Pattern Energy Group's (PEGI) CEO Michael Garland on Q4 2017 Results - Earnings Call Transcript

Pattern Energy Group, Inc. (NASDAQ:PEGI) Q4 2017 Earnings Conference Call March 1, 2018 10:30 AM ET

Executives

Michael Garland - CEO, President and Director

Michael Lyon - CFO

Analysts

Nelson Ng - RBC Capital Markets

Brian Lee - Goldman Sachs Group

Benjamin Pham - BMO Capital Markets

Rupert Merer - National Bank Financial

Colin Rusch - Oppenheimer & Co.

Frederic Bastien - Raymond James

Sophie Karp - Guggenheim Securities

Antoine Aurimond - Bank of America Merrill Lynch

Operator

Good morning, ladies and gentlemen. Welcome to Pattern Energy Group's 2017 Fourth Quarter and Year-end Results Conference Call. [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-K, which was filed later today and available on EDGAR or SEDAR.

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

Michael Garland

Thank you, Operator. Good morning everyone on the call. Thank you for joining us today. As the operator said, later today, we're going to be posting our 2017 fourth quarter and year-end results on our website, patternenergy.com. Today's earnings call will be a little longer than past calls as we have several exciting developments that we want to report to you on. First, I will recap the company's major accomplishments over the past year. I'll start with how we ended the year, relive some of the accomplishments from earlier in the year and finish with a review of our significant and exciting recent developments. Then Mike Lyon, our CFO, will review the annual and fourth quarter financial results. And lastly, I'll make a few comments about the markets and our outlook for our business.

So let's review last year. 2017 was a year of major steps forward for Pattern. We ended the year with some great news. First, I would like to talk about one item that we rarely discuss on earnings calls, but is in the forefront of our minds every day across the entire organization, which is safety.

For 2017, we decided a goal of beating the industry average for safety was not good enough, and we set on objective of zero recordable injuries. We ended the year with a record performance on safety. Our total recordable incident rate or TIRI - excuse me, TRIR, was 0.6, a tremendous accomplishment. Our safety culture goes beyond our employees, to their families and the communities we work in.

In 2017, we came together as an organization to support employees, their families and the communities affected by hurricanes in Puerto Rico and Texas. We did this formally through fundraising - charitable fundraising, but just as important through supporting each other outside of work to ensure basic necessities were met, whether that meant inviting a victim of the crisis into our home while they were displaced or lending them transportation to replace a vehicle destroyed in the flooding. I am especially proud of our operating teams that faced these adversities. They helped others and maintain our asset in good working order throughout the natural disasters.

Second, we will be filing our 10-K this afternoon, so we cannot say much about the progress we have made remediating the material weakness of our internal controls. I can say that I am very pleased with the progress, and I'm proud of the work accomplished by our leadership and the control owners and the focus and skills they brought to this work. Their efforts have laid the foundations for further company improvements, including opportunities to automate and streamline our back-office processes, which will be - which we will be actively working on this year.

From a financial perspective, we ended the year with a CAFD, cash available for distribution, of $41.9 million in the fourth quarter and $145.8 million for the full year. The full year results were within our guidance range and represents a 10% increase over 2016 CAFD. The CAFD results was not as good as we had anticipated, primarily due to some unexpected curtailments from onetime transmission repairs in Texas and Arizona as well as some weakening of the wind resource at the end of the year.

Adjusted EBITDA for the year was $344 million, up 13%, while production was 7,787 gigawatt hours, up 14%, both over 2016. Our turbine availability remained strong throughout the year at 97-plus percent. This morning, we announced the quarterly dividend of $0.422 per common share for the first quarter of 2018.

It is the first time in 16 quarters in which we have not increased our dividend. This was a hard decision for us, but we felt it was the appropriate decision given our current valuation, stock valuation and the track record of growth we've delivered together with the exciting growth opportunities we have available to us. As a result, we felt maintaining the dividend at the current level was important as we intend to continue to invest in accretive transactions.

Now let me recap some of the other major accomplishments during 2017. We have grown the portfolio we operate to nearly 4 gigawatts of gross capacity and an owned capacity of 2.9 gigawatts. We completed or announced the drop down of Broadview, Meikle, MSM and the Japanese projects and sold a 49% interest in Panhandle 2 to PSP Investments.

We also added more than 470 megawatts of solar and wind owned capacity to our iROFO list, including Crazy Mountain, Stillwater, Sumita, Ishikari and an incremental capacity to Grady, Futtsu, Kanagi and Tsugaru.

In June, we acquired and approximately 20% interest in Pattern Development 2.0, with a minimal amount of upfront capital, and we plan to grow our ownership to 29% over time. Again, we consider the development business as one of the best risk reward ratios in the energy business, and we consider it as a modest part of our overall business risk.

As part of the June announcement, we also secured one of the leading Canadian pension funds, PSP Investments, to invest across the three elements of our business, directly an ownership of Pattern Energy, as an investor in Pattern Development 2.0, and through a co-investment relationship owning minority interests in our near-term North America projects. PSP is currently one of Pattern Energy's largest shareholders.

In total, all the new capital commitments announced in June for Pattern Development and Pattern Energy represented $1.7 billion of investment commitments across the Pattern platform. With the new capitals committed for Pattern Development, its development pipeline expanded to more than 10 gigawatts of wind and solar assets, which will be converted over time to iROFO opportunities for Pattern Energy, including some large and innovative opportunities. In 2017, we continue to add to our iROFO list, with more than 470 megawatts of owned interest added to the list, as I mentioned.

Between Pattern Energy and Pattern Development, we successfully financed - financings for MSM, North Kent, Henvey Inlet, Grady, Broadview, Belle River, Ohorayama and closed turbine loans from the PTC qualified turbines. We also refinanced the Ocotillo project debt, refinanced our corporate revolver, issued our first corporate bond of $350 million and closed $215 million of equity offering.

From an operations perspective, we successfully transitioned five projects to self-perform during 2017. Our ability to manage these responsibilities internally provided leverage to achieve additional savings through the renegotiation of a select number of long-term agreements with our vendors. Once again, these savings through either self-perform or updated long-term service agreements are effectively growth in CAFD without the need for new capital increased overhead.

This year, because of our existing contract commitments, we are not currently in a position to transition other projects to self-perform, but we will be working on lowering our operating and service costs and transitioning of all of our projects to self-perform in the coming years.

During the course of 2017, Pattern Development significantly strengthened its internal team focused on solars and storage technologies and has built an impressive list of projects and development. Solar and storage are now playing an integral part in the products we offer our customers.

In the U.S. market, we are seeing increased demand for storage, and we could offer hybrid, solar and/or wind coupled with storage that can beat most profiles in the country. These are exciting new markets for Pattern to explore in the coming years.

So that's the recap of 2017. Let me turn my attention to some really exciting announcements that we have just made this week. Three days ago, we announced an agreement to acquire a portfolio of 206 megawatts of assets and interest in the development business in Japan, which represents our entry into that market, one of the most robust renewable markets in the world. We have agreed to acquire five projects consisting of three operating projects and two projects in construction. These acquisitions also provide the first two operating solar projects to our portfolio, Futtsu and Kanagi. These acquisitions represent 206 of owned interest. It's important to put the figure in context. On the surface of it, 206 megawatts is not much bigger than the Meikle project we acquired in 2017.

Renewable asset in Japan are quite different than your typical North America assets. As a general rule of thumb, the build cost of the Japanese asset is 2 to 3x as that of the build cost of the North American asset. So a 100-megawatt project in Japan is equivalent to a 200- or 300-megawatt project in North America. But more importantly, the power price is an even higher multiple than that available in North America. The Japanese portfolio of assets we just acquired have an average power contract price equivalent of 230 megawatts - $230 per megawatt hour.

The first four projects, Otsuki, Futtsu, Kanagi and Ohorayama totaled 84 megawatts and were acquired at a 10.5x multiple for the five-year CAFD - average CAFD, which means the acquisition is immediately accretive to our business. These assets were funded from existing liquidity. Each of the projects have a 20-year PPA contract, with credit offtakers. The contracted price as mentioned is an average equivalent of $230 per megawatt hour, which, as I described earlier, is a multiple of the price contracted in our North American assets.

In the case of Tsugaru, we have agreed to acquire the project at the close of construction financing, which is expected to occur within the next 30 days. The price represents a 9x multiple of our five-year average CAFD. We have secured equity bridge financing and some - a part of it will be closed in the next 30 days after the construction financing. The bridge financing and the interest on it and the end of loan will be capitalized, and therefore, not included - and is included in our CAFD calculations. The sellers of the project are also taking the first approximately $10 million construction cost overrun risk. As such, we have minimized the cash flow drag during the construction of the project.

The acquisition of this portfolio of assets immediately creates a critical mass of assets in Japan for Pattern Energy. As a rule of thumb, we believe we have to have an equivalent of about 500 megawatts to have a basis for a successful business in the new market. The 206 megawatts, as I previously mentioned, is the equivalent of 400 to 600 megawatts in North America. And as such, provides a strong base for growing our Japanese business. In addition to the asset portfolio, we invested through Pattern Development in the development business in Japan with our Japanese partner GPI. Pattern Energy funded $27 million toward the acquisition by Pattern Development of 2.0, a Pattern Development 1.0's ownership in GPI, the local developer and its Japanese development pipeline.

GPI is a well-established development and operations management team that will have local responsibility for managing the pipeline and O&M for the projects under service agreement similar to the ones we use in the United States. With the interest in GPI - or excuse me, with the investment in GPI, the development pipeline and the five projects we have established as sound platform to grow our Japanese business for the foreseeable future, Japan is one of the most exciting renewable markets in the world, and we, through GPI and Pattern Development 2.0, represent a leading renewable company with one of the strongest pipelines in Japan.

Keep in mind that Japan is an island with no natural energy resources other than wind, solar and hydro. And therefore, Japan must import expensive fuels to meet its demand. Japan is the third or fourth largest electric grid in the world, and consists of 248 gigawatts of installed capacity serving 985 terawatt hours of demand. The Japanese power - the Japanese Wind Power Association has targeted 36 gigawatts of wind to be installed by 2030 from a base of only 3 gigawatts in 2016, providing a great outlook for our business in Japan.

GPI's development pipeline currently stands at 2.4 gigawatts of gross capacity with more than 600 megawatts qualified for 20-year PPA, power purchase agreement contracts, and prices in the $205 and $240 range per megawatt hour at today's exchange rate. This is a fantastic opportunity for Pattern energy.

As you can tell, we are very excited about the opportunity for growth in Japan. We believe our position in Japan today is analogous to our position in Ontario at the time of our IPO four years ago. By the end of this year, our Ontario operational portfolio will exceed 1 gigawatt of gross capacity. We believe Japan represents a similar growth trajectory in terms of potential returns to the business. The transactions we just announced are just the first step in our Japanese growth strategy. We also believe that there are substantial opportunities for improving project performance, lowering our tax leakage as well as sourcing low cost domestic capital through local financing, which will increase the value of these investments over time.

In addition to the Japanese transactions, this morning, we announced that our Santa Barbara - Santa Isabel project in Puerto Rico has been reconnected to the grid and is developing - delivering of electricity. At this point, the amount of production we are allowed to feed into the grid is only a portion of our normal capacity, however, PREPA has already increased it once and we anticipate more increases shortly.

Our receivables with PREPA are paid up in current saving a very smallest modest amount, which we believe will be due - paid in due course. Given the challenges they faced, we felt it was worth mentioning this morning.

We believe 2017 was an amazing year for - which strengthened our platform, improved alignment across the business and provided us with greater flexibility for accessing different capital markets. That's my review of what we have accomplished in 2017.

At this point, I'll turn it over to Mike Lyon to review the financials in more detail, and then return to provide you an outlook on the market and our business. Thanks.

Michael Lyon

Well, thank you, Mike. Let start with electricity sales. We report electricity production on a proportional basis to reflect our ownership interests in our operating projects. Proportional gigawatt hours sold increased 17% to 2,124 gigawatt hours in the fourth quarter of 2017 compared to the same period in 2016. On a full year basis, proportional gigawatt hours sold increased 14% to 7,787 gigawatt hours compared to 2016. The increase in the quarterly period was primarily due to the new acquisitions since the same period last year, specifically Broadview and Meikle.

Overall, the production was about 9% below the long-term average forecast for the fourth quarter. This reduced production was a result of a modest decrease in wind at the end of the year and onetime utility transmission repair. Our wind index was 96% across the portfolio versus the long-term average for the fourth quarter. This was within our expected margin of error that is we expect that production to be near to or within 5% of at P50 typically..

The balance of the reduced production was due to transmission repair outages, primarily in Puerto Rico, the Western states in [indiscernible]. Total revenue increased 37% to $110.7 million in the fourth quarter from the same period in 2016. Total revenue was up more than 16% to $411.3 million for the full year 2017 compared to 2016. The change for the quarterly period was primarily related to an increase of $26.1 million from projects acquired during 2017, excluding unrealized loss on energy derivative and amortization of PPAs.

Adjusted EBITDA increased 16% to $98.9 million in the fourth quarter of 2017 compared to the same period in 2016. Adjusted EBITDA was up 13% to $343.7 million for the full year 2017 compared to 2016. The increase in the quarterly period was primarily due to the $26.1 million increases in revenue as I mentioned earlier, partially offset by an increase of $9.5 million in transmission cost and project expense as well as a $2.3 million decrease in the proportionate share of adjusted EBITDA from unconsolidated investments.

Cash available for distribution increased 16% to $41.9 million in the fourth quarter of 2017 compared to the same period in 2016. Cash available for distribution increased 10% to $145.8 million for the full year 2017 compared to 2016. The improvement in the quarterly period is primarily due to increases of $26.1 million in revenues that I referenced earlier and $7.2 million in available cash previously restricted to fund the projects, which is I highlighted on the third quarter call, occur from time to time.

These improvements were partially offset by increases of $11.4 million in interest expense, which was primarily related - primarily due to the issuance of the unsecured notes in January of last year, $7.1 million in transmission costs and $2.1 million in principal payment on project level debt and decreases a $4.5 million in network reimbursements and $3.3 million in distributions from unconsolidated investments.

This morning, we provided our cash available for distribution guidance for the full year 2018, which we have established as $151 million to $181 million. The 2018 guidance includes only the 24 projects expected to be operating and contributing during 2018, including the interest in the projects we have agreed to acquire, consisting of the 4 Japanese assets and Mont Sainte-Marguerite, but excludes Tsugaru, which will not be operational in 2018.

The midpoint of this 2018 range, $166 million, can be understand - can be understood by starting with a $146,000,000 of full year 2017 cash available for distribution and bridging to the midpoint by adjusting for last year's drop downs and this year's contracted drop downs and modest other adjustments.

We had assumed the growth of $15 million in 2000 - cash available for distribution over 2017, primarily from improved performance of our existing portfolio, which consists of a reversion toward the mean on production about a - up to about a $25 million improvement; a lessening of ERCOT congestion compared to 2017, an improvement of about $8 million; changes in partner-related distributions, a reduction of about $9 million to CAFD; and a little more than a $5 million increase in corporate costs such as G&A and finance charges.

To provide a little more color on ERCOT congestion, this resulted in both bases and curtailment loss of about $23 million in 2017. Our analysis results in upside of $8 million in 2018 compared to 2017 based on our understanding of the planned system upgrades in North Texas. We also included a full year performance for Broadview, Meikle and the Panhandle 2 transaction, which is a net negative due to its disposition from 2017, for a net increase of about $2 million. And finally, we add partial year performance for Mont Sainte-Marguerite and Japan, which adds about $12 million in cash available for distribution net of corporate financing costs.

Finally, I want to note that for purposes of determining the midpoint of our guidance, we are assuming we will be close to 2% below our long-term average wind production. As of December 31, 2017, our available liquidity was $666 million, which consisted of approximately $117 million of unrestricted cash on hand, $21 million of restricted cash, $393 million available under our revolving credit agreement and $136 million of available undrawn capacity under certain project debt facilities.

Subsequent to the end of the period, we announced the use of $132 million for the acquisition of the initial forward drop downs from Japan and $27 million as part of a normal capital call from Pattern Development 2.0, which supported its acquisition of the Japanese pipeline from Pattern Development 1.0. As a result, as of February 26, the amount available under our revolving credit agreement was $340 million. As we acquire new assets, we intend to draw on the revolver to fund those transactions.

Thank you, and I'll now turn the call back over to Mike Garland.

Michael Garland

Thanks, Mike. Before we take your questions, I want to address briefly the activity in our sector and the capital markets. The valuations - stock valuations in our sector came under pressure with certainty of the initial tax reform proposals in the fall. Since that time, the outcome of the tax reform package in the past looks to be beneficial to our business. So let me be a little more specific. When the tax bill was proposed, and again, when it was signed into law, we stated that we were confident that the PTCs and the ITC for renewables would remain intact, which it is. The second area of concern was the BEAT tax. We indicated that while we may lose a few tax equity investors, we would be able to access tax equity for our projects. Thus far, we have found that to be the case. Pattern Development currently has in place commitments for tax equity for all of our near-term projects.

Lastly, we believe that the lower tax rate that would improve our long-term returns by lowering our tax expenses over time, this is still our view. Yet since the new year, the valuation has remained under pressure. From our perspective, the reasons for this are not entirely clear. One possible explanation is a misunderstanding in the valuations involved in the recent sales of NRG Yield, an 8.3 compared to our value. We believe that we are undervalued compared to those transactions, in part, because we have a strong iROFO pipeline for growth, and we have significant upside from lowering our operating cost in the coming years.

Another issue is our payout ratio. We understand that we must drive down our payout ratio, and we believe we will be putting in place a number of measures to significantly improve our payout ratio in the coming years. Such measures include, for example, full implementation of our self-perform at our projects, implementing overhead cost reductions, repowering some of our older assets and possibly recycling capital in more accretive transactions such as the potential sale of El Arrayán in Chile.

Another reason for this possible downward pressure is the potential for interest rate increases. As we have said previously, increases in inflation and interest rates do put pressure on the past valuations. However, they also increase the residual value of our projects and allow us to acquire projects at lower valuations.

With this context, I want to be perfectly clear that our outlook for the business is extremely positive. We operate in a segment of the power market that will be the dominant new supplier of electric power. The pricing of renewables is already competitive with conventional generation across the broad part of North America, and technology improvements and equipment pricing trends continue to drive cost lower.

Pattern Energy is well-positioned, with a backlog of high-quality iROFO projects like Henvey Inlet, Ishikari and Grady, with the new markets opening like Japan and with greater flexibility to increase our revenues due to our ownership in the development business. However, within the current climate, it's only appropriate that we modify our growth ambitions. We will only drop at projects when they are accretive like the Japanese assets when - with available liquidity.

At this time, we are not planning on raising any common equity, but we will be looking at taking steps to create growth throughout - without raising common equity until such time that our stock price recovers. We have previously noted these actions, but I'll repeat a few examples again.

Additional opportunities available to deliver CAFD growth include the potential to repower certain projects while still eligible for the PTCs; recycling capital by selling partial ownerships in our projects and using capital to buy accretive assets and creating service fee arrangements; earning a return on our development investment, which, given the current bid, is increasingly likely in areas - in markets like Mexico; and selling assets that are no longer - have a strategic value such as the sale of the El Arrayán project in Chile.

Additionally, we are pursuing various ways to raise capital for our business. One example of a changing investor market is investors that plays a greater emphasis on ESG investing. We have begun to implement - the implementation of an ESG program that will clearly differentiate Pattern Energy. Frankly, we may be guilty of taking this fact for granted, being a business that is 100% renewables focused, we thought it was obvious, but it's a segment that is attracting larger and greater amounts of capital, and we think we are ideally positioned for that capital.

As I previously mentioned, we also see exciting new products opening up for us such as hybrid systems that combine utility scale, solar, wind, storage, either colocated or connected in a manner that effectively provide baseload or shape reliable potentially dispatchable generation to the grid.

As I hope you have heard on this call, we remain very excited about our business. We continue to refine our strategy as the market changes, and we believe 2017 demonstrated our ability and commitment to taking actions that will make us successful today and in years to come.

I'd like to thank our shareholders. We have a plan for creating long-term value for investors, changing the way electricity is made and transferred in developing countries while - developed countries while respecting the communities and the environment where our projects are located.

Now I'd like to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Nelson Ng from RBC Capital Markets.

Nelson Ng

Just a quick question on your O&M self-performing initiative. Could you just give a quick update on that? I know you touched on it earlier, but how many facilities are you, I guess, self-performing on as of today versus what you expect over the

next year or two?

Michael Garland

Well, we said five projects have been converted to self-perform by the end of 2017. So those five are self-perform. We have - and maybe we should post this on the website. We do have - I think we did this on Investor Day, Nelson, where we had a schedule of when our service agreements were coming off and how we convert to self-perform over time. This year, we don't have any projects coming off of service agreements with the turbine providers, so we're not converting any projects this year. I think there's 2 or 3 next year, I'll check on that. And then we phased all of them out over the next five years. At the same time, we're negotiating some service agreements and improving things. So for example in Ontario, we did not go self-perform on a recent project there. And it is a service agreement, but we are able to negotiate one of the lowest - well, the lowest service agreement we ever executed on. And so we are picking up some value there and it's included in our CAFD guidance.

Operator

Our next question comes from the line of Brian Lee from Goldman Sachs.

Brian Lee

I had several here. Maybe first off, just to address this - the dividend growth that you guys alluded to. It's the first quarter and full year so you haven't raised it. So just at a high level, how should we be thinking about the trajectory of growth from here? What could push this back up? And then, in what time frame if it does happen? And then just to be balanced on the flip side, how do you guys assess the risk that you could take it lower and actually cut the dividend level from here?

Michael Lyon

So Brian, thanks for the question. Our dividend growth trajectory we've always talked about in the context of growing our cash available for distribution per share over time and our ability to do so on a sustainable basis. So that really hasn't changed in the way we think about the dividend and the growth. I think we're not going to give a projection for - or timeline for when our dividend policy in the future. Our board frankly won't want to do that either. We evaluate a number of factors every quarter as we set that declaration of the dividend for the quarter, which includes our ability to continue to generate sustainable cash flows, our ability to grow it, our current liquidity. And increasingly, market conditions affect that decision-making, which is, as Mike alluded to earlier, in general, we had felt that our dividend per share currently is at such a high level that it just frankly doesn't seem responsible to continue to increase the dividend based on that.

So a risk to a reduction in the dividend, this is something that has occasionally come up. And it's not something we thought very much about doing. We don't like that approach to running our business. We think this is a dividend yielding set of assets, a dividend yielding business, and we should remain committed to the idea that the dividend that we are able to pay should continue going forward. We don't like the idea of - even if a case can be made for a dividend reduction, we don't like the sort of the impact on market perception that, that might create.

Brian Lee

Okay. Maybe a couple follow-ups year. I might have missed this, but on the Santa Isabel asset, what is the assumption that's baked in for the midpoint of the cash to guidance walk? I know you provided that. But what are you actually expecting in terms of that being fully back online? And then, what incremental impacts that, that particular asset will have year-on-year on the midpoint here?

Michael Garland

Yes, fairly roughly, we're anticipating about the same level of curtailment, let's call it, from the project that we experienced last year. Last year, it was compressed into, clearly, the fourth quarter primarily. And this year, we've experienced the delays in bringing the project back up for delivery of power, fully based on their ability to accept the power. We think that will continue at a curtailed level for a while. But that it will gradually improve. And we've seen signs of that to date, so we just expect that to continue.

Michael Lyon

I'll say it a little stronger, though. Our view is that they should be taking all of our power, whatever we can produce. We're trying to be gated community relations folks and support how [indiscernible] we are - we believe they're now able to, for the most part, take power around the island. There still have some transmission issues, but our position with them is they ought to be ramping us up right away, so that we shouldn't see much degradation in our revenues. But as Mike said, we've included degradation in our revenues as part of the midpoint of the guidance, but we're hoping that will beat that.

Brian Lee

Okay. So I don't want to put words in your mouth, but it sounds like you're fairly conservative there. But ultimately, is the swing factor to the higher end of CAFD guidance here for 2018 is that all performance relative to LTA? Or are there other variables? It sounds like Santa Isabel might be a smaller variable in that. But what else would be the bridge to the higher end of the guidance range?

Michael Lyon

Yes, wind is always the primary factor in our variability of results. A second area I would say is overall transmission congestion and its corresponding impacts on cash flow.

Michael Garland

In curtailment related to transmission repairs, that's an issue that's come up last year that hasn't been a problem for the most part. We've unfortunately had to manage several cases of it. And in Texas, it's still going on where ETT in particular wanted the transmission companies down there having to go back and repair some of the work that was recently done and it's causing redirection of the flow, which is causing some of the congestion, Mike. So some people, we use the term sometimes in confusing ways, transmission repairs can cause redirection of power that causes congestion that increases bases. If you follow, Brian, the logic there. And in other cases, it's purely - you have a repair on the line, that shuts down and you can't redirect and then it becomes just purely reduction. We try to manage that, and we're taking a much more aggressive - proactive is probably a better term, approach to this problem where we're trying to look around in different transmission markets and make sure that we know when the transmission providers are considering doing repairs or modifications in and getting ahead and working with them on trying to schedule it in a way that's beneficial to us. But that's one of the areas that we're cautious about this year, given what happened towards the end of last year.

Brian Lee

Okay, understood. Last one for me and I'll pass it on. The viewpoint here for 2018 understanding that you don't need and don't plan to address new equity capital. But to would you be in position to do additional drop downs this year without new equity outside of what you already outlined is embedded in the base case. I think we have been assuming if you assets from Canada, Ontario region assets this year, but wondering if that's not pushing.

Michael Lyon

Yes, we still have some liquidity left over that we can do some more drop downs. And we're being a little more creative at thinking through how we might, as I mentioned, recycle or various activities can - for example, the Tsugaru project I mentioned that we had some equity bridge financing that we can use. There's various techniques that we use to improve our ability to do some drop downs without capital raising. We'd like to do some capital raising this year, but we don't feel like we're in a position to have - we don't want to ever be in a position to have to raise capital. And that's where we are right now. If things improve or we get the right combination of assets, we think we can probably raise additional capital, probably not common equity, but other forms of capital that could allow us to do more drop downs.

Operator

[Operator Instructions]. Our next question comes from the line of Ben Pham from BMO.

Benjamin Pham

I wanted to go back to the question on the guidance and the ranges you provided this year than last year and probably I'm guessing some of your comments around transmission impacting some of that. But the could you guys comment on how you think that low end could materialize in terms of some of the factors that could be driving that or is it more you guys maybe thinking more of a that could be a draconian type of approach that you probably don't think will happen but you thought to think about that at this point of the year.

Michael Garland

Yes. So Ben, I don't think that we are much wider than last year. We're certainly wider than our guidance as we adjusted it at the end of last quarter. But last year, we gave our initial guidance in February of $140 million to $165 million, so a $25 million top to bottom range. And this year we got a $30 million top to bottom range on a bit higher midpoint. I squint my eyes and say it's not too different from last year. The low end of the guidance, when we do scenario evaluation, as I've mentioned to Brian, the primary factor that affects that swing is wind. And the P75 on a portfolio basis, P75 as a reminder, is a level of production that we would expect to exceed three out of every four years, is roughly 4% of the overall production. And depending on how it is distributed across the regions in the portfolio, roughly 4% of revenue. So that swing is the biggest factor that affects where we end up in the guidance range. And as I said, I think the variability around the impacts of congestion and transmission outages is probably the second base factor in our scenario planning. Does that help?

Michael Lyon

Yes, I don't think that's a draconian downside as well. And we were not looking at it that way, just to respond to your question, Ben.

Michael Garland

I would add just one other thing and that is that we were pretty hard at identifying threats to performance within the guidance range and finding ways to overcome that. We've done that a lot in the past. We've done some periodic refinancings for example of some of our project debt when that has shown itself to be available in the marketplace. That's just one example of the kinds of things we do. And so when we've seen the impacts that may move us towards the lower end of range, we'll sometimes end up accelerating plans to do things that can help us improve the financial performance. And so I don't like to think of these things as uncontrollable outcomes. Obviously, when the - as occurred in 2017, when there's a pretty significant drop off in wind at the very end of the year, our ability to react to that is limited just from a timing perspective. But we work pretty hard at meeting our targets.

Operator

Our next question comes from the line of Rupert Merer from National Bank.

Rupert Merer

Just a quick follow-up to one of the previous questions about your ability to do drop downs this year with the existing liquidity. Do you feel like you could do drop downs without having to go out and raise any more capital or do any asset recycling? Or do you think that the next drop down would need that additional liquidity?

Michael Lyon

Well, we have, for example, some liquidity in our revolver still remaining, so we can always use that. But yes, we would be looking at other ways of raising capital and potentially recycling. For example, if we did sell El Arrayán, actually we would reinvest in accretive opportunities. So I think we have some room to do without raising any capital, but not a lot.

Rupert Merer

All right, great. You talked a little bit about the rising yields in the U.S. So it looks to us like if we're heading for a 3% 10-year yield, that might be up 50 basis points or so from the levels of last year maybe 100 basis points from 2016. Does that inform the drop down price at all? I mean, should we expect the cash flow multiples to change if we see higher equity returns required by the market?

Michael Lyon

Yes. When you're talking about 50 basis points or 100 over two years, it tends to be absorbed into pricing as opposed to really move the pricing much. We've seen this in previous cycles. There are other offsetting features to how people price when it comes to only a 50 basis point shift in interest rate. So it doesn't change things dramatically enough to really notice or offset some other assumptions that people might be making in terms of merchant and so on. So for example - to make the obvious example, if you think interest rates are going up, you may be willing to pay more because of merchant assumptions, because the nominal price of power could be going up, maybe not the real price but the nominal price or inflationary assumptions you might use to increase your discount rate or your equity returns. So small changes like 50 basis points usually don't move the market much but they'll trend in that direction as - if interest rates continue to rise and inflation continues to increase. You'll see, I think, people pricing in higher discount rates.

Operator

Our next question comes from the line of Colin Rusch from Oppenheimer.

Colin Rusch

Can you guys talk a little bit about the dynamics around the project level debt prices? And how you see that playing out in the next couple of years especially as you start integrating the Japanese portfolio with the balance of the portfolio?

Michael Garland

Go ahead.

Michael Lyon

Okay, yes. That project finance market is - the banking market that supports project finance is huge. It's very deep. We have really incredible relationships with the primary players in that market space. And the pricing has had a pretty consistent trend for us while the base does move around as you've said that's been very favorable for us the last couple of years, maybe a little longer than that even. The margin over base has sort of steadily come down over that same period of time, so we've seen very attractive - historically attractive interest rates. Without putting a crystal ball on where base rates are going, I think we continue to see very low cost project financing being available in the North American market and in the Japanese market where we feel like we've been sort of breaking the mold on how you finance utility scale renewable power projects in Japan. We're seeing very low long-term swapped out interest rates, down in the 1% neighborhood for long-term financing, which is quite extraordinary, of course.

Michael Garland

I'd only add. If we had our project debt guys in the room, they'd be saying, we're getting the most extraordinary rates we've seen in ages. There's a lot of competition in the market now and hunger for good quality assets in the lending market. So particularly for construction and other things, we're seeing lower fees and lower margins as Mike said. And even if the index has raised a little bit it's generally been offset by the margins coming down. And so the markets for that project debt right now are extremely good.

Colin Rusch

And would you guys think about refinancing any of your existing debt given those dynamics or the actual absolute yields not compelling enough to do something like that?

Michael Lyon

Yes, we think about it and all the time, and we occasionally do it. We had sort of a burst of these refinancings back in 2015.

Michael Garland

We did Ocotillo in my laundry list of accomplishments last year, so that's a good example of refinancing project.

Michael Lyon

And some of the reason that, that becomes attractive is and not necessarily changes in the underlying base rates, because those are swapped out over the amortizing term of the debt. So where we have improvements associated with this project debt, it's usually because we can get better margins on a repriced financing or sometimes refinanced with different parties. And secondly, through longer-term amortization for projects that they may have achieved at the initial project finance closing date. And the combination of those two things can be very attractive. It's not as though we can do every project at - on any given date. We - as a market condition changes and as project situations evolve, we identify opportunities and take advantage of them.

Operator

Our next question comes from the line of Frederick Bastien from Raymond James.

Frederic Bastien

You mentioned El Arrayán a few times as a potential candidate for asset recycling. What's driving your thinking there? Is it asset specific or market specific? Because I recall you were doing strategic review of the Chilean operations.

Michael Garland

Yes, I used it a couple times merely because it's an easy one to example of potentially recycling. We've said that we were doing a strategic review as you mentioned, Frederic. And so I just use it as an example that it's a good example for a couple reasons. We said that for overheard reasons, it's the highest overhead cost for our projects, because [indiscernible] and cost more to stay on top of it. And the market has gotten really frothy down there over the last - very quickly. And so we have not seen returns that were acceptable to us in the more recent biddings down there. It seems like a natural, so we're not going to be silly about it. If we get an attractive price for it, we'll consider it. But it was meant only to be an example of one that's in the forefront, because we have mentioned that we are going through a strategic review.

Frederic Bastien

Okay, that's helpful. And just wanted to touch on the capital call. You made this initial investment of $60 million last summer for 20% interest in Pattern Development 2.0. Does this capital call allow you to maintain that 20% stake or that - does that bump it up a bit? Because I understand on every call I think the long-term goal was to get about 30% of development?

Michael Garland

You're quite right that we started at about 20%, that the main driver to get to the 29% will be the point in time when a full redemption of the prior LP 1 owners who have continued to own a little bit of LP 2 occurs. We have expected that to occur in the summer of this year. We may have an opportunity to make it happen earlier. But in the meantime, every capital call that we meet, because we're funding at the 29% share level gradually moves us up from that 20% towards the 29%. So if it all goes well, later this year, we'll be at the 29%. And presuming we continue to fund that 29%, at that point, we'll just maintain the 29% level going forward. Does that - so we have [indiscernible] we 21% and then 21.5% then 22% and then definitely the 29%.

Frederic Bastien

And so we should expect then more capital calls in the next 9 to 10 months?

Michael Lyon

Yes.

Frederic Bastien

Any idea of the approximate amount that you expect to spend or invest?

Michael Lyon

Yes, it really depends on the pace with which we have success in the project company. If we have bigger capital calls, that will be reflective of big, exciting news within the development company.

Frederic Bastien

Okay. And is it safe to say that works you consider that with the outlook to provide it and your more conservative kind of stance toward newer drop downs?

Michael Garland

Yes. Yes, absolutely. It's in consideration of capital available to invest, whether we do it - invest in the capital calls or in new projects.

Operator

Our next question comes from the line of Sophie Karp from Guggenheim Securities.

Sophie Karp

I wanted to talk a little bit about taxes. And as you require assets in other jurisdictions then the picture gets more complicated and you sort of increase your debt level to do that within [indiscernible] in the tax reform. How does it all factor in into your tax are you able to use your NOLs and sort of where does it go from here?

Michael Lyon

Yes, it's a great question, Sophie. So the taxes as we enter new jurisdictions like Japan, let's focus on that one, we will be a taxpayer in Japan. We fully expect to pay some level tax, and we've included that impact in our estimates for the CAFD coming from those projects. Very roughly, we have in the neighborhood of 25% tax rate locally. In terms of how it affects our U.S. tax, it varies by venue and by what we're doing in those venues. For example, in Canada, we have most of our entities - most of our projects held in Canada are held through - essentially passed through entities. We effectively look like partnerships into our U.S. tax return. There are exceptions to like that - to that like St. Joseph. In Japan, I think that you'll see, particularly while we're in a major expansion area mode, we will - we'll contemplate some level of distribution out of Japan, but there will also be likely be periods where we're effectively just reinvesting the cash that we're developing there into the next generation of projects. So it's a pretty complex web of tax effects. We have a very big NOL in the U.S. that we can use to shelter the impacts of income from foreign assets that come back into the U.S. return.

Michael Garland

Yes, maybe obvious, too, Sophie, but just to be clear. In our announcements like 10x multiple or whatever, we've included all the tax necessary. When we do our analysis of Canadian investment or Japanese assets, we'll take into consideration bringing that money to the U.S. and what kind of Japanese or withholding tax we have to pay to get it back into the United States. We actually that gives us a really good opportunity for us, because we think there's ways to structure - improve our structures over time to reduce the amount of taxes that are being paid both primarily Japanese taxes and some of the taxes we have to pay bringing money back as Mike said to withholding tax and things like that. But in Japan, I think there's some really interesting structures that we just need to scale to a point where we'll use them and will be able to bring in lower cost capital to improve the economics of those projects pretty substantially, both from a tax sampling but also the interest rate and the lower return requirements of local capital in Japan. So we're really excited about doing more work in the area you're talking about.

Sophie Karp

Got you. And then maybe a quick follow-up question on [indiscernible]. You've been [indiscernible] this year more acquisition like you said. What is the level of leverage that you are comfortable with and the short-term and long-term basis?

Michael Lyon

Yes, I don't think that's really changed for us in the last couple of years. We still tend to look at our corporate debt as a matter of primarily as a multiple on cash flow that we're generating. And we look at the combined level of that corporate level, net project, but corporate level that, relative to our - essentially CAFD plus corporate level interest under project debt facilities and look to be in a target zone of 3 to 4x. We are comfortable getting about that modestly from time to time. And I will tell you that we monitor our liquidity - Peterson and Chief Investment Officer monitors our liquidity very carefully as we think about our capital needs and I think most would agree that we've been pretty conservative in managing that corporate level that.

Michael Garland

We don't have a lot of exit capacity for corporate debt like corporate bonds there are type of tight today, but we've got a lot of flexibility around how we use our revolver.

Operator

Our next question comes from the line of Antoine Aurimond from Bank of America.

Antoine Aurimond

Just a quick one. So on capital raising, are you guys looking at sort of alternative ways of financing? So one of your peers has been like raising convertible preferred and like convertible debt and that allows them to like grow without staying out of their common equity market. Is that something you've been looking at and feel like you can have access to?

Michael Garland

Yes.

Michael Lyon

Yes. Let me get a direct answer.

Michael Garland

It's one of a number of tools we consider available to us and to improve not only the liquidity available for growing our business but also to manage our per share results. And it's is not the only one, it's not the only tool that we're looking to use, but it's right up there. It's fairly high on the list.

Antoine Aurimond

Got it. And then if you can just provide a quick update on where you are in like the Gulf Wind recontracting and whether the recent uptick in spread in the region changed your outlook at all?

Michael Garland

Yes. We're very interested in repowering Gulf Wind and we haven't made any announcements on timing and all. We're playing it out, because we have lots of - it's a great project for managing timing and other opportunities we have. And what I'm really speaking to there that about is the coordination between Pattern Development and Pattern Energy. Pattern Development has a lot of turbines that qualify for PTCs and we're working together to try to optimize how we use those turbines. Golf is an example of an excellent opportunity that can actually be repowered next year, this year, two years from now, and still be a very strong project and give flexibility and our ability to use - to develop other projects and be - and maybe even repower other projects at PEGI. The short answer on Gulf is it's absolutely top of our list to repower. It's just a matter of when we're going to do it.

Michael Lyon

Yes, I would [indiscernible] that recontracting is definitely part of that. It's perhaps - you were and had in mind we do come off contract next year, 2019. And so we've had our eye on the pricing available. And whether - we're going to recontact, and it will be an important part of repowering or not repowering either way.

Operator

That is all the time we have for questions for today. If you were not able to participate, please feel free to contact Sarah Webster at [e-mail]. Thank you. I'll now turn the call back to Mike Garland for closing remarks.

Michael Garland

Well, thank you, guys. It was a long call and a lot of information. I hope it was useful. It's a terrific outlook for the industry and Pattern. I think it's trying to right the ship on making sure that the markets understand the value that we can bring in getting our capital priced right, because I think, a tremendous set of assets that can be improved on over time significantly with all the new technology developments coming out and new ways of managing these assets. And then secondly, we have always had greater growth prospects and continue to have great growth prospects. And so it's just a really a matter for us of how we manage and finance our growth. So thank you very much. I appreciate the time this morning, and feel free to call or e-mail Sarah, and we can chat through any questions you have remaining. Goodbye.

Operator

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