By Matthew DiLallo
March 12th, 2019
Pattern Energy (NASDAQ:PEGI) recently closed the books on a solid 2018. Its financial results came in slightly ahead of its full-year growth forecast, as cash flow increased 14% year over year despite some headwinds during the fourth quarter. The company expects continued growth over the next couple of years, which was a key theme on its fourth-quarter conference call. Overall, CEO Mike Garland wanted investors to know four things they can expect from the company during the next two years.
In discussing what lies ahead, Garland stated on that call:
Today, we are doing something more than we had in the past, which is to give you two years of guidance. We are doing two years because we believe it is important for investors to understand how we share outlook and our commitment to growing our CAFD [cash available for distribution] per share. Our 2019 CAFD guidance range is $160 million to $190 million with a midpoint of $175 million. And our 2020 CAFD guidance range is $185 million to $225 million, with a midpoint of $205 million of CAFD. This CAFD outlook results in a 10% CAFD per share per year growth for the next two years and gets us to our targeted 80% payout ratio.
Pattern Energy's CEO wanted to provide investors with a longer-term outlook into the future so that they could see how the company intends on improving its dividend payout ratio. The company ended last year paying out 99% of its CAFD to support its 8%-yielding dividend. However, it aims to get that ratio to a more comfortable level of 80%, which the company's outlook suggests it can accomplish by 2020.
Garland, however, cautioned that "2019 is a building year with CAFD per share growth of approximately 5%." That's because the company is managing two notable headwinds: the impact of the expiration of contracts supports its Gulf Wind project and the continued congestion of Texas' electric distribution system. Garland noted that the company is "taking several steps to offset these headwinds and actually grow our CAFD per share, while at the same time maintaining our current dividend level and improving our payout ratio."
Garland then walked through the factors driving this view, stating that overall, "we expect to increase cash available for distribution at our existing operations of about $16 million in 2019," driven by better production at its wind farms and lower costs. He also noted that the company "anticipate[s] using some of our liquidity to make drop-down acquisitions around midyear that can generate about $5 million of accretive cash flow." These factors should more than offset the impact of its two notable headwinds.
Next, Garland stated:
In 2020, we'll start to receive increased benefits from our investments, including drop-downs, cost improvement, balance sheet optimization, and first distributions from Pattern Development. ... [W]e expect to add incremental cash available for distribution as compared to 2019 using new or recycled capital to add about $15 million. ... We also expect that we'll begin to receive significant cash distributions from Pattern Development, which by 2020 should exceed the partner's need for new capital development expenditure.
As the CEO points out, several factors will cause earnings growth to reaccelerate in 2020. That leads the company to believe that it can "expect CAFD per share growth of about 10% annually." The company also doesn't plan to sell any more stock to achieve this forecast, which will improve the dividend payout ratio to 80% in 2020.
One notable aspect of Pattern Energy's growth forecast is that it has no plans to sell stock to fund the acquisitions needed to grow its cash flow at a double-digit annual pace. Garland provided a glimpse of how the company might accomplish this by running through its funding options:
We have approximately $200 million in liquidity available at present for drop-downs, investment in Pattern Development, or paying down debt. We intend to expand our access to capital through a range of potential options, including co-investment structures, asset recycling, hybrid equity, and further optimization of the mix of our corporate and project capital. ... We believe multiple alternatives exist for us to fund between $300 million and $500 million for growth without accessing common equity.
As Garland points out, the company does have several funding options at its disposal, including selling assets and recycling the proceeds into acquisitions. This extensive list of alternative financing options increases the company's confidence that it can achieve its growth forecast without needing to sell any more stock.
Pattern Energy believes it can deliver double-digit cash flow growth on a per-share basis over the next two years, which would significantly improve its dividend payout ratio. The company also believes it has the funding options needed to achieve this goal without diluting its investors by selling more stock. If the company can execute this plan, it would put its high-yielding dividend on a more sustainable foundation, making it a much more compelling stock for income-seeking investors.
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