Pattern Energy (PEGI +0.00%) battled several headwinds during last year's fourth quarter, which negatively impacted results. However, the wind-focused renewable power company still delivered a healthy 14% increase in cash flow for the full year, which was just enough to cover its high dividend yield.
The company anticipates more of the same in 2019 as it expects to continue growing cash flow even as it battles more headwinds. That's one of a couple of things investors should keep an eye on when it reports its first-quarter results later this week.
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1. Does it remain on track to grow cash flow?
Pattern Energy put out a two-year outlook for cash flow when it reported fourth-quarter results earlier this year. The company currently anticipates that cash available for distribution will range between $160 million and $190 million this year. That outlook implies 5% growth at the midpoint.
However, there are lots of moving parts in that forecast. The company, for example, anticipates going up against two notable headwinds: The expiration of contracts supporting its Gulf Wind facility and the continued congestion of Texas' electricity distribution system. The company aims to offset these issues by delivering improvements at its existing operations to drive better production at its wind farms while also reducing costs. On top of that, Pattern Energy expects to make at least one acquisition that will provide some incremental cash flow.
Investors should see if the company is keeping pace with that outlook. In particular, they should see if there's been some improvement at its legacy operations since that factor alone should supply it with an incremental $16 million in cash flow this year.
2. Is it making progress on funding?
Pattern Energy estimates that it will need to fund between $300 million and $500 million of acquisitions to support its two-year growth plan. The company, however, only had $200 million of liquidity at the end of last year. Because of that, it needs to secure alternative funding sources so that it can achieve its growth strategy.
The wind power producer believes that it has multiple options that it could use to fund acquisitions, including co-investment structures, additional asset sales, and hybrid equity such as preferred stock. While the company does have ample near-term liquidity and plenty of time, investors should keep an eye on its progress in obtaining alternative funding. Ideally, the company will have started exploring its options and taken steps toward securing some form of financing, such as identifying assets that it can sell at a premium price.
Pattern Energy anticipates that acquisitions will supply it with $5 million of incremental income this year and $15 million of additional cash flow in 2020. That's a vital aspect of the company's plan to grow cash flow at a 10% compound annual rate over that time frame. This strategy is the key to getting its dividend payout ratio down from a worrisome 99% of cash flow to a more comfortable 80% by the end of next year.
Hoping for a good start to the year
Pattern Energy has a plan to grow cash flow at a double-digit annual pace over the next two years, which will make its high-yielding dividend more sustainable. However, the company needs several things to go right for that to work. That's why investors should keep a close eye on its progress this quarter since an early derailment could force it to shift gears.
