Michael Garland -- Chief Executive Officer

Yes. That continues to be the case. Keep in mind that we have a -- an issue there we're a -- we're still in joint venture with Samsung 50-50, and then the local community Chatham-Kent elected when we got our permit, they asked 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 are limited because of the arrangements we have to make at -- during the development period.

Brian Lee -- Goldman Sachs -- Analyst

Okay.

Michael Garland -- Chief Executive Officer

[Speech Overlap] 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 or the arrangement we created in 2017. They didn't participate in North Kent, so we took out all the available ownership in North Kent. So our strategy 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.

Brian Lee -- Goldman Sachs -- Analyst

Okay. That's helpful. Appreciate the clarification. I'll pass it on. Thanks guys.

Esben Pedersen -- Chief Financial Officer

Thank you, Brian.

Michael Garland -- Chief Executive Officer

Thanks, Brian.

Operator

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

Nelson Ng -- RBC Capital Markets -- Analyst

Great, thanks. Good morning, everyone.

Michael Garland -- Chief Executive Officer

Good morning.

Nelson Ng -- RBC Capital Markets -- Analyst

My first question relates to -- you mentioned that Pattern Development divested a -- 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, I guess -- could it potentially be a dropdown candidate like one or two years from now?

Michael Garland -- Chief Executive Officer

Yes. It could have potentially. And it didn't have a offtake agreement. And as we've talked about with Pattern Energy, we are going to be looking at potentially recycling capital like I -- we I think highlighted the Mexico business, we're not taking an ownership position -- PEGI is not taking the ownership position. So they're selling those assets and getting the cash from it and reinvesting in development opportunities, which benefits us, PEGI in the sense of less capital demand is required because they're effectively self-funding a portion or all of the development activities. So it's in the business plan. I think we've described it in the past to that we anticipate selling down some of the project opportunities that we have at Pattern Development.

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 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 profit -- the sell down.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. And just to clarify...

Esben Pedersen -- Chief Financial Officer

And also important to remember -- sorry, Nelson, I use it. [Phonetic] At least this is an opportunity for us to -- we get the benefit through our ownership in Pattern Development whenever these activities occur. And so in that way, I think the alignment I just want to remind you that, that's one of the reasons we set the business up the way we have.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. And just to clarify, that project was still in advanced development stage?

Esben Pedersen -- Chief Financial Officer

Correct.

Michael Garland -- Chief Executive Officer

Yes.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay, got it. And then just a related question in terms of Pattern Development doing or developing projects, so, we've touched on solar in the past in terms of I think Pattern Development was -- is looking at solar and I think Texas, but that's probably earmarked for a third-party sale. But from I guess, big picture, should we -- could we see PEGI do some dropdowns or do some acquisitions on the solar side in the U.S.? Or should we assume that Pattern -- most of Pattern Development solar activities would be divested to third-parties?

Michael Garland -- Chief Executive Officer

Yes. In the near-term, I think you can assume that we're going to divest into third-parties. The solar market, while we would add diversity and in some ways stability at cash flows, the returns are well under what PEGI requires for example on the wind project can gets on the wind projects. And so we have been low 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.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay. And then just one last question is probably for Esben. I know it happens occasionally and also in this quarter. So it looks like $6 million of the CAFD relates to release of restricted cash. Could you just provide a bit more color in terms of what it relates to?

Esben Pedersen -- Chief Financial Officer

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 the -- basically the operating activities and they got released out of those projects in recent months, Post Rock and Spring Valley.

Nelson Ng -- RBC Capital Markets -- Analyst

Okay, got it. Thanks.

Michael Garland -- Chief Executive Officer

It's pretty consistent with what we've done in the past. You probably have seen it, Nelson, from [Speech Overlap]

Nelson Ng -- RBC Capital Markets -- Analyst

Yes, one for sure. Okay. Thanks. I'll get back in the queue.

Operator

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

Rupert M. Merer -- National Bank Financial -- Analyst

Hi. Good morning.

Michael Garland -- Chief Executive Officer

Hi, Rupert.

Rupert M. Merer -- National Bank Financial -- Analyst

On Pattern Development, I'm 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, as you've got Grady and Henvey moving to COD, and then potentially additional sell downs to third-parties from that portfolio?

Michael Garland -- Chief Executive Officer

Yes. I think what we've said and I think it's still the case that this year we'll be reporting on gains such as [Indecipherable] and other assets that are in the sale process from Pattern Development, that's not assets that we don't consider that appropriate for PEGI. 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 have some $17 million of distributions were following into our CAFD numbers over 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 CAFD, or distributions. So that's really what our game plan is currently and has been for the last year.

Esben Pedersen -- Chief Financial Officer

Maybe a reminder, Rupert, is the -- our adjusted EBITDA incurs -- is impacted by the expenses that are occurring at Pattern Development. We had funded that investment previously. The last capital call we made was in the first quarter of this year. This is the recognition of the cost of the investment activities that are -- some of them are capitalized and some of them are expensed at the Pattern Development business segment, and they're not reflective of new cash outflows on an ongoing basis. At the CAFD level, we recognize the income when cash distributions are received out of that investment. And so there -- and that's been really the first time you'll see positive inflows at the CAFD level.

Rupert M. Merer -- National Bank Financial -- Analyst

Right, understood. From perspective of looking at your reported EBITDA, would you expect though that you should see say a less of an EBITDA loss in the back half of the year with late contribution from these new projects?

Esben Pedersen -- Chief Financial Officer

We don't provide guidance on adjusted EBITDA. 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 they'll be more significant. The -- what we really are focused on is ultimately the realization that we get out of the overall business and the distributions that we're going to start seeing from the investment as opposed to predicting the specific earnings 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 at each asset, and it's not something that we -- we're going to forecast.

Rupert M. Merer -- National Bank Financial -- Analyst

Okay, fair enough. And then secondly, you may not want to answer here in too much detail given you may not 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 iROFO projects as far as location of the projects and technology, if can you give us just a little bit of a preview? Thank you.

Michael Garland -- Chief Executive Officer

Yes. In terms of iROFO projects, you can anticipate they'll probably come from Japan and our activities in the U.S., those are the -- and our greatest activity in the U.S. right now is in New Mexico. So those are the two markets that are probably the most exciting from an investment standpoint.

Rupert M. Merer -- National Bank Financial -- Analyst

And will there be projects that are going to reach COD say, in 2021, 2022, or how should we think about that?

Michael Garland -- Chief Executive Officer

Yes. It's probably more spread out. As you know, Japan is a longer lead time than the U.S., both construction and 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. And the -- you've actually got projects that I mentioned are really large scale projects down there that we've talked about. It's possible that we might see some of that happen -- putting in service in '21.

Rupert M. Merer -- National Bank Financial -- Analyst

Very good. Thank you very much.

Operator

Your next call comes from the line of Ben Pham from BMO. Your line is open.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. Thanks. Good morning. I just want to clarify your comments on no need for a common equity. Is that also includes your ATM [Phonetic] as well in that definition?

Esben Pedersen -- Chief Financial Officer

Yes, we don't.

Michael Garland -- Chief Executive Officer

Correct.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. All right. Another thing I wanted to check in is going back to Henvey and Grady, just looking at the megawatts and rough math on capex needs and then equity, I just want to check is there any sort of other partners that could step in and communities or PSP that -- to think about there?

Michael Garland -- Chief Executive Officer

I'm sorry. Ben, ask the question again.

Ben Pham -- BMO Capital Markets -- Analyst

Yes, sure. On Henvey Inlet and Grady, there's about 350 megawatts or so, so I mean that's -- that looks like a $300 million equity check or so. So I just wanted to check is there any sort of other investors or communities that can stepped in and reduce that just like Chatham that's stepped in?

Michael Garland -- Chief Executive Officer

No. You know that Henvey Inlet is a 50/50 partnership with the Nigig band. And so that -- that's the partner we have there. We -- Pattern Development owns 150 megawatts and the Nigig band owns -- effectively owns other 150 megawatts for the 300 megawatts. Grady, there are no other partners.

Esben Pedersen -- Chief Financial Officer

We still have our joint venture arrangement with PSP, which they'll be a potential participant as well.

Ben Pham -- BMO Capital Markets -- Analyst

Okay, that's great. And my last one on, I know you talked about this $300 million to $500 million capital that's available to you. Could you refresh us on the ranges in terms of what's driving that $300 million [Phonetic] range?

Esben Pedersen -- Chief Financial Officer

Your question got a little garbled. There was something in the line. Could you just -- the $300 million to $500 million was?

Michael Garland -- Chief Executive Officer

Additional capital available that we could raise. Is that what?

Ben Pham -- BMO Capital Markets -- Analyst

Yes. I'm just wondering the -- like what's -- when you guys built this range? What was driving going from $300 million to $500 million? I mean is that really you guys are thinking $400 million made and then take it to $500 million, it's capital that is a hybrid for example that you may or may not need?

Esben Pedersen -- Chief Financial Officer

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 -- with finance projects that are not currently financed or changed the financing profile of existing projects, refinancing for example in Canada. We're looking at our monetization strategy in Japan. We're looking at our -- the potential for raising corporate, hybrid securities as we have talked about in the past. And we look at all of those together and we are considering, and month -- by the way, monetization potentially of other assets. And we believe that a $300 million to $500 million range is a reasonable range among all of those options for us to bring our corporate capital that can be used to invest in these opportunities that we just talked about.

Michael Garland -- Chief Executive Officer

And Ben, you may have read in some of the trade magazines that we and Samsung have already started initiating some efforts in Canada to -- around refinancing. So this is -- these are activities that are right in front of us and available to us. These aren't just a theoretical list that has been giving you their real opportunities to raise funds if we want or need them.

Ben Pham -- BMO Capital Markets -- Analyst

Okay. That's fair, just very helpful. I know you guys do a lot of detailed analysis on that. Thanks for the answers.

Esben Pedersen -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is open.

Julien Dumoulin-Smith -- Bank of America. -- Analyst

Hey, good morning. Can you hear me?

Michael Garland -- Chief Executive Officer

Yes, we can hear you, Julien.

Esben Pedersen -- Chief Financial Officer

Good morning.

Julien Dumoulin-Smith -- Bank of America. -- Analyst

Excellent. 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 2.0 structure? I don't want to get too specific as I alluded to already [Indecipherable] But when you think about a 29% stake in the business and a consistent $17 million of distributions, how do you think about the scale required, not think 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 your peers scaling up their renewables businesses.

I mean is this a half gig annual, or gig annual, more than a gig annually of solar, wind development? I'm just kind of trying to get a sense of the scale here that you guys are contemplating as you think about this new 2.0 structure, and especially post PTC pivoting into the new solar world, how to start there?

Michael Garland -- Chief Executive Officer

Yes. I -- as you know, development is lumpy and particularly when these larger projects. When we talk about Japan, I think we mentioned some of the new projects tend to be 100, 200 megawatts. Those are three or four times the scale of say a U.S. project, the cost and so on. And if you look at the off-take arrangements, they are even much better than that.

So they tend to be really lumpy in U.S. are big projects, in New Mexico are extremely lumpy. And so when we look out and say, OK, for the next five to 10 years what do we think? I mean the thing that's 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 a one, two, three year horizon with a vision of where we should be to take advantage three to five years, three to 10 years out. But never had an actual pipeline that 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 giga 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 giga year over the next five to seven years.

Julien Dumoulin-Smith -- Bank of America. -- Analyst

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? I'm thinking specifically toward opportunities to refinance and upsize the convert as well as preferred those I think you've talked about or contemplated before, how do you think about that to pay down revolver versus term loan, and how to decide on the latest course of action if you can as well?

Esben Pedersen -- Chief Financial Officer

Yes. Maybe we can start with the $250 million loan we just raised that was a relatively straightforward opportunity to term out our revolver, while we're waiting for distributions to start coming out of the Pattern Development business. So that was a relatively 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 are really balancing the financial policy that we're 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 hybrid product that'll be high in equity content. So that's the prioritization that we have and then how we're thinking about it.

Julien Dumoulin-Smith -- Bank of America. -- Analyst

Got it. And just quickly elaborating the timing of some of those pieces, especially the Japanese piece here. So Canadian financing, just to understand that relative to the timing of the convert -- sorry, to fix it a much here. [Phonetic]

Esben Pedersen -- Chief Financial Officer

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 that's due for Tsugaru is in the first quarter of next year. So as we look at the funding obligations, we're really trying to make sure we time the capital raisings around when our funding obligations starting to come up.

Julien Dumoulin-Smith -- Bank of America. -- Analyst

Excellent. Thank you.

Esben Pedersen -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Thanks so much, guys. Can you talk about what you need to see that revisit the dividend policy?

Michael Garland -- Chief Executive Officer

Hey Colin, you -- it's kind of muffled. It's hard to hear you. Can you...

Colin Rusch -- Oppenheimer & Co. -- Analyst

Sure. Let me try it again.

Michael Garland -- Chief Executive Officer

Okay.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Could you just let us know what you need to see to revisit the dividend policy?

Michael Garland -- Chief Executive Officer

That's a great question. I wish you recall my Board Chair. I think our priority is to get our payout ratio down. So when we start getting down in the 80s, say 85%, we can start talking to the Board about what's our growth outlook look like, and can we start raising the dividend again. And our Board has just been pretty fixated on not 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 100% payout ratio, and I think there were a number of people saying [Indecipherable] bump in the road, you could 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. The message that we want to convey is that we're going to create a payout ratio daylight between our dividend and our cash flow, so that we can have more flexibility, and we can reinvest in our business.

And so my guess is, as I said, is mid-80s to the 80% we'll start. Once we get down to 80%, it's up to the Board, but 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.

Colin Rusch -- Oppenheimer & Co. -- Analyst

That's super helpful. Yes. Thank you so much. And then this is maybe just -- kind of adjacent to your 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 valuation. Are there areas for material improvement in terms of that capability, and then what sort of investments would be required to improve that capacity?

Esben Pedersen -- Chief Financial Officer

Sorry, this is our -- I'm not sure I fully understood the question. But is it for many [Speech Overlap]

Colin Rusch -- Oppenheimer & Co. -- Analyst

Your ability to predict wind resource and performance of the assets.

Michael Garland -- Chief Executive Officer

Yes.

Esben Pedersen -- Chief Financial Officer

Okay. I -- 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. And if we look back 10 years ago where the industry was, I think that the changes that had happened, especially with large wind farm analysis and wag 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 multi-year impacts 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 onsite 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 wind turbines, but also the overall wind farm on itself has seen tremendous improvements in the last four, 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 wind patterns they impact production. The near-term and the medium term changes to the wind profile, long-term average is something that really is dependent a much on larger global climate factors that can like I said cost long-term -- longer to medium term variations in the performance against the average.

Michael Garland -- Chief Executive Officer

The only other color I would add is, we had spent a lot of time and effort analyzing wind 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. We can say the forward-looking modeling that's six months a year is that well developed compared to the onsite long-term data that has been described.

But it tells us something about how the weather patterns are going. And what we've tried to do is 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 wind prediction model that we're trying to manage to.

And it's a very interesting business right now. Our diversity as I mentioned in the comments is very helpful for us and was intentional in how we located some of our projects, And we think that's adding some benefit to us. I think the Japanese business over time 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 coupled with a business strategy that I think really allows us to maintain our objectives.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Perfect. Thank you so much, guys.

Michael Garland -- Chief Executive Officer

Thank you.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Thank you.

Operator

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

David Quezada -- Raymond James -- Analyst

Thanks. Good morning, guys. My first question here just on the cost side of the business. I'm wondering if you could just remind us where you are in terms of cost savings on your self-perform initiatives, and how much more runway you see there?

Esben Pedersen -- Chief Financial Officer

Yes. 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 didn't really address, and we usually do. The self-perform has been terrific. We have driven down costs. 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 signed a contract for an OEM at levels that were more competitive with our self-performed than in the past. So the five -- I think we have five projects or six under self-performed currently, they are all doing very well. We are anticipating, I think in 2020, one or two more going into self-perform. And as they roll-off, the short term agreements with the OEMs we'll make a decision whether we ought to be reopting 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's some very interesting approaches, if you can manage your business in a way that you can actually lower staffing at some, and not in terms of eliminating staffing, just so my friends at the sites don't get worried. We're talking about how do you optimize around joint staffing efforts where you can move people around or have people go and help where you have maintenance and can you time the maintenance in a more sophisticated way.

So there's some really interesting aspects of the business. The data analysis that's coming out on what's important things around meantime between visits where that seems to be a really a powerful measure in driving down costs where, people have a tendency to go out and check things out. And when they do, they have to shutdown turbines. So you try to drive up your 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.

There's 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 didn't proved out at our sites. And so talk is a little too easy in some cases. But we're still very optimistic that you're going to see some pretty significant cost reductions in -- over time in terms of results from technology. I think we've talked in the past about the -- even things like 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. There's just a lot of technologies that are coming on. You just have to be very disciplined about making sure you're choosing the right ones that are putting real dollars in your pocket.

Kevin Devlin, who heads up our Operations and Construction Activities kicked off a 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 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 were well below the power curve, and nobody anticipated that. So he and his team are really looking at ways to up 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.

David Quezada -- Raymond James -- Analyst

That's great color. Thank you very much. That's all the other questions I had.

Esben Pedersen -- Chief Financial Officer

Thank you.

Operator

Your final question comes from the line of Jerry Rosenfield from Industrial Alliance. Your line is open.

Jeremy Rosenfield -- IA Securities -- Analyst

That was a good try. Jeremy, but that's OK. So let me just cleanup the CAFD range here for the full year unchanged, it's still relatively wide, and you're more than seven months through the year, six months reported, but you have a pretty good idea as 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?

Michael Garland -- Chief Executive Officer

I'll give you the quick answer, and then Esben can give you the more sophisticated answer. It's wind and price, right. I mean congestion is always an issue in Texas, but we're seemingly understand that right now enough to -- it shouldn't be -- hopefully it won't be a big variable, but it's really wind and spot prices.

Esben Pedersen -- Chief Financial Officer

Yes. We've done well so far this year where as we've said we're in line with expectations. We still have another six months to go and we haven't changed a range that we're guiding to at this point. The variables that Mike mentioned is predominantly on wind variability. And then secondarily on the growth and the timing of the dropdowns and the terms of the financings from those. I just might remind you that what we had suggested in our guidance was about $5 million of CAFD coming from new investments for the year. And then the rest is really operating performance on our existing portfolio. So we haven't really seen any change to that, but we still need to see our way through the rest of the year before we know where we're going to end up.

Jeremy Rosenfield -- IA Securities -- Analyst

Okay. That's perfect. And maybe just one other question. In terms of the asset sale in South Dakota, maybe not that asset sales specifically because you're probably low to speak about one sale. But just in terms of the returns that you're earning or that you're seeing or that you anticipate maybe on asset sales, either in terms of a CAFD multiple or in terms of percentage returns, something like that, just so you can give us an idea relative to the dropdown that you're making between Pattern Development and Pattern Energy, and between what you're seeing in the market when you go out and sell to third parties?

Michael Garland -- Chief Executive Officer

Yes. I think on the South Dakota project, you have to think of it as more of a two-fold. One, is a profit issue not a CAFD multiple in that it helps fund the development activities. The second is it was a merchant trend -- project that was -- it wasn't contracted, and it wasn't completed in its development. And so you have to weigh the cost and the returns or the profitability against the risks.

And so I don't know quite how to answer your question. It's a judgment call when we look at these things to say is it better. And somebody, I think it was Ben earlier asked, why not hold on to it. And -- no, maybe it was Nelson was selling it. It's a judgment call at the time. I think we still believe that our development activities create about a CAFD multiple, if you're contracted and leasing at about a six day, seven times. And we buy the assets at PEGI at around a 10 time multiple. And so that continues our belief in the two businesses. So I don't know if that's very helpful.

But Esben, you have some thoughts?

Esben Pedersen -- Chief Financial Officer

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 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 its 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 a project might give us 1.25 times the money we have invested, sometimes at 2.5, 3 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 the asset has, and what it can be sold to a third-party, whether it be PEGI or somebody else. And we look at where do we think we can maximize return.

In this case, given the capital we had invested in South -- in that South Dakota project, and the opportunity that somebody else presented us in terms of taking the project now before we have to put construction capital in and then sell it at COD it was deemed to be a more optimal case than the alternative. But every asset is evaluated in that way.

Michael Garland -- Chief Executive Officer

So everybody [Phonetic] answering your question. Sorry.

Jeremy Rosenfield -- IA Securities -- Analyst

Yes. No, that -- the combination of the 6 to 7 times, and I think just to what has been said in terms of 15% plus and that -- that's very, very useful. That's exactly what I was looking for. Thank you guys. That's it.

Esben Pedersen -- Chief Financial Officer

Okay.

Michael Garland -- Chief Executive Officer

Okay. Thank you, mate.

Operator

There are no further questions. I turn the call back over to Mike Garland for closing remarks.

Michael Garland -- Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Michael Garland -- Chief Executive Officer

Esben Pedersen -- Chief Financial Officer

Brian Lee -- Goldman Sachs -- Analyst

Nelson Ng -- RBC Capital Markets -- Analyst

Rupert M. Merer -- National Bank Financial -- Analyst

Ben Pham -- BMO Capital Markets -- Analyst

Julien Dumoulin-Smith -- Bank of America. -- Analyst

Colin Rusch -- Oppenheimer & Co. -- Analyst

David Quezada -- Raymond James -- Analyst

Jeremy Rosenfield -- IA Securities -- Analyst

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