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Pattern Energy Group Inc. (NASDAQ:PEGI)

Q2 2014 Earnings Conference Call

August 5, 2014 10:30 AM ET

Executives

Michael Garland – President and CEO

Michael Lyon – CFO

Analysts

Nelson Ng – RBC Capital Markets

Frederic Bastien – Raymond James

Paul Ridzon – KeyBanc

David Noseworthy – CIBC World Markets

Ben Pham – BMO Capital Markets

Operator

Good morning ladies and gentlemen and welcome to Pattern Energy Group’s Second Quarter 2014 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions).

I would like to remind everyone that today’s discussion 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 of Pattern’s risks and uncertainties related to these forward-looking statements please refer to the Company’s prospectus as of May 8, 2014, which is available on EDGAR and SEDAR.

Now I would like to turn the call over to Mr. Mike Garland, President and Chief Executive Officer of Pattern Energy Group Inc.

Michael Garland

Thank you. Good morning everyone and thank you for joining us today. Earlier this morning we released our second quarter earnings results which you can find on our website at patternenergy.com.

It was a strong quarter for us in which we performed – our performance improved and we continued to execute on our growth strategy. First, we had a good production and strong cash flow generation in the period. Wind and production were in line with our long-term average, expected average for the quarter. Our cash available for distribution through half year was approximately 61% of our annual target. We increased our own megawatts to 1,472 megawatts with the acquisition of 172 megawatts of owned interest at the Panhandle 1 project in Texas and an additional 44 megawatts at our El Arrayán project in Chile. We commenced promotional operation at both our Panhandle 1 and El Arrayán projects this quarter.

We increased our ROFO portfolio to 601 megawatts by adding a new project, Logan’s Gap which represents approximately 160 megawatts of owned assets and is located near Dallas, Texas. We completed a $586 million follow-on offering, which included $288 million in net proceeds to treasury.

Lastly because of our successful growth we have increased the dividend for our third quarter 2014 by 2% over the second quarter dividend to $0.328 per share per Class A share and $1.312 on an annualized basis. The second quarter was a great example of our company’s growth. Electricity sales at our operating projects grew 770 gigawatt hours, an increase of 55% for the same period last year. Wind conditions on average across our fleet of project sites met our long-term performance – our long-term forecast and as a result production was also in line with our long-term average.

We expected some reimbursable start-up issues at our South Kent project which is typical when you are commissioning a new project. Siemens is addressing these issues and we anticipate the project to be meeting or exceeding our performance levels shortly. We also are continuing to have some problems, some issues with the MHI blades at the Gulf Wind project. We are working with MHI to create a plan to correct these problems. While we do not want to minimize these issues they have had only a modest effect on our overall performance to-date.

Our cash available for distribution has been strong and as I previously mentioned is well ahead of half the annual target of $55 million that we suggested for 2014 at the time of the IPO. We are at 61% of the annual target. However we do expect third quarter to be bit less than Q2 results in cash available for distribution.

Regarding growth through acquisitions we bought the 218 megawatt Panhandle 1 project from Pattern Development in June as anticipated. Our own interest is a 172 megawatts and the balance of the ownership is owned by the tax investors. The project commenced commercial operation in June on schedule and on budget.

We also acquired an additional 44 megawatts of interest in the 115 megawatt El Arrayán project in Chile from AEI, one of the original partners in the project. El Arrayán is the largest wind project in Chile. It is located approximately 400 kilometers north of Santiago on the coast, in a location with strong coastal winds. The acquisition brings our total interest in the project to 80 megawatts or about 70% interest with our partner, Antofagasta Minerals holding the other 30%.

Antofagasta Minerals is also the controlling party of the – Minera Los Pelambres which will acquire approximately 75% of the project’s expected electricity generation through a long-term fixed or floating hedge. The project will sell its remaining output into the Chilean spot market at the prevailing market price at the time of the sale. As you know the price for power in Chile is quite high compared to the United States and so we are very comfortable selling 25% of the production into the Chilean market.

We commenced commercial operations at El Arrayán on schedule during this quarter as well. We continue to like Chile; the Chilean market for its robust and stable economy, its U.S. denominated electricity and its aggressive policy to expand renewables given their limited domestic energy resources. Together the Panhandle 1 project and the El Arrayán acquisitions increased our total owned capacity by 17% to 1,472 megawatt. When combined with the Grand Renewable acquisition and agreement to acquire Panhandle 2 which we announced last year we have grown our own capacity by 41% since the IPO.

Based on our demonstrated cash available for distribution from our projects the addition of the operations at Panhandle 1 and El Arrayán and the additional interest in El Arrayán, the Board declared a 2% increase of our third quarter dividends. The new dividend as I mentioned is $0.328 or 3.28 cents per Class A share or $1.312 on an annualized basis. The dividend will be paid out October 30, 2014 to shareholders of record as of September 30, 2014. The increase in our dividend demonstrates our confidence and ability to meet or exceed our growth targets. We have now successfully dropped down three of the seven initial ROFO projects into Pattern since the time of the IPO.

As we have said previously we will be identifying new ROFO projects in the coming months. As a first step this morning we announced addition of the new project to the ROFO portfolio, Logan’s Gap. Logan’s Gap is a 200 megawatt project located near Dallas, in Comanche County, Texas. After financing Pattern Development will own a 160 megawatt interest in the project and tax equity investors will own the balance. The project has a 10 year PPA with Wal-Mart for about 60% of the expected production. The project is ready for financing and is expected to begin commercial operation in late 2015. The addition of Logan’s Gap brings the current identified ROFO projects, anticipated to be dropped down from Pattern Development to a 106 megawatts of owned interest.

In addition to Logan’s Gap the identified ROFO projects include our call rights for Pattern Development’s remaining interest in Gulf Wind, which is exercisable as of October 2014. K2, which is under construction with completion expected in 2015; Armow which is expected to begin construction at the end of this year and Meikle which has now received its environmental assessment certificate, the major environmental approval and the last big milestone and we expect and we have started to arrange construction financing for the project.

In addition to the identified ROFO projects we are often asked for more detail on Pattern Development’s pipeline. We continue to [reaffirm] that development is a confidential and lumpy business and it is not productive to prematurely identify potential ROFO opportunities. What I can say is the pipeline is a robust three gigawatts of wind and solar projects and some transmission opportunity that represent a full range of developments from early to late stage. Pattern Development usually enhances when they obtain an economic proposition such as a PPA for a development project. This is a good indication that such a project is likely to become and identified as a ROFO project for Pattern Energy.

We believe this demonstrates the disciplined approach in the way we add projects to the identified ROFO risk. On the third-party acquisition front we continue to be active in the market. We see most every opportunity that comes to market. Currently we are still shortlisted for some third-party acquisitions. However I would note that it is in our opinion that many of the recent assets sold are being sold at relatively high prices given the long term nature of these project. It appears many buyers are looking really at short-term cash flows and accepting, or accepting aggressive pricing assumptions.

As we have discussed previously Pattern Energy is unique in that we have identified ROFO projects that if all are successful, will exceed our growth targets. This allows us to bid for projects in a disciplined manner with a focus on sustainable accretive cash flows over the long-term. That’s how we have been successful over the last 25 years and what we told shareholder we do when we went to public last year – when we went public last year, we also get a lot of questions about the evolving yield co sector. We have been joined by number of new issuers, both recognized names and new faces which broaden our group of comparables. It is anticipated that many more yield cos will be issued in the coming year.

As a management team that has been in the sector since the 1980s it’s great to see the breadth of technology in companies in structures that are attracting capital. We believe it’s beneficial for the long term health of the sector. Additionally we are very excited about the depth of the investment market, given our continued demand for capital especially in the coming year to fund our growth.

With that, I will turn it over to Mike Lyon, our CFO to go over the financial highlights for the second quarter.

Michael Lyon

Thank you Mike. As Mike mentioned we are well positioned to meet or exceed 2014 cash available for distribution target of $55.4 million that we outlined at the time of our IPO. Cash available for distribution was $16.1 million for the second quarter of 2014, bringing the total at the mid-year point to $33.9 million or 22% ahead of the target on an annualized basis that we originally set out for 2014.

Based on the June commitment of commercial operations at El Arrayán and Panhandle 1 we expect those projects to begin making meaningful contributions to cash available for distribution and adjusted EBITDA starting in the third quarter as they reach full performance levels. Panhandle 2 will do the same later this year following its commencement of commercial operations and our subsequent completions of its acquisition and the Grand a few months into 2015. The reason for the lag in Grand’s contribution to cash available for distribution is that we typically do not start receiving distributions from unconsolidated investments until a few months after the start-up of operations.

Electricity sales at are ownership interest in operating projects grew to 770 gigawatt hours in the second quarter, an increase of 55% compared to the same period last year. These increases were primarily attributable to an increase in production at Ocotillo and Santa Isabel and also to the commencement of operations at South Kent.

Adjusted EBITDA was $58.8 million for the second quarter of 2014, a 28% increase compared to the same period last year. Net income in the second quarter of 2014 was $7.2 million compared to $44 million for the same period last year. The change was primarily due to higher unrealized losses on our energy and interest rate derivatives this year and also a higher recognition of deferred tax expenses. Total revenue for the second quarter was $65 million, 11% increase compared to the same period last year. This improvement was due primarily to the commencement of commercial operations on the final 42 megawatts at Ocotillo in July 2013.

Cost of revenue was $38 million for the second quarter of 2014, an increase of 17% compared to the same period last year. This increase is primarily attributable to the completion of the final 42 megawatts at Ocotillo and also higher property taxes as well as increased depreciation. As each new project commences commercial operations we incur new incremental and ongoing costs on various items, including maintenance and service agreements, property taxes and other costs associated with managing operating and maintaining the facilities. In addition, typically we begin to incur costs at a new project before it starts generating revenues.

As of June 30, 2014 our available liquidity was $470.3 million, consisting of unrestricted cash on hand of $234 million, restricted cash of $44.4 million, $97.4 million available under our revolving credit agreement and the $94.5 million available under project level stand-by credit facilities. We believe this liquidity provides us with a strong foundation and the flexibility to execute our growth plans.

I will now turn the call back over to Mike Garland.

Michael Garland

Thanks Mike. We are very excited about our outlook for 2014 and 2014. Operationally our fleet is performing well and we see further improvements coming. Our construction projects are being delivered on schedule and our team’s productivity is high. Our relationship with Pattern Development continues to demonstrate its value, delivering 41% growth in our owned capacity since the IPO. We are starting to add to the list of the identified ROFO projects and we are seeing a number of new exciting opportunities that should create additional ROFO opportunities in the coming months and years.

I’d like to thank our shareholders for investing in us and our employees who are doing a great job and are dedicated to the success of Pattern. All of us at Pattern are committed to creating value for the shareholders and to continuing to build on the trust you have shown in us. Lastly I want to reinforce that our outlook for Pattern Energy for the rest of the 2014 and 2015 is very exciting.

We’d like now open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Nelson Ng from RBC Capital. Your line is now open.

Nelson Ng – RBC Capital Markets

Great, thanks. Good morning everyone.

Michael Garland

Hey Nelson, how are you?

Nelson Ng – RBC Capital Markets

Great, just a quick question on Logan’s Gap in terms of the 60% hedge level, are you generally comfortable at the 60% going forward or are you looking to get additional contracts on that project, to push it to somewhere close to 80%, I believe Panhandle is close to 80%?

Michael Garland

Yeah, we are pretty comfortable with 60% but we are in discussion with parties to round it out to 80% as you suggest.

Nelson Ng – RBC Capital Markets

Okay, got it. And then can you comment on the hedge pricing and also the capacity utilization of the project?

Michael Garland

We can’t disclose individual pricing. So we would say it’s good pricing and the availability is high, NCF is high. Dallas, obviously that region isn’t quite the Panhandle but it’s a very strong wind region and it’s very close to Dallas, relative to West Texas and to the Panhandle where you are further way from the load centers and therefore it has a little less transmission issues. You always look at basis, risk and so on. But the wind is strong there and I think I wouldn’t say the Wal-Mart contract is anything extraordinary it’s reasonable market pricing.

Nelson Ng – RBC Capital Markets

Okay and then just moving onto Grand Renewables, I think in the commentary there was a mention about the potential delay and cost overrun. Could you just talk about the rough magnitude you are looking at, what is it like one or two quarters and also on the construction cost, whether any of that, I thought the project is under a fixed price fixed date EPC, so whether any of these would be applicable?

Michael Garland

Yeah, the Grand project is, I think we have always said it will be fourth quarter. And so we are not anticipating any material delays like one or two quarters, anything like that. In fact from what we have been saying it’s going to be relatively on schedule, maybe a little late over what we had hoped but not anything extraordinary. It is a fixed price contract and we are in discussions. It’s not unusual for us to have construction contractors when they have had additional cost to come to us and claim that they should get reimbursed for all of the cost and all the decisions they made along the way that ended up costing more than they originally expected and so this is pretty standard operation for some contracts and our guys in our construction group are really quite talented at managing those kind of exposure. And so I am not too worried about the challenges. It’s a timing issue and like I said I think it’s going to be within our forecast that fourth quarter in service, it could slip in 2015 but I think that would be a surprise to me anyway.

Nelson Ng – RBC Capital Markets

Okay, and there is just one last question, what’s the expected run rate for G&A going forward?

Michael Garland

I don’t think it’s changed very much. It’s gone up a bit because we have added a few more staff for the public company elements of our overhead and as we add operating projects or even when we are at towards the end, typically we look three to six months ahead of time of buying, hiring site operators. And so it will go up relative to the site operations as we add more projects we bring on more overhead basically. So it will ramp up consistent with more along the lines of how many projects we are bringing on as opposed to anything else. We have a pretty good overhead already, pretty good staff that we don’t need a lot of overhead.

I guess the other thing I would say is so when you look at our new project you look at both the two site operators that we always have at our sites and then we typically would have some back office support for that, either accounting or a few other things. If we are in a new area we may need to add some staff for regulatory or other purposes legal or something like that. But generally it’s proportionate, it raises with the number of new projects we are adding.

Michael Lyon

I would, since you asked, I would also say that, Nelson we do have costs associated with acquiring interests in projects, whether it’s third-party acquisitions or even the drop downs from our parent. So we get a little bit of increase in allocation from Pattern Development as we utilize some of those resources, legal and financial to support our efforts when we are making and pursuing acquisitions. So I think run rate concept doesn’t work quite as well for G&A as it does for project cash flows, but in the scheme of things I don’t think it will be a significant varying factor going forward in the way that new project cash flow contributions will be.

Nelson Ng – RBC Capital Markets

Okay. Thanks guys. I will get back in the queue.

Operator

Your next question comes from line of Frederic Bastien from Raymond James. Your line is now open.

Frederic Bastien – Raymond James

Good morning. I was wondering if you were in a liberty to provide some color on the terms for which Pattern Development was able to acquire Logan’s Gap?

Michael Garland

Well, it’s the same approach that we have taken on all our acquisitions from Pattern Energy acquiring assets from Pattern Development. We have a third-party, we anticipate that we will be going through the same process in the sense of our conflicts committee will be reviewing the proposed purchase price, we’ll outside advice and for legal we will see about on pricing, but they will be the standard. We have gone through it two or three times now, so we anticipate that the standard of analysis will be consistent with what we have done on our past deals. The market has gotten more aggressive and so the market pricing tends to be a little bit more aggressive than it had been in the projects we acquired for example last year.

Frederic Bastien – Raymond James

Okay, but no real surprises there?

Michael Garland

No, I don’t think so.

Frederic Bastien – Raymond James

The other question I have, I was wondering if there were any regions or projects that showed particular strength or weakness during the quarter?

Michael Garland

There were, but let’s see I’d have to pull them up, I don’t have it in front me I would rather not do it from memory. While we are talking, let me see if I have it with me. Yes, I thought it better to bring – to get back to you with it, but I can bring it up.

Frederic Bastien – Raymond James

Okay, thank you.

Operator

Your next question comes from line of Paul Ridzon from KeyBanc. Your line is now open.

Paul Ridzon – KeyBanc

Thank you. Good morning.

Michael Garland

Good morning.

Paul Ridzon – KeyBanc

The Gulf project and what’s the status with MHI and does this need to be resolved before you think about exercising the option?

Michael Garland

Yeah, it’s a good question. It certainly will be discussed at some level, if we can get a better deal on that we believe everything is going to work out. Maybe it’s better to negotiate it now rather than later. But my sense is everybody is better off if we come to a resolution with MHI which is in the process that our guys are very actively involved, talking with them. They have a bunch of people down there looking at to the various plays, I think we mentioned that they are going through an inspection program currently to see the extent of the issue. And then our warranty is over the end of this year, I think in November of this year and by then we anticipate – we hope to have something worked through with MHI, as to how it’s going to be dealt with on an ongoing basis.

Paul Ridzon – KeyBanc

Has there been a root cause established?

Michael Garland

Yes.

Paul Ridzon – KeyBanc

How should we think about the dividend trajectory going forward here?

Michael Lyon

No, what we said last quarter is that I think all we can repeat here, the Board really reserves the right to make decisions about dividends on a quarter-by-quarter basis. They like to look at what is our current cash flow, what are the additions we put in new projects that we put on line and what kind of support the cash flows would give to a dividend increase in so we really can’t say anything out of respect of our Board. They really honestly want to have an independent judgment on this to be able to feel comfortable about giving dividend increases based on our actual cash flow performance.

Paul Ridzon – KeyBanc

And then lastly, looks like cost of revenue as a percent of revenue kind of crept up in the quarter. How should we think about that kind of ratio going forward?

Michael Lyon

I think you are right that it did creep up a bit this quarter. I think that’s a little bit unusual we had a couple of one-time increases. We had a property tax increase that I don’t think we will see going forward. We experienced a little bit of maintenance cost in one of our projects that was a little out of the ordinary, not by huge amounts. And we do have I think as you know long-term service agreements in place that will provide stability for the operating costs at most of our projects going forward. So I think you’ll also see a little bit less variability on that going forward.

Of course the margin is a factor, not only of the operating cost but also of the revenue stream and some of our newer projects have a little bit lower price points than some of the Panhandle projects in particular have a little bit lower price point than some of the older projects. And so the balance is going to shift overtime by modest amounts. I think when you look at that percentage. So I don’t think that you should regard the current quarter’s perform and say sort of indicative of any kind of long-term change in our expectations.

Paul Ridzon – KeyBanc

Okay, thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of David Noseworthy from CIBC. Your line is now open.

David Noseworthy – CIBC World Markets

Thank you and good morning.

Michael Garland

Good morning.

David Noseworthy – CIBC World Markets

I was wondering if you could just give us a little bit more color regarding comments that you see more additions coming into your ROFO pipeline in the coming quarters. Just in terms of timings of the potential additions and whether they are coming from your development projects or new acquisitions?

Michael Garland

I can’t put too much color on it. As I said, we are very careful about describing what’s going over at the development company because it is lumpy. It’s kind of a roller coaster development, one day something is really looking fabulous, the next day something else pops up and runs ahead of it. So what I would say is that most all of the projects that are at the head of the queue or things that we are developing currently and have been developing over the last period of time, there is a couple new projects that were – we have started with partners in various locations and we anticipate seeing some of those projects come to fruition in terms of potentially going on to the initial or the identified ROFO list in the next, like I said months or year.

So I can’t really put anymore color on it. It’s just the backlog will start coming out as it comes out as we said all along.

David Noseworthy – CIBC World Markets

Okay, so if I say, if I can just may repeat back what I heard differently, it sound like the additions to the ROFO projects are coming more from the selling pipeline than they are from acquisitions, near term?

Michael Lyon

Yes, over at the Development Company we do the acquisitions of early to late stage development opportunities as well so when you said acquisitions I was thinking on the development side. We are not anticipating a big growth in acquisitions, third-party acquisitions. We are very active as I said. But in terms of market starts rationalizing again we think that it’s pretty frothy right now. People, as I said in my opening statement that we are seeing people assuming pretty aggressive assumptions and pricing at pretty low returns and we don’t really – we have not participated when that happens in the acquisition market. But right now we do see opportunities still. We just have to be a little more disciplined about where we find those opportunities.

So that leaves us with the development pipeline which is very robust and so we will be relying primarily in the next months and year we think on the growth through development as opposed to acquiring from third-parties projects and construction or in operation.

David Noseworthy – CIBC World Markets

Okay and then perhaps if you can just discuss what opportunities you are seeing in Japan, Mexico and what your return expectations for these markets are relative to North America?

Michael Garland

It’s too early. We have talked over the last three, six months about that we are looking around the world and saying what’s an appropriate other area, the U.S. market for example is slowing down a bit, where else do we see opportunities for growth and we have mentioned Japan and Mexico are two that we are looking at. But I can’t go into the specifics at this time.

David Noseworthy – CIBC World Markets

Maybe then just to contrast Japan and Mexico versus Europe and why you did mention Japan and Mexico explicitly but not Europe?

Michael Garland

I think Japan Mexico are much more exciting markets from the standpoint of Europe is a fairly matured market. It’s been going for a long-term, the pricing for opportunities tend to be more aggressive there because the maturity in the market. Maybe you could argue some of the offshore projects are an exception but at same time the risk are much higher on the offshore and they are much bigger. And so we look at places like Japan and Mexico where there has been some form of disruption. Obviously in Japan it was the whole policy change away from nuclear into trying to get renewables and the contracting out of solar and some wind. I mean they have done an incredible job at executing on contracts. We will see how they do it, actually building projects but there is a tremendous amount of projects that are been signed up with very attractive off-take pricing.

In Mexico, it’s going through a total revolution in terms of how they are going to be managing and dealing with their energy sectors. You know that they are talking about breaking up Pemex, and bringing in third-parties down oil and gas and midstream and other things. On the electricity side it’s very similar, that they are effectively allowing CFE to move into the gas business which makes CFE the national electricity company very excited about opening up two independents to supply power, they are going to do a transmission operator somewhat similar to California and so it opens up the opportunity. How that, those opportunities evolve and the timing of those opportunities, I think, is something that just, we’re going to have to wait and see. We are very careful about how we go into markets and how we spend our money and so we are looking at it very carefully but we don’t want to miss the opportunity. Those are two countries in the world we are most comfortable with where we see a disruption that opens up some real opportunity.

David Noseworthy – CIBC World Markets

Thank you for the color. I appreciate it.

Operator

Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is now open.

Paul Ridzon – KeyBanc

Just had a quick follow-up, 50% of the year you are 61% of the way to your cash expectations, are you on target, is there some seasonality here we need to think about?

Michael Garland

You are breaking up. I don’t know if it’s the line or your phone. Could you say it again you said we are 61% and half a year

Paul Ridzon – KeyBanc

Is that within your expectation, is there seasonality here, whether the back half is traditionally weaker?

Michael Garland

There is a little bit of seasonality Paul. We as Mike hinted it earlier there is, we do expect that the third quarter will be seasonally a little lower than the other quarters of the year. We think actually we are on target for what we laid out in the IPO forecast. That forecast has I think you know is a static forecast that did not take into account the impact of acquisitions that we might be making and as events have turned out have been making.

So I am not going to give you any sort of updated forecast for the balance of the year but we do feel as we said that the performance to-date have been consistent with our forecast in terms of our cash flow generation and we feel very good about what that means for the balance of the year.

Paul Ridzon – KeyBanc

So these new unforeseen things are kind of offsetting the weaker first quarter?

Michael Lyon

The first quarter was a little bit weak in terms of cash flow but not much and so I think that you are right, that some of the acquisitions that we have foreseen will provide some growth in our cash flow overtime as opposed to every acquisition we hope we will do. We do think that we are really kind of right on target for where we would wanted to be at this time of year.

Paul Ridzon – KeyBanc

Great, great, thanks again.

Operator

Your next question comes from the line of Ben Pham from BMO Capital Markets. Your line is now open.

Ben Pham – BMO Capital Markets

Okay, thank you, good morning everybody. Just to key on that last commentary on the CAFD and your expectations for Q3 numbers to be lower than Q2, I think that’s what I heard. I just wonder if you provide a little more color on that. I know you mentioned the seasonality impacting that but you also have Panhandle 1 spinning, you have [El Arrayán] project also high interest there, so I’m just curious why you expect a lower number in Q3?

Michael Lyon

It really just, Ben has to do with the seasonality. I think that the acquisition of those two interests and the commencement of operations of those two projects will offset the seasonality impact. But based on the portfolio of assets pre-existed in Q3 we would have anticipated being a lower quarter than the other three quarters anyway. Anytime we are thinking about the next quarter ahead or the quarter after that, I would just always recognize or urge people to recognize that our expectations about seasonality are for short periods of time and the shorter the period of time the greater the variability around those expectations.

So a strong quarter could push us up above that expectation and seasonality will bring it down or poor performance could accentuate that typical seasonality. So in short span I think that we will see some offset from the impact of those acquisitions. But my sense is that we should expect the third quarter to be in general lower quarter than the other quarters of the year still.

Michael Garland

Just having said that, we are not revising our forecast; we are very comfortable that we are going to meet or exceed our forecast for the year. I don’t think there is an issue. We are slightly ahead and we may be third quarter may be a little less, it may turn out to be quite good. We just don’t know how it looks yet. But I think what the reference, I want to reinforce something that Mike said which was that if you just look at our existing portfolio, before we added Panhandle and the addition of El Arrayán we would have expected a little dip in the third quarter. With the two additional projects that smooths it out around a bit. And but remember those projects are ramping up. They haven’t had all the shakedown, as I mentioned.

It’s very typical about projects to, in the first month or two to produce a little less than what our long-term average is. But we anticipate a strong finish on the year. We are not at all trying to give any indication that we are concerned about the rest of the year. We are just stating the fact that typically third quarter for the existing projects is a little lower but we are very bullish about the rest of the year.

Ben Pham – BMO Capital Markets

Okay, thanks for clarifying that Mike. And maybe if I can just go back to the Logan’s project, if you guys don’t up the contracted position to 80%, do you still feel that, that’s a project that is in line with your strategy at the [pegged] level?

Michael Garland

Yeah, we are always talking about, what we have already said is we are very careful about our overall merchant exposure. It only bumps us up a couple of percent on our overall merchant exposure for the fleet. So we – I don’t know where we are now something like 89% and we will go up to like 91% or 92%. And so it’s not a big mover on our exposure and so we are not changing our philosophy. We are not, we haven’t moved in any other direction. We are still doing contracted long-term asset management. So we are not anticipating that this is a trend where most of our projects will have a higher merchant component. This is just an anomaly of this project and that we could very well end up with contracting hedging for bringing it up to the 80s percent level.

Michael Lyon

I might also add Ben, that the Logan’s Gap project will be financed in a similar manner to the Panhandle projects where it won’t have long-term debt in place. And so because of that financing feature we don’t have a subordinated cash flow position as one of the equity partners in the project. And so that creates a little more cash flow stability for us relative to a typical project in our portfolio and may be gives us a little bit more comfort with merchant exposure on the project than it might in other circumstances.

Ben Pham – BMO Capital Markets

That’s helpful. And if I may lastly can you talk about your expected financing plans over next year and I know you got potentially the Panhandle 2 later this year, but when do you, do have capacity to buy anything additional, given your current liquidity position?

Michael Garland

We do Ben. We have as we mentioned in the discussing the liquidity about $230 million of unrestricted cash on our balance sheet right now and we also have close to a $100 million of capacity under our revolving credit facility. As you know our commitment on Panhandle 2 is for a purchase price of about a $123 million and so that leaves us with pretty comfortable margin for additional acquisitions, should we identify new opportunities soon.

We are – our business model requires that we will raise capital overtime as we identify new acquisitions and that will certainly continue to be the case in the coming 12 months as we execute on both our ROFO projects and potentially third-party acquisitions.

Michael Lyon

And we are looking at expanding our revolver, it gives us more flexibility as well. So we are looking at different capital structures or opportunities to be able to manage further acquisitions.

Ben Pham – BMO Capital Markets

Okay, very good. That’s it from me. Thanks everybody.

Operator

Your next question comes from line of [Cindy Motz] from Edison Investment. Your line is now open.

Unidentified Analyst

Hi, thanks and I appreciate you taking the call. Just wanted to follow-up a little on Logan’s Gap, congratulations on that. I know that you are talking about starting commercial operations in late 2015 but I guess we would expect maybe to see revenues from my model, sometime late first half, early second half of 2015. And then just, a lot of my other questions were answered, but can you just talk a little bit about – give more color about the ramp in production at Ocotillo and Santa Isabel that led to the increase in megawatts for this quarter?

And then just may be lastly, just an update as you are still on track with Panhandle 2 operation in Q4? Thanks.

Michael Garland

Let me start with the last question. Panhandle 2 is on schedule for construction and we are still looking for it to be in service at the end of the year. The thing I would mention on Ocotillo and Santa Isabel, two things one is if you remember last July we put the last 42 megawatts of Ocotillo in operation. So part of what Mike referred to in his remarks is that difference where in second quarter last year the 42 megawatts weren’t fully commercial or weren’t commercial. And so that’s the additional piece.

Secondly, you may remember that from a production standpoint, Siemens had some problems with their B-52 blades and that we were going through a renovation process in May, June, July of last year to retrofit those blades and so that reduced the production. So those are really the two drivers that reduced the production last year and that won’t be a problem going forward from here. Siemens has completed their, successfully completed all of their retrofits in very quick fashion. Our cash flows were only minimally disturbed. I think we were basically fully covered or close to fully covered on our cash flows last year.

So there is not a big change there for the downtime because of the B-52 blade and going forward we don’t anticipate any problems with those blades or the operation at Ocotillo or Santa Isabel.

Unidentified Analyst

Great.

Michael Lyon

I might address the question that you raised about Logan’s Gap for a moment. The timing on that is little bit still open to completion of the development of that project. We have indicated that the project is ready for financing now and we believe that the commercial operations would commence late in 2015. So I think it’s reasonable to expect that we might have some increase in revenue next year or early 2016 assuming that we acquire that project. We haven’t yet reached the terms on acquiring the project and that will be subject to our overall dropdown process with Pattern Development. But your timeline sounded generally right. I think you said, I couldn’t quite hear you, I though you said start receiving revenues in mid-2016, I may have heard you wrong, but that feels a little late to me.

Unidentified Analyst

The first half.

Michael Lyon

Okay, first half, that sounds okay.

Unidentified Analyst

Late first half, early second half that’s what I was thinking about.

Michael Lyon

I see, okay, that sounds about right. Again, all subject to everything coming together in line with current timelines that we are anticipating, but it’s development, things can change.

Unidentified Analyst

Sure, thanks.

Operator

And there are no further questions I will turn the call back over to Mr. Garland.

Michael Garland

Thank you very much. I think we are done and like I said it was a good quarter and I think our momentum is building for the remainder part of the year and early, mid next year. We are actually seeing some exciting developments which we hope to be able to disclose to you over the coming months. So thank you very much for your interest in Pattern Energy and we look forward to talking to you again.

Operator

And this concludes today’s call. You may now disconnect.

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Source: Pattern Energy Group's (PEGI) CEO Michael Garland on Q2 2014 Results - Earnings Call Transcript
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