Pattern's Wind Energy Generates 'Non-Taxable' Returns Of Capital To Shareholders

| About: Pattern Energy (PEGI)

Summary

Pattern Energy owns a geographically diverse set of wind and solar generating facilities.

It is a small cap and rapidly growing distributable cash flow. But there are no IDRs and no K-1.

In 2015, 100% of distributions were characterized as "non-taxable" returns of capital.

PEGI yields 7.3% and is a BUY.

Pattern Energy Group (NASDAQ:PEGI) owns and operates a globally diversified portfolio of wind and solar energy generating assets. It is a small-cap stock (Q2 revenues of $93.4 million) and is expected to grow cash available for distribution ("CAFD") by 46% this year. The stock also trades under the symbol "PEG" on the Toronto Stock Exchange ("TSX").

Assets

PEGI owns a diverse set of wind and solar power generating assets across North America, Puerto Rico, Chile and Japan:

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Source: September Presentation

This week Pattern completed the acquisition of a 90 MW interest in the 179 MW Armow Wind power facility in Ontario, Canada for $133 million. The company said that is a roughly 10x valuation on the forecasted 5-year average annual CAFD from the project.

The deal was immediately accretive and was funded with cash on hand and draws on the existing revolver. The Armow Wind array consists of 91 Siemens (OTCPK:SIEGY) 2.3 MW wind turbines and is jointly owned by Pattern Energy and Samsung Renewable Energy, Inc. The facility began operation in December 2015 and carries a 20-year power purchase agreement with the Independent Electricity System Operator in Ontario.

Most of PEGI's turbines are relatively new (<3 year average) and are leading edge, high quality turbines made by either Siemens or GE (NYSE:GE).

Earnings

The Q2 EPS report was excellent and is summarized by the slide below:

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As can be seen, capacity, revenue, adjusted EBITDA and distributable cash flow are all showing substantial growth. With the inventory of available drop-downs, investors should expect this to continue next year as well (see outlook below).

Distributions

Pattern's distributable cash flow is underpinned by long-term power sales contracts. The length of these contracts - and more information about each particular facility - can be found here, with the average contract being 20 to 25 years. 90% of existing capacity is covered under long-term contracts.

The Q2 dividend was declared at $0.40 per share or $1.60 on an annualized basis. That is a 2.6% increase over the previous quarter's dividend, and equates to a current yield of 7.3%.

Unlike an MLP, PEGI is a YieldCo that has no IDRs and does not issue a K-1. In fact, in 2015, all dividends were characterized as a "Return of Capital" and were therefore "non-taxable." From the company's tax reporting webpage on the distributions:

100% is a nontaxable return of capital and reduction of a U.S. shareholder's tax basis, to the extent of a U.S. shareholder's tax basis in each of its Pattern Energy common shares, with any remaining amount being taxed as capital gain.

Outlook

Today Pattern Energy owns ~2.7 GW of total generating capacity and plans to grow that to 5 GW by year-end 2019 - almost a double. Near-term drop-down opportunities by the sponsor, Pattern Energy Development, have identified an additional 942 MW of capacity. That is a 36% increase over PEGI's existing capacity and bodes well for continued distribution growth going forward.

In addition, lower cost and higher capacity battery systems may enable wind energy facilities to turbo-charge returns by backing up wind generated power in times of low demand.

Summary & Conclusion

PEGI is a unique wind and solar owner/operator that has no IDRs and issues no K-1. 100% of 2015 distributions were characterized as a "non-taxable" return of capital. That's good news for income-oriented investors who find the 7.3% yield attractive. PEGI is a BUY.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PEGI over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck!

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