Attached files
| file | filename |
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| EX-99.1 - EXHIBIT 99.1 - Pattern Energy Group Inc. | exhibit991.htm |
| 8-K - 8-K - Pattern Energy Group Inc. | redwhitepaper8kapril2017.htm |
Investing in Development
Understanding the Risk-Reward Profile | 2017
PATTERN ENERGY GROUP INC.
PAGE
Renewable energy is an essential
part of today’s energy mix and
is poised to become the major
source of new energy supply in
this century. Global investment
in renewable generation reached
$265 billion in 2015, nearly double
the $130 billion investment in new
fossil fuel generation1.
Pattern Energy Group Inc.
(“Pattern Energy” or the
“Company”) is committed to
capturing a significant share of the
growth in the renewable market
and has set a goal, as part of its
Pattern 2020 vision, to double
its portfolio to more than five
gigawatts (“GW”) by 2020. The
primary method of this growth
will be through acquisitions from
Pattern Development2.
Executive Summary
1 Source: Bloomberg New Energy Finance & Frankfurt School-UNEP, “Global Trends in Renewable Energy Investment 2016.”
2 In this White Paper, Pattern Energy Group LP is referred to as “Pattern Development” for the period and events prior to December
2016, and Pattern Energy Group LP (“Pattern Development 1.0”) and Pattern Energy Group 2 LP (“Pattern Development 2.0”) are
together referred to as “Pattern Development” for the period post December 2016.
In addition to acquiring high-
quality assets from Pattern
Development, Pattern Energy also
believes it can potentially improve
shareholder returns through
a modest initial investment
in Pattern Development 2.0,
securing a captive interest in
development assets at a materially
lower cost than buying operating
assets from third parties. A
modest investment of under
$100 million would be one that
is appropriate for both Pattern
Energy’s size and retained cash
flow and allows Pattern Energy
to maintain its dividend, low risk
profile and stable cash flows.
EXECUTIVE SUMMARY
1
PATTERN ENERGY GROUP INC.
PAGE
Primary reasons for considering an investment
in development
A Proven Platform
Since 2009, Pattern Development has built a reputation as one of the
top developers in the renewable industry, successfully developing
more than four GW of high-quality operating wind farms and delivering
private equity returns to its investors. The management team has
successfully completed more than 40 projects, raised more than $8
billion in capital from more than 40 institutions and purchased more
than $3.5 billion of wind turbines from top manufacturers.
A Strong Investment Thesis
A disciplined, experienced development business offers one of the best
risk-reward opportunities in the renewable energy value chain. The key
drivers that support the thesis for investing in development are:
» Strong returns – Targeted total pre-tax returns at the development
business level of more than 15% and a multiple of invested capital
(“MOIC”) of approximately 2.0x;
» Yield compression - Significant de-risking of projects through
long-term offtake contracts and other arrangements so that, during
the construction phase, projects can be sold at a significant yield
compression. For example, building assets at a 6-8x multiple of
cash available for distribution (“CAFD”) and selling the assets at a
10-12x multiple; and
» Managed capital – Managing capital in a disciplined manner,
including 1) selecting good opportunities to invest in, 2) minimizing
the capital at risk during the early development stages, and 3)
minimizing the duration of the relatively higher capital outlays that
are required once a project has achieved an advanced stage.
EXECUTIVE SUMMARY
2
PATTERN ENERGY GROUP INC.
PAGE
Given Pattern Energy’s interest in potentially investing in the
development business, the Company has prepared this White Paper
as an introduction for investors not familiar with renewable power
development. The White Paper addresses two core subjects and
includes a number of actual project examples.
1. The Business Model and Investment Thesis
2. Renewable Energy Development Phases – a description of the
various phases of development and what happens in each one
This White Paper defines the renewable energy development
business as the process of advancing renewable energy projects
from identifying a “greenfield” site through the start of construction.
Development encompasses all the activities within this time frame,
including permitting, real estate acquisition, resource assessment,
interconnection and transmission, community and political engagement,
power marketing, financing and equipment procurement.
EXECUTIVE SUMMARY
3
Pattern Development is active in wind, solar and transmission
development in the United States (“U.S.”), Canada, Mexico, Chile
and Japan, and each type of power development is different (e.g.
solar tends to have lower barriers to entry compared to wind, while
transmission tends to have comparatively higher barriers to entry). In
order to more succinctly present the development process, this White
Paper focuses solely on wind energy development in North America.
PATTERN ENERGY GROUP INC.
PAGE
Development Business Model
A Strong Investment Thesis
DEVELOPMENT BUSINESS MODEL
When done right, renewable energy development offers one of the
most compelling risk-reward trade-offs in the energy value chain.
However, not all companies are able to consistently create the right mix
of capital access, disciplined capital management, and development
expertise to create value from a rapidly evolving industry. For those
with the right mix, the development business model offers strong
returns.
At the core of this model is to “de-risk” projects. This is done through
effective contracting, engineering, and operational management,
so that a fully developed project can be constructed and put into
operation with a significantly higher fair market value than what it cost
to fully develop the project. Or, in other words, it could be “sold down”
at a significant profit.
The key elements to achieving this goal which are discussed below are:
» Returns and yield compression
» Capital management
4
PATTERN ENERGY GROUP INC.
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DEVELOPMENT BUSINESS MODEL
Construction03
Developer
Equity
Profits &
Distribution
Origination & Early
Development
01
Development
Overhead
Early Stage
Capital
Recycled/
Repaid Capital
Pre-construction
& Financing
02
Pre-Finance
CapEx
Sale of
Project
04
A developer makes money from
capturing the delta between the
cost to develop projects and the
fair market value of those projects.
This includes the costs associated
with the overhead expenses
for the business (people and
buildings), taxes and the “dry-
hole” costs associated with
projects that do not proceed.
This value differential is referred
to as “yield compression” or
“multiple expansion.” It is
derived from the fact that a
final owner’s required return
for a long-term investment in
a fully developed, de-risked
project is much lower (e.g. 7-9%
on an after-tax basis) than what is
embedded in the returns required
to develop and construct the
facility (e.g. 10-15%). It is worth
noting that the returns and yield
compression of a project can vary
widely depending on such factors
as the level of risk removed from a
de-risked project and the market
conditions at the time of sale;
FIGURE
1 Equity Investment
Capital Recycling
however, the numbers discussed
in this paper are indicative of
what Pattern Development has
experienced.
Yield compression can also be
thought of as the difference
between the cash flow (or CAFD)
multiple on a build-period equity
investment relative to that of a
term-period equity investment.
The build-period equity is
typically a 6-8x multiple of
CAFD on an approximate basis,
although projects can range as
low as 3x CAFD and as high as
9x CAFD, compared to a 10-12x
multiple of CAFD for the term-
period equity investment. The
Example Project described on
page 23, describes this math in
more detail.
The expected investment
returns for a well-managed
development business are in
the range of 15% or higher
targeted pre-tax returns at
the corporate level and pre-
tax approximately 2.0x MOIC.
Returns and
Yield Compression
5
PATTERN ENERGY GROUP INC.
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DEVELOPMENT BUSINESS MODEL
For example, an investment of
$10 million in a development
business that obtains a 2.0x MOIC
would generate $20 million in
net receipts before tax. If it took
four years from the date of that
$10 million investment until the
capital and profits were returned,
it would generate approximately
19% pre-tax return on investment.
The Example Project section
describes how this typically works
for a representative project. It
outlines that for a 100 megawatt
(“MW”) project, the developer
invests approximately $16 million
in “pre-construction” capital.
Upon de-risking the project by
closing financing and starting
construction, and assuming
that the developer holds the
investment during construction,
the investment level may rise
to $40 million of construction
equity (i.e., the equity portion
of the project’s build cost), and
produce a profit upon sale of
approximately $20 million after
return of capital. A developer
may be able to manage down the
construction equity to one-half
the project-level investment, or
approximately $20 million in this
case, via the use of non-recourse
“holdco” or “back-leverage”
financing, while still achieving
approximately the same amount
of profit. Similarly, if the developer
can sell the project upon the start
of construction, the $20 million
profit (subject to a small time-
value-of-money discount) might
be realized while having only
invested the $16 million of pre-
construction capital.
Accounting implications
A minority investor in a
development business would
typically account for its
interest in that business as an
unconsolidated investment
using the equity method of
accounting. It would initially
reflect the investment at cost
in the balance sheet on the
line item “unconsolidated
investments.” The investment
would increase or decrease
by additional contributions or
distributions, as well as by its
proportional interest in the
earnings (losses). In addition, the
proportional recognition of the
interest in earnings (losses) would
be reflected in the statement
of operations in the line item
“earnings of unconsolidated
investments.”
Under normal circumstances,
the holder of such an interest
would recognize CAFD from
the distributions received from
the development business, and
it would reduce its adjusted
earnings before interest, tax,
depreciation and amortization.
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PATTERN ENERGY GROUP INC.
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DEVELOPMENT BUSINESS MODEL
Capital Management
At the heart of development
is the business of capital and
risk management. At the project
level, the developer allocates
capital based on risk limits defined
by project-specific factors, such
as environmental, transmission
and land issues. At the corporate
level, the developer manages
a large portfolio of early stage,
higher-risk, low-cost opportunities
(referred to as the pipeline) and a
smaller number of late stage, high
value, lower-risk projects (referred
to as advanced stage projects).
Successful development is thus
defined by the ability of the
developer to prudently allocate
resources (capital and human) to
projects where an execution path
to completion is clear and well
defined.
The most critical element
to achieving a profitable
development business is the
ability to manage capital,
which includes choosing good
opportunities to invest in,
minimizing the capital at risk
during the early development
stages, and minimizing the
duration of the relatively higher
capital outlays required once a
project has achieved an advanced
stage. The other factors that
contribute to disciplined capital
management include: limiting
the number of “dry holes,”
diversification of the development
portfolio and the recycling of
capital.
As described below in the
Renewable Energy Development
Phases section, early development
100%
50%
Risk
Origination &
Early Development
Pre-construction
& Financing Construction Sale
$ Capital Outlay
0%
Commence
Land/Met
Commence
Env./Planning
Execute PPA &
Interconnection
Commence
Construction
Commence
Operations
FIGURE
2
Risk Management
is primarily focused on securing
land control, data collection,
community engagement,
preliminary permitting, and
offtake analysis. During the period
when the project reaches mid-
stage development and prior to
executing an offtake agreement,
discipline and experience is
critical. A good developer will do
enough permitting, engineering
cost estimating and other work
to be able to make a sound
judgment on the probability of
completing development with
7
PATTERN ENERGY GROUP INC.
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DEVELOPMENT BUSINESS MODEL
limited capital outlays. Less
successful developers can often
get caught up in their optimism
for a particular project, which can
result in less disciplined spending
during this period, resulting in
higher risk and lower returns.
As shown in Figure 2, the green
line indicates low spending on
a project prior to a committed
power purchase agreement
(“PPA”), then significant capital
is usually required to secure an
appropriately structured PPA
and interconnection to the grid.
At this point, the probability of
completing the project for a good
developer is high. Since there is
significant capital at risk, the role
of the developer is to complete
the rest of the development in
as short a time as possible. This
reduces the duration of capital
used and improves returns.
Diversification
Successful developers manage
the risk associated with individual
projects, as well as risk across
the portfolio as a whole. Large
developers allocate capital
across a broad set of diverse
development projects that have
different characteristics
(e.g., located in different
geographies, contracted
with different offtakers and
possessing different transmission
characteristics). This level of
diversification, as well as the
economies of scale that larger
developers can take advantage
of, provide another mechanism
to manage risk and improve yield
compression across a portfolio of
uncorrelated projects.
Use of debt
Pattern Energy’s management
believes a development
business should be funded with
equity and that debt should
only be utilized in relation to
developed assets. For example,
once a development project
has progressed to the point
of construction financing, the
project risk has been substantially
reduced and the project is ready
to obtain non-recourse debt.
Equity “back-leverage”
financings may be attractive
to the developer because
such financings can usually be
obtained at rates well below the
marginal cost of funds of the
developer. Under this structure,
the development business is able
to minimize the capital it allocates
to the project in a cost-effective
manner. This in turn increases
the MOIC of, and returns on,
the development business. The
Example Project described on
page 23 assumes construction
equity is approximately $40
million. The developer uses “back-
leverage” to finance much of the
construction equity – a good rule
of thumb is 50% of construction
equity (or $20 million in the
example). Additionally, a project
could be sold at this stage to free
up additional capital to re-invest
in the business.
Self-funded
Capital can either be injected into
the development business up-
front or over time, but depending
on the strategy and portfolio,
a well-managed development
business could start to return
capital to its owners within two
to three years and potentially
become self-funding, thereby
achieving a steady-state business,
within four to five years of its
formation.
Failed projects
For well-managed development
businesses, write-offs associated
with unsuccessful projects are
modest (e.g. less than 10% of
equity capital supporting the busi-
ness) and typically can be accom-
modated within the expectations
for overall return, capital recycling
and payback. As a result, once
a development business is fully
capitalized, new capital injections
may not be required, subject to
dividend distribution policies.
8
PATTERN ENERGY GROUP INC.
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DEVELOPMENT BUSINESS MODEL
During the pre-construction and financing phase, the developer seeks construction financing,
usually on a non-recourse basis. Under “non-recourse” project financings, lenders provide
funds based solely on the value of the project’s assets and projected future cash flows, with
limited or no support from the owner beyond its equity funding commitment. The high standard
to meet for securing non-recourse funding requires that final permits are obtained and not
Raising Non-Recourse Financing
subject to appeal; land rights are finalized; interconnection and transmission rights are secured;
construction-related agreements are executed; operating agreements are finalized; and revenue
arrangements for the sale of energy and renewable credits (if applicable) are entered into with
offtakers. This type of financing will generally support 70-90% of the project construction cost.
The balance of funding is provided by the project sponsor or the developer as equity in the
project and typically is funded at the beginning of construction.
At the same time, the construction lenders require the developer to secure critical post-
construction capital funding for the project. This means long-term debt (usually a term-out of the
construction debt), or tax equity funding for a U.S. project using production tax credits (“PTCs”),
is lined up at the close of construction financing. For the developer, at the point of the close of
construction financing, both the construction and term equity required are known and defined.
The end of pre-construction is often the point of maximum business exposure on a project (see
Figure 2), but not necessarily the point of maximum capital at risk, and completion of the project
should also be at the lowest risk. As a result, capital is managed to specific milestones to ensure
capital exposure and risks line up. The costs typically incurred at this stage include:
» Interconnection deposits to reserve firm transmission capacity;
» PPA security deposits to secure the offtake agreement;
» Equipment supply orders to reserve manufacturing space or lock in price;
» Engineering or pre-construction work to hold schedule; and
» Legal and other soft costs associated with securing the financing.
The developer will also derive the final bank “underwriting” set of financial forecasts that is the
basis for the large investment required to commence construction. The objective is generally to
maximize the project’s net present value (“NPV”) while keeping capital at risk low. Successfully
bringing a project to the point of closing non-recourse financing is an achievement that creates
significant value as those projects are highly attractive to investors with a desire for low-risk,
financially secure renewable energy facilities.
9
PATTERN ENERGY GROUP INC.
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Successful renewable energy development requires a highly skilled
and experienced team capable of managing each of the development
phases. This requires strong origination, negotiation, political and
community engagement, permitting, scientific and strategic analysis
capabilities, together with a rigorous focus on development risk
management. Developers must also establish and maintain effective
relationships with key contractors, financial institutions and offtake
counterparties. These skills are essential to cultivating a broad portfolio
of development projects.
Renewable Energy Development Phases
DEVELOPMENT PHASES
10
Blade Signing Event in Curry County - Broadview Wind Project
PATTERN ENERGY GROUP INC.
PAGE
Phase 1 Origination and
Early Development
Identify preferred sites control
Secure real estate rights
Resource assessment and measurement
Interconnection and transmission evaluation
Site design
Social, political and regulatory assessment
Permitting and environmental assessment
Construction and operations cost analysis
Procure offtake and revenue arrangement
Economic analysis
Transition to
Advanced Stage
Key measurements:
Ì Known and defined primary risk of completion
Ì Elevated probability of success
Ì Meets identified ROFO list consideration
requirements
Phase 2 Pre-Construction
and Financing
Finalize early development phase work streams
Secure permits, leases and rights of way
Select vendors, manufacturer and contractors
Optimize site and equipment
Finalize major construction contracts negotiations
Complete detail engineering and site design
Prepare soils testing and surveys
Complete financial model
Secure offtake and revenue arrangement
Close construction financing
Execute interconnection agreement
Phase 3 Construction Execute all major construction contracts
Construct balance of plant
Install turbines
Connect to grid
Achieve “Commercial Operation Date”
Drop Down Process 3rd party fairness opinion and legal review
Independent board approval
Phase 4 Sale Sale of facility
Phase 5 Operations Generate electricity into the grid
Power sales
Manage operations and maintenance of assets
Ongoing analysis and optimization
Project Phases: Origination to Operation
Typical renewable energy project development phases
DEVELOPMENT PHASES
11
PATTERN ENERGY GROUP INC.
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DEVELOPMENT PHASES
Origination and
Early Development
During the origination and early
development stage, projects
are screened for the strength
of renewable energy resources
(wind speeds in this case); social,
political, regulatory and market
risks; availability in terms of
the requisite interconnection
transmission, land, permits
and revenue agreements, and
constructability. Projects that pass
the screening process are either
acquired or self-sourced, and
development begins.
Each project has a unique set
of attributes which drive its
development. The key success
factor for the development of one
project may be securing a permit
(e.g. building on public land). In
another project, securing permits
may be relatively straightforward
(e.g. when building on private
land in low land use regulation
states), but resolving other issues,
such as access to transmission,
may be the key success factor.
In every project, however,
development and origination will
PHASE 1
require the developer to deal with
the same basic set of scientific
analysis, contractual rights and
permits. A description of each is
set out below.
Real estate control
Site control that reflects the
long-term nature of renewable
energy projects is obtained
either through acquisition of the
underlying real estate or, more
often, a lease or right of use of the
property. The developer typically
secures an option to receive the
necessary rights with minimal
payments made during the
development period prior to the
commencement of construction.
Resource assessment
Information is collected from
on-site meteorological towers
(“met masts”), light detection
and ranging sensors (“LIDARs”)
and sonic detection and
ranging sensors (“SODARS”),
as well as from other statistically
significant macro or long-term
off-site reference sources, such
as airports or weather stations.
This information is used to refine
estimates of site productivity
and to identify potential turbine
locations in order to optimize
production. This assessment
requires strong meteorological
expertise to undertake analyses
of on-site and reference weather
data, site suitability, physical
structures, power conversion of
the technology and the impact of
the equipment on itself (i.e. how
upstream turbines can impact
downstream production). These
analyses are an essential tool for
turbine selection, site suitability
and forecasting. Data gathering
periods range from one to five
years or more depending on the
complexity of the site and quality
of the data. It is a sophisticated
12
Less
Energetic
More
Energetic
Wind Resource Map - Meikle Wind
Wind Flow
PATTERN ENERGY GROUP INC.
PAGE
DEVELOPMENT PHASES
process that has evolved to
include the use of multiple models
that estimate the long-term
performance of different turbine
technologies on a specific site. For
example, in the past, an average
long-term (20+ years) expected
wind speed would be estimated
and the single best turbine
for that wind speed would be
selected. Today, meteorologists
can model each individual tower
location and make adjustments
for the specific turbine to be used,
including different blade lengths
or hub heights. These scientists
can model the interaction of each
turbine’s location and its effect on
other turbines on the site.
Social, political and regulatory
assessment
A project becomes a long-term
part of the community where it
is located, and each community
has its own unique concerns and
opportunities for helping the
community. In the early stages
of development, it is important
to identify any policies at the
state, provincial or local level
that could be relevant to the
project and how those policies
may change over time. It is
equally important to identify key
stakeholders, ranging from local
and state permitting authorities
and elected officials to business
owners and interested citizens,
and determine what they care
about and how best to engage
with them. This requires direct and
indirect forms of communication,
such as creating project materials
and a website, media briefings,
town hall meetings, and one-
on-one meetings. Often specific
community benefits or design
features are incorporated into the
project. Working respectfully and
transparently with all stakeholders
is not only the right thing to do
but is also good business practice.
Interconnection evaluation
Developers undertake
comprehensive analyses of the
requirements to interconnect
a project to the transmission
system, and assuming the analyses
have a positive outcome, apply
for interconnection. Numerous
studies are required to confirm
the ability to safely inject power
into the system and to understand
the impact of the project on the
transmission system.
Developers are required to
identify if the facilities and system
require upgrades, as well as the
projected cost and schedule for
the construction of those facilities
and upgrades. Developers must
also assess the potential for
congestion or curtailment on
the transmission system that
could limit generation or create
economic burdens on transferring
power across the system. Working
within the constraints of utility
regulations, the developer often
works closely with the relevant
utility on the impact assessment of
the power facility.
Permitting and environmental
assessment
While there are numerous types
of federal, state and local permits
with varying requirements, many
of the major permits associated
with renewable energy projects
require rigorous environmental
impact assessments. Permit
preparation typically involves
siting and environmental studies,
stakeholder engagement
processes, and in many cases,
management, mitigation and
monitoring plans. Threatened
and endangered species, cultural
resources, and visual impacts
are carefully assessed and
mitigation plans are developed
in coordination with the relevant
stakeholders.
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PATTERN ENERGY GROUP INC.
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PERMITTING CASE STUDY
Construction and operations cost
analysis
Estimated costs to build and
operate a project are determined
with the selected contractors,
internal technical resources and
engineers. Large developers
like Pattern Development that
possess detailed knowledge of
construction and operations have
an advantage in understanding
current and projected pricing
and the potential for specific
features to negatively or positively
impact pricing. Ever-evolving
approaches to construction and
site management can lower time
on site and improve delivery
logistics. Experienced developers
can manage the construction
process to lower build costs which
can either be passed on as lower
power prices or increased profit to
the sponsor.
Procure offtake & revenue
agreements
Obtaining an offtake or other
revenue agreement at a specified
price and location is critical to
building profitable and low-
risk renewable energy projects.
1 Source: American Wind Energy Association (“AWEA”), 2015 and 2016 Annual Market Reports.
Offtake agreements can vary
widely, but renewable energy
projects usually have long-
term contracts that range from
10-25 years with creditworthy
offtakers. Given the capital
intensive nature of an asset, a
significant portion of the revenue
is typically contracted on a long-
term basis to allow for longer
financing periods. Contracts
are obtained by responding
to requests for proposals
(“RFPs”) or conducting bilateral
negotiations with potential
power buyers or power traders.
These counterparties typically
consist of utility, commercial,
industrial and financial enterprises.
Developers also analyze the
merchant markets for potential
future pricing of any energy or
renewable energy certificates
produced by the project. In
a merchant market scenario,
developers can obtain greater
revenue certainty by contracting
with financial institutions under
physical hedges. Historically,
most power contracts were with
utilities; however, direct sales to
major corporations are playing a
larger role in the renewable power
market. In 2015 and 2016, private
enterprises, such as Amazon and
Walmart, made up 54% and 39%,
respectively, of the wind power
contracts signed in the U.S.1
Economic analysis
A critical element of a successful
development business is
determining if a project can
ultimately generate a return on
investment that is appropriate
for the risk that is assumed. A
large portion of the origination
and early development phase is
spent determining the likelihood
that a project might move
forward on terms that allow the
developer to originate a profit
from the final sale. This includes
building economic models/
underwriting cases that consider
the development, construction
and operating costs, as well
as capital charges, taxes and
other frictional costs, associated
with a project within multiple
production outcomes based on
wind performance (e.g. at P50,
P75, P90 and P99) to evaluate
whether returns are adequate for
the various capital sources.
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PATTERN ENERGY GROUP INC.
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DEVELOPMENT PHASES
Creating an Advanced
Stage Project
The core objective of the origination and early development
phase is to create a revenue proposition (a PPA or hedge) that
allows for a project to be constructed with adequate returns.
An accurate estimate of these returns takes into consideration
the real estate, resource assessment, interconnection, cost
structure and permitting compliance perspectives to deliver
a project with the best value, or one that will look much like
Pattern Energy’s operating projects.
The threshold for achieving a distinct revenue proposition can
be defined as having created an “advanced stage project,”
which would then move to the “pre-construction and financing
phase” described below. While the developer may not have
completed all aspects of the development at this point,
once a project is an advanced stage project, the primary risk
of completion relates to specific execution risk items that
are relatively well understood and defined. For instance,
this could be obtaining final permits, finalizing construction
contracts, raising financing or executing/finalizing the offtake
arrangement. While risks are always present, the probability
of success is much higher at this stage. In fact, Pattern
Development has successfully completed all the projects it
designated as advanced stage. Advanced stage projects are
also candidates for Pattern Energy’s list of identified ROFO
(“iROFO”) projects.
15
Projects in the initial origination
and early development phase are
referred to as “pipeline projects.”
From a value perspective, pipeline
projects have significant potential
for value creation, but there
are key aspects in the overall
commercial and economic viability
that make it unclear whether
individual pipeline projects will
ultimately go forward.
An experienced developer will
keep a high number of projects
in this pipeline stage, at minimal
cost. This creates the most
“option” value for the developer.
The expectation is that only a
subset of the pipeline projects
will move forward and that the
developer will write-off the
remainder at a minimal cost.
The projects that reach the stage
where there is a high degree
of confidence for successful
completion are referred to as
“Advanced Stage Projects.” This
stage typically means the project
has executed or qualifies for a
PPA from a creditworthy offtaker.
Experienced developers are able
to secure a high percentage of
pipeline projects while keeping
the development losses to a
minimum level.
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DEVELOPMENT PHASES - CASE STUDY
Project
Case Study
Broadview Energy Projects
The Broadview Energy projects were part of a development acquisition
that lacked sufficient meteorological towers for Pattern Development
to obtain the necessary confidence in the productivity of the projects.
Consequently, soon after obtaining control of the development
projects, Pattern Development added an incremental six met
masts and a remote sensing device to more accurately define the
horizontal and vertical gradient of the wind resource across the
projects. In order to further characterize the long-term wind regime,
the met masts were correlated to a long-term wind speed reference
that extended the total wind data collection period to 16 years.
Pattern Development undertook an extensive wind flow modeling
exercise (using model types including linear, computational fluid
dynamics, and weather-driven mesoscale) to map the sites’ wind
potential. The meteorological team further took advantage of the
newly installed met masts by utilizing modeling tools to create a more
comprehensive picture of the available wind resource than otherwise
available using the prior meteorological data.
By combining the modeling campaign results with new site layout
optimization tools that accounted for both energy generation and the
build costs, the meteorological team created the lowest “levelized cost
of energy” (or the lowest cost to produce the energy) while maximizing
energy generation. The tool factored costs to topographic features
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Wind Resource Data Analysis - Broadview Wind Projects
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DEVELOPMENT PHASES - CASE STUDY
as part of the calculation. The layout also underwent a quality-control
process that applied learnings from observed operational tendencies
of the layout performance of similar projects in the Pattern Energy
fleet. By applying operational data considerations during development,
Pattern Development leveraged proprietary data to build the
Broadview Energy projects better and more efficient.
The layout design process also incorporated the concept of
“overbuilding” by using additional turbines so the actual project
capacity exceeds the maximum capacity allowed to be injected into
the grid. During periods when total energy production is less than the
maximum capacity allowed to be injected into the grid, the additional
turbines included in the overbuild enable the project to generate more
energy than the project would generate with fewer turbines.
The meteorological team used a new time-series based energy-capture
technique to model the effect of the production cap on an hourly basis.
Then working with third parties to evaluate turbine performance using
data from Pattern Energy’s operational facilities, Pattern Development
ensured stakeholders such as lenders were comfortable with the
production estimates.
Project
Case Study
Meikle Wind
The Meikle Wind project, acquired by Pattern Development as an
early-stage development opportunity in 2013, demonstrates many
of the concepts described above. Immediately after acquiring the
project, Pattern Development focused on optimizing and improving its
economic viability. Utilizing its meteorological capabilities to optimize
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forecast production, Pattern Development efficiently exploited differing
terrain and wind conditions by selecting and locating different types of
turbines on the project site.
Pattern Development also worked closely with BC Hydro, the PPA
offtaker for the project, to develop a mutually acceptable arrangement,
balancing BC Hydro’s needs for cost-effective energy and maintaining
a viable project for Pattern Development. Additionally, the project’s
comparatively long-term (25-year) PPA and strong fundamentals
enabled the project to receive non-recourse project construction to
term financing with a long-term (22-year) amortization profile and a
fixed-rate swap.
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DEVELOPMENT PHASES - CASE STUDY
Natural casts of a rare type of ankylosaur
(armored dinosaur) trackway in 97 million
year-old rocks of the Dunvegan Formation.
rare dinosaur fossil tracks during
construction. The best tracks were
preserved and donated to the
nearby Tumbler Ridge Museum.
As with all wind project developments, community support played a
large role in the success of Meikle Wind. Located on Provincial Crown
Lands, the site lies within the traditional territories of Treaty 8 First
Nations. The involvement and support of First Nations throughout
development was fundamental to the project’s success. The Pattern
Development team worked closely with the nearby community of
Tumbler Ridge and affected First Nations groups to create attractive
community benefits packages reflective of Pattern Development’s
community and cultural values.
Construction of the project created over 500,000 person-hours of
employment, and a significant portion of the construction contract
value awarded went to First Nations-affiliated contractors and local
and regional contractors, providing a meaningful boost to the local
economy. Meikle Wind is now the largest operating wind project in
British Columbia, Canada.
Almost every wind project development contains surprises. One of the
more unusual surprises at the Meikle Wind project was the discovery of
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DEVELOPMENT PHASES
Once a project transitions
to the advanced stage, pre-
construction and financing
activities commence. Managing
this stage of development
involves completing activities
required to build the project
without material risk of loss
of the project and managing
schedule delays or changes to the
economic parameters established
in the revenue proposition. At
this stage, all aspects of the
origination and early development
stage work streams are finalized.
Final contracts are executed and
detailed engineering and plant
drawings are completed.
Large developers execute the
engineering, procurement and
construction work together with
Pre-Construction
& Financing
PHASE 2
1 BOP contracts relate to civil and electrical work (outside the turbines), such as roads, turbine foundations, met mast foundations,
monitoring systems, cable networks, and buildings/facilities.
experienced contractors.
The developer manages the
interface between the balance of
plant (“BOP”)1 contractors, turbine
vendor and the other contractors.
The developer typically procures
the turbines and towers directly
from the equipment vendors and
executes the construction of the
facility under fixed-priced, fixed-
schedule contracts with credible
construction contractors. Under
the terms of these contracts, it
is the construction contractors
and the vendors that bear nearly
all the risk for the completion
of construction rather than the
developer.
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DEVELOPMENT PHASES
Construction
PHASE 3
The construction phase is
characterized by the commitment
of all major contractual parties
to complete a project. All the
capital required to construct
the project is in place, including
required contingency to allow
for unforeseen circumstances not
fully covered in the construction
and supply contracts. The
major counterparties include
the offtaker, the equipment
vendors, construction contractors,
landowners and the system
operator. At this stage, the risk
to successfully completing the
project is low when the developer
is working with experienced
contractors. As a result, there
is minimal risk that the project
will not be completed once full
construction commences.
Optimizing the design of
projects requires considerable
expertise and a focus on long-
term operations. Experienced
contractors help to minimize the
potential issues that can impact
operational costs. For example,
many small design features that
are important to the profitability
of the project may be overlooked
by less experienced (or short-
term focused) owners, resulting in
increased long-term operational
risks and costs. A simple example
is that underground transmission
cables can require connections,
known as “splices,” that have a
higher risk of failure than non-
spliced lines. In the final analysis,
good judgment and experience
pays off. Long-term focused,
experienced owners would
consider incurring slightly higher
construction costs to enable easier
operations and maintenance
over the 25-year life of the wind
project.
Once construction of the project
has been completed, and the
facility has been commissioned
and interconnected to the
grid, the project achieves its
commercial operations date
(“COD”). From this point forward,
the fully operational project
generates electricity and sells
power.
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DEVELOPMENT PHASES
Since the formation of Pattern Development, the Pattern Development construction team has
successfully managed construction of 19 wind and solar projects (with gross capacity of over 2.8
GW) and brought all to completion within budget and on schedule.1
Pattern Development Construction Track Record
Project Rated Capacity MW
Within
Budget
On
Schedule
Hatchet Ridge 101 �3 �3
St. Joseph 138 �3 �3
Spring Valley 152 �3 �3
Santa Isabel 101 �3 �3
Ocotillo 265 �3 �3
El Arrayan 115 �3 �3
South Kent 270 �3 �3
Grand Renewable 149 �3 �3
Panhandle 1 218 �3 �3
Panhandle 2 182 �3 �3
K2 270 �3 �3
Armow 180 �3 �3
Logan’s Gap 200 �3 �3
Amazon Fowler Ridge 150 �3 �3
Conejo Solar1 104 �3
Meikle 180 �3 �3
Futtsu Solar 42 �3 �3
Kanagi Solar 14 �3 �3
Broadview 324 �3 �3
Ohorayama 33 in construction
Belle River 100 in construction
Mont Sainte-Marguerite 147 in construction
2
Pattern Development Construction Projects
3
1 Conejo Solar was two months delayed.
2”Within budget” means within the board-approved budget (including contingency).
3”On schedule” means achieved commercial operations prior to the term conversion deadline under the project
construction credit facilities.
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DEVELOPMENT PHASES - CASE STUDY
In 2009 and 2010, Pattern Development was constructing its first
project in Canada, the St. Joseph Wind Farm in southern Manitoba.
This project is located in an ancient lakebed that has silted in over the
centuries. As a result, below the surface is 150 feet of mud that has
virtually no structural support to sustain a wind turbine. Additionally,
the Red River flows through its northern boundary which makes it prone
to flooding.
To overcome the design challenges associated with the soil conditions,
Pattern Development worked with various design firms to create an
innovative foundation of pipe piling and integrated concrete cap, which
provided the necessary support for the wind turbines. To overcome
the effects of potential flooding, Pattern Development worked with
the BOP firm and turbine supplier to ensure that the entire electrical
infrastructure was either capable of being submerged in water or
sufficiently elevated well above historical averages.
All of the design effort and planning were tested during its
construction, as the project suffered four different significant weather
events that flooded the region to historic levels, including a 100-year
flood. In order to properly sequence and plan the work around the
affected areas, these events required daily collaboration with the BOP
contractor and the wind turbine supplier. Pattern Development and
the construction contractors successfully delivered the St. Joseph Wind
Farm project without delay and within the original budget.
Project
Case Study
St. Joseph Wind Farm
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EXAMPLE PROJECT
This section expands on the example introduced in the Development
Business Model description of the economics of a project as it moves
through the stages of development. The example below is a generic
project as each project can have slightly different attributes, but it
is highly indicative and comparable to actual projects completed
by Pattern Development. In this scenario, the economics relate to
a 100 MW project that has a development period of 24 months,
a construction period of 12 months, and an all-in total projected
cost to construct of $160 million, inclusive of all hard and soft costs,
contingency costs, interest during construction, fees and other
expenses. Once the project achieves commercial operations, it has a
fair market value of $180 million and generates CAFD of approximately
$5.5 million per year.
Project at a Glance
Project Size 100 MW
All-in project cost
to construct
$160 million
$120 million non recourse financing
$40 million developer’s equity
Time to COD 36 months
Development 24 months
Construction 12 months
Fair market value
of asset
$180 million
CAFD per annum $5.5 million
An Example Project
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EXAMPLE PROJECT
Origination and early
development phase
capital structure
In the early stages of develop-
ment, assumed to be 24 months,
limited capital is expended to
advance the project. To take
projects from this phase to the
point of construction financing,
“at-risk” development expenses
may total less than $1 million on
the low end to $5-10 million on
the high end. Assume that the ex-
ample project incurs expenses of
approximately $2 million during a
two-year development period pri-
or to the pre-construction stage.
This $2 million investment would
be all equity funded.
Pre-construction phase
capital structure
In the pre-construction and
financing stage, the developer
will take the project to readiness
for construction financing by
closing out general development
activities and receiving a PPA and
interconnection rights. Typically,
PPAs and interconnection
agreements require developers
to post Letters of Credit (“LCs”)
in support of project obligations.
These LCs are usually supported
by cash deposits. The total
capital deployed to advance
projects from project origination
through pre-construction capital
expenditure, including letter
of credit exposure, varies from
construction period as proceeds
are needed to pay for the project
costs. Limited or non-recourse
financing, or “back-leverage,”
reduce the equity capital further
and ultimately result in less than
$20 million in net investment
during construction.
Developer return analysis
In the example, as a multiple
of CAFD, the project’s equity
value is $40 million ÷ $5.5 million
= 7.3x on an “as built” basis
and $60 million ÷ $5.5 million
= 10.9x on a fair market value
basis. Alternatively, the $160
million investment that yields
$5.5 million in CAFD per year for
a period of a 25-year asset life
will result in a levered after-tax
IRR of approximately 13.9% from
the commercial operations date.
project to project. However,
based on Pattern Development’s
experience, a reasonable estimate
is approximately 10% of the built
cost on average, or $16 million in
this scenario.
Construction period
capital structure
Assuming that the non-recourse
financing covers 75% of the
$160 million project cost in the
example, the project capital
structure during construction in
this scenario would consist of
$120 million of debt and $40
million in developer’s equity
(often referred to as borrower’s
equity). The equity would be
funded or committed by the
developer at start of construction
and the loan proceeds would be
drawn down during the 12-month
Uses Sources
Construction
Debt
Back Levered
Construction Equity
Construction Equity20% 12.5%
12.5%
75%
25%
55%
Other Developement,
Interconnection & Financing
Expenses plus Contingency
EPC/BOP
Turbines
FIGURE
3
Project Capital Structure During Construction
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SUMMATION
On sell-down at the commercial
operations date, assuming the
$180 million purchase price, the
levered after-tax IRR would be
approximately 8.1%, generating
5.8% (or 580 basis points) of “yield
compression.”
Per-share accretion analysis
Assume a company with $1.8
billion market capitalization, 6%
yield and 80% targeted payout
ratio, invested $60 million to buy
the example project using funds
from an equity raise, corporate
debt and a portion of existing
CAFD. If the investment produced
incremental CAFD of $5.5 million
($4.5 million after servicing
corporate debt), accretion arising
from that investment would be
around 1.8%. Assuming the same
facts, except that the company
invested $40 million to develop,
build and own the example
project, accretion arising from
that investment would be around
2.8%, which represents more than
a 50% increase from buying the
developed project.
In summation, renewable energy development offers ever-growing
opportunities both domestically and abroad. Although the process
has certain risks associated with it, an experienced, disciplined team
can effectively manage those risks to generate high quality assets and
attractive returns for its investors. Should you have any questions,
please don’t hesitate to contact us at:
Pattern Energy Group Inc.
Investor Relations
ir@patternenergy.com
Economic Conclusions
In summary, the following conclusions can be drawn:
» A well-managed project can progress through the early
development and origination phases, which are typically
the longer duration and higher risk periods for an individual
project, on a limited amount of capital – less than 2% of
build cost.
» The point of maximum business risk exposure, typically
approximately 10% of build cost, is usually during the pre-
construction stage immediately prior to the beginning of
construction.
» The point of maximum capital at risk is usually upon close
of construction financing and full commencement of
construction – typically approximately 40% of build cost.
While the capital is higher at this stage than during the pre-
construction stage, this capital is lower risk in nature. The
primary risks at this stage relate to construction completion
and sell-down price of the equity interest.
Summation
Disclaimer
Any investment in Pattern Development 2.0 would be subject to approval by Pattern Energy’s Conflicts Committee and Board of
Directors. The content provided in this White Paper is intended solely for general information purposes. The case studies, hypotheticals
and other information in the White Paper do not constitute estimates, forecasts or assurances that similar future circumstances will result
in similar results. The White Paper in no way constitutes the provision of investment advice. Pattern Energy does not accept liability for
direct or indirect losses resulting from using, relying or acting upon information in the White Paper.
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