odyd

Pattern Energy Group Inc. (PEGI)

138 posts in this topic

1 hour ago, sunnypease said:

Almost 50% higher borrowing costs though.

Not sure what you mean.

IRR is where you make your money and nobody would disclose this, openly.

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1 hour ago, odyd said:

IRR is where you make your money and nobody would disclose this, openly.

I thought they make money when they have a good supply of investor capital.  So it'd be good to publicize the IRR.  

If you were going to buy a windfarm, you'd want to know that windfarm's IRR.  We the investors are being asked to finance windfarms.  So I would expect that info to be available. 

Can the number be calculated?  I suppose it can be estimated?

I was surprised to see that they have been reporting losses for several quarters.  Also missing estimates.  That doesn't strike me as great, but then again I don't fully understand the business.  

I need to read more & educate myself.

Matt

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34 minutes ago, sunnypease said:

I thought they make money when they have a good supply of investor capital.  So it'd be good to publicize the IRR.  

If you were going to buy a windfarm, you'd want to know that windfarm's IRR.  We the investors are being asked to finance windfarms.  So I would expect that info to be available. 

Who is buying a wind farm? What investors?

When you negotiating a PPA you will disclose your IRR?

 

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2 hours ago, sunnypease said:

I thought they make money when they have a good supply of investor capital.  So it'd be good to publicize the IRR.  

If you were going to buy a windfarm, you'd want to know that windfarm's IRR.  We the investors are being asked to finance windfarms.  So I would expect that info to be available. 

Can the number be calculated?  I suppose it can be estimated?

I was surprised to see that they have been reporting losses for several quarters.  Also missing estimates.  That doesn't strike me as great, but then again I don't fully understand the business.  

I need to read more & educate myself.

Matt

If you are really interested in knowing what PEGI is about read this Raymond James analysis. Things have not changed at all when it comes to existing projects. It should give you some real pointers, rather than trying to guess your way out of it and produce unrelated assumptions.

http://www.raymondjames.ca/en_ca/equity_capital_markets/equity_research/sample_research/docs/PEGI 01302014.pdf

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Perhaps the discussion is warranted to understand what we know about reporting for the company like PEGI and how this falls within the project dynamic. 

So first is CAFD, cash available for distribution. I have attached structured calculation of the CAFD from Q3 for PEGI. 

Is CAFD a cash flow described in the IRR?

We know that project which has IRR greater than WACC or weighted average cost of capital, is profitable.

How is project's relationship to CAFD described in the announcements?

If I take the Armow project, it speaks about payback of 9.5 to 10.5 multiples using average five years of CAFD. So the CAFD generated is about $13.9M at 9.5.  Why just cash receives payback and not debt? Is it because CAFD already has both principal and interest addressed?

If I use 13.23M (adjusted down by about 10% half way from original) 19 years of cash flows project's IRR is about 7.6%, borrowing at 5.87% with 30% tax rate is about 4.1%, so it makes sense.

I looked at the project dynamic. This one gets about 10 cents US per kWh. 90MW at 365/8 is about $27M per year. To pay it off in 18 years I would have to use about $13.6M per year on a debt of $199M with 4% interest. The amount of debt is actual; rest is my calculation.

Above shows that IRR is higher than WACC, it indicates that CAFD is after deduction of principal and interest. This project is with Samsung, and there is an economic adder of CAD $0.27 per kWh. Pattern would get some $52M from the province for it. At the end not that bad, but looking scary at $3.68 per watt initially. If the $52M is applied to debt level the $13.6M becomes about $10M for 18 years. Based on those numbers this is probably already in calculation.

 

PEGI-CAFD.png

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Interestestengly some projects owned by PEGI without the debt at all. This is why their debt level is below 1. This will be changing as more money will be borrowed. In fact, the change is happening now with the corporate bonds. I am hoping however that in time people will be buying more of the stock due to dividend growth. 

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16 hours ago, odyd said:

Interestestengly some projects owned by PEGI without the debt at all. This is why their debt level is below 1. This will be changing as more money will be borrowed. In fact, the change is happening now with the corporate bonds. I am hoping however that in time people will be buying more of the stock due to dividend growth. 

Is the reason for the unleveraged projects that their IRR is too low to leverage?

If IRR is lower than cost of project debt the leveraged IRR becomes lower than the unleveraged IRR.

 

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5 hours ago, explo said:

Is the reason for the unleveraged projects that their IRR is too low to leverage?

If IRR is lower than cost of project debt the leveraged IRR becomes lower than the unleveraged IRR.

 

My article shows that cost of debt is less than the cost of equity. I would imagine it is the reverse. Projects have such a good return that buying for cash makes more sense than borrowing against them. Also, availability of capital may have something to do with it.

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1 hour ago, odyd said:

My article shows that cost of debt is less than the cost of equity. I would imagine it is the reverse. Projects have such a good return that buying for cash makes more sense than borrowing against them. Also, availability of capital may have something to do with it.

In that case maybe they'll leverage them later to reduce cost of capital as I assume that project level debt is cheaper than corporate level debt.

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27 minutes ago, explo said:

In that case maybe they'll leverage them later to reduce cost of capital as I assume that project level debt is cheaper than corporate level debt.

The perception of yieldco is that their debt is cheaper than projects, since the risk of development versus the already operating facility. However, there are other investors involved, and perhaps due to tax equity, they need equity in the project to deliver the sale. It is hard to tell for me. Their debt to equity with the Friday's bond went over the ratio of 1.  In the comparison to NYLD and NEP, they have a lot of room to borrow, as those two have a 2.4 ratio. 

Still, their plan is basically to avoid revolver, which will come back to around $475M or something of that nature.  Between two projects Armow and Broadview, some $40M of CAFD is expected. I would probably think it is more of $35M. That is 20% more than 2016 result. It could warrant 20% growth of dividend in 10% volume per year. 

In considering my next action to buy CSIQ  or to buy PEGI to average down, I made an observation of their equity losing 13% of value due to material controls issue announced in November. 

If this is addressed, it is required and should be addressed, and if they grow the dividend by 10%, the stock could easily get 20 to 25% in equity back from the current price, to $24.60- $24.70. At that point, new equity could be issued, and produce more expansions with high debt ratios. 

 

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Anyway if I look at the yieldco space opportunities vs manufacturers PEGI seems to be the one that is lagging and thus still a good transition candidate. If I would diversify into yieldcos now it would likely be a mix of PEGI and TERP, but I'm not quite there yet.

 

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If we look at the year in earnings, we have a threshold of 15% to 17% in gross margin, which can effectively stop profits.

FSLR and SPWR already announced massive losses, SPWR extending them to 2018. Assuming Trina is gone and with JASO having nothing to show, only two companies can make the difference in this perception. I see Canadian make a lot of announcements beating JKS in expansions to Latin America and propose projects in Alberta, but their GM will be weak, based on recent calculations. I think there is no point to congregate around manufacturers. Although I am surprised how strong they are, I see solar stocks to sell still. We need some info and yearly announcements from them. Then we can expect market's reaction.

PEGI, unfortunately, is sensitive to feelings around the industry. Still, I hope they will look better if controls are back and the dividend is raised. I am adding PEGI with the dividend to continue to average.

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The reason manufacturers are strong is likely not related to near-term outlook. Maybe due to reduced uncertainty about the outlook (good or bad) but primarily in combination with the discount to when they traded in the 30's being juicy and maybe uncertainty about how long such juicy discount can sustain as we each day get closer to a recovery even though it is not here yet we might at least have approached a stabilization point.

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I like how action is taking place with Terraforms, since not a lot of individuals are connected to yieldcos, industry buyers are the best option to reduce choice. I am hoping for Q2 to produce really nice action

Sent from my HTC One_M8 using Tapatalk

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The only yieldco dropping is PEGI. Lol I guess in sympathy to solar

Sent from my HTC One_M8 using Tapatalk

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On ‎1‎/‎20‎/‎2017 at 2:13 PM, sunnypease said:

Hi Pete -

  Your thoughts make a lot of sense.  

  Do you think that once a company has a certain scale that it will be difficult for new entrants to compete?  Or is this a market where anyone with a billion dollars can set up shop & start selling?

  I'm not normally supporting FSLR, but if they can somehow create CdTe panels with a lower $/W than cSi, then that'd be a moat.  Everyone, including a few investors here, would be scratching their heads wondering how they did it.

-Matt

I'm not sure how hard it is for a new company to enter the PV manufacturing market, as there is a significant up-front capital investment, but by now there is more than enough existing capacity to justify calling solar cells a commodity even without new market entrants.  And the trend for ever-cheaper cells continues.  Cut-throat competition forces manufacturers to drop their prices, which drives two processes.  First, investment in cost-cutting procedures and technology, be it basic R&D in the design of solar cells or just avoiding waste in existing manufacturing processes.  That's a good thing all around, for the company (lower costs means they can lower prices without reducing margins, all other things being equal [except they're not, but that's a separate discussion--see below]), for consumers (lower prices for PV products eventually means lower electricity prices, whether consumers purchase their own PV systems or just buy power from other companies/organizations owning/operating such systems), and for the planet (cheaper renewable power will eventually supplant dirty fossil fuels just by economic forces alone, never mind arguments between climate skeptics and those of us living in the real world).  Second, and not so good all around, is a drive to increase capacity in a desperate attempt to make up in volume what you're losing in unit profitability.  (In other words, if you used to make 10% profit on a given unit, and now you're only making 5%, you have to sell twice as many to maintain your profits.)  That's what you're seeing now--prices are dropping faster than companies can cut costs, leading to this ever-intensifying competition for market share.  Odyd has remarked on this before as well.  But this is a self-destructive spiral--the lower selling prices become, the more I have to sell at those lower prices, which drives my competitors to lower their prices even more to do the same, which I have to match, etc., etc.  That's why I say PV manufacturing has now become a commodity.  At some point, that spiral has to end--no one can sell at below production cost indefinitely; weaker financial players will start going under, and the system will stabilize.  But it's hard to know if we're at that stabilization point yet--witness the continuing announcement of capacity expansions by large players, even while market data suggests the overcapacity situation is not yet resolved.  And once we do reach stabilization, the once-fat profit margins will be razor-thin.  Not an economic situation that fills an investor with confidence.

As for FSLR, their sales will tell the tale.  If they do come up with a technology that provides a significant price advantage to their competitors, and that technology can be protected, yes, they would have a moat.  But they're currently locked in the same desperate struggle as their competitors--just look at their stock performance, plummeting from a high above $70/share, due to disappearing profits.  That alone tells you they're not able to significantly differentiate themselves in the current marketplace.  Maybe they will come up with that miracle breakthrough--or maybe one of their competitors will.  There'll be plenty of time to "load the boat" when that happens.  For now, though, I'd say it's too early to make that bet.

Just my 2 cents' worth....

Pete

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4 hours ago, solarpete said:

There'll be plenty of time to "load the boat" when that happens.  For now, though, I'd say it's too early to make that bet.

Hi Pete, That's a good point you make that we can just wait & see.  We follow these stocks closer than most & will be able to see early on once things have turned positive again or if FSLR somehow pulls it off.

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