Earlier this year, Pattern Energy (NASDAQ:PEGI) unveiled a two-year plan aimed at improving the long-term sustainability of its 7.4%-yielding dividend. The renewable energy company expects to grow its cash flow per share at a double-digit annual rate over that time frame. That growth would improve its payout ratio from a dangerous 99% to a more comfortable 80% by the end of next year.
While Pattern Energy experienced some headwinds during the second quarter, the company also made some notable progress on its strategic plan. Because of that, it's still on track to achieve its targeted payout ratio by the end of next year.
A look at the numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Gigawatts hours sold | 2,114 GWh | 2,263 GWh | (6.6%) |
| Adjusted EBITDA | $102 million | $108 million | (5.6%) |
| Cash available for distribution | $53 million | $59 million | (10.2%) |
| CAFD per share | $0.54 | $0.61 | (11.5%) |
| Dividend coverage ratio | 1.28 times | 1.45 times | (11.7%) |
DATA SOURCE: PATTERN ENERGY.
Pattern Energy's power production declined by almost 7% compared to the year-ago period. That's due to asset sales and unfavorable wind conditions, which more than offset the positive impact from acquisitions.
Those headwinds weighed on Pattern Energy's earnings and cash flow during the period. The company lost $11 million of EBITDA from the asset sales while weaker wind conditions cost it $3 million. It only partially offset those issues by making acquisitions that added $5 million in EBITDA and recording an incremental $3 million of earnings from its investment in development projects. Those same headwinds impacted cash flow, which isn't yet benefiting from the development segment since it won't start distributing cash until next year.
What management had to say
“The portfolio and the business continue to perform well,” according to CEO Mike Garland. “We generated strong CAFD of $53 million, which is in line with our expectation and on target to achieve our 10% CAFD CAGR by 2020. We saw strong average power prices and lower than expected financing charges, which offset wind levels below the LTA (long-term average) for the period.”
In addition to reporting decent results despite the headwinds, Pattern Energy made excellent progress on its strategic plan. The company completed two acquisitions during the quarter. It bought stakes in two Canadian wind farms, Belle River and North Kent, which will boost its renewable generating capacity by 57 MW. It paid $44 million for the projects, which should generate steady cash flow backed by long-term contracts. “The two acquisitions put us on track to achieve our 2019 and 2020 growth targets,” Garland said.
Pattern Energy also secured a three-year $250 million bank loan. That increases its liquidity so that it can continue making acquisitions.
Those strategic moves enhance Pattern Energy's ability to achieve its growth targets. Meanwhile, the company still expects to start receiving cash distributions from its development arm next year. Those factors, noted Garland, “place us in a great position to continue to grow our CAFD per share and drive down our payout ratio.”
Still on track
After generating $105 million in CAFD so far this year, Pattern Energy is well on track to deliver on its 2019 forecast, which would see it produce between $160 million and $190 million of CAFD. Meanwhile, after making two small acquisitions and boosting its liquidity, it's another step closer to having all the power it needs to achieve 2020's target. While that helps increase the sustainability of this high-yielding renewable energy stock, it still needs to make a few more deals to guarantee its success. That's something investors should keep an eye on over the coming quarters.