US yieldco Pattern Energy is considering selling some operating projects to free up capital while it waits for a rebound in its share price
By Karl-Erik Stromsta in New York
March 6, 2018
Pattern Energy executives addressed the yieldco’s sagging stock price, after the US-based wind operator chose not to raise its quarterly dividend for the first time since going public four years ago.
Although Pattern grew its cash available for distribution (CAFD) last year by 10% to $145.8m, adding the Broadview and Meikle wind farms to its roster, its dividend payout ratio has reached 100% of CAFD – a level the company deems unsustainably high and wishes to reduce.
Pattern’s annual dividend yield has surged to nearly 10%, following a 35% decline in its stock price since September 2017 – with much of the drop coming in the past month.
Explaining the decision to freeze the quarterly dividend at its current level of $0.422 per Class A share in the first quarter, chief financial officer Michael Lyon told analysts: “Our dividend per share currently is at such a high level that it frankly doesn’t seem responsible to continue to increase [it]."
“It’s the first time in 16 quarters where we’ve not increased our dividend,” added chief executive Michael Garland, calling it a “hard decision”.
Although Pattern has nearly tripled its owned capacity since its 2013 initial public offering, its shares currently trade just above $17 – well below its $22 IPO price.
Renewables yieldcos like NextEra Energy Partners and Pattern Energy have sold themselves to investors in part based on their relatively generous dividend payouts and the promise of increases.
What’s behind the stock price decline?
It’s difficult to understand Pattern's stock price decline, Garland says, given that the outlook for the company specifically and the renewables industry broadly remains “extremely positive”.
“We operate in a segment of the power market that will be the dominant new supplier of electric power."
Pattern owns 2.9GW of renewables capacity today, mostly US and Canadian wind; is targeting 5GW of owned capacity by 2020; recently bought its first projects in Japan; and has access to a huge pipeline of acquisition opportunities at the two privately owned Pattern development companies.
The late-2017 US tax reform legislation turned out relatively favourably for the renewables business, Garland says, “yet since the new year, the [stock] valuation has remained under pressure”.
“From our perspective, the reasons for this are not entirely clear.”
Garland offered several possible explanations, including expectations of rising interest rates, and the recent sale of two other US renewables yieldcos – NRG Yield and 8point3 Energy Partners – for what many in the industry saw as surprisingly low prices.
“We believe that we are undervalued compared to those transactions,” Garland says.
No plans to cut the dividend
Garland also addressed Pattern’s pricey dividend. Given the nearly 10% annual yield at the current stock price, it’s expensive for the yieldco to raise capital for project acquisitions through its regular avenue: issuing shares.
Pattern doesn’t plan to raise common equity “until such time that our stock price recovers”, Garland says.
Among the options being explored to grow the CAFD without a need to issue shares are a sale of some of Pattern's operating assets, including perhaps the 115MW El Arrayán wind farm in Chile, and repowering other existing projects with new turbines.
The Gulf Wind project in Texas, completed in 2009 with Mitsubishi turbines, is a good candidate for repowering, Garland says.
Pattern expects to report CAFD of $151m-$181m for the whole of 2018, an increase of 14% on 2017 at the mid-point in the guidance range.
While Pattern is holding off on raising its dividend for the time being, and Lyon declines to say when it might increase again, he dismisses the likelihood that the yieldco might resort to cutting its dividend in the near future to bring the payout ratio down.
“We don’t like that approach,” Lyon says. “Even if a case can be made for a dividend reduction, we don’t like the sort of impact on market perception that that might create.”
Pattern grew its gigawatts sold by 14% last year, to 7,787GWh, while its revenue rose 16% to $411.3m.
The company reported a net loss of $82.4m in 2017, worse than its $52.3m loss the year prior.