Wind power can be as volatile as wind itself, petering out in
the dead heat of a sticky afternoon in central Texas or blowing
up a storm from gusts off the Gulf of Mexico.
YetPattern Energy Group (
), a wind-power outfit that went public in early October, prides
itself on its stability and predictability.
"We positioned ourselves as a stable dividend-producing
company with good growth," said CEO Mike Garland in a phone
Analysts say Pattern's structure is similar to a master
limited partnership used for natural gas pipelines and other
assets meant to generate cash flow to be paid out to investors as
The company's six current wind-power projects in the U.S. and
Canada operate under long-term fixed prices. Power generated is
sold to "highly creditworthy" companies, Garland says, such
asPacific Gas & Electric inCalifornia (
) and Manitoba Hydro in Canada.
Wind Power Pipeline
Two other projects now under construction are expected to
become operational in the first half of next year, in Chile and
Canada. Several others are in the works, including locations in
Texas and Canada.
"All of our projects are in different wind regions," said
Garland, who adds that geographic diversity offsets the ups and
downs of wind patterns. "New projects will continue to dampen the
The six current projects and two to open next year were
developed and "dropped down" to Pattern by its parent company PEG
LP, majority owned by private equity firm Riverstone
PEG owns a majority stake in Pattern. Analysts expect
Riverstone to sell its interest over the next three to four
years. Pattern was incorporated prior to its IPO to own, operate
and construct power projects developed and transferred to it from
its parent company. PEG was formed in 2009 as a development power
company, much of it wind power, backed by Riverstone and
employing executives with years of experience in renewable
Members of Pattern's management team were part of PEG prior to
"We're probably the fastest growing renewable-energy company,"
Garland said, referring to the more than 1,000 megawatts under
its control from the eight projects transferred from PEG.
"Over the last four years very few companies, even in solar,
have developed 1,000 megawatts," he said.
He figures Pattern is among the top 20 wind-generation
companies in North America. Many have been around a lot
RBC Capital analysts write thatNRG Yield (
) andTransAlta 's (
) unit TransAlta Renewables (traded on the Toronto exchange) have
similar business models. But NRG has more diversified power
assets and TransAlta has a lower growth profile and older assets.
Both companies recently completed IPOs.
Pattern's power contracts average 19 years. About 80% of the
company's cash flow will be used to pay dividends.
"Our operating cost, or margin, is fairly stable, with only
material variability in our production, which is wind- and
equipment-related," Garland said.
Improvements in wind-turbine technology since 2009 have made
turbines 50% to 100% more productive, he says.
"We see the cost of wind continuing to fall over the next
several years," Garland said.
The company's biggest expense, 60% of costs, goes to servicing
its $1.3 billion in long-term debt.
Pattern will initially pay $1.25 a share on an annualized
basis, with the first quarterly dividend set for Jan. 20 to
shareholders holding stock at the end of the fourth quarter, Dec.
31. It expects to grow that dividend 8% to 10% annually over the
next few years as six projects come online.
"If we only do four then we'll probably be at 8% growth, five
would be 10% and if we do all six it'll be above 10%," Garland
Analysts expect the company's dividend to grow at a higher
rate than management's forecast.
Morgan Stanley forecasts 11% a year on average through 2016.
RBC Capital Markets forecasts 10% to 12% growth through 2017. BMO
Capital Markets sees a 10.8% dividend growth rate the next three
years but said third-party deals could "offer upside" to its
Analysts' projections are based on Pattern's ability to grow
"by adding accretive projects," as RBC Capital analyst Nelson Ng
put it in a recent research note.
Once Pattern's market capitalization, now around $1 billion,
reaches $2.5 billion, its parent will transfer its employees to
Pattern and Pattern will take on its own development
Meanwhile, PEG will continue to transfer development projects
to Pattern to operate. And Pattern will also try to acquire
assets in order to grow its cash available for distribution --
what the firm "lives and dies" by, as Garland says.
In the nine months through Sept. 30, it had $37 million in
such cash, with $6.3 million from the third quarter.
Electricity sales from its wind-power assets in the third
quarter rose 32% over a year earlier to 464.8 gigawatt-hours.
Revenue jumped 239% to $57.3 million while net income totaled
$4.2 million vs. a net loss of $16.9 million a year earlier.
"We're looking (at acquisitions) primarily in the U.S. and
Canada," Garland said, adding that they are interested in both
wind and solar projects.
"We think solar is a nice complement to our wind projects," he
said. Take Texas, where in inland areas wind tends to die down
periodically. "Texas is a pretty sunny place," he said.
According to a company filing citing the U.S. Department of
Energy, wind power was the second-largest source of new
electricity generating capacity in the U.S. after natural gas in
six of seven years from 2005 and 2011.
And wind-power trade group the American Wind Energy
Association says wind power became a leading source of new
electricity in the U.S. for the first time in 2012. Investments
up until then totaled more than $120 billion.
The U.S. boasts the second-largest wind market after China.
Federal tax credits to develop new wind projects expire at the
end of this year, though qualified projects not yet begun can
start after the deadline and still use the credit.
The end of the tax credit could impact new development unless
the credit is extended, as has periodically happened in the