Fairly new to the earnings-season hoopla, Pattern Energy Group (NASDAQ:PEGI), which had its IPO in October, is a pure play on wind power. And, like traditional utilities, the company offers investors higher dividends.
Operating in the United States, Canada, and Chile, the company owns wind farms and sells the generated power to off-takers in the form of long-term power purchase agreements, or PPAs. But, unlike traditional utilities, the company provides investors with growing upside potential in the rapidly expanding wind power market.
Performing consistently well over the past few quarters, Pattern Energy has gone largely unnoticed; however, it won't last forever -- Mr. Market is sure to catch on. And when it does, investors may regret that they had not paid this unique energy company closer attention when they had the chance.
As states continue to meet renewable portfolio standards, utilities are adopting greater amounts of wind capacity into their portfolios, thereby offering Pattern Energy an opportunity to further grow its business. For example, the company just agreed to acquire 179 MW of owned interest in the 218 MW Panhandle 1 project. Increasing its owned capacity under completion by 14%, Pattern Energy now has 11 wind power projects in its portfolio -- four of which are expected to begin operations in 2014.
Since its IPO in October, the company has increased its owned capacity by 38% to a total of 1,434 MW. Looking toward future growth, the company has the potential to expand its portfolio through both Pattern Development drop down acquisitions and third-party acquisitions.
It should be noted that the substantial growth that the wind industry has experienced owes itself, in large part, to tax incentives like the production tax credit, which Congress hasn't renewed. Should the expiration of the credit persist, it could adversely affect the development of future projects and Pattern Energy's long-term success; however, experts suggest that the wind industry is nearing grid parity, meaning that the wind industry may no longer need to be so reliant on tax incentives.
Committing $40 billion to renewable energy projects, Goldman Sachs is predicating its investments on this fact. An article from Greentech Media finds that Goldman Sachs accepts the fact that "costs will continue to decline as efficiency improves, [and] that solar and wind will reach grid parity without subsidies in the not-too-distant future."
Additionally, the company operates in Canada and Chile -- two countries where the PTC is a non-issue. Furthering its operations in these countries (and possibly others) would ensure the company's continued success.
Showing investors the money
Pattern Energy had a very good quarter -- adjusted earnings before interest, taxes, depreciation, and amortization rose 8% to $37.2 million; electricity sales rose 8% to 653 GWh; revenue rose 13% to $49.5 million. What attracts many investors to the company, though, is the dividend. Committed to the sustainability of its dividend, Pattern Energy has identified a clear path toward the healthy distribution of its cash to its shareholders.
After releasing first-quarter earnings, the company announced a $0.322 per share dividend for the second quarter, which represents a 3% increase; moreover, the company raised its target on its annual growth rate for its CAFD per share from 8% to 10% over the next three years to 10% to 12% for the same time period.
Looking back, the gain in CAFD from 2012 to 2013 provides the company with solid footing toward realizing its future goals -- Pattern Energy grew its CAFD nearly 240% from $17.7 million in 2012 to $42.6 million in 2013. Long term, the company has what it refers to as a "conservative" target payout ratio of 80%.
Unlike traditional utilities, which deal in fossil fuels and are subject to market price fluctuations, Pattern Energy's long-term PPAs mean that it has a clear and steady revenue stream from which continued dividend growth can be well-sustained.
Looking at the long-term relationship
Pattern Energy prides itself on its partnerships with industry leaders like Siemens (NASDAQOTH:SIEGY). Just this week, Siemens confirmed that it has received an order for 270 MW worth of wind turbines for Pattern Energy's K2 wind project in Ontario. In addition to the 140 turbines, the deal with Siemens includes a long-term service and maintenance agreement.
In a further show of confidence, Pattern Energy announced the signing of multiple 10-year service contracts for its facilities in North America with Siemens. Located in the U.S., Canada, and Puerto Rico, the six projects are comprised of 400 onshore wind turbines and represent 930 MW of total output.
Besides dealing with a top-tier vendor like Siemens, Pattern Energy mitigates risk by dealing with credit-worthy offtakers. Located in three different countries, these offtakers have an 'A' weighted average credit rating.
Foolish final thoughts...
Pattern Energy has a lot to offer investors looking to gain exposure to the energy sector. For those looking to bring some environmental friendliness to their portfolios, the company is deeply vested in the growing acceptance of a renewable energy source -- wind. And for those looking to add a different type of green to their portfolios, the company seems committed to its shareholders, expecting to grow its dividend over time.
Why should OPEC be afraid of this company?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!
Scott Levine has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.