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Edited Transcript of PEGI earnings conference call or presentation 1-Mar-17 3:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Pattern Energy Group Inc Earnings Call

San Francisco Mar 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Pattern Energy Group Inc earnings conference call or presentation Wednesday, March 1, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mike Garland

Pattern Energy Group Inc - President and CEO

* Mike Lyon

Pattern Energy Group Inc - CFO

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Conference Call Participants

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* Nelson Ng

RBC Capital Markets - Analyst

* Ben Pham

BMO Capital Markets - Analyst

* Andrew Hughes

Credit Suisse - Analyst

* Rupert Merer

National Bank - Analyst

* Frederic Bastien

Raymond James - Analyst

* Shivani Sood

Oppenheimer & Co. - Analyst

* Jeremy Rosenfield

Industrial Alliance - Analyst

* Antoine Aurimond

UBS - Analyst

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Presentation

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Operator [1]

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Good morning ladies and gentlemen welcome to Pattern Energy Group's 2016 fourth quarter and fiscal year-end results conference call.

(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 we filed later today March 1, 2017 and available on EDGAR or SEDAR. Now I would like to turn the call over to Mike Garland, President and Chief Executive Officer of Pattern Energy Group Inc.

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Mike Garland, Pattern Energy Group Inc - President and CEO [2]

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Thank you operator. Good morning everyone and thank you for joining us today. Earlier this morning we released our 2016 fourth-quarter and year-end results which you can find on our website at PatternEnergy.com.

We achieved a 44% growth in cash available for distribution in 2016. Over the 2015 cash available for distribution. Which was the midpoint of our guidance range we set out at the beginning of the year. This morning, we also announced a 1.4% increase in our quarterly dividend to $0.41375 cents per share for first-quarter 2017.

This is the 12th consecutive dividend increase we have made. And it results in a 32.4% increase in the dividends since the first quarter we paid in quarter one, 2014. Our fleet continues to operate at the top of the industry. With availability in excess of 97% in fourth quarter. Our strong operating performance and high quality of our assets means our projects continue to provide investors with stable and growing cash flows.

Subsequent to the end of the year, we successfully issued our first rated corporate note offering a $350 million offering. Which was well received by the market. The proceeds allowed us to repay a portion of our revolver, which we use as our primary tool for making accretive acquisitions. Such as the Armow transaction that we completed in October last year.

The proceeds of the bond offering will also fund a portion of the Broadview acquisition. Which we have committed to acquire from Pattern development once it commences commercial operation. Which we expect to occur this coming April. The bond offering demonstrates our ability to access capital through multiple avenues. As we continue to scale our portfolio rather than solely relying on equity capital raises for growth.

So 2016 was a good year. We were able to meet the midpoint of our [Cap D] guidance. Demonstrate that we could grow our business and our cash available for distribution in a difficult market. And that we can be patient in our capital raising and raise capital in new ways that benefit our shareholders. Including raising nearly $270 million of equity and $300 million of corporate-rated debt.

At this point, I'd like to take a step back. I'd like to take an opportunity at the beginning of this year to outline our vision for Pattern. And our strategy to capitalize on the growing opportunities in renewable energy. Late last fall, we launched an internal initiative that we called Pattern 2020. It is a vision that brings focus throughout the which organization. As we execute our day-to-day work to deliver safe reliable low-cost renewable energy to the communities we serve.

It has three primary tenants. The first is to make Pattern the best place to work in the industry. I won't some time on this tenant today, but it's importance should not be dismissed. The type of growth that we have delivered to date and that we continue to target requires an engaged high-performance team. And that's exactly what we have and are building at Pattern.

The second tenant is to double the size of our portfolio by 2020. This goal is consistent with what we outlined at our Investor Day in June 2015. Our goal is to grow from the 2.6 Gigawatts we own today. Including the agreement to acquire Broadview, to more than 5 Gigawatts by 2020. The third tenant of Pattern 2020 is to continue to be a top competitor. Which includes aggressively lowering our costs to deliver renewable energy through lower build costs, lower operations and maintenance expenses, increased production, and operational initiatives. Such as improved systems and automation.

Our strategy for growth will continue to be through acquisitions. Predominantly from Pattern development and predominantly wind where we continue to see the best balance of risk and reward for our shareholders. However, we continue to work on solar and transition opportunities as well. This has been, and continues to be an effective strategy.

There is always a market for new power. The fundamentals for renewables have never been better than they are today. They are low cost, clean and plentiful. And at a time when customers demand is at its highest levels in history. No one in the market is saying renewables aren't going to be growing at an increasing share of our power generation.

Bloomberg New Energy Finance reports that's $286 billion was invested globally in renewables in 2015. Compared to only $130 billion in fossil fuels. Even if some coal plants that were planned on being shut down continue to operate in the US because of the new administration, we are not going to see new plants built in our lifetime. Within the growing renewables market, we have designed our business around a simple shareholder investment strategy. Consistent dividends and strong growth.

We've been very effective at consistently providing dividends. In fact we have consistently grown our dividend for 12 straight quarters. We've demonstrated that we do that. It has been effective and is going to continue to be effective. As long as we can grow, we will continue to grow our dividend. If we don't grow, we can't grow the dividend like we have. But we will still be in the position to continue to pay the dividend.

The reason we can consistently pay a dividend is our cash flows are generated from stable performing assets, which have long-term fixed-price contracts. The growth part of our business has been successful. We have been patient when we needed to be. And we have been able to raise capital in various ways when the markets are open. Going forward, if our access to capital is restricted or the growth of our business is restricted then we can make adjustments.

Our Management Team has done this together for nearly 20 years. So we have the experience to make these adjustments that are necessary. We can grow in new areas. Like different countries other than United States. We can grow in different businesses like solar. And we can grow through development by expanding our margins.

Alternative, we could take an asset-lite strategy which would place less emphasis on our direct ownership of 100% of assets. And instead own partial interest and generate fee income for managing the assets. And by recycling capital by selling projects and investing in new, more accretive ones. And we can grow by playing a role in the consolidating the renewable industry.

We continue to be disciplined and patient about our use of the capital markets. We have shown that discipline and patience is effective. But we have other tools that are at our disposal. Such as accessing alternative capital being responsive to changing markets including making adjustments to our business model. This is a sustainable and effective business model.

Now let me touch on our third tenet of Pattern 2020 which is to be a top competitor. While the market has, and will continue, to be competitive we believe we can and will be able to see significant improvements in our internal operations. As well as how we build, operate, and own assets in the coming years. This will not only allow us to increase our existing assets operating margins, but it will also better position us to lower the cost of renewable power to our customers. Resulting in more opportunities to contract for growth.

As part of Pattern 2020, we are already pursuing cost efficiencies from both operations and G&A expenses. We have previously stated that we can generate between $10,000 and $20,000 in net savings annually per turbine over the next three to five years. On a fleet of 1,100 turbines that translates into an average of $15 million in annual savings.

As I said, we have already started taking steps to meet or exceed these savings. During 2016, we made the decision to invest in a self-perform model for our operations and maintenance. We have hired experienced operators that have implemented those programs at other major independent power companies. By the end of this year, we will be self-performing on five projects.

Additionally, we have renegotiated seven of our long-term power service agreements. On sites which will materially lower the annual cost of service. We originally contracted for full-wrap services at these sites to support our IPO. Since then, we have scaled up our business to a size we can take on some of the risk of servicing our turbines in exchange for materially lowering our costs of our O&M.

Additionally, we have determined that we can reduce the cost of our administrative services through automation and process improvements. We're very excited about these improvements to our business. And our Pattern 2020 vision to be the best place to work in the industry, double our business, and to continue to be a top competitor in the renewable industry. This is our vision and strategy.

Let me turn to a few questions that investors have asked us recently. The first one is related to the new federal administration. Right after the election, I wrote the we did not anticipate major headwinds from this administration. And in several ways, we thought it would improve our business situation. First, the federal government primarily affects our business through tax policy and permitting.

We believe the proposed tax policies, for the most part, improve our returns. And we do not anticipate increased government regulation from this administration. We do believe that they had the will to do what they said. And slow down the shutdown of some coal plants by loosening coal regulations and potentially even providing certain subsidies to the coal industry. Which would be ironic.

But in the scheme of things these few coal plants extensions will not change the landscape for renewable power. In our industry, we know that states, not that the federal government, drive demand for renewable power through renewable portfolio standards. And through their utility resource planning efforts.

In several states, the states where we are most active, there is support for expanding the demand for renewable energy and increasing certain renewable portfolio standards. Additionally, the wind industry is a net job creator. Which now accounts for 100,000 jobs in the United States. And the new administration likes job creation.

If you still believe the new administration is a threat to the wind industry, which we do not, keep in mind that 90% of our identified ROFO assets are outside of the US. And contrary to the concern about this administration, we are going to expand on our identified ROFO list in the coming months.

Another question we receive, is the impact of interest rates and inflation on our business. First, there would be minimal impact on our existing fleet. Given we use fixed-rate debt at the project level. Second, if interest and inflation rates go up, then we and the rest of the market will increase our [desk] count rates on the project valuations. So we would pay less for new assets. Which helps maintain the growth component of our business model.

While we have taken advantage of the low interest rate environment to this point to lock in long-term project debt on the existing fleet, we have managed assets and raised capital for growth across multiple cycles in the market during the past 20 years. And we're confident in our ability to continue to do so in the future.

Lastly, we continue to get questions around our intentions to participate in the development business. As we have said previously, we are considering making a minority investment in Pattern development. The minority investment would be made incrementally over the course of several years.

Initially, it would require a modest investment of less than $100 million. That would likely be funded from available cash and our revolver capacity. This investment would be a funding without ongoing requirements to continuously fund activities. We will not put ourselves in a position where we have to keep funding development and draw funding away from the dividend or -- we do not think we have excess capital to continue to make investments in development.

If we do make an investment in development, we'll be able to choose to make funding if we think it is prudent. But we will not be required to fund. We have not decided to make such an investment in development. But we do believe there is strong rationale for doing so. To help our investors understand the rationale, we will be publishing a white paper on the benefits of investing in the development business in the coming weeks. Which will be publicly accessible on our website.

The white paper will outline the financial benefits and risks of Pattern Energy and its shareholders investing in development. As we have discussed previously, we believe strongly that a disciplined, experienced, well-managed development business has the lowest risk for the returns available in the power industry.

The economics are simple. We can acquire projects at a lower-cost in the range of a six to eight cash available for distribution multiple for a development project. Compared to market price of 10 to 13 times cash available for distribution multiple. In essence, it is that two to four turn uptick in CapD multiple that we would be acquiring by making an investment in Pattern development.

The final item we believe is key differentiated to our business and which positions us for long-term success is our structure. We are fundamentally different than the [yo culls] we're compared with. We are an integrated industrial business. And not a financial instrument. Our Management Team [and is entirely] exists internally in Pattern Energy. We have no IDR's and no undisclosed commitments to the affiliate.

We believe these are good examples of good governance. That differentiate us from some of the other issuers, with which we are commonly compared. Our structure is sound and our governance is in great shape. Our independent processes are in place. They're working and we are still committed to them. We have turned our attention to our internal governance. And are making great progress at reserving our internal control deficiencies. And we have turned that into a priority equal to safety.

We see it as similar issue. Which is core to the health of the Company. While the overview is longer than I would have typically provided you on this earnings call. We felt that it was important to kick off the New Year with a clear view of our vision and our strategy. And how we have positioned the business for success in this exciting and growing renewable power market. With that, I'd like to turn it over to Mike Lyon our CFO to review the financials. Mike?

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Mike Lyon, Pattern Energy Group Inc - CFO [3]

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Thank you, Mike. Let's start with electricity sales. We reported electricity production on a proportional basis to reflect our ownership interests in our operating projects. Proportional gigawatt hours sold increased 6% to 1,818 gigawatt hours in Q4 2016 compared to the same period in 2015. On a full-year basis, proportional gigawatt hours sold increased 33% to 6,806 gigawatt hours compared to 2015.

This increase during the quarterly period was primarily due to an increase of 128 gigawatt hours from controlling interest in consolidated gigawatt hours. Including production from our Amazon Wind project that commenced commercial operations in December, 2015. As well as an increase of 115 gigawatt hours from unconsolidated investments. Due primarily to the acquisition of the Armow project in October of 2016.

Production from the fleet for the fourth quarter was below our long-term average off approximately 6%. Based on the wind levels, which we anticipated would be lower in the first half of 2016, overall for the year the wind was about 7% below our long-term average for the year. Our Met team and independent parties believe that wind conditions in 2017 are reverting to something closer to our long-term average. At this point, we are assuming wind speeds and production will be at the long-term average for 2017 in our guidance. Which I will address a few minutes.

Total revenue was $81 million in the fourth quarter down 11% from the same period last year. Total revenue was up more than 7% for the full-year 2016. At $354 million, compared to 2015. The change for the quarterly period was primarily related to $5.4 million in higher unrealized losses. Due to higher forward electricity price curves compared to the same period in 2015. As well as a $6.7 million decrease in electricity sales from projects that were in operation prior to 2015.

Adjusted EBITDA increased almost 9% to $85.1 million in the fourth quarter of 2016 compared to the same period last year. Adjusted EBITDA was up 21% to $304.2 million for the full year of 2016 compared to 2015. The increase for the quarterly period was primarily attributable to the [collection] from Amazon Wind and Armow, which I referenced earlier.

Cash available for distribution increased more than 10% to $36.2 million in the fourth quarter of 2016. Compared to the same period in 2015. For 2016, cash available for distribution increased 44% to $133 million, compared to 2015. The $3.3 million increase in cash available for distribution for the quarterly period was primarily due to: increases of $5.5 million in distributions from unconsolidated investments; $4.2 million in network upgrade reimbursements; and $0.7 million in related party income. As well as decreases of $0.7 million in each of net losses on transactions, project expenses and principal payments.

These improvements are partially offset by decreases in revenues of $4.1 million. Excluding unrealized loss on energy derivative and the amortization of power purchase agreements due primarily to: the decreases in volumes; increases in operating expenses of $2.2 million; and increased distributions to non-controlling interests of $2.6 million.

This morning, we provided our cash available for distribution guidance for the full-year 2017. Which we have established as a range of $140 million to $165 million. The 2017 guidance only includes the 17 operating projects plus the interest we have agreed to acquire and Broadview once it commences commercial operations in April. We do not include potential dropdowns in our guidance unless they are already contracted like Broadview is.

The midpoint of this 2017 range of $152.5 million can be clearly understood by taking the $135 million midpoint of full-year 2016 cash available for distribution guidance. And adding the expected increased cash available for distribution contribution from improved wind. And from Armow and Broadview, less the costs of debt associated with those acquisitions.

In short, we bridged to this year's guidance by adding to last year's midpoint, $13 million for each of the Armow and Broadview acquisitions. And subtracting about an incremental $10 million for additional interest costs associated with carrying the senior notes that we just issued in January. Compared to the cost of carrying a revolving credit facility balance.

The Broadview contribution to 2017 cash available for distribution is about $15 million less than the run rate contribution from that project for three reasons. First, we have only a partial year of operation for Broadview this year. Second, Broadview will also be affected this year by the pay-as-you-go tax structure under the tax equity financing that we put in place.

Under the structure, the tax equity investors will make contributions to the project for a portion of the value of the production tax credits earned by the project each year. These contributions, which will be a portion of our annual cash available for distribution from the project, are about $6 million per year. And the first of these will be made in 2018 rather than 2017.

Lastly, we're utilizing a little over $50 million of back-leverage funding for the acquisition. With a first-year carrying cost of about $3 million. The midpoint of the range represents approximately 15% growth in cash available distribution versus last year.

As of December 31, 2016, our available liquidity was $497 million. Which consisted of: approximately $84 million of unrestricted cash on hand; $25 million of restricted cash; $288 million available under our revolving credit agreement; and $99 million of available undrawn capacity under certain stand-by project credit facilities.

As Mike mentioned earlier, we successfully completed our first note issuance in January. In the short term, we've used the proceeds from the $350 million offering to pay down the revolving credit facility. Once Broadview commences commercial operations, we will use approximately $215 million from the net proceeds of the note offering to fund a portion of the Broadview acquisition. The remaining $128 million in net proceeds from the note offering were used to repay borrowings under the revolving credit facility.

As discussed, during our third-quarter earnings call, we are taking aggressive steps to remediate the material weakness identified in our internal control over financial reporting. I'm pleased to announce today the hiring of our new Controller, Richard Osberg. Richard was previously the Chief Financial Officer of Source Gas. And before that served in a variety of roles at Black Hills Energy and Excel energy.

Is important to note that a weakness of internal controls over financial reporting is separate from an assessment of our financial statements. We have certified both the third-quarter 2016 statements and later today, we will do the same for our full-year 2016 financial statements.

The remediation is of the highest priority for us. However it is not a short process. Controls are tested. And two successive successful tests must be completed for each control deficiency prior to attesting that the control is remediated. Some of these controls are tested daily, some monthly, and some quarterly. At a minimum it will require two quarters of successful tests to remediate a quarterly item.

With this in mind, we're conservatively preparing to deal with this issue throughout the course of 2017. We are investing in additional resources within the Accounting Team to support and accelerate that remediation during this fiscal year.

Based on the improvements we are implementing through this process, we also believe we can streamline roles and responsibilities in the out-years after 2017 as Mike mentioned. I'll now turn the call back over to Mike Garland.

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Mike Garland, Pattern Energy Group Inc - President and CEO [4]

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Thanks Mike. We have structured the business and successfully deployed a strategy to produce and grow stable sustained cash available for distribution. We delivered 44% growth in our cash available for distribution for 2016. With modest equity raises. We raised our dividend for the 12th consecutive quarter.

We're targeting growth of 15% in our cash available for distribution at the midpoint of our guidance range for 2017. Which will grow, as Mike mentioned, as the Broadview project reaches its run rate in future years. That is growth based on no additional equity raises, no additional acquisitions.

We will be publishing a white paper in the coming weeks outlined in the financial and strategic benefits of investing in the development business. We have set clear goals under our Pattern 2020 initiative that will engage our employees, double the size of our asset base, and position us to compete at the highest possible level within our sector.

This coming spring, we will be holding our second Investor Day in New York City. A save-a-date notice will be published shortly. We are excited about the developments we have to share with you on the business. And look forward to seeing you at that event.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Nelson Ng from RBC Capital Markets.

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Nelson Ng, RBC Capital Markets - Analyst [2]

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Thanks. Good morning everyone.

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Mike Garland, Pattern Energy Group Inc - President and CEO [3]

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Hey Nelson.

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Nelson Ng, RBC Capital Markets - Analyst [4]

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So just to clarify on your guidance. Is it fair to say that the CAFD run rate of your portfolio will essentially be the midpoint of your guidance plus $15 million for Broadview?

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Mike Lyon, Pattern Energy Group Inc - CFO [5]

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I would not arrive at the number in that way. As I said in my prepared notes, I think I would add to the midpoint of last year's figures the effects of the Armow acquisition. And the Broadview transaction. Less the carrying cost of the notes that we issued. Those would be the primary factors affecting our --.

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Mike Garland, Pattern Energy Group Inc - President and CEO [6]

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Nelson are you asking beyond 2017?

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Nelson Ng, RBC Capital Markets - Analyst [7]

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Yes I'm saying for 2017 the only non-run rate item is the partial contribution from Broadview which is $15 million less than what it would, is there any other --?

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Mike Lyon, Pattern Energy Group Inc - CFO [8]

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You're wanting to add the $15 million to this year's --?

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Nelson Ng, RBC Capital Markets - Analyst [9]

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To the 2017 guidance. And would that be what you consider the run rate for the portfolio?

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Mike Lyon, Pattern Energy Group Inc - CFO [10]

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I think that's a reasonable conclusion to reach Nelson. However we are embarked on a number of initiatives as Mike described about reducing our cost structures going forward and so we expect to see --.

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Nelson Ng, RBC Capital Markets - Analyst [11]

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So you see upside from that.

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Mike Lyon, Pattern Energy Group Inc - CFO [12]

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Upside from that.

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Nelson Ng, RBC Capital Markets - Analyst [13]

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Okay and just on reducing operating costs. I was wondering if there's room to reduce overhead costs as well? I know you're in the process of ( Multiple speakers ) --?

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Mike Garland, Pattern Energy Group Inc - President and CEO [14]

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I didn't mean to imply that it was only [ops] that we are doing and it's really ops and G&A. So for example when I referenced process improvements and so on. And automation. That's really aimed at lowering our G&A costs.

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Nelson Ng, RBC Capital Markets - Analyst [15]

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I see. Then I think Mike Lyon talked about liquidity. But I think big picture, is it still fair to say that you have liquidity to do at least one more drop down without needing to raise equity? And if that's the case, are there any other considerations that you need to take before doing a drop down? I know [Minco] is now commissioned and you have closed your term debt offering. I'm just wondering if there's any other considerations that would cause you to wait?

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Mike Garland, Pattern Energy Group Inc - President and CEO [16]

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There are other factors. But we have to be offered the opportunity to acquire Minco from Pattern Development. I think right now what we were primarily interested in is getting through the year seeing how the bond went off. And now we are going to start this next couple months, look at what the timing of the next drop down and how we would finance it.

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Nelson Ng, RBC Capital Markets - Analyst [17]

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Okay. And then just finally, on your dividend policy. I know it's the midpoint of your CAFD guidance implies roughly like a 94% payout. What is your longer-term payout ratio target? And could you comment on the payout ratio for 2017?

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Mike Lyon, Pattern Energy Group Inc - CFO [18]

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Yes, you are quite right that based on those numbers, Nelson, that the payout ratio would be about a 94% level. We do continue to target in the longer run an 80% payout ratio. I think I would say that we have some ambitions to, in fact lower that payout ratio over time, in modest steps over the course of some number of years. But think that will emerge over a longer period of time. The dividend declaration really, I think reflects our confidence in our ability to continue to grow our cash flow. It was moderated to some degree by where the yield is on our stock today.

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Nelson Ng, RBC Capital Markets - Analyst [19]

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Okay. And then just a quick housekeeping question. For K2 was the generation this quarter a lot weaker than it was in 2015? Whereas the other Ontario facilities were flat year over year? I'm not sure whether the data source I am looking at is correct.

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Mike Lyon, Pattern Energy Group Inc - CFO [20]

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I'm going to have to get back to on that question. Just make sure I got it right Nelson. [You're interested in the] Q4 production compared to --?

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Nelson Ng, RBC Capital Markets - Analyst [21]

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Of K2.

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Mike Lyon, Pattern Energy Group Inc - CFO [22]

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Just of K2. So let me get back to on that.

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Nelson Ng, RBC Capital Markets - Analyst [23]

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Okay thanks.

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Operator [24]

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Ben Pham, BMO.

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Ben Pham, BMO Capital Markets - Analyst [25]

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Thanks good morning. I had a question about some of the metrics you provided on the development return. Specifically I think you mentioned the 6, 8 times multiple. And that is a couple percent difference between high and low. Is that reflective of different countries that you're looking at from a return perspective? Or is that how you've seen returns trend over the last 10 or 20 years you've looked at the space?

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Mike Garland, Pattern Energy Group Inc - President and CEO [26]

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Yes, no, I mean sometimes. It really is meant to convey that if you look at our portfolio. If you just squint your eyes as the expression goes a little bit, you'd say it's roughly 6 to 8 times. We do a number of project developments where it takes less than 6 or 8 times to develop it. But it's safer to look at 6 to 8 as an average. In some markets and some countries, those numbers can be substantially better. Meaning, that if you are in the right time at the right place, you might make a lot more margin than that. And in other cases you're making little bit less. So we just are using 6 to 8 as the proxy for what's a reasonable expectation overall.

So for example right now, Japan seems to have very good margins. We have very good margins on Ontario. Texas can be a lower margin business because it's really cheap to do. So the cost to do it is very low. But the market is very competitive and can sometimes drive down the margins compared to some of the more robust markets. But it's just not something Canada, for example we do other projects that are less robust. You have to have a variety of opportunities in your development business to be successful consistently year in and year out.

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Ben Pham, BMO Capital Markets - Analyst [27]

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Okay and how do you think about this as you move towards development? Just that carrying cost on the front end? Just full cycle returns to pay your shareholders, whereas with an acquisition you're pay [ex] dollars and that's pretty much all you need to think about?

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Mike Garland, Pattern Energy Group Inc - President and CEO [28]

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Yes. It's a very modest investment, as I mentioned earlier. And so the carrying cost is not very large. And typically, after a couple years you would see that investment being realized. We actually in Pattern One, when we started Pattern Development, we actually started doing dividends and saw successful profits before the end of the second year. So it is possible to see relatively short time periods when you see a return on your investment. But we had anticipated it would take a few years to actually prime the pump, if you will, and start seeing the realization of those benefits and be able to recycle the capital back into that business such that it's a self-sustaining development business.

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Ben Pham, BMO Capital Markets - Analyst [29]

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Okay, and my last question in your 2020 plan. And I came on a bit late, so I may have missed it. Was there any commentary about solar? You mentioned a 20% target quite some time ago. Is that mentioned at all or is that a bit stale now?

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Mike Garland, Pattern Energy Group Inc - President and CEO [30]

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Pattern Development is gearing up to do more solar in the US. We have focus primarily the United States. For example we have to operating solar projects in Japan and we have more in development. We have made the decision at Pattern Development to go ahead and start focusing on the US market and we are gearing up for that.

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Ben Pham, BMO Capital Markets - Analyst [31]

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So 20% longer-term is still a good number to think about from just a high level?

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Mike Garland, Pattern Energy Group Inc - President and CEO [32]

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I think now we would hope that we could move up to 20%. But we'll just have to see. That would be a target over time.

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Ben Pham, BMO Capital Markets - Analyst [33]

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Okay. Thanks Mike. Thanks everybody.

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Mike Garland, Pattern Energy Group Inc - President and CEO [34]

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You bet, Ben.

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Operator [35]

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(Operator Instructions)

Andrew Hughes, Credit Suisse.

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Andrew Hughes, Credit Suisse - Analyst [36]

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Good morning, guys, thanks for taking the question. A couple on guidance and costs. Mike Lyon, I appreciate the walk from last year's midpoint of CAFD to this year's. Just curious what the walk is or how you guys think about guidance this year relative to the $156 million run rate that you guys introduced at analyst day in June 2015?

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Mike Lyon, Pattern Energy Group Inc - CFO [37]

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It's a different exercise. But the components of it probably don't change that much from the walk that I gave you. We still need to include the impact of both Armow and Broadview as being additive. I'm not going to walk you through all the numbers. But just conceptually, at Armow and Broadview, because they weren't included in those run rate figures. And take into consideration the changes in the capital structure that we put in place since that point in time. Which, you'll recall that investor day was actually before a subsequent capital raise, a mix of both equity and convertible note offering. And then of course, the senior note offering that we just completed in January last month.

We always have lots of other smaller items that tend to move up and down a little bit. But the big factors I think have been, and are going to continue to be asset acquisitions and changes in capital structure.

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Andrew Hughes, Credit Suisse - Analyst [38]

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Is there anything in the portfolio as it stood in June 2015 that's not quite at the level to get you to the $156 million for that portion of the portfolio too? Or is that mostly in your view there?

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Mike Lyon, Pattern Energy Group Inc - CFO [39]

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Yes think it's mostly there, Andrew. We've definitely seen some, obviously some changes in wind performance. Certainly last year. This year we expect that to be more normalized subject to normal short-term fluctuations that we will undoubtedly see.

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Mike Garland, Pattern Energy Group Inc - President and CEO [40]

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The big changes to the $156 million is really the corporate finance costs that was not included in the $156 million run rate number. The convertible and the bond interest.

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Mike Lyon, Pattern Energy Group Inc - CFO [41]

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I would point to one other item. Which is we have continued to see weakness in merchant pricing. As you know, merchant pricing's not a huge factor for us. Only about 10% of our production is subject to merchant prices. But it has continued to be pretty soft in the markets where we have some merchant sales. And we have seen some emergence of basis differential that we had not really seen at all up until this past year. And we are expecting that to temporarily continue into 2017. In ERCOT especially where we're seeing this effect until further upgrades get made to the transmission system. But we think that's a temporary phenomenon. And while it is a measurable impact it's not one that changes our (multiple speakers).

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Mike Garland, Pattern Energy Group Inc - President and CEO [42]

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it is short-term and included in our numbers.

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Andrew Hughes, Credit Suisse - Analyst [43]

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Just quickly on the cost front. You mentioned the $10,000 to $20,000 per turbine cost savings that we've heard about in the past totaling $15 million. Is that primarily project operating expenses or does that include some of the G&A cost down (multiple speakers)

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Mike Garland, Pattern Energy Group Inc - President and CEO [44]

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That's just the O&M costs. So for example, I mentioned the long-term service agreements we've renegotiated are within that range. And if you look at some of our sites as we move to self perform we would expect the operating costs to be reduced to about that as well. And so it does not include additional measures that we can take in the O&M side of things as well as G&A improvements.

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Andrew Hughes, Credit Suisse - Analyst [45]

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Is the timeline for that savings in aggregate, is that a three-year thing or does that come do you think sooner --?

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Mike Garland, Pattern Energy Group Inc - President and CEO [46]

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It's probably increased. There's nothing this year, unfortunately. It starts -- for example I mentioned we're taking over five sites to do self perform. We won't see any benefit of that. But we are ramping up and hiring personnel to achieve self performance on those five sites. We'll start seeing benefits in 2018 and 2019 and 2020. As we convert over various projects each year, we will be adding some overheads to gear up for additional sites in 2018 and 2019. And then we will see the benefits of that long-term after we do that.

If you think about it, it probably takes three or four years to convert all of our projects over and run off our existing contracts. So, for example new build projects have two to three year warranty agreements already in place. And so as those roll off, we will be taking on greater responsibility for the O&M and driving down the cost.

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Mike Lyon, Pattern Energy Group Inc - CFO [47]

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I think for different reason the G&A benefits that we expect to come over time are also probably more likely realized in 2018 going forward. We know that we've got the material weakness to continue to deal with. And that will be a factor in our overhead that we incur this year. But as a benefit coming from that, we are identifying opportunities to improve processes as we go through the remediation steps. And we think that will have meaningful benefits that we think will start in 2018. We will quantify that better for you probably next year at about this time but that is our expectation.

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Mike Garland, Pattern Energy Group Inc - President and CEO [48]

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Andrew, we're really excited about it actually. Because it comes at a time when we've now stabilized and can grow. And we have a very strong pipeline. So we built [up] and will be announcing a bunch of stuff coming up in the next few quarters and at investor day about our growth. And paralleling that, then is improving our cost structure. And that, like I mentioned, we are even looking at ways of lowering our build cost through taking on some additional responsibilities on the construction side. We have hired a guy who headed up Mortenson's construction efforts, Kevin Deters. And he drove their cost savings programs in solar and wind and transmission. And so it's really an across-the-board opportunity to improve our margins going forward over the next several years.

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Operator [49]

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Rupert Merer, National Bank.

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Rupert Merer, National Bank - Analyst [50]

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Good morning, everyone.

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Mike Garland, Pattern Energy Group Inc - President and CEO [51]

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Good morning.

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Rupert Merer, National Bank - Analyst [52]

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Mike G, you talk a little that financing options available to PEGI already. This year if the share price does not respond well, would you consider recycling capital or asset sales to invest in other dropdowns or potentially [end] development assets?

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Mike Garland, Pattern Energy Group Inc - President and CEO [53]

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Yes.

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Rupert Merer, National Bank - Analyst [54]

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What does the market look like for selling operating assets today? What price you think you can realize on cost of equity?

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Mike Garland, Pattern Energy Group Inc - President and CEO [55]

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It's still a very good market driven primarily by some of pension funds and lifecos and to some extent some of the utilities. But it's really more some of the financial houses that really are driving some competitive pricing. I don't think we should talk specifically about how the pricing would go. But let's just say that the returns tend to be 100, 200 basis below ours. And in some cases maybe even more, particularly on the solar side. But in the wind side I think we could see 100, 200 basis points improvement over some of the returns in competitive bidding arrangements that we would see an uplift on the sell down of an asset.

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Rupert Merer, National Bank - Analyst [56]

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(Multiple speakers) Okay great. You also talked about the policy impacts of the new federal government or lack of impact that you see. I don't think you talked about tax equity though. Can you give us an update on how the market for tax equity is evolving? And what impacts you might see with potential tax cuts?

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Mike Garland, Pattern Energy Group Inc - President and CEO [57]

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Yes I think there's two elements. One is, does it really affect our projects? First of all, it doesn't affect any of our existing projects other than actually improving the returns. So it's really, what is the availability of tax equity for new projects. And there are some benefits right? If you look at, while they're talking about lowering the tax rate, they're also talking about immediate write-offs for example and other things. And so the consequence of that is, we believe that the larger players are going to be fine and they're going to be very active and robust. Some of the smaller marginal players that don't have a strong [at tax] appetite, they may get marginalized out and other players may step up and come in to the market.

If you think about it, the PTCs for example aren't affected by tax rates. So you're only talking about the depreciation and interest deductions. And like I said, if a company has a little bit of tax appetite, and the tax rates go down, then they may fall out. But some of the bigger players, they have so much tax appetite candidly and we're only tapping a small part of it, it won't affect them.

Secondly, there will be some folks who are in AMT that no longer will be in AMT. And so they will be taxpayers as well. And so, we're actually fairly optimistic. We think the market may tighten up. And if it does tighten up, that will put us in an advantage that us and some of the other larger players and well-known players will be more likely to get that the tax equity would be investing with us, rather than some of the smaller players that they currently invest with. They will try to work with higher quality parties like ourselves, than smaller companies that may not be in the business long term. So, they're not sure who their partner will be over the long term. In the short run, we don't think it's a big problem. And in fact some of the companies that use tax [appetite] now may become taxable themselves. And pull out of the marketplace opening up more available capacity.

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Rupert Merer, National Bank - Analyst [58]

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All right. I will leave it there, thank you.

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Operator [59]

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Frederic Bastien, Raymond James.

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Frederic Bastien, Raymond James - Analyst [60]

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Hello, good morning. The Ontario government is considering lowering hydro rates in some shape or form down the road. Is there any potential impact on your asset base in the province? And does it lower your growth ambitions in the province?

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Mike Garland, Pattern Energy Group Inc - President and CEO [61]

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No not at all. All of our contracts in Canada are executory contracts that can't be changed. They don't sell as spot markets. They are fully contracted. And our development activities for the next three years are all fully contracted.

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Frederic Bastien, Raymond James - Analyst [62]

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Okay. Good to hear. Question on the dividend. Is any thought been given to increasing the dividend only once annually rather than doing it on a quarterly basis. I don't know how much time that topic consumes at the Board level but wouldn't it be preferable to just address it once and get it over with?

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Mike Lyon, Pattern Energy Group Inc - CFO [63]

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It might be administratively easier. We have gotten comfortable I think with the cadence of dividend increase. And it is actually may be a bit of a source of pride even that we're able to continue to regularly grow the dividend. That is something we occasionally talk about, Frederic. I can't commit to what the Board will do in the future but it has been on our mind.

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Mike Garland, Pattern Energy Group Inc - President and CEO [64]

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Why do you like it?

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Mike Lyon, Pattern Energy Group Inc - CFO [65]

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Just turn it around, Mike.

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Frederic Bastien, Raymond James - Analyst [66]

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I prefer it once annually and then people can reset expectations. You've gone from 2% to 3% to 1%. So people will always ask the question where is it going next? Rather than having that question only asked once annually.

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Mike Lyon, Pattern Energy Group Inc - CFO [67]

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Yes. Okay. It's good feedback, thank you.

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Frederic Bastien, Raymond James - Analyst [68]

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You're welcome that's all I have.

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Operator [69]

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Colin Rusch, Oppenheimer.

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Shivani Sood, Oppenheimer & Co. - Analyst [70]

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Hello this is Shivani Sood on for Colin Rusch. Can you give us any updates on the opportunities to retrofit wind farms with battery systems? As you're going through those changes?

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Mike Garland, Pattern Energy Group Inc - President and CEO [71]

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If you're thinking about just adding batteries to some of our operating sites, we could do that relatively easily. Under our existing contracts, we probably couldn't add them and increase the capacity of the plant. But there may be interconnection savings and other things that we could do. And provide utilities and our off takers some ancillary services by providing battery and storage capacity. But right now to be honest with you, people aren't willing to pay much for that. And so until the utilities and the public utility commissions are little bit more willing to pay good returns on investing in batteries, that we don't anticipate doing much of that at our existing sites.

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Shivani Sood, Oppenheimer & Co. - Analyst [72]

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Great. And just one more for us. You had mentioned that 20% long-term solar target. Is there anything changing in the market for solar systems that you think could affect that target?

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Mike Garland, Pattern Energy Group Inc - President and CEO [73]

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The cost of solar keeps dropping. That the obvious thing. The flip side of it is that the experience we are having in California with what's known as the duck curve where a lot of solar got built, and now we're seeing the peak being on the shoulders as opposed to the middle of the day when all the air-conditionings are on. I think you are going to see that eventually in places like Texas and other markets. And so I think you'll see a short-term real expansion of solar. And then there's going to have to be a balancing again with just like California's having to do, of saying we can't take too much more solar without storage and wind complementing or gas complementing the activities around the solar area.

So I think solar's inevitably going to keep coming down. How much further is anybody guess. But I think they still have efficiency improvements and cost reductions that can be realized such that we'll see a continued expansion of that market in many areas of the country and even out of country that will keep it strong for at least the foreseeable future.

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Shivani Sood, Oppenheimer & Co. - Analyst [74]

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Great. Think so much.

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Operator [75]

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Jeremy Rosenfield, Industrial Alliance.

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Jeremy Rosenfield, Industrial Alliance - Analyst [76]

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Thanks. I'll start with a cleanup question for the Broadview acquisition. Was the cost estimate changed at all? I think previously you had highlighted about $269 million?

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Mike Lyon, Pattern Energy Group Inc - CFO [77]

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No we haven't made any adjustments to that.

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Jeremy Rosenfield, Industrial Alliance - Analyst [78]

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Okay. Perfect. And maybe just from a higher level perspective. As you look to expand the ROFO pipeline, can you provide any comments on where you see Pattern Energy and Pattern Development getting long-term PPAs and off take agreements? Do you think you're going to see more from utility companies from corporates and -- just some color on that would be useful?

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Mike Garland, Pattern Energy Group Inc - President and CEO [79]

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Jeremy, you're taking away our story coming up at the investor day. (Laughter)

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Jeremy Rosenfield, Industrial Alliance - Analyst [80]

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I'm sorry. Keep it brief then.

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Mike Garland, Pattern Energy Group Inc - President and CEO [81]

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We see US growing, as I mentioned. Even under this administration for us. And so we'll be announcing some things in that area. We'll be staying at in other markets we're in, such as Japan. Yes, there is going to be opportunities for the C&I market as well in the coming years or two. We still believe that is a robust market. It's still about 50% or more for the wind market off takes are being done by the C&I, the commercial and industrial customers. And we see that continuing and we're having discussions in other markets as well. All the way from Japan, Mexico, US around those type of contracts. So we will tell you more at the investor day meeting.

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Jeremy Rosenfield, Industrial Alliance - Analyst [82]

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Okay I will wait for investor day, thanks.

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Mike Lyon, Pattern Energy Group Inc - CFO [83]

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Thank you.

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Operator [84]

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Antoine Aurimond, UBS.

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Antoine Aurimond, UBS - Analyst [85]

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Hey guys, thank you for taking my call. First question is, I apologize if I am missing anything. On the last presentation in September, you laid out a 5000 megawatt target by 2019. It seemed like you pushed that back to 2020, is that correct?

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Mike Garland, Pattern Energy Group Inc - President and CEO [86]

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Yes. No, it sounds like that. We just for Pattern 2020, the vision was really, I think what we said for investor day on the 5 gigawatts by 2019 that we'd be in construction or in operation with 5 gigawatts. And all the nuance that we've added for the Pattern 2020 vision is that we will have 5 gigawatts of operation in 2020. So it's a subtle difference. It's essentially the same. We anticipate exceeding the 5 gigawatts. But there's no change in our views that we will be able to develop that many megawatts by the end of 2019.

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Antoine Aurimond, UBS - Analyst [87]

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Okay, got it.

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Mike Garland, Pattern Energy Group Inc - President and CEO [88]

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We just like the sound of 2020.

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Antoine Aurimond, UBS - Analyst [89]

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And just last one. Can you share your views on the Texas market before contracted generation and merchant generation? Particularly when it comes to the expiration of the contract on Gulfland?

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Mike Garland, Pattern Energy Group Inc - President and CEO [90]

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Yes I mean the Gulfland is pretty easy. We pay down debt and equity, the tax equity and the debt on that transaction. So it's an unleveraged cash flow currently. And we anticipate, when it comes off, there will be chance to re-contract it, if not before it, when it comes off the hedge. Remember that project is all about 55% contracted for its generation. So, almost half of it already is at spot market. So we would be transitioning even in worse case from half to full spot market. We think will be will to re-contract it.

It's in a market where it's a desirable product, in that it produces electricity during the more valuable periods of time of the day. Which is the afternoon, when the offshore winds occur. So our intention is to re-contract it. It will be at a lower price than what the original hedge was done at. But that's in our plan already. We anticipated that. And we think it's a great asset that we'll be able to contract, but at a lower rate.

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Antoine Aurimond, UBS - Analyst [91]

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Okay, thank you so much.

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Operator [92]

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That is all the time we have for questions today. I will now turn the call over to Mike Garland for his closing thoughts.

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Mike Garland, Pattern Energy Group Inc - President and CEO [93]

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Well thank you, everyone, for your time and attention to us and interest. We are absolutely very excited about where this market is going. I know that there's been a lot of talk about issues with everything from administration to interest rates. Our experience as a management team has been, change is typically good for us. We feel we are more responsive, that we're not afraid of change and being able to modify how we approach our business to react to the market changes. We've done that successfully for several decades now.

We think it's a very exciting time. And the combination of our outlook for growth, the high-quality performance of our projects, and lately now our focusing on internal improvements is really, I think going to return shareholders real value in the coming years. So we look forward to your questions, and meeting with you in the coming months. And thank you again for your interest in our Company and your attention today. Thank you very much.

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Operator [94]

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