Pattern Energy Powers Up Despite Weak Winds In West

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High pressure in the West this winter may have caused a few wind farms there to slow down as winds died. But Pattern Energy Group has plenty of other wind projects to keep business whirring.

The San Francisco-based wind-power company has added three projects to its portfolio since December, for a total of 11 in North America and Chile. All but a few are fully operational, and they will all likely go commercial by year end.

Now thatPattern Energy Group ( PEGI ) has raised $300 million in an oversubscribed follow-on offering last week, it also has more money on hand to acquire other projects. The company's initial public offering was in early October.

"We see a lot of opportunities in front of us," said CEO Mike Garland in a phone interview. "We were recently shortlisted for a number of acquisitions. If we like the assets, we can be competitive because our cost of capital is competitive against anyone else's now."

Those candidates are in the wind markets where Pattern now operates, he says. If negotiations are successful, this year the firm may announce acquisitions equal to about 500 new megawatts of power.

Drop-Down Strategy

Meanwhile, Pattern continues to have "right of first offer" for projects developed by parent PEG, formed in 2009 as a development power company, mostly in wind power. It's led by a team experienced in renewable energy and majority owned by private equity firm Riverstone Holdings.

PEG's wind-power pipeline assets include projects in Texas and Canada. PEG agreed to "drop down" two wind projects to Pattern in December, one in the Texas Panhandle and another in Ontario, Canada. Pattern recently agreed to buy a second project in the Texas Panhandle.

One project in Texas is slated to become operational in June, the other drop-downs by year end.

Taking into account the three new projects and future drop-downs expected from PEG, Pattern said that it would aim to increase growth of its cash available for distribution per Class A share annually over the next three years to 10%-12% from an 8%-10% previous target. The board recently approved a 3% increase in the quarterly dividend to $1.288 annually.

The new target assumes only initial drop-down purchases from PEG and no third-party acquisitions, Morgan Stanley analyst Stephen Byrd said in a client note.

Based on his figures for expected additional asset growth, he estimates dividends per share through 2016 could grow roughly 15% a year.

After PEG sold 10.3 million Class A shares in the recent follow-on, its majority stake in Pattern was cut roughly in half to a little more than 30%, Garland says.

"The float improved significantly," said Wells Fargo analyst Neil Kalton, adding in an interview that the increased liquidity from the proceeds will help finance drop-down and third-party buys.

"When you look at the opportunities for wind and solar in the U.S. and abroad, the opportunities are enormous," Kalton said. "It is very difficult to build nuclear-power plants and coal-power plants."

As the cost to build wind-power farms is falling, "the economics of wind relative to other resources like natural gas is improving," he said. "We think wind is going to continue to capture increasing market share over the next 15 years. Pattern is well-positioned to be a meaningful player in that market."

Pattern is the sixth largest firm by market cap in IBD's No. 1-ranked Energy-Alternative/Other industry group. The biggest isVestas Wind Systems ( VWDRY ), a global wind-power company based in Denmark.

NextEra Energy ( NEE ) is the largest owner of wind energy in North America. Other wind-power companies areNRG Yield ( NYLD ) ( see The New America in the May 5 IBD) and TransAlta Renewables'TransAlta ( TAC ) unit , which trades on the Toronto Stock Exchange.

How Wind Power Works

Wind power can be volatile. The wind doesn't always blow and generate much electricity.

"This year, wind got off to a bad start," Kalton said. Unusually high pressure in the West that carried into the first quarter from late in 2013 caused wind to decline. Pattern's production came up 5% shorter than expected.

As a result, EBITDA (earnings before interest, taxes, depreciation and amortization) was lower than expected, too, though still up 8% to $37.2 million on an adjusted basis.

Garland says that the high pressure system affected Pattern's largest wind project, near San Diego, and two others, in Nevada and Texas.

"Variations can be 5% to 10% or more quarter to quarter or year to year," he said. "We plan for that. We have ways to manage our costs."

Pattern's operating costs are "modest," he says. Its top expense is servicing debt, which stood at more than $1.3 billion in the first quarter.

"We're fairly young. We haven't paid down a lot of our debt," said Garland. Its 60-40 debt-to-equity ratio "is not a high ratio, and even better is that we will be paying it down every year," amortized over 17 years, he added.

Pattern uses about 80% of its cash flow to pay dividends. Despite the 5% production shortfall in the first quarter, cash available for distribution rose 23% from the prior year's same quarter to $17.8 million.

Total revenue grew 13% to $49.5 million. But the company posted a net loss of $21.9 million, or 20 cents per share, vs. a net loss of $18.8 million a year earlier. It said that the loss was due in part to higher losses on some interest-rate swaps, energy hedges and higher operating expenses "associated with being a public company."

Analysts polled by Thomson Reuters forecast a full-year profit of 42 cents a share, up 27% from a year earlier.

Meanwhile, the high pressure system that caused wind in the West to peter out has essentially broken up, Garland told analysts on a conference call this month.

Despite weak winds in the first quarter, Raymond James analyst Frederic Bastien told clients that Pattern was "still hitting key milestones." He called it a good core holding "for clients craving wind power exposure" or for those who want a "sustainable" investment and "healthy total returns."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: PEGI , VWDRY , NEE , NYLD , TAC

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