Value Line has initiated coverage of Pattern Energy Group, Inc. (PEGI) in its flagship product, The Value Line Investment Survey. The San Francisco-based company owns interests in ten wind power projects located throughout the United States, Canada, and Chile. These platforms utilize proven, best-in-class technology and have a total owned capacity of 1,255 MW, consisting of six operating projects and four projects under construction. Its strategy is to focus on purchasing and maintaining power businesses with stable long-term cash flows, in attractive markets, that possess potential for continued growth.
Pattern Energy anticipates that its four construction projects will all commence commercial operations prior to the end of the fourth quarter of 2014. Each of these ventures has contracted to sell all or a majority of its output pursuant to a long-term, fixed-price power sale agreement with a creditworthy counterparty. Furthermore, ninety-three percent of the electricity to be generated by PEGI’s projects will be sold under these power sale agreements, containing a weighted average remaining contract life of approximately 18 years. Like many utility companies, Power Energy has its sights on generating the highest possible dividend yield for its shareholders. Thus, management has indicated the company’s target payout ratio will remain around 80% of cash flow.
PEGI competes with other wind power, infrastructure funds, renewable energy companies, and conventional power companies, to acquire profitable, construction-ready operating projects. In addition, competitive conditions may be substantially affected by various forms of energy legislation and regulation considered from time to time by federal, state, provincial, and local legislatures and administrative agencies. Such laws and regulations may considerably increase the costs of acquiring and constructing operating ventures. Finally, Pattern Energy must also face the realization that some of its peers may be better able to adapt to and operate under such laws and regulations in a more-efficient and profitable manner.
Although it does not face much direct competition in a traditional sense, the company squares off against any business delivering bids for energy investment projects. PEGI sells its electricity and environmental attributes primarily to local utilities under long-term, fixed-price arrangements or, in limited instances, local liquid ISO markets. For the year ended December 31, 2013, Manitoba Hydro, San Diego Gas & Electric, Pacific Gas and Electric Company (PGC), and Electric Reliability Council of Texas accounted for 18%, 17%, 15% and 12%, respectively, of its total revenue.
The company recently completed its initial public offering. On September 26, 2013 Pattern Energy sold 18.4 million shares to the public at an average price of roughly $22.00 per share. Several months after the IPO, the equity’s price surged to around $31.00, but has since fallen back down to Earth some. That said, the issue, on average, continues to trade about 25% higher than it did during its debut.
PEGI’s top- and bottom-line prospects appear intact. It already has six power plants up-and-running, with the additional four units coming aboard by the end of this year. The key here remains that each plant’s electrical output is already spoken for, as businesses (primarily utility companies) have reached terms with Pattern Energy to purchase a bulk of its electricity at a solid, fixed rate. Moreover, the fact that these deals have an average life of nearly two decades augurs well for this energy provider, since long-term contracts allow for greater revenue and profit stability over the long haul.
It is important to note that at present solely Class A shareholders are entitled to the company’s distributions. However, on January 31, 2014 all Class B shares will be converted to Class A stock on a one-for-one basis.
All told, subscribers interested in this energy provider are advised to consult Value Line’s quarterly reports for Pattern Energy Group, Inc., as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.