Pattern Energy Group (PEGI +0.00%) has hit a rough patch over the past year. After growing its dividend 15 straight quarters, the renewable power company pressed pause on payout increases this year to shore up its financial situation, which had gotten a bit too tight as a result of a steady string of acquisitions over the past few years. However, the company's third-quarter results showed a significant improvement, which, when combined with some strategic moves during the period, have it on track to achieve its targets.
Digging into the numbers
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Gigawatts hours sold |
1,623 GW |
1,514 GW |
7% |
|
Adjusted EBITDA |
$79.5 million |
$54.7 million |
45% |
|
Cash available for distribution (CAFD) |
$31.7 million |
$9.5 million |
235% |
|
CAFD per share |
$0.32 |
$0.11 |
191% |
|
Dividend coverage ratio |
0.75 times |
0.26 times |
189% |
Data source: Pattern Energy Group. YOY = year over year.
Powering Pattern Energy Group's increase in electricity sold versus 2017's third quarter were acquisitions completed in the past year, favorable wind conditions in several regions, and increased availability of its assets. Those factors helped offset the fact that overall production for the quarter was 8% below the long-term average forecast due to weakness in the Eastern U.S., which the company only partially offset with strength in Canada, Japan, and Puerto Rico.
The year-over-year increase in electricity sold helped power the surge in earnings and cash flow. In addition to that, the company also benefited from paying down debt as well as from reduced transmission costs. Those factors helped offset some of the lost income from the sale of its El Arrayan operations in Chile.
Pattern Energy Group received $70.4 million from the sale of El Arrayan, which helped bolster its balance sheet as well as provide it with the funds needed to acquire a 51% interest in the Mont Sainte-Marguerite project in Quebec. The company is paying $37.7 million for the stake, which should generate about $3.8 million in annual CAFD over the next five years.
Image source: Getty Images.
A look at what's ahead
"It was another solid quarter with CAFD up more than three times the same period last year, which puts us in a great position to achieve our targeted CAFD for the year," stated CEO Mike Garland in the earnings press release. That forecast would see the company generate between $151 million to $181 million in CAFD this year. At the midpoint, that's a 14% increase from 2017 and would provide the company with just enough cash to cover its 9.1%-yielding dividend.
However, Pattern Energy's aim going forward is to improve its dividend payout ratio from around 100% at the moment to 80%. It intends on doing that by continuing "to take proactive measures to increase our CAFD without issuing common equity, including asset recycling, repowering Gulf Wind, and the implementation of cost savings," according to Garland. The company took a notable step forward on those initiatives during the quarter by selling El Arrayan while making progress on a second asset sale that's in the final stages. Those transactions will enable the company to recycle capital into higher-returning opportunities such as Mont Sainte-Marguerite, as well as repowering Gulf Wind, which will see it replace aging turbines and components so it can generate more power and cash flow.
Pattern Energy is taking those steps to improve its financial profile so it has the flexibility to pursue its growing pipeline of acquisition opportunities. The company, through its two development arms, has more than 10 GW of projects in the pipeline, which is just a tiny slice of the estimated $10 trillion renewable power market potential. It currently has the right of first offer to acquire 743 MW of identified projects, which represents significant growth for a company that has purchased 1,564 MW of renewable assets since its IPO five years ago.
A bright future
Pattern Energy Group expanded its renewable power portfolio and its dividend at a fast pace during its first few years as a public company. However, it has had to slow down in the last year to digest those deals and improve its financial situation so that it's in a stronger position to capture the growing opportunity set in front of it. While the company still has some work to do before it achieves its financial targets, it's certainly heading in the right direction, which makes it one renewable power stock that investors will want to watch closely.
