odyd

Pattern Energy Group Inc. (PEGI)

138 posts in this topic

Google recently announced they will be using 100% renewable energy....  In 2017!

https://www.theguardian.com/environment/2016/dec/06/google-powered-100-renewable-energy-2017

 

I'd read that back in 2014 Google bought a PEGI windfarm.   

http://www.greenchipstocks.com/articles/google-buying-pattern-energy-nasdaqpegi-wind-farm/2201

 

I wonder if PEGI will play a role in Google's conversion to 100% renewable power.  That's a whole lot of power.

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Hi Robert & other PEGI investors -

 I'd like to put a big % of my net worth into PEGI.  PEGI seems to meet my goals of 1. investing into positive causes & 2. earning more than the inflation rate.

 What is holding me back is the over-valuation of the stock market.  I noticed that when the market went down in the spring, so did PEGI.  Down to 15 or so.  

 However, is this rational?  Does PEGI's price have anything to do with the current overall market prices?

  From a quick read, it looks like the way to determine the fair price has to do with the dividend, it's growth, and consistency.  Also the EPS, as it should match the dividend growth so that consistent growth is possible.

  Has anyone had a close look at this with PEGI?

Thank you-

Matt

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3 minutes ago, sunnypease said:

Hi Robert & other PEGI investors -

 I'd like to put a big % of my net worth into PEGI.  PEGI seems to meet my goals of 1. investing into positive causes & 2. earning more than the inflation rate.

 What is holding me back is the over-valuation of the stock market.  I noticed that when the market went down in the spring, so did PEGI.  Down to 15 or so.  

 However, is this rational?  Does PEGI's price have anything to do with the current overall market prices?

  From a quick read, it looks like the way to determine the fair price has to do with the dividend, it's growth, and consistency.  Also the EPS, as it should match the dividend growth so that consistent growth is possible.

  Has anyone had a close look at this with PEGI?

Thank you-

Matt

The yield requirement on PEGI will be set relative to alternative yield opportunities. If yields on bonds and non-yieldco stocks go up (in the bonds case due to rising interest rates and in the stocks case due to dropping stock prices) the yield change of yieldcos will by market forces most likely follow that same direction. However if stocks prices drop as a symptom of bad industry health that bad industry health is not directly impacting the outlook for yieldcos (unless there's a credit crunch following that), it's the price drops themselves that have the impact.

 

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Hi explo - 

  Thanks for the explanation.

  I'm more concerned with the effect of an overall stock market correction on a stock like PEGI.  Imagine if the stock market dropped 50%.  Would it be likely that PEGI would also drop 50%?  

  I would think not, because PEGI's price has more to do with it's ability to generate CAFD & increase that over time.  

  But I don't know.  I don't understand how to value a stock that generates a large dividend as it's primary value to share holders.

  I guess what you are saying is that if PEGI dropped 50%, then their yield would shoot up and suddenly there would be a bunch of investors buying up that stock.   The yield has a stabilizing effect on the stock price?

  Also I don't know what to compare it to.  Are REITs similar?

Cheers-

Matt

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52 minutes ago, sunnypease said:

I'm more concerned with the effect of an overall stock market correction on a stock like PEGI.  Imagine if the stock market dropped 50%.  Would it be likely that PEGI would also drop 50%?  

I depends on whether that is a correction of the risk premium, i.e. even with dividends unchanged the market wants the PPS down to raise the dividend yield to matching the rise in bond yields. In that case the market would likely want the same for yieldco yields. If the corrections is due to lowered dividends due to lowered earnings and i.e. PPS is adjusted down to keep the dividend yield constant under shrinking dividends in the industry it will not affect PEGI as yieldcos are not normal business where earnings and thus dividend are impacted by general economy conditions. You could view yieldcos more as a financial asset class than as a business when predicting how the market will price it based on condition changes (i.e. it is likely more impacted by financial market condition changes than economy changes). The outlook for the yieldco's dividend growth is impacted by both though.

Edited by explo
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PEGI has concerns as a stock and has concerns as an income instrument. Both concerns individually can and are a benefit as if looked at as one entity.

PEGI as equity is exposed to the fluctuation of the market. This one is pointless to review. Unless you not in the market, you are exposed. If you are in a particular industry like renewables even by association, you are exposed to it. PEGI is a utility profile company using renewable assets.  As a car owner who tracks to work every day, I am not exposed to automotive industry jitters; here the market thinks different of PEGI. Fluctuations of the cost and trending lower in the building of plants should benefit the buyer of this plant who in return sells electricity to PPA contract. The advantage of flatlining of the PPA is real, while reduction of cost is still without limit. The problem for PEGI and any other yieldco is if the technical profit of sponsor does not overwhelm this relationship.

What works for PEGI here is that its sponsor is not required to achieve high profit. Its profile is not public and can run on slight net income, passing benefits to PEGI. I am not sure if this is true yet, the bad times are ahead, but as you may observe the wind is somewhat different than solar, its ASP had bottomed long before. Should be considered a factor point. 

As any company needing to borrow IR is important as impacts return. The borrowing can be replaced by the sale of equity. An equation to sell shares, to produce more dividend put simply raises the value of that and all other equity. So in theory selling high may not be a principal objective but most likely a marketable preference. More shares do not change the value of the dividend . Hence the equity sale does not create dilution; the money is invested in paying asset.

Finally, in the rising IR environment, old bonds at 2% have a loss in face value when new bond at 3% is issued.

Although dividend stocks are faced with this forced on logic, one needs only to think about the ability to grow dividend and the yield organically. In yieldco, this line of relationship cannot be more evident, and it is different than yield offered by BMO and managed by profitability associated with more irregular business cycles.

In theory, PEGI can double its dividend and hence the equity, holding to the same yield, but expanding its portfolio to 5GW. Math is not as easy, but you can see variations of it in various recommendations out there.

PEGI is in a lot more predictable business than the market is giving the credit because SUNEQ yieldcos and conflict of ideas about building a renewable asset and using it.  However, all those points are probably an article about good yieldcos.

 

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5 hours ago, odyd said:

Although dividend stocks are faced with this forced on logic, one needs only to think about the ability to grow dividend and the yield organically.

I think this would be the one thing which could end one of the biggest yieldco-problems. If they reduce their payout ratio and instead use the free cash + some dept to grow instead of selling new shares, there can't be a "death spiral" anymore, where the yield gets to high to finance new projects.

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Thank you for the PEGI analysis, Robert.  Much to think about.

Mostly, I'm interested in knowing what will happen to PEGI if the market goes into crash mode.  I'd like to make a long term investment & feel that we are near some kind of market top.

I thought maybe PEGI was different in this regard.  Because the description of the Dividend Discount Model speaks only about dividend paid & growth of dividend.  And, if the stock price goes down then yield goes up.  Who could resist over 10-12%?  

However, comparing it's volatility to say LQD or AGG, PEGI has bigger swings.  Is this just because there isn't enough diversification of assets within PEGI?

Even during a market down cycle, PEGI could continue to use debt to build projects.

You said that "More shares do not change the value of the dividend".   So if PEGI raises $100M from an equity raise, but then creates a project from this which has a value of $115M, and raises the dividend accordingly, then the $/share dividend should actually increase a little.   Correct?

When PEGI's stock price is low, will it affect their ability to raise rates?

More relating to the current market:  When inflation & interest rates rise, does O&M have costs that increase?

Matt

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their project structure is still 20% to 30% equity and 70 to 80% borrowing. $100M equity can afford $500M plant which in today's wind settings can bring about 400MW or more based on PEGI development costs. 

If you want to read on the wind,  this gives some good ideas below

http://www.aweablog.org/new-report-highlights-bright-low-cost-wind-future/

The conversation is about costs metrics and in general, say IR as said by me before would impact project costs, but the assumption that IR affects everyone, in the same way, does not reflect reality. For example, private equity investment could own a percentage of the project for returns on it as one example of reduction of cost. I think PEGI is the highest wind portfolio owner in the US among the yieldocs; NEP has about 2.1GW, NYLD has 1.9GW, TERP has 1.5GW.  PEGI has 2.6GW by Q1, Then about 370MW of wind can be added and about 130MW of the wind in 2017. I think revolver has $278M left as they took for Armow and they will use it for Broadview.

So for that $600M they would need about $120 to $180M, achieving this by selling 10M shares. Not a huge enterprise. In my opinion, they can grow their dividend and buy projects with higher rates of IR. As mentioned they get PTC credit on some 2GW in the US, so certainly I see them continue expand and build their company, and create dividend growth along at the best yield out there.

As mentioned, anyone in the market has a risk. Some companies will react less to sell off some in another way.  The dividend is not based on the share price; it is based on assets, so while stock price limits purchasing, there are ways to do it. To me, the dividend has a protective mechanism, even though IR sets back a share price of the company. If you can get your profit by the dividend payment and the equity increase, well that is better than just equity increase.

Of course, everyone should do own dd, what works for me may not work for anyone else.

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Thank you again for the further analysis.  It's very helpful for me to think about PEGI.  I currently have about 20% of my money in PEGI.  I'm comfortable with that for now.

Ideally I want to invest in wind as the developer invests in it, with a fixed % annual return.  It would be nice if somehow wind power & solar power projects could be securitized so we could trade them like bonds.  I'm not sure if that even makes sense - but I'd really like to be able to just trade it as a fixed income sort of asset without having to worry about how the market floats the security.

Imagine if the project was funded directly by us in a P2P mechanism.  If you wanted your money back, you could sell the note on a secondary market.  Much like Lending Club & their Folio site works.

 

Back to PEGI.. Do you know what happened to the share price since it traded for 34 or so a share?  Was the step down because of some missed targets or an equity raise?

How do you think PEGI and others will take it when the Fed increases rates?

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30 minutes ago, sunnypease said:

Back to PEGI.. Do you know what happened to the share price since it traded for 34 or so a share?  Was the step down because of some missed targets or an equity raise?

How do you think PEGI and others will take it when the Fed increases rates?

I look at the future of the company and not the past. I already said, and so did others, what happens with IR and dividend companies. I also look at the IR as a factor, not a destination. If I ever considered IR as more, I would never buy stock in a growth industry;

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Interesting and most likely wrong note on TERP having bid for by PEGI. I wonder if this is something about available projects,

http://www.streetinsider.com/Mergers+and+Acquisitions/TerraForm+Power+(TERP)+Binding+Offers+Said+Due+to+Mid-January+-+DealReporter/12338373.html

Binding offers for TerraForm Power (NASDAQ: TERP) are due in mid-January, according to DealReporter, citing sources. Pattern Energy (NASDAQ: PEGI), Brookfield Asset Management (NYSE: BAM), and buyers in Asia are among potential acquirers. There is a fairly large group of buyers still interested.

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8 hours ago, odyd said:

Interesting and most likely wrong note on TERP having bid for by PEGI. I wonder if this is something about available projects,

http://www.streetinsider.com/Mergers+and+Acquisitions/TerraForm+Power+(TERP)+Binding+Offers+Said+Due+to+Mid-January+-+DealReporter/12338373.html

Binding offers for TerraForm Power (NASDAQ: TERP) are due in mid-January, according to DealReporter, citing sources. Pattern Energy (NASDAQ: PEGI), Brookfield Asset Management (NYSE: BAM), and buyers in Asia are among potential acquirers. There is a fairly large group of buyers still interested.

It makes more sense that a sponsor (e.g. BAM) than a yieldco (e.g. PEGI) would bid for another yieldco (e.g. TERP).

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JPMorgan downgraded Pattern Energy Group (NASDAQ: PEGI) from Overweight to Neutral with a price target of $24.00 (from $26.00).

For an analyst ratings summary and ratings history on Pattern Energy Group click here. For more ratings news on Pattern Energy Group click here.

Shares of Pattern Energy Group closed at $19.86 yesterday.

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