Seeking Alpha

Pattern Energy: So Long And Thanks For All The Dividends

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About: Pattern Energy Group Inc. (PEGI), Includes: AY, CWEN, NEP, TERP
by: Justin Law
Justin Law
Value, dividend investing, dividend growth investing
Summary

Pattern Energy is being purchased at $26.75/share.

Shares are trading at a slight premium to present value.

Shareholders should consider the possibility of a higher offer and the tax implications of selling shares.

Similar companies which may be potential replacement investments include Atlantica Yield, Clearway Energy, NextEra Energy Partners, and TerraForm Power.

Just as Pattern Energy (PEGI) began making progress on delivering significant CAFD growth, it decided to sell out to the Canadian Pension Plan Investment Board. Shareholders are mostly disappointed at the offer of $26.75/share to take the company private. While the offer represents a “premium” to the price before buyout rumors began, it was below the share price at the time of announcement. Pattern’s peers in the yieldco space have appreciated similarly in the last few months. As it stands, the current offer represents fair value for the company without taking into account the significant growth from recent acquisitions and upside from the development business.

Shareholder Options

What should shareholders do now that the buyout has been announced? Several items should be taken into consideration:

Go Shop Period: The buyout offer includes a 35-day “Go Shop” period during which the company may consider other offers. Shareholders should consider waiting to see if a higher offer materializes by the end of the period (Dec. 9)

Upcoming Dividend: Pattern Energy has declared its next dividend of $0.422, going ex-div on December 30. This puts the present value of shares at 27.172 (26.75 + 0.422). Pattern Energy is expected to continue paying its quarterly dividend through the close of the acquisition (expected by Q2 2020). Whether or not this includes an additional dividend at the end of Q1 is debatable.

Tax considerations: Longtime shareholders of the stock are likely sitting on significant capital gains, as all of Pattern’s dividends have been return of capital, reducing cost basis. Shareholders should consider whether they would prefer to recognize gains in the 2019 or 2020 tax year. For those looking to collect the upcoming dividend but realize gains in 2019, shares must be sold on December 30 or 31.

As it stands, shares are currently trading at a slight premium due to the possibility of a higher offer and the possibility of a second dividend prior to the close of the acquisition. An argument can be made for selling shares now to lock in this premium if a suitable alternative investment is available.

Alternative Investments

Pattern Energy’s most comparable peers in the yieldco space include Atlantica Yield (AY), Clearway Energy (CWEN), NextEra Energy Partners (NEP), and TerraForm Power (TERP).

Atlantica Yield (6.3% yield) – From a valuation and yield perspective, AY is the closest comparison to PEGI. From a portfolio perspective, AY only holds 68% renewable power generation, with the balance coming from natural gas, electricity transmission, and water desalination. Geographically, AY is much more diversified, with 36% of CAFD from North America, 41% from Europe, 12% from South America, and 11% from the rest of the world.

Clearway Energy (5% yield) – On a Price to CAFD basis, CWEN is similarly valued as AY and PEGI. There is overhang from the PG&E (PCG) bankruptcy which restricted cash distributions from projects contracted to the utility, forcing a dividend cut from CWEN earlier this year. CWEN’s portfolio consists of 40% solar, 28% wind, 10% thermal, and 22% conventional power generation, and virtually all assets are in North America. Bonus: Class A shares (CWEN.A) consistently trade at a discount due to lower liquidity despite having an identical dividend and greater voting rights.

NextEra Energy Partners (3.8% yield) – NEP is arguably the “blue chip” among yieldcos and commands a rather high valuation. The company has been growing at a torrid pace and expects to increase its dividend 15% annually through 2021. Potential investors should be wary, however, as the company has made extensive use of convertible debt which could result in significant dilution in a few years. Additionally, the company pays a 25% incentive distribution rights fee to its parent NextEra Energy (NEE). NEP’s portfolio consists mostly of wind assets, with some solar and natural gas pipelines, all located in the US.

TerraForm Power (4.8% yield) – TERP is technically a subsidiary of Brookfield Renewable Partners (BEP), holding a mix of wind (64%) and solar (36%) assets. While the bulk of the portfolio is located in the United States, there is a significant portion of assets in Spain. Shares are fairly pricey and the company recently took advantage of this to issue equity. Like most Brookfield subsidiaries, TERP pays an annual management fee, in this case a fixed fee plus 1.25% based on market capitalization. Bonus: BEP can also be considered if you don’t mind K-1 reporting and a different portfolio mix (mostly hydroelectric assets)

Most of the traditional utilities seem to be fully or overvalued due to the recent flight to quality and search for yield due to declining interest rates. It may be prudent to reallocate away from the sector.

Conclusion

Pattern Energy is being bought at fair value. Shareholders should consider holding to see if a higher offer is made and to collect an additional dividend (or two), while considering the tax implications. The most comparable and best-valued alternatives at this time appear to be Atlantica Yield and Clearway Energy Class A shares.

Disclosure: I am/we are long PEGI. 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.