Pattern Energy Group Inc. (PEGI) CEO Mike Garland on Q1 2019 Results - Earnings Call Transcript

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About: Pattern Energy Group Inc. (PEGI)
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Earning Call Audio

Pattern Energy Group Inc. (NASDAQ:PEGI) Q1 2019 Earnings Conference Call May 10, 2019 10:30 AM ET

Company Participants

Mike Garland - Chief Executive Officer

Esben Pedersen - Chief Investment Officer, Pattern Energy, Chief Financial Officer, Pattern Development

Conference Call Participants

Nelson Ng - RBC Capital Markets

Brian Lee - Goldman Sachs

Colin Rusch - Oppenheimer

Ben Pham - BMO

Julien Dumoulin-Smith - Bank of America Merrill Lynch

Adnan Waheed - National Bank Financial

Operator

Good morning, ladies and gentlemen. Welcome to Pattern Energy Group's 2019 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. [Operator Instructions].

I would like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Pattern's risks and uncertainties related to these forward-looking statements, please refer to the company's 10-K, which will be filed later today and available on EDGAR or SEDAR.

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

Mike Garland

Thank you, operator. Good morning and thank you for joining us today. Earlier this morning, we released our 2019 first quarter results which you can find on our website at patternenergy.com. You can also download a copy of the presentation that accompanies today's call from our website by selecting Invest then Events on our webpage.

Turning to Slide 3 of the presentation. But before I start the presentation, let me just make a personal note. I've been fighting off a cold so if you hear a little less energy in my voice today it's not because of our business we're still excited and positive about the quarter and our outlook. But have a little less personal energy this morning, so. The first quarter was good from a financial and operational perspective. We reported $53 million in CAFD, cash available for distribution up 23% from the prior year period and in line with our expectations. As a result, we're reconfirming our 2019 CAFD guidance in the range of $160 million to $190 million this morning.

We're now providing segment and accounting as Esben will discuss in a moment. Our adjusted EBITDA included $113 million from operations and a loss of $12 million from our investment in Pattern Development and after other adjustments totaled $98 million. Revenue was $135 million up 21%. Production was 92% long-term average LTA in the quarter included compensated curtailment primarily as a result of lower wind in the Eastern US.

Our production shortfall was fully mitigated at the CAFD level by a combination of higher average power prices, other revenues and improved debt service cost. Today we announced our second quarter dividend of $0.422 per share unchanged from the prior period. We're committed to maintaining our dividend and have a clear path that we laid out on our last call to drive down our payout ratio through growth without requiring the use of new common equity.

This morning, we will highlight the continued growth opportunities we have in front of us specifically, one: the distribution outlook from our investment and Pattern Development. Two: opportunities for continued optimization of our assets like the repowering of Gulf Wind and three visibility into our dropdown acquisitions.

Moving onto Slide 4, we view our investment in Pattern Development as a clear differentiator for our business compared to our peers. We continue to believe that well down developments offers the best risk reward profile in the renewable value chain and one of the few ways to get more attractive returns than simply acquiring assets from third parties. Our total investment in Pattern Development now stands at $190 million with an additional $7 million invested in Q1.

We target investment returns at Pattern Development of 15% or more on an IRR basis and two times on an MOIC basis. As we outlined on our yearend call in March, we anticipate reporting gains on sale of assets in 2019 and receiving initial distributions from Pattern Development in the fiscal 2020. We are confident and on track to achieve these objectives. As a reminder, Pattern Development already booked its first project gain on sale of the Stillwater project in 2018.

The Grady project represents the second in a series of opportunities to realize a gain on sale in New Mexico. Grady is nearing the end of construction and is scheduled to commence commercial operations in the third quarter. Similar to our existing Broadview project Grady will sell electricity to the California market. Pattern Development is also constructing three projects in Mexico which are expected to commence commercial operations in the fourth quarter.

Pattern Development will sell these projects to a third-party as I've described in earlier calls. This is another benefit of investing in the development business as it provides an upside to as even the cases where we believe select assets are not a good fit for our portfolio. Pattern Development also has more than 300 megawatts of 100% PTC eligible project which are scheduled for construction in 2019 and 2020. These projects include the ones where we expect to utilize 100% PTC qualifying turbines in addition to other development projects in US including solar.

In April, Pattern Development agreed to sell to the sale of the Western Spirit transmission project it's developing in New Mexico to PNM upon the project's completion next year. There's a 145-mile transmission project is designed to enable 800 megawatts of renewable capacity developed by Pattern or possibly other developers. In Japan, the development business continues to be very exciting. We have 200 plus megawatts in Japan on our iROFO list today consisting of Sumita and Ishikari. These two projects are being prepared for financing which we expect to close in early 2020. In addition to our growth prospects and development, we also continue to pursue opportunities to optimize and improve our existing assets.

Moving onto Slide 5, Gulf is a great example. As you are aware, Gulf Wind was coming off in attractively priced hedge agreement in April of this year and with that, the expectation that we would be selling power into the spot market for the balance of the year. This morning we announced that we've executed a short-term hedge agreement for Gulf Wind that takes advantage of the strong forward price curves we're seeing for the summer months. The hedge runs from April to August and includes a very good price. Close to hedge price that terminated in April which represents a very positive improvement of our expected revenues from the Gulf Wind project.

And the hedge provides greater certainty on the cash flows in advance of repowering. As to repowering, we expect to finalize the development of financing in 2019 with construction commencing in Q1, 2020 and completion scheduled for Q2, 2020. We have invested approximately $19 million to-date and expect to commit a total of $50 million in permanent equity in the completion of the project. We expect to receive development like returns from the investment or six to eight times CAFD multiple versus the 10 times multiple at which we typically drop an operating asset.

We have a couple opportunities to contract for the power from the repowered Gulf Wind project that we're currently evaluating and we will decide soon how we will proceed. Our existing assets in Japan are performing well as we build a portfolio scale in that market. Our Tsugaru project is on budget and scheduled to commence commercial operations in the second quarter of 2020, all civil and electrical work has resumed from the winter with foundations scheduled to be completed in the next couple months and the electrical complete in fall. We've just started turbine erection and we have our first turbine in the air.

As we've mentioned in the past, a 100-megawatt project in Japan is comparable to 200, 300-megawatt or larger US project based on the cost to construct and the power prices which are many times higher than the US prices resulting in very attractive returns. As a result, we believe that once Tsugaru reaches COD we will have an operating portfolio of scale in Japan.

Additionally the opportunity exists to monetize a significant portion of our Japanese portfolio with low cost domestic capital in Japan. Assessing permanent capital letting more attractive cost in Japan will provide us with flexibility to fund new growth either in Japan based on our robust opportunities or even in North America.

On Slide 6, we outline our iROFO list as it stands today. We have series of opportunities in 2019 and 2020 including Belle River, North Kent, Henvey and Grady. We did remove one project from the iROFO list, the 80 megawatts Crazy Mountain project. The project was subject to court challenge and we decided to put project on hold while disappointing, it is only one project from a portfolio candidates on the iROFO list. Without Crazy, our iROFO list currently stands at over 1.3 gigawatts and we expect it to continue to grow with additions this year which will significantly increase our opportunities.

This list provides visibility into our potential dropdown and growth available to us. Prior to turning it over to Esben to discuss our financial results, I'd like to review our production for the quarter. Production was 1,116 gigawatt hours which we reported on a proportional basis. The production result was primarily driven by good performance in most markets except in the Eastern US where we saw lower than expected win.

In Q1, 2019 there was a developing Central Pacific base El Nino that was declared officially by Nova [ph] in February, 2019. What is interesting is the impact - this event had in different regions in North America. With this type of El Nino there is a Southern Jet Stream that tends to reduce the strength of the storms that typically are brought down the Polar Jet Stream during the winter months.

The Eastern region depends largely on the Polar Jet Stream in the winter for its resource, as a result of these interactions. The west wasn't impacted as much as our Eastern fleet which is dominated by our Texas projects but also includes Kansas, Indiana and Missouri. And that we're out in our portfolio, as you can see in Slide 7. The impact was greatest in the Eastern US region. Wind resource in Western US, Canada, and Japan was essentially at our long-term average LTA.

We are in the business of managing for wind variability and we anticipated a lower than normal Q1 for wind and we've demonstrated that consistent track record of being able to manage these situations. At this point, I'd like to turn it over to Esben to review the financials in more detail.

Esben Pedersen

Thank you, Mike. Let's start with the review of how we did in the first quarter relative what we had expected when we outlined our 2019 guidance. As Mike mentioned, we remain on track for our CAFD guidance, our CAFD for Q1, 2019 was $53 million and the guidance range for the year remains $160 million to $190 million with the midpoint of $175 million. Our 2020 guidance is $185 million to $225 million with a midpoint of $205 million which represents a CAGR approximately 10% on a CAFD per share basis over our 2018 results. And we believe we can achieve these growth targets without issuing new common equity.

To provide some background on our overall results, revenues of $135 million were lower than expected due to lower LTA was partially offset by higher average prices and contingency included in our original forecast. In particular, our new assets namely Japan and MSM outperformed expectations. Our revenues also included compensation for loss production in one project of approximately $2.7 million which will be paid to our tax equity partner in a later period.

Our project and corporate costs were largely unchanged relative to our expectations, but we realized better than expected debt service cost. I want to highlight a change we made in our prior filings. In our 10-K we began segment reporting in two primary segments the operating segments and the development segment. We view these two areas of our business as distinct and our primary performance measure in evaluating these segments adjusted EBITDA in addition to CAFD for our overall business.

Starting with our operating segments, we recorded $113 million in adjusted EBITDA which is modestly lower than expectations and largely reflective in cost, G&A and write downs. We had no sales of development assets in Q2 to offset these expenses which is consistent with our plan. In addition to the operating segment and the development segment we had corporate and other activities which resulted in the total adjusted EBITDA of $98 million.

It is important to note here, that the development business is a separate investment from our normal operating business and it has already been funded through capital calls. The reported loses are ordinary course business for development as Pattern Development continues to invest in opportunities which will be offset overtime as to portfolio matures and assets are monetized. Our confidence in the development business is based on our medium and long-term view of what development can deliver through growth and CAFD starting in 2020.

As Mike mentioned this morning, we declared our second quarter dividend of $0.422 it's unchanged from the previous period, without any additional dividend increases for the year. At the midpoint of our guidance, we would end the year with a 95% payout ratio. Moving the Slide 10, we review the year here - year-over-year changes to our results. First revenues were up 21% compared to the same period in 2018.

The primary drivers were increased revenues from our existing portfolio that improved $14 million compared to Q1, 2018 mainly due to lower congesting in curtailment and [indiscernible] higher average prices and better performance in our US western region. As part of this increase approximately $6 million is due to lower unrealized losses at Gulf Wind as the hedge terminates.

In addition revenues from new projects were $18 million higher than Q1 from our acquisitions up to Japan portfolio MSM and Stillwater. These improvements were partially offset by the sale of El Arráyan which accounted for $8 million. Adjusted EBITDA was $98 million reflecting income from our operating segment and losses at Pattern Development which is overall down 6% compared to the same period last year.

First our performance from existing operations was up slightly at $2 million compared to Q1, 2018 and our new projects contributed $16 million to our performance. These improvements were offset primarily due to higher equity, earnings losses of $10 million and Pattern Development as well as the sale of K2 and El Arráyan which accounted for $13 million. CAFD was up $53 million up 23% compared to the same period in 2018. The improvements in CAFD is due to the items I mentioned earlier. I want to mention that the pick up between adjusted EBITDA and CAFD is primarily due to project - debt service being lower year-over-year, a better performance out of our JV is in terms of distributions received compared to the net income recorded which impacts our adjusted EBITDA. In addition, Pattern Development impacted adjusted EBITDA but not CAFD.

Moving to Slide 11, as of March 31, 2019 our available liquidity was $677 million which consisted of $93 million of unrestricted cash on hand, $15 million of restricted cash, $170 million of available under our revolving credit agreements and $223 million available undrawn capacity under certain project debt facilities and $176 million post construction project facilities. Our corporate rating outlooks remain unchanged BB minus BA3 and we ended the quarter with corporate debt to corporate EBITDA in the mid three's which is consistent with our financial policy.

We believe we have flexibility to access cost effective capital to fund growth without requiring us to issue new common equity. The new capital could take a variety of forms including monetization of the portion of the portfolio of Japan as Mike discussed, recycling additional assets giving the success we achieve in the sale of K2 and El Arráyan. A consideration of hybrid equity options making means of available capacity at the project level, to add or consolidate debt at certain projects including refinancing of our Canadian portfolio and making use of the available capacity at the corporate level either by expanding our convertible debt issuing additional unsecured notes or separately expanding our revolving facility.

We maintain a conservative capital structure which provides us an opportunity to access additional capital while maintaining our state of financial policy. In short, we believe there are multiple options available to us that demonstrate the flexibility of our balance sheet prior to returning to the capital markets. We have effectively positioned the company to maintain our commitment to the current dividend level and to fund growth opportunities we have in the near term.

Thank you and I will now turn it back over to Mike Garland.

Mike Garland

Thanks Esben. We have a clear path to execute on our continued growth opportunities through our investment in Pattern Development, the management of our existing operations to optimize assets and our capture of wind resources and our robust opportunity set on the iROFO list which consist of near term opportunities in 2019 as well as projects we can transact on through 2021 and 2022.

We delivered strong CAFD in Q1. With this result we remain on track to meet our 2019 guidance which we reaffirmed this morning. We are still on a path to grow our CAFD per share approximately 10% on a CAGR basis through 2020 without the requirement of new common equity and driving down our payout ratio. We believe our opportunities in New Mexico and Japan together with our investment in Pattern Development will continue material growth and the business in 2020 and beyond and our material ownership interest the development business is a clear differentiator to other players in the market.

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

Question-and-Answer Session

Operator

[Operator Instructions] and your first question comes from the line of Nelson Ng of RBC Capital Markets. Please go ahead your line is open.

Nelson Ng

In terms of Pattern Development, can I just confirm that adjusted EBITDA included a negative $14 million contribution from Pattern Development?

Esben Pedersen

That's correct Nelson.

Nelson Ng

Okay and I think $4 million of that relates to writing down Crazy Mountain project. So would $10 million be like a normal rate per quarter if Pattern Development doesn't sell any assets.

Esben Pedersen

It's lumpy, it'll be different every quarter. Last year I can point you to it was approximately $40 million for the year that would average out $10 million a quarter, but I just expect it to be variable quarter-over-quarter.

Nelson Ng

Okay and then, you talked about the year-over-year revenue increase. I think one of the drivers was receiving some reimbursement for loss PTCs at Broadview due to an outage. Do you remember roughly what that amount was, whether that was large amount or not?

Esben Pedersen

It was $2.7 million.

Nelson Ng

Okay, so it's not that material. And then more on Pattern Development I think Mike mentioned that [indiscernible] three projects in Mexico that Pattern Development would be divesting. Roughly what's the total size of those projects, in terms of megawatts?

Mike Garland

Two of them are solar projects for a total of 300 megawatts and then I think its 23-megawatt wind project [indiscernible].

Nelson Ng

Okay, got it. And then one last question on financing. I know that last year you guys fully repaid the Spring Valley debt. So can you just give a little bit more color, as to why it was fully repaid and whether you're looking to raise new debt at that project?

Esben Pedersen

First of all, part of what we continue to do is look at where can we balance the overall mix of the debt between corporate and project debt as we're trying to consolidate into more simple capital structures and not have debt spread over multiple places as we had cash from proceeds of K2. It was logical thing to pay the Spring Valley debt down we have mentioned before we have project refinancing opportunities in the works and that could result in a dividend recap getting us basically back to potentially the same levels of total indebtedness, we just continue to look at how to mix the overall capital structure.

Nelson Ng

Okay, thanks. I'll get back in the queue.

Operator

Your next question comes from the line of Brian Lee of Goldman Sachs. Please go ahead your line is open.

Brian Lee

The first stuff on the Eastern US fleet here where you saw the production weakness, was that weak throughout the quarter or was it concentrated in part of the quarter and has that seen any change in the early part of 2Q?

Mike Garland

I don't know how, it depends on your sensitivity. I would say generally it was across the quarter. It's close enough. It was - depending both in the east and west for example, on the western area we saw February was very strong out west, so it did have variations. I don't think it's that critical to distinguish them for example. Spring Valley was like 200% LTA for the month and February, but and so if you look out East I think - really it's central US it was pretty much over the quarter. There's a few good weeks and a few bad weeks around those. We don't really talk about current arrangement or situations for the coming quarter or the current quarter because we haven't announced anything on it. So I rather not to speak to what's happened this last month.

Brian Lee

Okay fair enough and then just second question from me and I'll pass it on. The better CAFD performance year-on-year it seemed like a part of that was the smaller drag from unconsolidated investment earnings if I'm getting the financials correctly. I know this is lumpy and it can move around from quarter-to-quarter. But can you speak to that a little bit more in detail what drove the year-on-year change and is that kind of sustainable trend level for that line item going forward in terms of the CAFD calculation for the share. Thank you.

Esben Pedersen

Brian it was, part of it was just the difference between how it gets picked up and adjusted EBITDA versus CAFD and at the CAFD level, it wasn't materially different than what the expectations were and it does move around and as you know, it comes in as cash comes in, so it tends to be a little more lumpy, so I think that there was many thing extraordinary in those results.

Brian Lee

That's great. Thanks guys.

Operator

Your next question comes from the line of Colin Rusch of Oppenheimer. Please go ahead your line is open.

Colin Rusch

Can you talk a little bit about your propensity for taking in outside capital so the term fee attractive certainly there's been a lot of money looking at different opportunities in this space and some recent deals, would love to take your temperature on that?

Mike Garland

Yes, I think generally there is very healthy appetite for really capital coming in to the renewable space and that really exists at all level. So at the project level, we find there's a lot of appetite in portfolios or at the corporate level. There's just a lot of people trying to deploy capital, so we have seen over the last year a lot of inbound increase to find ways to invest with, people like ourselves and you know and some of the deals that occurred in the market that you may have seen is very indicative of that.

So that is certainly is the case, I think the project debt and tax equity markets remain very robust and healthy and we have really no issue continuing to find ways to optimize cost of capital along all of those lines.

Colin Rusch

And then obviously you guys have been amongst the best in the business in terms of being able to predict production on these facilities. Are there areas where you're seeing opportunities for investment to improve those capabilities and how should we think about refinement of projections on an ongoing basis?

Mike Garland

You should hear our discussions internally Colin. They're quite robust around this - we do use [indiscernible] these days we'll use four, five different modeling techniques to search for variations and primarily anomalies in the modeling techniques. We also use outside advisors that are kind of cutting edge, PhD, think tank types that are constantly looking and in particular trying to look ahead, pretty good a few weeks, especially few days for our short-term trading activities and as you mentioned that we've been trying to get better at looking ahead in the coming years like for example we did anticipate first quarter being a bit week and that helps us manage the business a bit and really it's just an ongoing exercise of - it's kind of the science of climate is very complicated as you know and there are a lot of people working on it now because of climate change modeling and other things. And new techniques are coming online, but we haven't seen any radical change.

Again the most radical change that we've seen in the last five years has come around modeling wake effects and how do you manage wake effects? And then on the weather side, it's just refining as we go based on real-time data that is the most recent data not relying on historical from two, three years ago. So I can't give you a whole lot more specifics today at what we do because it's in some ways a proprietary exercise. But I can tell you that we are constantly looking and using outside advisors to keep us on top of the industry.

Colin Rusch

All right, appreciated. Thanks so much guys.

Operator

[Operator Instructions] your next question comes from the line of Ben Pham of BMO. Please go ahead your line is open.

Ben Pham

You provided update on your liquidity, capital structure. Can you remind us - the overall financing needs through 2020 in terms of debt and equity that Tsugaru, Gulf Wind to work out [indiscernible] to try and get the sense of how much potential asset monetization there may be in a bucket?

Esben Pedersen

We have the Tsugaru construction ongoing and it has been fully financed through COD. At COD there are two payments due, there's approximately $100 million payment due to Pattern Development and then there's a loan that is not the project loan, but it's a effectively a secondary loan or mezz loan that sits behind the project loan, that totals little under $100 million, so that's about $200 million. The loan does not come due, it has a maturity date well beyond the COD date, so we have a well past 2020 to get that finance but we will have to finance that out and would expect to do that and then we have the Gulf Wind project which as we've indicated we have invested about $20 million. We don't expect that through the construction period we would need lot of additional capital, but on the term out when tax equity comes in, we would need to end up at about $50 million total investment. Those are the primary investments outside of expansionary growth in buying new assets. We also have refinancing the convert that we have to tend to, so we're evaluating that but that's a obviously a separate product at a minimum can just be a rollover.

Ben Pham

Okay, so it looks like the - a secure projects there's one that $150 million of equity where you could just simply just put on your credit facility and then you got to look at determining net credit facility [indiscernible] paying it down and then the convert then - when you have to kind of attack that. I mean it's 2020 but how do you think about that and is there any sort of indication of what's the best capital that could refinance that at this moment?

Esben Pedersen

In terms of the exact product that we will use as something that we're still evaluating rolling the convert is - entering into a new convert is one option using unsecured notes at the corporate levels is another option. So I think we have the option of balancing it out with the project as well. I think we'll look at total consolidated leverage and corporate leverage when we make that decision. It is largely dependent on capital market strength and evaluating obviously the option value of that's embedded in the convert relative to the unsecured debt. So that is an ongoing evaluation of those products and we have until mid-2020 to deal with it, but we think that it's something that we don't want to deal with at very end obviously, so [indiscernible] playing a runway before we - in order to get that resolved.

Ben Pham

Okay, only last thing I wanted to check you talked a little bit about the development EBITDA dragged here quarter-on-quarter. I'm just trying to follow the - how that flows the into CAFD, I guess your CAFD your development EBITDA doesn't flow into CAFD, that's what I heard you said.

Esben Pedersen

Yes, so we pick up the equity and earnings in EBITDA and then for CAFD, it would be the cash received from the investment just like the other EMI's.

Ben Pham

Okay, got it. So you're stripping out the equity loss but there's no distribution. So it's not in there.

Esben Pedersen

Correct.

Ben Pham

Okay, all right. Thank you.

Operator

Your next question comes from the line of Julien Dumoulin-Smith of Bank of America Merrill Lynch. Please go ahead your line is open.

Julien Dumoulin-Smith

So I wanted to follow-up a little bit on financing options here. How do you think we're conceptually about balancing debt versus equity? When I say debt obviously there's a spectrum here of equity like options, can you just talk to with respect to convert. How do you think about rating agency treatment of various tools here? And how do you think about the right balance overtime? You obviously articulated like sort of aggregate growth leverage metrics, when do you get to that next point and how do you think about deferring those options right now because it seems obviously like you get a litany of tools before you. If you can spell out sort of in aggregate what those tools are, that would be helpful. If you don't mind.

Esben Pedersen

Okay and maybe I'll start with the first one, I think the - a key feature of how we construct all this is looking at what our financial policy is, I think just to restate it, we generally ensure that our project capital and as project debt and tax equity is fully amortized and paid down over the life of the PPA or contract that we have at the project level, so we really don't have amortization of third-party capital beyond the contract and we are really just dealing with the residual and Gulf is an example of that, it's an unlevered project today.

And that we finance things at the project level really to an investment grade quality and generally at standards that are better than what are more conservative than what you see in the market. So that means the capital that comes up at the corporate level is really an investment grade quality cash flows and our policy at the corporate level is to target three to four times leverage at the corporate level. So what - those constraints remain the same, part of what we have today is an investment and pattern development which you can almost think of that's having been funded out or corporate capital and so we know we have flexibility around our financial policy to go over our leverage targets at least in the short-term because we know we have the way to deleverage it through proceeds coming out of Pattern Development notwithstanding that our policy is really three to four times. I just want to point out that we have flexibility.

What we look at is, now what is the right capital source and where do we optimize the cost and project - debt [ph] remains the somewhat the cheapest source of capital so we continue to make sure that we put capital to use there or raise capital there and so that's a good option. That we have opportunities and projects that are unleveraged and also projects that we can opt side the leverage in the projects.

Then at the corporate level, we have unsecured notes convert preferred equity, the two formers ones are obviously going to get 100% debt treatment whereas the hybrids can get anywhere from 100% equity treatment to 50% equity treatment depending on the structure of the hybrid and then behind that is obviously equity.

Julien Dumoulin-Smith

Excellent and then if you don't mind, can we turn to the Devco side of the business obviously you're going to be pivoting on that from 19 into 20, how should we thinking about the evolution to the course of this year of your development company EBITDA or financial metrics to make sure that you're on track to be able to take distributions. Right so for instance, at present I see a small negative number in the Devco EBITDA. Where should I be pointing to as we think about being able to take distributions out of that company next year? And whatever other metrics you would be thinking about right, just conceptually in the 20?

Mike Garland

I would just lead with what we've said which is, we will through 2019 report that we've monetized some assets and have created gains on sale. As the first indicator that, we're on track to be recycling capital enough to where we'll be able to make distributions. And the second element I guess is just looking at our pipeline as to what looks like it could be available for monetization in 2020 and 2021 and then the only thing that I'd say, is that's not going to be apparent is, what's the demand. If the demand is lumpy as we've talked about in the past in terms of need for capital for new projects. The good news is that, if we need more capital it's probably because we got lot more opportunity. If it stays within the current schedule we probably don't need much funding and if it slows down, we need even less. And so we will try to give some indication of whether we're on track or not as we go forward into, in the end of 2019 and early 2020, but it is a private business and we have the ability to manage at a bit in terms of when we use capital and when we distribute capital. But I think you'll get some indications from us as we go through 2019 and 2020.

Esben Pedersen

And Julien, can I just maybe add what we did layout is a couple projects that are in construction Grady, some of the stuff in Mexico as we go through the year. Those projects maybe monetized and so that's one thing to start looking at when they get monetized. That's not to say that, just because they hit COD that they will be monetized. But that is the logical place to start thinking about monetization for those projects and that should show up in financial performance of P2.

The other thing I will say is, you should expect to continue to see expenses incurred on a consistent basis out of development business as it happened last year and that will continue to happen through this year and the realization, the moments for realization are going to lumpy as we've been saying. But so - you can look at the projects that we're sort of telling you that are already in the construction and obviously we'll look to monetize those.

Julien Dumoulin-Smith

And then just to clarify - EBITDA on a cumulative annual basis inclusive of gain should be positive in 2019 or 2020 or should flip positive?

Esben Pedersen

We haven't made that - we've not said that they would be one way or the other. I think it is a very complex set of mechanics that would tell you whether that will be the case. So I don't think I would go that far.

Julien Dumoulin-Smith

All right fair enough, what was that?

Esben Pedersen

No, that's okay.

Operator

Your next question comes from the line of Adnan Waheed of National Bank Financial. Please go ahead your line is open.

Adnan Waheed

I'll be speaking on behalf of Rupert. To start off, can you give us an update on the regulatory developments in the Japanese offshore wind market? And there have been some partnership announcement there recently between various parties development in Japan. And I was wondering if PEGI is also planning to partner in this market? Could you just give us your thoughts overall with respect to your entry in Japan?

Mike Garland

Sure. On the regulatory side we haven't seen too much change on the offshore side of things or even on the onshore in the last six months. Probably the most active thing - that's going on is the total Tohoku auction and the results of that I think they've announced publicly that, they have given a short window for people to withdraw their bids if they want to and that they are - they've seen one project drop out separate from the open window, which we love because we have the opportunity potentially to see some real step up in our award in that area in the Tohoku auction area because we were right on the cusp of the number of projects being eligible previously. So we're hoping in the coming months, we'll be able to tell you some good news around Tohoku auction.

There have been a number of announced joint ventures and it's not clear to us yet what they include, some of them sound like they're very narrow and limited and other sound like they're more broad based and with people that, we think are modest players or have modest opportunities in their area of one case of electricity utility that joined up with European that doesn't have a lot of opportunity for offshore and their province. And we're looking at opportunities to team up, we're not committed to it yet, but we're in discussions with the while number of folks who have strong interest in our portfolio.

We are really only looking at this point at partners that can provide additional if you will strategic value to our business. We have one of the strongest pipelines in Japan. I think we're now - if we're not the largest, second largest developers, we have probably the largest number of fit contract qualified projects in Japan and so we're getting a lot of inquires. We're mostly interested in what partners make sense for the Japanese market and maybe teaming up with a few folks on that have the expertise in the offshore.

If you remember our first offshore project Ishikari is a shallow shore if you will, it's like 20 or 30 meters. So it's not like building a project in the North Sea it's a fairly much more manageable type of transaction for our first project which is terrific. But we will find partners who are - have a lot of experience in building offshore, have the talents to help us build that project. We're not looking at self-building or anything like that.

So I can't give you any specifics because we haven't executed on any relationships, but we're in constant discussions. We're not feeling we have to execute on anything currently, but we think it will add strategically to our opportunities there if we do and in certain areas, team up with some important strategic Japanese partners.

Adnan Waheed

[Indiscernible] I appreciate the color. And then my second question is on the New Mexico transmission line. The Western Spirit line that's being sold to Pattern Development can you give us a more color on the transaction. As you expecting any gains that PEGI through your ownership in PD 2.0?

Mike Garland

Well, all it is as it sail to excuse me, P&M. if you're talking about the Western Spirit line sorry about my voice, I mentioned earlier that I'm fighting off a cold starting - I hope it doesn't sound too bad. That transaction we hope will have some profit in it, it is - we have to construct it to for P&M but our main driver for those transactions are to be wind projects that connect to it and so while we hope to see some realizations on the transmission line. We really are looking for to the opportunity to building out a significant number of megawatts as I mentioned I think. It's upwards of 800, 815 megawatt capacity line and we're taking the majority of that for wind development that we're going to be doing at Pattern Development. So I hope that responds to your questions.

Adnan Waheed

Yes, that gives - that's helpful. I think [indiscernible] I'll get back in the queue. Thank you.

Operator

And our next question comes from the line of Anthony Armand [ph] of Bank of America. Please go ahead your line is open.

Unidentified Analyst

Just a very quick question maybe more for Pattern Developments, but Taleon [ph] was talking about jointly developing a solar project on this side one of its coal plant, Montour [ph] just curios, if you can discuss that little bit more and if there are also opportunities for further projects like that?

Mike Garland

I guess what we can say is, we're doing a joint development with them. I can't say too much more about the project. We think it's a really great opportunity as you know, a big coal plant has strong interconnection rights and it's a good transition way from coal and we think it's a starting point of demonstrating to the coal industry that we can come in and help them make the transition from coal to renewable and we're looking to potentially partner with other coal project owners that could do something similar to Taleon [ph].

Unidentified Analyst

Got it and you expect that to remain development or you potentially dropped that down at the Yoko [ph].

Mike Garland

Yes depending on the economics and the benefit. We could drop it down to the Yoko [ph] to PEGI but as you know we don't make a decision about that until the time that Pattern Development determines that it's going to be selling the assets and at that point we'll look at PEGI's situation with capital what are the returns, what are the risks associated with the project to make a determination of PEGI wants to make an offer that could be attractive to Pattern Development. And it will go through the same normal process that we have for conflicts and so on with the independent members of our board reviewing and analyzing the decisions on what we should propose.

Esben Pedersen

Given the structure there, I think it's - that's unlikely that there will be an opportunity for us.

Unidentified Analyst

And just quickly in terms of timing, what should we expect for the 100-megawatt project?

Esben Pedersen

For the Taleon [ph] portfolio?

Unidentified Analyst

Yes.

Esben Pedersen

It's still in - I would say in early staged development, we haven't really indicated a date for MTP at this point.

Unidentified Analyst

Got it, okay. Thank you guys.

Operator

There are no further questions in the queue. I'll turn the call back over to the presenters for final remark.

Mike Garland

Thank you everyone. Appreciate your time and questions, interest in the company looking forward the rest of the year. Have a good day.

Operator

This concludes the conference call. You may disconnect.