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Suitors eye Pattern Energy as clouds gather over US wind market

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Pattern Energy Inc. owns stakes in dozens of wind farms like this project in Illinois.
Source: American Wind Energy Association

Pattern Energy Group Inc., a power producer with wind farms across North America, is fielding takeover interest ahead of a potential market slowdown in the U.S.

The company confirmed Aug. 13 that it is responding to "interest from third parties." The day before, Bloomberg News reported that Brookfield Asset Management Inc. is considering a deal that would merge Pattern Energy and TerraForm Power Inc., another renewable energy company in which Brookfield owns a majority.

Talk of a possible acquisition is coming months before the scheduled expiration of the U.S. production tax credit, which has helped drive domestic demand for wind power. Losing the incentive "creates a challenge for future growth" at Pattern Energy, CreditSights analysts said in an Aug. 6 research note.

Asked about a potential acquisition, CreditSights analyst Andy DeVries said in an Aug. 13 email that it "looks more like [Pattern Energy] owners looking for an exit than a sign of corporate-level M&A starting a new trend."

"Investors are still bullish on wind but [are] much more bullish on solar, so the [private equity] owners of [Pattern Energy] likely figured selling out to a company with both assets makes the most sense and gets them the highest value," DeVries added.

Pattern Energy, which responded to news reports at the urging of financial regulators in Canada, said it does not intend to comment further on "rumors or speculation unless it determines that disclosure is warranted or required."

A Brookfield spokesperson declined to comment.

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'Enormous' capital needs

On an Aug. 8 earnings call, Sachin Shah, head of Brookfield's renewable power group, touted the company's takeover of TerraForm Power in 2017, saying it has improved asset reliability and squeezed out more than $30 million in annualized cost savings.

"Over the last decade, decarbonization has emerged as a global theme and has resulted in significant disruption and opportunity in the power sector. We have used this period to build one of the largest renewable businesses in the world," Shah said. "Looking ahead, the transformation of global power grids is still in its early stages and will require an enormous amount of capital over multiple decades."

Pattern Energy owns stakes in 26 renewable power plants in the U.S., Canada and Japan as well as a minority interest in a project developer whose pipeline has grown to more than 10,000 MW. Analysts at Oppenheimer & Co. Inc. said in an Aug. 6 research note that Pattern Energy appears to have ample access to growth capital from debt and equity markets.

"We see [Pattern Energy] as having a strong ... pipeline of potential assets with an experienced, sophisticated sponsor, and a strong technical team," Oppenheimer analysts said.

However, CreditSights has noted "negative speculation" that Pattern Energy's private equity backers could overcharge for future project dropdowns "and/or" increase debt financing to boost equity returns.

Dividend hold

Pattern Energy reported second-quarter adjusted EBITDA of $102 million, which beat analysts' estimates but was below the company's year-ago results. Revenue of $140 million was flat year over year but lower than the company expected as wind production came in below the long-term average, CFO Esben Pedersen said.

Cash available for distribution, or CAFD, a closely watched metric for dividend-paying companies such as Pattern Energy, totaled $53 million, down from $59 million a year earlier.

During the fourth quarter of 2018, Pattern Energy said it would not increase its dividend for the first time since becoming a public company in 2013, CreditSights said. So far in 2019, the company has held its dividend at about 42 cents per share.

Pattern Energy CEO Michael Garland told analysts in March that the company was keeping its dividend level as it works to lower its payout ratio.

"I don't think we're going to see any change in our dividend policy, and so it's really, how do we grow our CAFD?" Garland said.

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