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Pattern Energy profile: Our plan is to be the most profitable

UNITED STATES: Mike Garland, who becomes chairman of the American Wind Energy Association (AWEA) this month, heads an unusually innovative Californian wind company -- Pattern Energy.

High flier… Garland’s company counts household names such as Amazon and Google among its customers
High flier… Garland’s company counts household names such as Amazon and Google among its customers

As such, he is the man behind the US's first wind-industry initial public offering (IPO) and who can count some of the world's best known brands, including Amazon, Google and Walmart, among his electricity clients. Pattern's reach stretches beyond the US and wind, though; it has successfully diversified into Canada, Japan and Latin America, and into solar and transmission.

Today, San Francisco-based Pattern is a mid-sized operation, employing just over 100 people. The original parent company, Pattern Development (formally known as Pattern Energy Group LP) was founded by Garland in 2009, and is co-owned by private equity fund Riverstone.

The yieldco, Pattern Energy Group Inc or Pattern Energy, is listed on the NASDAQ and Toronto Stock Exchange. Pattern Energy has interests in 12 wind projects, one of which is under construction, with a total owned interest of more than 1.6GW. All nine of the parent company's senior management team come from the now-defunct Babcock & Brown.

"I don't have the aspiration to have the biggest renewable energy company in the world (in 10 years' time), but it will be the most rewarding," says Garland, who is CEO of Pattern Development, and president and CEO of Pattern Energy. "Size can be helpful, but our plan is to be the most profitable."

Garland's stint in the public sector, as chief of energy assessments in California from 1975 to 1986, came just as the modern global wind industry was taking shape in California's Altamont Pass, prompted by strong state support under the governorship of environmentalist Jerry Brown. Garland, a physics student in his youth, says he first became interested in wind power because he wanted to apply physics to the environmental world. Now, some 40 years later, his companies are on a roll.

In March, the yieldco Pattern Energy reported revenues of $265.5 million for 2014, a 32% increase on 2013. It declared an increased dividend for the first quarter of this year of $0.342 per Class A share, or $1.368 on an annualised basis, a 2% increase from the fourth-quarter 2014 dividend of $0.335.

When it was launched in 2013, the IPO raised $352 million, well above the expected $319 million. The yieldco had an initial portfolio of 1GW of operating wind projects in the US (including Puerto Rico), Canada and Chile. As much as 95% of output was committed under long-term power purchase agreements (PPAs) and six of the projects had been operating for two to four years, all representing stable income, as preferred by yieldcos.

In April, Pattern Energy admitted that the unusually low wind speeds in the western US and Texas - the lowest in 47 years — meant that it lost 5% of the annual expected production in the first quarter in those geographic areas. That's an eye-watering hit for any yieldco, which are by definition publicly traded. Pattern declined to comment further, citing Securities and Exchange Commission regulations prohibiting "selective disclosure" of information. When asked about possible stock market response to the shortfall, Amy Grace, chief wind analyst at Bloomberg New Energy Finance, said, "Ultimately I think people realise there is some variance to wind project returns, but I may be overestimating the average investor."

Brand recognition

It was Amazon Web Services (AWS) that approached Pattern about using its name for Fowler Ridge, a 150MW development in Indiana. "At first I did not want to change the name. It's odd to have one of our projects named after another company," says Garland. "But then I thought, this is pretty cool. It really says that the huge companies in the US are committed to wind." The cloud company, part of retail giant, and Pattern had also announced AWS's 13-year PPA for the project.

In Texas Google Inc has invested $75 million in Pattern's 82MW Panhandle 2 wind farm, and major retailer Walmart has a PPA for about 60% of the power from the 200MW Logan's Gap project, which in August 2014 Pattern announced it was buying.

Pattern has so far stuck to investing in OECD countries. "We think it's the right risk profile for a yieldco," Garland says, for stable dividends. As such, it has extended into Canada, partnering with Samsung, and Chile, where it developed the country's largest wind project, 115MW El Arrayan. Although Chile is not populous, and demand will continue to come from mines, he says, Pattern is committed to doing a great deal more renewables development there.

Pattern Development plans to develop 1GW of wind and solar projects by 2020 in Mexico in a joint venture with an affiliate of cement firm, Cemex, which is well-known and can open doors to offtakers, he says. Mexico's energy market opening to private competition presents major opportunities and challenges, he says.

Earlier this year, Pattern revealed its first foray into Asia with the purchase of a majority stake in Japanese developer Green Power Investment (GPI) that added up to 1GW of nearand longer-term wind and solar developments. Pattern's senior managers, while at Babcock & Brown, worked with the team that founded GPI, giving Pattern a shoe-in to a difficult market for foreign firms to enter.

Pattern could eventually diversify into other renewables, or even into natural gas, or storage, he says. The company is developing the Southern Cross HVDC transmission line from the ERCOT market in Texas to the states in the south-east, due for completion in 2019, and has already developed the HVDC Trans Bay Cable project under San Francisco Bay.

Garland is clearly doing something right. One of Pattern's directors is Lord John Browne, the former chief executive of BP who tried to remould the company as "Beyond Petroleum", when it ventured into wind energy. Browne is now a partner and managing director of Pattern's co-owner, Riverstone. "I think he likes what we're doing," says Garland.

Flat demand

The major challenge in the US wind market is flat electricity demand, which with low natural gas prices makes today's market very competitive, says Garland. "You have to be regional in your focus in terms of where demand will come from." The wind industry is thus often looking at providing replacement capacity as dirty coal plants and ageing nuclear plants are retired.

But Garland sees exciting market changes within the next five to ten years that will help wind, as smart grid concepts are increasingly adopted, as storage becomes more widely used, and as diversified and smaller power plants become more common.

Of the Production Tax Credit (PTC), he says that there should be a "reasonable" timetable for phasing it out or replacing it. He points to possibilities such as a technology-neutral PTC, an option that is being discussed on Capitol Hill, or allowing wind to benefit from Master Limited Partnerships (MLPs), which are publicly traded, a popular structure in the oil and gas sector. "People recognise there is a fairness issue," he says, noting that the wind PTC is an easy target and that other electricity technologies get subsidies. "When (there is) talk of winners and losers, all those embedded policies are often forgotten," he says.

What of the well-funded opposition to wind? "If somebody starts encroaching on to somebody's turf, there will be push-back," he says. "The Koch brothers (the conservative fossil fuel magnates and political funders) are a classic example. Wind infringes on where they get their wealth. It's to be expected," says Garland. But he is confident wind power will win. "We're clean, we're independent, and we're domestic," he says. "The facts are on our side, and so is the public."

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