Pattern
Energy Group, Inc. (PEGI: $23.15) Pattern Energy Continues it’s Pattern of
Returning Value to Shareholders
By: Daniel Ptacek, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
· Pattern
Energy Group, Inc. (NYSE: PEGI) operates in the power industry as a pure play
electric generation company holding interests in 25 wind and solar projects
with a total owned capacity of 2,942 MW. The Company derives revenue from the
United States, Canada, and Chile. The
firm was founded on October 2, 2012 and is headquartered in San Francisco, CA.
·
Q4 saw revenue of $120.7 million, an increase
of nearly $40 million from Q4 2017. Net income for the quarter was -$12.8
million, making full year earnings equal to $142 million. Net income for the
previous year was -$18 million, representing an increase of nearly $160
million.
·
Cash Available for Distribution (CAFD) for the
year came in at $167 million, slightly missing our estimate of $172 million.
However, estimates for 2019 and 2020 provided by management have midpoints that
are higher than our initial estimates.
·
In March 2019, it was announced that 400 MW of
wind projects in New Mexico had their contracts secured and were added to the
iROFO portfolio, bringing the total to 1.4 GW. Offshore wind projects in Japan
offer attractive growth potential.
·
Q4 EPS was -$0.13, underperforming consensus
estimates of $0.21.
Key
Points:
As PEGI continues into 2019, expectations of numbers reflecting a
strong 2018 are expected. Management offered guidance for CAFD in the range of
$160-190 million, which would represent a roughly 10% increase over 2018’s CAFD
levels. The firm’s focus on expansion and cost saving initiatives are pushing
for an 80% payout ratio for the full year of 2019. The consensus estimates for
CAFD for 2019 sit around $200 million, with these increases being driven by
improved generation, previous investments, and cost improvements, as well as a
cash distribution from Pattern Energy 2.0 in 2020.
The addition of 400 MW of wind projects in New
Mexico brings PEGI’s iROFO (right of first order) pipeline to 1.4 GW. These
wind projects have already signed sales agreements for delivery of energy
produced to California. In addition to the New Mexico projects, Pattern Energy
has secured 453 MW of new FiT contracts in Japan, and has $200 million in
available liquidity to fund its growth. Drop downs from these investments are
expected to increase in 2020 and beyond. Furthermore, Pattern Energy has
amassed nearly 10 GW of potential projects through their subsidiaries Pattern
Energy 1.0 and 2.0
PEGI’s management and its investors focuses
more on CAFD than EPS, thus, the earnings miss had a minimal impact on price
per share.
What has
the stock done lately?
PEGI was added to the portfolio in
mid-December. After a dip in the latter half of the month, the stock has
performed exceedingly well. In the last three months, PEGI has posted returns
of 12.37%. It began 2019 at a price of $18.65 and has climbed to its current
level of $23.03. Consensus estimates put the one-year price target above $23.
Past
Year Performance:
Over the
past 52 weeks, PEGI has posted returns of nearly 40% and a price change of
roughly 30%. Last July, the firm reached its 52-week low at $17.09. It has
shown a higher than expected amount of volatility with an adjusted 52-week beta
of .82. The company’s 52 week high was reached on May 3rd at a price
of $23.15 per share. Following the aforementioned dip in December 2018, PEGI
has steadily climbed for nearly all of 2019 to its current price of around $23
per share.
Source: FactSet
My
Takeaway:
PEGI’s management has displayed its willingness to maximize value
to shareholders through cost cutting, smart use of capital and clear, concise
guidance looking towards the future. The firm’s focus on growing its CAFD and
making sure its investors are receiving regular disbursements gives me
confidence that management will continue to do so in the near term.
Furthermore, their ever-increasing pipeline of projects maturing through their
subsidiaries, especially the expansions in New Mexico and Japan, give the
company’s value a good deal of leg room through 2020. I recommend that we hold
our position in PEGI and reap the rewards of the drop downs expected in 2020.
Source: FactSet
