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Pattern Energy grapples with electricity congestion in Texas

Electricity congestion in Texas is causing headaches for Pattern Energy Group Inc., which operates at least four wind farms in the state.

Company executives blamed the problems on overbuilding in the country's biggest wind power market and difficulty repairing transmission infrastructure that is critical for moving electricity from the Texas panhandle to population centers such as Dallas.

"In Texas, I do think you can assume for the next couple quarters we're going to have congestion on the same order of magnitude as what we've been seeing," Pattern Energy CFO Michael Lyon said May 10 on an earnings conference call. "Now that affects our revenues and production levels."

Congestion on the grid managed by the Electric Reliability Council of Texas, as well as unfavorable wind conditions and curtailment at a wind farm on Puerto Rico, contributed to a $15.8 million decrease in electricity sales during the first quarter of 2018 compared to a year earlier, Pattern Energy said in a securities filing.

To mitigate the financial impact, the company is cutting back production when power prices dip too far into negative territory and working to reduce operating costs, Lyon said.

While Texas is causing headwinds for Pattern Energy, the company sees big opportunities to grow its footprint in Japan. The San Francisco-headquartered company invested in a 206-MW portfolio of wind and solar projects in that country during the first quarter through a deal with Japanese project developer Green Power Investments. Additionally, Pattern Energy affiliate Pattern Energy Group 2 LP has built up a 2,400-MW pipeline of projects in Japan, CEO Michael Garland said.

Contracted power prices that are higher than in North America make Japan an attractive market for renewable energy development, Garland said. "Additionally, the debt and equity capital markets for renewables in Japan are becoming very attractive," he said. "Historically, Japan has had some of the lowest-cost capital available, and we believe over time we will be able to refinance these assets with considerable upside."

Pattern Energy reported a net loss of $12.6 million in the first quarter of 2018, compared to net income of $2.5 million a year earlier. Accounting for results attributable to noncontrolling interests, including a one-time adjustment of $150 million due to a reduction in the federal corporate tax rate, Pattern Energy reported net income of $135.9 million, or $1.32 per diluted Class A share, up from $5.7 million, or 6 cents per diluted Class A share, a year earlier.

Pattern Energy finished the first quarter of 2018 with $43.1 million in cash available for distribution, compared to $45.1 million a year earlier.

The earnings report was "relatively uneventful — and that is a good thing," Wells Fargo analysts wrote in a client note, adding that the company's financial performance historically "has been plagued by below average wind production or other negative events" such as power plant curtailment in Texas.

Analysts at Oppenheimer & Co. Inc. said Pattern Energy's project portfolio is "rich with opportunities" for integrating energy storage, "which could provide meaningful growth with limited development expense."

"We look at the opportunity to go into some of these areas where they may be shutting a [nuclear power plant] or shutting down a coal facility and replacing it with renewables with a combination of wind-solar-battery," Lyon said. "And as that market grows ... you're going to see the cost of batteries shrinking pretty rapidly, to the point where we're hopeful that there will be a ... breakpoint where people will say, 'Hey, yeah let's do this more and more.'"

"And that just becomes self-reinforcing," Lyon added, "and you start having the economies similar to what happened in solar with batteries."

Pattern Energy shares rose by 3.91% May 10 to close at $18.59.