Interview with CEO Mike Garland

SNL Financial - by Jason Lehmann, March 29, 2010

Pattern Energy Group LP CEO Mike Garland spoke with SNL Energy about Pattern’s wind growth strategy and the role of private equity in renewable generation development, its plan of attack in gas-heavy Southwest markets and its role in transmission development. Pattern Energy is backed by Riverstone Holdings LLC.

The following is an edited transcript of the interview.

SNL Energy: As a private energy company, can you talk a little about Pattern’s growth strategy and what sort of opportunities your company is looking to capitalize on in terms of asset geography, project size and the customers you’d like to serve?

Garland: We have about eight transmission lines we’re developing currently and we anticipate they’ll take a little bit of time to mature, but we’ll be seeing those starting to roll out in a couple years. In terms of geography, we’re primarily focused in North America. We see Canada as an excellent opportunity for us over the next couple of years. The U.S. market is still very strong for us, and we have a couple of very strategic projects going on in Latin America. The pipeline that we brought over when we were established was a mature pipeline, and therefore that’s allowed us to hit the ground running. Our first project was Hatchet Ridge, which was started three months after we were created, and we now have closed the Manitoba project. Both of those had been matured for quite awhile, and we have several other developments that we are pursuing that have been matured for quite a few years. We anticipate probably two more projects this year starting construction toward the end of this year, and then continuing into next year, 300 to 400 MW of additional projects in 2011.

Our pipeline could very easily do more than that, but we like the optionality of having more choices rather than less so we’re not having to do any one project. We can always choose not to do a project if it isn’t creating the returns or is creating risk that we’re not comfortable with. In the United States, we tend to be in some of the premium states like California, but we have projects being developed in 14, 15 states around the country right now, and it really just depends over the next few years how those different regions mature as to which ones will make the grade to move forward in the near term rather than the long term. All of the sites have the potential over the long period, say three to five years, to be developed. Our projects tend to be a minimum of $200 million to several billion dollars in terms of capital costs, and we serve quite a range of customers in that we do utility customers, municipalities and governments. We do, in some cases, like Gulf Wind, use financial instruments or hedging contracts to be able to sell our power, and we do [renewable energy credit] sales as well into the market, and sometimes we do those as private sales to individual corporations. In other cases we’ll do longer-term contracts to utilities or people who want a stable set of renewable energy contracts over time.

SNL Energy: How do you view wind generation’s role across Pattern Energy’s U.S. footprint in California, Nevada and Texas, where gas-fired generation is prevalent and independent power producers such as NRG Energy Inc. and Calpine Corp. have announced plans for new nuclear, solar and geothermal development?

Garland: The Southwest is obviously a challenged market because there aren’t high winds in the Southwest to speak of — there aren’t consistent strong winds. We do think that over time the technology is changing where if you look at some of the bigger turbines with longer blades, they can be economic in some of those regions in the Southwest, so we are being relatively active, a little more than some other people, and the reason is the technology, we think, is going to mature to where in some locations in those states there’s enough wind to make them cost-effective projects. The other element is I don’t’ think the Southwest will always be a stand-alone market. Our transmission group is looking at different options to get renewable power, particularly wind, down into the Southwest at reasonable prices. Our strategy is to complement both local as well as imported wind into the Southwest. And it’s also going to be complemented by gas projects. We’re of the belief that good gas projects complement the wind industry as opposed to compete against it. In the $6 to $7 range, we’re going to see a very nice relationship between gas being able to fill in when our wind projects aren’t blowing or producing. You can fill in very nicely with gas production, and at $6 to $7, we think that we can be very competitive on the wind side and attract a lot of support for buying wind, and with the complement of gas, electricity won’t be that expensive and the two will be good partners in developing a broader base of energy supply to communities than if you just chose one or the other.

SNL Energy: Renewable energy developers are facing a number of issues, notably the lack of adequate transmission infrastructure to carry their power to markets. Could you talk a little about Pattern’s philosophy and role regarding transmission infrastructure development?

Garland: We have in a number of cases teamed up with municipal utility-type organizations that allow us to manage our process a little easier than we might as a stand-alone transmission company. Our approach is really to look at the different environments and project opportunities and determine who would be a good partner. We have in California a municipal utility partnering with us on several projects, and we have several projects around California and the rest of the country which we’re currently doing on our own. We would look at, over time, the potential of bringing in partners for those if we had strategic reasons or economic reasons. We certainly are open to that. Our philosophy isn’t that we’ll only do it if we own and control 100% of the project. We’re not adverse to working with partners, but sometimes it’s better to get projects well down the road because we’ve found we can move a little quicker and be more flexible than some parties, and therefore we like to see the projects mature to a point where when we bring partners in, we have the projects in a very strong foundation of development and the chances of success going forward are higher.

SNL Energy: A recently released research report stated that as more states meet or draw near their mandated renewable portfolio standards, it will be more difficult for wind developers to secure power purchase agreements this year and on into next. Is this a concern for your company and how are you hedging against that risk?

Garland: I think that’s a little bit of old news, to be candid. Power purchase contracts have been hard to get for the past year or two. There just aren’t that many out there — it is a part of the challenge for the industry. However, we have found that there is enough to go around if you have the right strategy. For example, the easy one is California. The utilities have been quite supportive of trying to move forward with power purchase agreements, so we continue to see opportunity in California. Secondly, we target certain areas where we might be able to do negotiated agreements or where there is a more limited number of parties that can perform and deliver on the schedule that the utility, for example, wants, which increases our chances of being successful with a power purchase agreement. Third, we do look at ways to use hedging instruments as an alternative to a power purchase agreement with a utility.

SNL Energy: Can you talk about the state of project financing and equity support as it pertains to your company and, more specifically, how your relationship with Riverstone Holdings benefits your company’s development efforts?

Garland: The financial markets have been better than we thought. We were very surprised that we were able to close our Hatchet Ridge financing with six new lenders within four months of being created as a new company. They were six new lenders that we had not done a wind deal with previously, so that was a pretty remarkable result. We now have 13 lenders committed to us in various ways to support our projects that we have under construction or operation, so I think our reputation in the quality of the projects that we’ve provided to the financial community in the past years has served us well, and we’ve had a very good response. The market itself is starting to firm up a little bit, so there are more lenders in the marketplace than there were at the beginning of 2009. That’s been a terrific addition and positive development for us.

Riverstone has been a great partner to us. Part of the reason why we were able to accelerate our business plan a year ahead of schedule is because they understood our business and were supportive of what we were trying to do. It has been a very good relationship. We’ve known some of the members of Riverstone for quite a while and have a good rapport with them. It has truly been a pleasure being able to move quickly in the marketplace as the market firmed up and financing was available. They have been terrifically responsive to us and we work closely with the Riverstone team. They have met our financing requirements at every turn, and we’re probably going to be raising more equity early this year to continue to expand our development and long-term equity positions in our projects.

Generally, the equity markets have been pretty positive, particularly for us. We’ve had a lot of discussions with different equity investors, and we’re finding tax equity being available for the projects we are looking for tax equity on. Interest in equity in our company has been very strong. We’re going to be raising upwards of $400 million a year for the next couple of years for expansion. The money’s going to be needed to find new capital investments in our projects, and so far, so good.

SNL Energy: What distinguishes Pattern Energy from other private equitybacked energy companies that are active in the renewable markets in terms of acquisitions and project development?

Garland: I think there are several distinctions. One is, we’ve done it before. The group as a whole that came out of Babcock & Brown was responsible for developing and owning and operating 2,000 MW, and we did that for about a five-year period of time. There are very few other organizations that have been together and have actually proven themselves the way we have. Second, we have, I think, a stronger skill set across the board. In the financing area, we are generally credited with having come up with the tax structure that most of the industry used up until the [investment tax credit] grant, and we have additional ideas on how to structure our financing so that we’ll be very efficient financially.

We also have a very strong science-, engineering- and math-based business where we analyze our projects. We feel like we are able to select premium sites and develop them in a very efficient way and anticipate problems better than most of our competitors.

SNL Energy: Are there any plans to make a foray into solar development?

Garland: We have been looking at solar. We don’t have any projects that we’ve invested in yet, but we have been active over the past several years. For us, the biggest hurdle has been finding good projects that meet our return requirements. Generally speaking, we like solar and we’d like to do a lot more of it, but it is one of those areas we’re cautious in right now.