Pattern Energy Group's (PEGI) CEO Michael Garland on Q2 2016 Results - Earnings Call Transcript

| About: Pattern Energy (PEGI)

Pattern Energy Group Inc. (NASDAQ:PEGI)

Q2 2016 Earnings Conference Call

August 05, 2016, 10:30 AM ET

Executives

Mike Garland - President and CEO

Mike Lyon - CFO

Analysts

Nelson Ng - RBC Capital Markets

Ben Pham - BMO

Frederic Bastien - Raymond James

Rupert Merer - National Bank

Matt Tucker - KeyBanc Capital Markets

Sophie Karp - Guggenheim Securities

Michael Morosi - Avondale Partners

Julien Dumoulin-Smith - UBS

Andy Levi - Avon Capital Advisors

Operator

Good morning ladies and gentlemen. Welcome to Pattern Energy Group's 2016 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]

I would like to remind everyone that today's discussion 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 August 05, 2016 and available on EDGAR and SEDAR.

Now, I'd like to turn the call over to Mike Garland, President and Chief Executive Officer of Pattern Energy Group Inc.

Mike Garland

Thank you, operator. Good morning and thank you for joining us today. Earlier this morning, we released our 2016 second quarter results, which you can find on our website, patternenergy.com.

We're very pleased with our Q2 results. CAFD, Adjusted EBITDA and revenue were all up despite the expected lower wind we experienced in the quarter. CAFD, our primary financial metric was up 27% year-on-year to $35.5 million. This keeps us on track through the first half of 2016 to achieve our full year CAFD guidance of $125 million to $145 million.

Our full year guidance represents built-in CAFD growth of 46% over our 2015 CAFD at the mid range of -- at the midpoint of the range and we can achieve that target entirely based on the existing ownership of our 16 operating assets, meaning no new equity capital or any acquisitions are required to achieve our full year guidance.

Our 2016 production through the end of the second quarter is at the low end of the range of our expected output. We forecasted and planned for El Niño to affect us through second quarter and production to be about 5% or 10% below our long-term average.

We ended up slightly above the range; however much of the production occurred in ERCOT, where energy prices ran about one third to one half of what the average energy prices are in our fleet. This diminished the impact on our revenues, adjusted EBITDA and CAFD.

So through prudent capital and cost management along with higher than expected income from equity method investments and lower than expected distributions to non-controlling interest, we were able to achieve the reported $35.5 million CAFD.

In addition to CAFD being up 27%, our revenue was up 10% and adjusted EBITDA was up 18%. Our fleet continue to operate at the top of the industry. Our strong operating performance and high quality of our assets means our projects continue to provide investors with stable and growing cash flows.

As a result, this morning we announced an increase in our third quarter dividend of 2.6% to $1.60 per share on an annualized basis. It's our 10th consecutive quarterly dividend increase.

And our outlook for growth remains strong, both through identified ROFO projects, we expect to drop in the next 18 months and new dropdowns as pattern developments expands its project opportunities.

During Q2, we announced an agreement to acquire a 272 megawatt interest in the broad -- the 324 megawatt Broadview wind project from the Pattern Development. Located in New Mexico, Broadview is a high quality asset that complements our existing portfolio.

Broadview has entered into two PPAs with Southern California Edison for a 100% of its output up to a total of 297 megawatt to sell attractively priced electricity into the California market. The project will use Siemens 2.3 megawatt turbines the work force of our existing fleet. Our cash flow interest started 84% and the tax equity 16%.

We agreed to acquire Broadview for $269 million at the commencement of commercial operations, which is expected in the first half of 2017. This price represents an excellent 9.6 average CAFD multiple over five years. We can fund the purchase of Broadview with a combination of currently available liquidity and new long-term project holding company debt. To be clear we do not need to raise any equity in order to complete the Broadview acquisition.

But we have build into the financing the flexibility to use all our portion of the project holding company debt financing commitments and fund the balance with additional equity or corporate debt.

The forward commitment to acquire Broadview at COD is essentially the same as we did for Amazon Wind and the Panhandle 2 projects where the tax equity investors requested that pattern energy provides a forward commitment, because we will be the long-term owner and operator of the project.

The Broadview acquisition demonstrates our commitment to grow with the portfolio, when appropriate and with projects that are accretive to our shareholders. At this stage we believe we are nearing a range where capital for growth is available for accretive drop down, drop downs that drive increased cash flow per share for our investors. And we are well positioned through our relationship with Pattern Development to deliver on our growth.

With the agreement to acquire Broadview, our identified ROFO list with Pattern Development totals just over 1 gigawatt of owned capacity and represents a growth of 40% to our existing portfolio.

At the same time Pattern Development continues to expand its pipeline, subsequent to the end of the quarter, Pattern Development acquired the King Pine project from SunEdison. King Pine is a 600 megawatt project located in the North-Eastern Maine. It's the largest wind project in the State like all the Pattern Development projects, Pattern holds a Right of First Offer over the project.

The project's profile shares the high same quality -- excuse me, shares the same high quality characteristics of our existing assets and will complement our portfolio by providing additional geographic diversification.

With that I'll turn it over to Mike Lyon to review the financials in more detail.

Mike Lyon

Thank you, Mike. I'll start with electricity sales. We report electricity production on a proportional basis, to reflect our ownership interest in operating projects.

Proportional gigawatt hours sold increased 40% to 1,715 gigawatt hours in Q2 2016, compared to the corresponding period in 2015. This increase was primarily due to an increase in volumes of 445 gigawatt hours from our controlling interest in consolidated gigawatt hours and 45 gigawatt hours from unconsolidated investments due primarily to the acquisition of K2 in June 2015.

As Mike mentioned, the anticipated El Niño conditions continued during Q2, causing lower wind speeds, which resulted in lower production. Our Met team and independent parties continue to believe a reversal of El Niño conditions should occur in the second half of 2016 or early 2017.

This new system referred to as La Niña, could result in higher wind speeds for our fleet. This would potentially result in production at or higher than the long term average for the latter part of the year and into 2017. For our full year guidance, we have assumed wind speeds and production at the long term average during the second half of this year.

Adjusted EBITDA increased 18% to $78.6 million in Q2 2016, compared to the same period last year. This was primarily attributable to projects, which commenced commercial operations or were acquired since May 2015.

Cash available for distribution increased 27% to $35.5 million in Q2 2016, compared to the same period last year. The $7.5 million increase in cash available for distribution was due primarily to two items. First additional revenues of $13.6 million excluding unrealized loss on energy derivative and amortization of PPAs, primarily from projects which were acquired since May 2015, or which commenced commercial operations since Q3, 2015.

And second, an increase of $4.2 million received in cash distribution from our unconsolidated investments when compared to the same period in 2015 due to full operation at each of our unconsolidated investment in 2016.

These increases were partially offset by increases in project expenses of $5.4 million and operating expenses of $1.8 million primarily resulting from projects which commenced commercial operations or were acquired during 2015. The increases in cash available for distribution were also offset partly by increased distributions to non-controlling interests of $3.5 million.

This morning, we are reaffirming our guidance for the full year 2016 cash available for distribution of $125 million to $145 million. This represents built-in cash available for distribution growth of 46% at the midpoint of the range from the current 16 operating projects in our portfolio with no new projects and no new equity capital required to achieve this target.

While we have reached the midway point of the year on target, we've decided to take a conservative approach at this stage and not narrow our guidance range. We remain confident in the fleet's ability to achieve this range and we will update the market as appropriate at the time of our Q3 call.

As of June 30, 2016, our available liquidity was $349 million, which consisted of approximately $88 million of unrestricted cash on hand, $29 million of restricted cash, $133 million available under our revolving credit agreement and $100 million available undrawn capacity under certain project debt facilities.

As discussed on the Q1 call, we established an aftermarket or ATM program to provide us with another mechanism to access capital. To this point we have issued approximately $29 million in equity from treasury prior to the trading blackout in advance of our Q2 results.

We expect to continue to use the program at prices we view appropriate as it's a cost effective manner to raise incremental equity over time, providing greater flexibilities and larger discreet equity or debt transactions.

Thank you. I'll now turn the call back over to Mr. Garland.

Mike Garland

Thanks Mike. At the midpoint of 2016 we remain on track to achieve our CAFD full year guidance. We recorded $35.5 million of CAFD in the second quarter as Mike and I've said.

We increased our dividend for the 10th consecutive quarter. Our turbines continue to operate at a high level of availability. We grew our portfolio by 12% with the announcement of Broadview. The capital markets have continued to improve through quarter -- second quarter and into third quarter positioning us for a return to the virtuous cycle to drive continuous cash flow per share growth.

We possess a clear path to deliver this growth given our identified growth of this represents a 40% increase to our existing portfolio and Pattern Development continues to expand its pipeline with projects like the 600 megawatt King Pine asset.

Our list of ROFO assets continues to grow in a market when the higher demand for renewables and improving technology. Our relationship with Pattern Development remains the primary means through which we will grow our portfolio as we strongly believe we get better value for invested dollar from the projects Pattern Development creates. We've structured the business and deployed its strategy to produce stable sustainable CAFD per share and CAFD per share growth.

We have never viewed the company as a side car that funds the development business quite the opposite. We structured the business with internal management and no IDRs because Pattern Energy is the growth density.

With that in mind and as I've mentioned on the May call, we believe we can increase our long-term value by migrating over time to a fully integrated independent renewable energy company.

We continue to hold discussions with patent development on the possibility of PEGI to participate in the ownership of the development pipeline. Given the disrupted -- disruption in the public market over the last year, we are being very careful and cautious about the timing, structure, value and the funding of such a transaction. At this stage there is nothing to report and there can be no assurance that any transaction will occur.

We have consistently delivered results based on our discipline and strategy including our built-in CAFD growth within the portfolio of 2016. We have clear -- a clear strategy to provide a growing and stable base of cash flows from a portfolio of high quality renewable assets.

Again I would like to thank our shareholders. We are very excited about our future. We have a plan for creating long-term value for our investors, changing the way electricity is made and transferred in development countries -- developed countries, while respecting the communities and the environment where our projects are located.

We would like to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Nelson Ng from RBC Capital Markets.

Nelson Ng

Great, thanks. Good morning everyone.

Mike Garland

Hey, Nelson.

Nelson Ng

Just a quick thing in terms of wind generation, you mentioned that El Niño had a negative impact and La Niña may have a positive impact in the second half, are you seeing El Niño ease in Q3 and -- like I hear people talk about heat terms, so I am thinking okay, El Niño is still around but like what are you seeing in Q3?

Mike Garland

We were anticipating your question just a few minutes ago. Yes, we -- all we can say now, we can’t really say what’s happening in Q3, we only have one month, but the first month this year July, first month of the quarter has been good, very good.

Nelson Ng

Okay. And then just another -- next question is the amortizing debt repayments, do you have a rough estimate as to what the Q3 and Q4 debt repayments would look like or in terms of the amount?

Mike Garland

Yeah, Nelson, we have project level debt repayments that are distributed roughly two thirds in the third quarter and one third in the fourth quarter for the remaining amortization this year. So is that helpful?

Nelson Ng

Do you have a -- like absolute amount or kind of so it's all up.

Mike Lyon

Sure the consolidated debt amortization remaining is roughly $25 million.

Nelson Ng

Okay.

Mike Lyon

And that’s split about two thirds, one third.

Nelson Ng

Got it, okay. And then I just want to clarify the King Pine development doesn’t have a contract yet, right. But when do you expect to hear back regarding the status of that project?

Mike Garland

Well we have a bid into Tri-Cities, they have delayed the announcement and we don’t have a new date. We’d had expect it by today to have heard something, but we don’t have a renewed date as to when they might announce, what they are going to do.

And then subsequent to that Massachusetts anticipates doing a number of solicitations over the next year or so and we'll be looking at those as well.

Nelson Ng

Okay. And then just one last question. The current ROFO list only has I think one remain U.S. development left and I think you obviously expect to add more or expect to replenish the iROFO list, could you give more color in terms of whether you expect to or replenish list from U.S. developments, Canadian developments or can you talk about the geography?

Obviously, I think you mentioned in the past that you will be participating in the Mexican auction, are you participating in the Ontario LLP?

Mike Garland

I don’t know that we should be telling you if we are or not, but let me just say on the replenishment, we're going to be replenishing from both U.S. and outside the U.S. And so U.S. is a very robust market currently and we anticipate over the next year or two for it to increase activity particularly because of the phase down of PTC obviously us and a number of our competitors who are positioning ourselves to try to retain the ability to receive a 100% PTCs.

And so we anticipate that over the next year to two years, there will be a number of parties making commitments to projects that can still enjoy the higher PTC levels. So we think that U.S. market will become relatively robust for the next four or five years.

Nelson Ng

Okay. Thanks. Those are my questions for now. Thanks.

Operator

The next question is from Ben Pham from BMO.

Ben Pham

Okay, thanks. Just a couple of questions on transmission and I am just curious what the Broadview acquisition that you’ve done as a piece of a transmission part in there. Is your plan to own that place? I know it's a smart of piece of it? Are you plan to own it longer term?

Mike Garland

Yeah. We have an economic interest in it, which is similar to ownership. Yes, we will depending on how you to defining it in PEGI or the project entity. Project entities will have some economic benefit from participating in that indirect benefit in the transmission line and the transmission line will be fully utilized by the projects that we have planned for New Mexico.

Ben Pham

So that includes Grady then?

Mike Garland

Yes.

Ben Pham

Okay. And is that transmission the way you think about it, is that a wrapped contract to your counterparties then?

Mike Garland

Wrapped contract, what do you mean?

Ben Pham

While you are selling the energy and the power…

Mike Garland

Yes it's wrapped to -- we have to get the power to a delivery point for Southern California Edison to take it. So it includes the transmission. Southern California Edison doesn’t take the Western line risk, we did that.

Ben Pham

Okay.

Mike Garland

So it’s pretty much a gen-tie.

Ben Pham

Okay, all right. Thanks for that. And is there anything you are doing on transmission? I know a lot of you mentioned the Pine project there is some transmission associated with lot of the proposals are you planning to get involved in the transmission side that area at all?

Mike Garland

When you say, you were talking about patent development....

Ben Pham

Yeah, yeah.

Mike Garland

Just to be clear for everybody listening. Yeah, the patent development is very active in a number of projects. So you all have heard us talk about Southern Cross which is clearly a big, very exciting opportunity that could connect ERCOT to the Southern utility areas, which opens up some really good opportunities for wind power to get from Texas into those states but also have a bi-directional benefit for the parties involved.

We are looking at two or three other fairly large projects that include transmission plus renewable energy projects attached to them to be able to deliver into markets that would be more in demand for renewables and potentially pay a higher price as a result or at least a competitive price for the power.

So we have -- and if we step back part of the reason then they have these transmission lines have become more available if you will to be developed is A, one or two of them have been in development for a while, but B, the IRS came out with a four year guidance to -- guidance on four years that from the start of construction of ordering of your equipment, you have four years to complete the project.

So you have a Safe Harbor of four years compared to what it used to be a two-year Safe Harbor for getting a project in construction and qualifying for the PTC, getting into operation and qualifying for the PTCs that got extended to four years, which allows bigger projects and the ability to get fairly long transmission lines accomplished within and built in four years.

So that’s really driving some of our activity is to be able to look at some of these bigger opportunities then what had been possible previously.

Ben Pham

Okay, that’s helpful. Thanks guys.

Operator

The next question is from Frederic Bastien with Raymond James.

Mike Garland

Hi, Frederic.

Frederic Bastien

Hi, good morning congrats on a solid quarter good execution again.

Mike Garland

Thank you.

Frederic Bastien

You spoke to King Pine project in Maine that pattern development acquiring from SunEdison, can you speak to similar opportunities that you may be considering with other third parties at this time?

Mike Garland

Yeah, I can’t -- were like we normally say we look at a lot of things, we looked at a number of additional opportunities with SunEd. We see projects coming in all the time. We have two or three on the development side similar to King Pine opportunities coming in from third parties we're actually likely to joint venture with third parties because they are bigger projects, but we also are looking at independently acquiring from third parties development opportunities.

We do that all the time but we have signed a number of new opportunities that we have not announced over a Pattern development and we’re haven’t announced in part because of proprietary reasons for competitive reasons. We’d like to advance those projects before we start talking about them publicly.

King Pine was different in that it was a sale under their bankruptcy process and was publically announced by them the first time not us and so we didn’t have a choice but to get out and announce it, but as you know, we typically don’t do press announcements or anything around our new development opportunities, but we have signed several in the last several months with third parties.

Frederic Bastien

Okay. So, it's fair to say that this -- I guess that the pipeline of opportunities with third parties is improving relative to couple years ago.

Mike Garland

Yeah.

Frederic Bastien

Okay. Now and I guess, investor interest and renewable power stocks, seem to be pretty strong right now, at least in Canada and Pattern continues to differentiate itself from most yields out there. Doesn’t that give you the confidence to tap the markets again?

Mike Garland

Go ahead, Mike.

Mike Lyon

You know and I think everybody on the call knows that access to growth capital is the key component of our strategy and we do monitor the market on an ongoing basis and I think we will continue to be disciplined and thoughtful about when we think it’s the right time to access that market.

I can’t provide a specific timeframe for when we’re going to re-enter the equity market. As we mentioned a number of times over the last 12 months I suppose, we don’t require any new equity to achieve our guidance for this year, but we’re -- but the core component of our strategy is raising capital when it is cost effective relative to the returns we can generate from investing in new assets and I think we will continue to look for an opportune time to enter the market when we are confident that we can complete a successful transaction at price levels that we like.

We’re definitely pleased with the direction of the capital markets in the last few months compared to what we weathered in the latter half of last year and first part of this year but we don’t have any specific time line or announcement to make at this point.

Mike Garland

So Frederic, I always assume that when you ask that, you must have a voice monitoring equipment to gauge or what we’re saying because you know, we can’t really answer your question so there must be some, you must be gauging the positiveness or do something in how we respond.

Frederic Bastien

You can’t blame me for trying. Thank you.

Mike Garland

I can’t.

Frederic Bastien

Thanks.

Mike Garland

You bet. Thanks Fredric.

Operator

The next question is from Rupert Merer from National Bank.

Rupert Merer

Good morning, everyone. Just as a follow-up on Fredric’s question, I would like to ask a couple of questions on financing plans, so it seems like you’re at the market program seems to be working well. Can you remind what the limits are or the potential for that program for raising funds?

Mike Garland

Sure. Rupert it’s a $200 million program and there really isn’t a time limit on the program other than the time limit under our shelf registration statement, but both of those are easily renewable filings with the securities regulators.

So of the $200 million, we’ve issued close to $30 million and so we got a lot of room left on that and once we’ve worked our way through that, I think given how much I like the program, I think it’s highly likely we would seek to refresh it at some point in the of future but obviously, we don’t have fantastic crystal balls.

Rupert Merer

Right. Okay, great. And secondly you mentioned potential for partnering with third parties on large projects. Now, of course, you already have a private equity apparent but to give any consideration to partnering with other sources of private funds when you invest project drop downs or M&A and we see some your peers for example, co-investing with tax-advantaged to private funds with lower hurdle rates that helped them to choose their returns?

Mike Garland

Yes, there’s three levels to that answer so, let me start. First of all, we’ve always done joint venture development. We talked about like in CEMEX in Mexico is a joint venture development activity with them.

They don’t anticipate holding operating asses long-term. Secondly, we do look at and particularly, as we’ve grown some of these larger opportunities, they're natural to bring in third-party passive if you will.

In some cases, maybe even active partners to own at long-term and as you say the natural depending on where they are, there’s some benefit to looking at like in Canada, Canadian pension funds or in U.S. similarly and other similar type of entities and managing the assets and being the managing member of a partnership that owns a larger transaction with partly own buys parties that have potentially tax exempt status or similar type of benefits for providing lower-cost capital. So we do look at those things.

We think until now we haven’t really thought that the projects we were doing warranted it. There’s a level, like you don’t really want a 100-megawatt projects. In Ontario, we have our joint venture with Samsung where all the projects are on 50-50 and in some cases, we brought in First Nations, but it really is more efficient to own assets, smaller assets individually at 100% rather than breaking them up too much. And so we are now, as we scale up, some of our opportunities, I think we will be looking at some of the things you’re thinking about.

Rupert Merer

Okay. Excellent sounds like you have a all the basis covered. Thank you.

Mike Garland

Great, thanks Rupert.

Operator

The next question is from Matt Tucker from KeyBanc Capital Markets.

Matt Tucker

Good morning gentlemen. Thanks for taking my questions. Should we assume that the Broadview will be your next acquisition when it starts operations next year or if not, what would it take for you to do an acquisition between now and then?

Mike Garland

Go ahead, Mike.

Mike Lyon

Well Broadview certainly is the first new project acquisition that we’ve made a commitment to and we noted that when we announced that acquisition that we’ve restructured the potential of financing for that project so that we can make the acquisition on our commitment without having to raise new capital.

It does use up most of the available liquidity that we have available for new acquisitions. So we would look to be racing more equity and some that can occur through the ATM or through other means. I think that we’ve got on an iROFO list that has a number of attractive candidates for the next drop down, some of which our operational projects.

So were we to drop one of those later this year, we would certainly, be completing that prior to the closing of the acquisition of the Broadview project but as I mentioned earlier, we don’t have any announcements on either capital raise or drop-down at this time.

Matt Tucker

Got it. So that largely dependents then on capital market conditions, is that the way to think about it?

Mike Garland

Yes, I think that’s right, I mean our…

Mike Lyon

We also have planning. There’s other considerations. Cash flows, how we mix the CAFD multiple return of the projects and how attractive are they, what's the right timing to drop them, how’s liquidity of those LP and there’s a number of considerations that we go through in evaluating what's the right timing to drop a project.

Matt Tucker

Okay. Thanks. And then with respect to Mexico, you touched on that market briefly. I guess, could you be any more specific on when you think we’ll see a Mexican project on the ROFO list and what are the steps for getting there?

Mike Garland

So it is we’re awarded the PPA and I’m serious about that. And we are in discussions with some private companies but also we’ll be participating in the next round of RFPs. And I think we have a reasonable good chance of that. If you remember the first round of RFPs, there was this notable pricing difference and it really favored certain regions in Mexico and we happen to have our prime projects not in those regions. So we were disadvantaged in that first round.

Since then, Mexico has basically eliminated those preferential regions and it’s a levelled playing field now and so we’re more interested and excited about this next round then the past one.

And so that will be -- so those are the two approaches we’re taking both having some private direct sale opportunities going on that could result in something and we’ll be participating in the RFP. But there’s nothing definitive at this point, they’re all speculation and it’s all part of our development efforts.

Matt Tucker

Thanks. Just a quick follow-up to that. When do you expect to find out about this next round of RFPs?

Mike Garland

I don’t know when the timing is for announcing. I think that next bid is in a couple of months but I don’t know what the turnaround time is.

Matt Tucker

Great. Thanks guys for the color.

Operator

[Operator Instructions] The next question is from Sophie Karp from Guggenheim Securities.

Sophie Karp

Hi guys, thank you for taking my questions. I have a follow-up on the King Pine project. Is this something that you could potentially participate in a development capacity is similar to what you’ve done in the past, as in acquiring it before it’s complete and finish it on your own balance sheet like Pattern Energy?

Mike Garland

It’s possible. Right now, we’re planning on just Pattern Development doing the whole thing but it’s possible that PEGI could decide to approach Pattern Development and see if they’re open to PEGI participating in the project.

It’s about a two-year, even if we were awarded a PPA under this Tri-state bid soon, it’s about a two-plus year permitting process that we have to go through. And so there’s still a fair amount of development work that has to go on.

Obviously, we have extremely good track record that once we sign a purchase agreement that we have delivered on those projects and so the risk is reasonable. We believe at this point if we had -- if we get a PPA and whether it’s appropriate for PEGI to start participating in development through individual projects with Pattern Development, will be something the two boards will have to address.

We can’t really tell you today that that would be acceptable to Pattern Development’s Board or PEGI’s Board. But it’s an interesting question.

Sophie Karp

Got it. Thank you. And then one of your competitors discussed potential repowering opportunities to really capture PTCs in existing wind farms and they seem to have identified a sizable amount of opportunities like that. Is this something that you’ve looked into and do you think that it’s something that’s available to you?

Mike Garland

Yes, we've looked into it a lot and it’s really not available. Our fleet is very young. You got to think about that our first project really was 2010. So our fleet is much younger than some of the other guy's portfolios. You really have to – the standard to be able to get PTCs on a retrofit like that is that the new equipment is valued at 80% of the total value of the wind assets that would be being utilized.

So for example, some projects are old enough that people are saying, jeez, if you leave the substation distribution foundations and tower in place and put a new missile and hub on top of the tower, then the value of the existing tower foundation, etcetera, is less than 20% of the total value that new asset if you will, and therefore the projects qualify for PTCs.

We just don’t have many assets that would be valued in that manner, meaning that the existing tower and foundations would be as less than 20% of the total value of the project afterwards. And so if you have an older project like it’s 15, 20 years old, it makes perfect sense to look at that but if you’re 10 years and younger, it probably doesn’t unless it’s unusual situation.

All of our projects have -- are very high-quality and so it will be hard to justify that the embedded project balancing project isn’t worth at least 20% if not more.

Sophie Karp

Got it, thank you.

Mike Garland

You’re welcome.

Operator

The next question is from Michael Morosi from Avondale Partners.

Michael Morosi

Hi guys, thanks for taking my questions. You’ve already covered a lot of ground here but I guess, just one remaining question I had was with respect to the potential materiality of owning transmission assets longer term in Southern Cross would obviously be a very viable asset.

I know you have talked about others, how incremental could that be to CAFD longer term? It's not part of ROFO now but just in terms of orders of magnitude, how big is that opportunity?

Mike Garland

Mike I’m not going to be able to give you a very satisfactory answer. Transmission is very lumpy and it’s a long cut. It takes a lot to make it happen over a fairly long period of time such as Southern Cross. We’re working on for a long time.

And so we really don’t like to get into too many specifics about the opportunity and the potential because if you look around the market, it’s not like there’s been a hundred transmission projects built in the last 10 years.

They’re a fairly limited number, you have to do things like we’re talking about. There’s the independent transmission projects like we did Transmit Cable, we finished the construction of that when we formed Pattern but it was developed as the prior company we were with and that stands alone. Most of the big transmission deals we’re talking about are associated with reaching new markets for renewables that are not available currently.

So I think the parallel example that’s perfect is Broadview that you have a transmission project there which is not that long or big but it’s really -- was a transmission development project standalone and we got incorporated into the broader Broadview project development activity, so that it allows Broadview to connect through New Mexico and Arizona into California and sell into California.

I think that is what you’re going to be seeing predominantly where you have renewable energy being connected through a transmission line and you end up treating it as a big gentile if you will because it’s too hard to finance them separately until you have both projects essentially done, then you may choose to optimize the financing by financing them separately.

Having said that, these opportunities can be $500 million, $1 billion, $1.5 billion, the transmission lines and you can anticipate if a project is $1 billion, roughly what kind of cash flow should be associated with it?

Typically, transmission lines are viewed as lower risk than renewable energy projects like wind and solar and so they can be financed very efficiently and we’ll look at it depending on the type of projects or the characteristics of the project as an individual transmission line when we get there.

But I can’t give you any real concrete sense of what the market is for transmission and how it will affect our CAFD going forward just because as soon as we start talking about numbers, people don’t forget those numbers and they start expecting them and transmission is too risky out there and takes too long and would rather announce it when we find one that we really pull together a little bit like Broadview again rather than trying to anticipate how the market will ultimately support such a transmission project three or four years from now.

Michael Morosi

That is fair, thanks for the color.

Mike Garland

You bet.

Operator

The next question is from Julien Dumoulin-Smith with UBS.

Mike Garland

Hi Julien.

Julien Dumoulin-Smith

Hi good morning, so I apologize if I missed this earlier but just wanted to follow up on the development business vis-à-vis Pattern Energy and specifically here, how you’re thinking about the eventual incorporation of development asset, either late stage or early stage back into the YieldCo itself and where you are in that process and conversations et cetera?

Mike Garland

All I can say is we’ve been talking off and on, quite a bit with our Boards both Pattern Development Board as well as PEGI about how is the best way for PEGI to start participating in the development activities and given I think, on my comments, I mentioned it’s been quite a ride the last year in the YieldCo space and rough.

It took us a year to see a recovery and so we don’t want to get out in front of the market taking development risks and participating in risks transactions but we have been talking about that for a while and I think Sophie’s question is a good one.

We're talking to the Board, does it make sense for us to buy a piece of the development company, does it make sense to do participate in individual projects, is it better to wait longer because of the market disruption for the last year, let’s think settle again and start recharging, if you will the credibility and trust in our basic business before we try to take a step or two beyond that.

And those are the discussions we’re having and what I’d say is right at the moment, that’s where we are. We are just continuing to do the business that we’ve done for the last year and we have nothing more to report but we’re looking at all those possibilities and trying to get our particularly our public board, our independent directors up to speed about what it means to be doing development, what are the other areas that we could expand our margins for our investors beyond just development and see how to get them educated, so they’re comfortable and confident and feel like they can give us better insight.

So at this point, Julien all I can say is we’re talking about it. We love our development business as you know, we’ve been doing it long time and we really have a good time and I think we are pretty good at it and we think it’d be great overtime allow PEGI to participate in some fashion in that area.

But we’ve been called conservative and I guess in this case, we’re continuing that trend where we are being very cautious about how we might enter that market and making sure that the public investors are confident in how we do it and first and foremost our independent directors are, and then secondly we do it in a way that’s very positively received by the market.

And so we’re not there yet, the market is still in our minds too sensitive to jump into it. So we are going to keep doing what we’ve been doing which is primary focused on operating assets and see if there’s a way to incrementally get involved with development over time.

Julien Dumoulin-Smith

Got it. And just to clarify here. Would that be kind of later stage project that are close to COD as you're thinking about it or realistically, is this early-stage stuff that obviously is a lot less cost to it. And then I suppose the second element of that would be how would it going to be finance, obviously you got market considerations come to the market for public equity but would this be potentially something where you could share back to the development side?

Mike Garland

Yes, that’s, I’ll start with your last question first. Yes, that’s always a possibility. We talk to Riverstone about that as to whether they would be willing to accept shares in exchange for certain participation in the development business.

We talk to them about whether we ought to be starting at very early stages or late stages and what’s the benefit and risks associated with that. I would say it a little differently than you did.

The later stages really when the dollars the development dollars jump up, right. Once you get a power purchase agreement interconnect the biggest dollars are generally the security associated with the PPA and the inner connection. And so once you reach that stage your costs actually jump up compared to the early stage development.

And that may be your risks are lower too, as I said we've never had one of our projects knock on wood fail once we've signed a power purchase agreement. And so your risks are less, but your total dollars are more. And there's some trade-offs between that you may have a higher valuation or return if you start from the very beginning of a project.

But to start with getting the market in our independent directors comfortable with it I think Sophie’s question was right down that that fairway which was hey could you do something like King Pine which has got some development already. And if you get a PPA even though you have two years to finish the permitting and do construction financing, is that a good one to start stepping into for the company.

And those are all questions we're talking about. And there's no clear answers, easy answers and like I said the first step is for us to make sure independent directors understand what they're getting into, and getting comfortable in that take some time as they're not energy professionals unlike Riverstone who obviously are top of the class energy professionals are independent directors are truly independent. Mike likes to point out we didn't even when people before they became independent directors for our company.

So we want to build their trust first on how we might approach it. But right now, again I can only say there's been no development and no decisions made, how we should do it. But all of the ways you you've raised the question. Julian are things that we're having discussions about we just haven't come to any conclusions yet.

Julien Dumoulin-Smith

Got it. And then just a follow-up a little bit on financing. Where do you stand vis-à-vis liquidity and your revolver balance availability and maybe a broader question from there is how do you think about appropriate leverage and sources of leverage to the extent to which you continue to pursue that to finance transactions again. I suppose is around to ask you about equity without asking?

Mike Garland

Well, I'm not –

Mike Lyon

I'm going to tell you.

Mike Garland

I'm not going to address. I think kind of the equity markets in their state and their progression from where we were earlier this year and late last year. As to the other forms of capital that we can raise we continue to find the capital available on a project finance basis to be very attractive, very robust very available it good rates. Maybe a little less so for the tax equity in terms of good rates and then the project level debt, where there's a lot of competition amongst providers of project debt and a smaller market for tax equity.

At the corporate level, we've said since last summer that we felt like we would be entering the corporate debt markets at some point, as we size up the business, we said that as we progress toward our 5000 megawatt target by the end of 2019 that the incremental corporate capital that we need to acquire projects might be roughly two thirds equity and one third debt. And I don't think our view has changed a whole lot on that front.

We think about capacity for that corporate level debt. Being inclusive of let's say corporate bonds and revolving credit facility type debt as a multiple of our CAFD or maybe CAFD plus overhead. And we think a comfortable level there's about a three times multiple. So as we grow our CAFD we think we'll be continuing to increase our corporate debt capacity.

I’d say that on -- you’ve asked about the revolving credit facility balance, we've drawn a substantial portion of that about $335 million of the $500 million facility. And we've issued letters of credit under the facility as well.

We have about $100 million and I think it's $130 million or so available for draw under the revolving credit facility and that together with our portion of our unrestricted cash represents the liquidity that’s being available for making new investments in new projects.

Julien Dumoulin-Smith

Got it, right. So presumably, you wouldn’t necessarily want to run with substantial balance against your revolver in the future, right, I imagine that would get refi out or paid out with equity in subsequent deals?

Mike Garland

That’s right, Julien. We’ve always viewed the revolver as, if you sort of a bridge to more permanent part of our capital structure. We’ve sort of relied on that reasonably heavily during this past 12 months period and we actually think that’s one of the reasons we want to have a facility like that, so we can get through periods of disruption.

We’re doubtful that most periods of market disruption will be as long and deep as the ones we just experienced and so we’re hopeful that we’ll have a more maybe sort of a more frequent recycling of the revolver usage in the future and turning it out with a corporate bond, I think is something that we look at or mix of corporate bond and equity. And you got it exactly right.

Julien Dumoulin-Smith

Sorry for one last quick one here. Southern Cross, getting I supposed a bit more attention here. From a permanent perspective, how is it going with the states exposure to Mississippi, Louisiana as you execute there and separately how are the PPA negotiations going with counter-parties?

I suppose it would include the preponderance of the Southeast Utilities and are you finding them to be competitive relative to store locally?

Mike Garland

Yes, that’s been the big development recently is the solar pricing has gotten much more competitive. We have two ways of competing. One is head on, which is bringing wind in from Texas which is one of the best and lowest cost wind resources in the country but we have to pay for the transmission line as well. Head-to-head, we can compete with solar pretty closely.

The advantage we have with the transmission line is it’s not just a Janco or Gentile in the case of Southern Cross, it also can be used bilaterally which adds value to the transaction that Gentile would not and what I mean by that is obviously, there are times when excess capacity, there’s excess capacity in Texas, it can be shipped to the Southern States and there are times when Texas is short of capacity where you’ve seen.

Julien, I know you know there’s been these peaks were $1,000, $4,000, $5,000 of megawatt hours that had happened in last several years that would allow for some of the Southern States to ship power into Texas at very attractive rates to help Texas ratepayers well.

And so there’s value in Southern Cross for that purpose that other projects don’t have, that makes us highly competitive against what we think is pretty cheap solar right now. So we run the numbers and they look pretty good and we talk to a number of the utilities and we have some that are pretty excited about it. We can’t talk about those because there’s nothing announced but as you know, you can count anything until you have an executed agreement.

On the permitting side, transmission always has people that have concerns about transmission on their property. Luckily, we’re getting through some states we’re generally speaking, the landowners are pretty receptive to these sort of things but there always some that aren’t and in some cases, we can work around it and in some cases, we have the authority to use eminent domain to resolve the opposition.

And so we’re still very bullish that the permitting process for Southern Cross can be done in a reasonable fashion. There are specific laws or regulation that allow for more efficient permitting for transmission line like this in the states and so we are in reasonable shape on that, you’re never out of the woods until it’s done but we have pretty good authority if we need to use it.

Again, having said that, we haven’t announced anything dramatic on Southern Cross, it’s just an idea at this point that we’re working hard on that we think is a unique asset.

It’s one of the only grandfathered under the Texas law that was passed last year that restricts ERCOT interconnection to Mexico and other places, other states, and so it’s got a unique position to connect ERCOT into other states and protect ERCOT at the same time.

And so we think that it’s an elegant solution to connecting a market that is very productive, being Texas, to a market where renewables are harder to compete because of price and it provides additional benefits to both regions that is unique, but these things take a long time and there’s a lot of reasons why they don’t happen.

That’s why we generally don’t talk about the very much is because it's easy for transmission projects to not be successful because of limited opposition. So we’re very bullish about the concept but we’re not there yet on the project.

Julien Dumoulin-Smith

Great, excellent. Thank you.

Mike Garland

You bet.

Operator

The next question is from Joe Zhou from Avon Capital Advisors.

Andy Levi

It’s Andy Levi. How you guys doing

Mike Garland

Hey Andy?

Andy Levi

Good. Just a couple of follow-ups from Julian’s questions. I don’t remember you guys saying it on the call, but I don’t know if I missed it. Just at your aftermarket program, how much equity have you issued this year on that?

Mike Garland

$29 million.

Andy Levi

$29 million. Okay. And then, how much equity did you say guys wanted to do this at the market? I’m sorry.

Mike Garland

But we didn’t say how much we want to do this year. The program size is $200 million. So we got a little over $170 million of capacity remaining available under the program, but it’s not as though the program lives for the calendar year or for only a year in total or anything.

So we got a lot of flexibility about how and when we capped that program and we haven’t made any statement about the timing or amount of any other equity raises that we might contemplate.

Andy Levi

Okay. And the $29 million is that the end of June. Is that out of the quarter, is that…

Mike Garland

No, actually, that was after June. We didn’t pull down on the ATM through the end of June, so all of it was during a few weeks in July when we were issuing under the program.

Andy Levi

Okay. So before you’re quite period, I guess.

Mike Garland

That’s right.

Andy Levi

Okay. And then you have this credit facility and the letter of credit which I think I’ve discussed with you guys in the past. And just understand that because it seems like you guys have a lot of opportunity out there to grow, but the credit facility is kind of fully -- not fully drawn but there’s a good portion of it drawn and if I am not mistaken, you’re priced equity wise as far as like things being accretive, is it 22 or 23 or as far as the stock price that it becomes attractive.

Mike Garland

You can do the math. Historically, we’ve dropped around 10 times CAFD multiple, you can do the math. We’re accretive on our historical drops and we did note that what was it 9, 6 multiple on Broadview, which is extremely attractive. It’s one of the better drop multiples I’ve seen in the industry and so at those levels, I think you can do the calculation that we’re…

Andy Levi

Yes, that’s what I come up with. Yes. it just seems it would behoove you to pay down the credit facility at these prices because that means there seems like there is so many opportunities for you even this year to kind start growing quicker. Am I mistaken on that on the second part obviously the first part I know you don’t want to touch?

You made that very clear but basically there seems to be like a lot of opportunities going forward and just a matter of…

Mike Garland

There are.

Andy Levi

…those opportunities. Is that fair?

Mike Garland

Yes, we’re very bullish on the opportunities in front of us and so your second point is absolutely correct.

Andy Levi

Right, okay, thank you very much. Have a great weekend guys.

Mike Garland

Okay, you too. Thanks for calling.

Operator

And that was our last question. I will now turn the call over to you Mike Garland for closing comments.

Mike Garland

Well, again, thanks everybody for calling in. We appreciate your time and effort and the shareholder's participation. We do think that our quarter was extremely good given the circumstances and we’re positioned well looking both for production levels as well as opportunities, drop down opportunities and we’re pleased that the market seems to be settling in again and hopefully we’ll see some continuation of that through the year and we all can continue doing the business we look forward -- we've talked about and look forward to doing for a while.

So thank you all for participating today. We’re excited, give us a call anytime, you have questions and we look forward to talking to you some more. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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