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Pattern Energy: Attractive Entry Point

Bank On Insight profile picture
Bank On Insight


  • A new partnership and investment by PSP, a Canadian pension fund.
  • Pattern can be thought of as a bond proxy with a great yield.
  • Accounting issues give an attractive entry.

I never really gave Pattern Energy (NASDAQ:PEGI) much thought until late 2016. I was always one to look at traditional utilities with renewable operations, instead. Like many other investors, I doubted the continued viability of yieldcos after the well documented

SunEdison (SUNEQ) implosion. I almost missed a gem by ignoring them. Pattern Energy is a great value for dividend investors and has recently had its quality reaffirmed, with a major investment by a Canadian pension fund.

St Joseph wind farm in ManitobaSource: Pattern Energy

What is a yieldco?

Yieldcos are slightly complicated entities, but let's try to keep it simple for the purpose of the article. You can read a more in-depth explanation here. In short, yieldcos are the entities created by a parent company that holds renewable energy assets. They are able to limit their tax burden by rapidly growing their asset base and there are tax implications, but as a Canadian, they're taxed differently than in America. Read more about yieldco taxation here. What's inherently wrong with yieldcos? Nothing. The thing that has really set the sector back has to do with its former poster-child, SunEdison and its yieldcos, TerraForm (TERP) and TerraForm Global (GLBL).

Pattern out with the bathwater

You can see the yieldcos get taken down with SunEdison.

ChartSUNEQ data by YCharts

What fascinates me about this is that Pattern has nothing to do with SunEdison or its yieldcos, yet it got taken out with the pack. In fact Pattern and its parent Pattern Development have been snapping up projects off SunEdison, it's a competitor off the table. The only two reasons I can think Pattern would get taken to the woodshed along with the Sun family is:

  1. Concern grew about whether Pattern would be a Terraform 2.0, or its parent a SunEdison.
  2. Investors saw depressed valuations in the Terraform

This article was written by

Bank On Insight profile picture
I manage a conservative portfolio of blue-chip equities. I target dividend-paying blue chips on sale. The majority of my articles will focus on what I know best (and what is under-covered on Seeking Alpha), Canadian mid and large caps. REITs are my focus, though I dabble in everything. Ranked 3rd on Seeking Alpha for Services stocks!To get notified when I release a new article simply hit the orange follow button above!Connect with me on Twitter!

Analyst’s Disclosure: I am/we are long BBRY. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (28)

jimklawyer profile picture
Bank-on-Insight, very good article and as a long-term [since Dec. of 2014] holder of PEGI, I agree with most of your reasoning and your conclusion that PEGI is a buy right here.

Another Contributor, Michael Fitzpatrick (for whom I generally have a lot regard), wrote an article shortly after the "accounting" issue raised. He was negative on PEGI. The issue, to me, was really more of an internal control miscommunication over allocation of capital and accuracy of spreadsheets, and thus likely returns on contracts. As far as I can tell, this issue was limited to the third quarter of 2016. I would bet the problems are now and have been for several quarters completely resolved. At the time of MF's article, I'm thinking PEGI was trading in the high teens. Now, it's just over $25, precisely $25.18 on Friday's close.

The 5 yr. chart looks good to me. PEGI has cleared, just barely, the $25.13 double top from the weeks of Aug. 8 and Sep. 5 of 2016. Assuming it doesn't fall back below $25, I think PEGI has a good chance to challenge the $27 to $30 level in the next 6 months. Meanwhile, it's paying me 6.6% to wait while it decides which way it may go in the near term.
Jchessler profile picture
Thank you for the article on PEGI. Where is the "here link" that discussed their tax treatment? I saw it on my first reading, but can"t find it again.

Thanks again
all distributions for 2016 were ROC.. so basis will decrease.. no tax until sell
Dividend Sleuth profile picture
Thanks for a helpful article, BOI. I'm long PEGI and the Canadian pension fund infusion is a nice plus. PEGI's credit has not been rated by S&P until recently, when it came in at BB-.

This is three notches below the ephemeral "investment grade" BBB-, which was disappointing. S&P is expecting an issuance of stock, which might provide a short-term buying opportunity even though it should be accretive long term.

I take the credit ratings seriously, and PEGI is now my only rated stock that is lower than BBB. I don't see a recession on the immediate horizon, but I would be a bit concerned if PEGI goes into the next recession with a BB- credit rating.
Knight Investments profile picture
If they do issue stock, I will be buying when the masses sell and make PEGI my largest position. You present a dream that has a good chance to play out. Please, dilute so I can get cheap shares!
The FED essentially just admitted interest rates will not be rising much. Too much debt. At what is it 6% almost every penny will go towards the national interest only?
We are not going to see high interest rates in our life time, barring a currency crisis due to extremely lower demand for US Treasury bonds. In that case perhaps gold and silver will do well.
CincinnatiRick profile picture
I found the post-election swoon for renewable energy a good buying opportunity and have been long PEGI since. Renewable energy, properly done as PEGI has and without being propped up by political artifice, has a bright future but, like any other investment, can get ahead of itself. I was considering cashing out when this Canadian Pension boost came through and raised the ceiling for PEGI in the forseeable future and also provided some reassurance regarding the accounting problem kerfluffle.
pbst profile picture
I agree with your assessment on Pattern. Have long believed (and argued) that strategic co-investment arrangements, such as Pattern/PSP, should be considered more often and that they are a win-win for both sides.

Looking ahead, I think the thing to watch will be how the group positions itself in the solar space and how it complements the portfolio with storage.

I would argue that Pattern should be considered in context with Brookfield Renewable Partners and Innergex.
Knight Investments profile picture
Important to separate PEGI from Other yield co's. PEGI parent is private which offers many advantages compared to a publicly held parent.

Long PEGI and will be adding more on weakness.

My average cost is $19.91
Growtheport profile picture
Right with you KI. Average cost of $20.
Zheffafa profile picture
$19.75 and loving it. Got all I could under $19 and saved all winter to keep adding. Torn between keeping low average for bragging rights, and adding at today's (probably still low) price.
Kevin Neumaier profile picture
Excellent article. The chart showing how Sun Edison got people to jump out (or short) the yieldco space is excellent. As you say, no relation other than they were both yieldcos. IMO Sun Edison had a great top line summary business plan without a good company underneath.

I think it did cause Pattern problems initially as they couldn't raise capital in the markets as a result of the share price drop. On the plus side, they were able to pick up some bargains on projects with the uncertainty in the space. The deal with PSP now makes them more bullet proof with regard to market fluctuations.
Bank-on good article on PEGI. Have owned PEGI since 11/2016. Been happy so far with performance - particularly since it is now going up.

I enjoy investing in utes particularly ones that have a large alternative energy slant to them.

If you like PEGI you might want to look at HASI and HIFR they are somewhat similar to PEGI. Another to look at would be CVA - trash to energy.

Have a great day.
c21vintage profile picture
Very happy to be long Pattern and re-investing dividends too. The move to renewables is inexorable despite the cretin temporarily occupying the White House. 1- He claims to be all about the jobs and the job creation is in green energy. I doubt he will do anything to set green energy back even though he's doing all he can to keep us enslaved to oil. Remember, his boss gets all of his income from sales of oil so while he's beholden to Putin, he won't kill job growth to do it. 2- He won't be in office much longer. He's a criminal, he's been caught, it's simply a matter of time before congress is forced to act out of self preservation. Mueller's pros have his tax returns, all the classified intel the public will never see and if we already know enough to put him away, Mueller knows 100x more. There is plenty of there there.
A little more respect for your democratically elected President would be more pleasant, do not be a deplorable entity.
Jimmy_Newyork profile picture
It's the middle of summer and I see snowflakes.... pfffffttt
Respect is earned.
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