Am I Blown Away by Pattern Energy Group?

I seem to have a fascination with power, especially when it comes to the stock market. Oil, natural gas, solar power… it doesn’t matter. If it generates electricity, I’m there. Yet there are some segments of the energy market that I haven’t really looked at, but deserve my attention. Let’s talk about wind power. Around 4 to 5% of US energy is generated by wind, and that number is only slated to grow. As a percentage of total power, wind is the fastest growing source worldwide. Wind is clean, renewable, and powerful. I can testify to the powerful part. Last week I had some shingles blow off my house in a windstorm. Wind can also be a hassle, it seems.

I’d like to take a moment to talk about all the ‘green’ energy I seem to be particularly interested in. With my positions in First Solar (NASDAQ: FSLR) and 8point3 Energy Partners (NASDAQ: CAFD), and my newfound interest in wind power, it might be easy to view me as an ‘eco-friendly’ investor, primarily concerned with the planet, trees, and little furry animals. Now I’m all for the planet, trees, and little furry animals, but rest assured, when I’m investing, the only green I care about is money. Cigarettes? Coal? Handguns? Telemarketing? (Well, maybe not telemarketing) I don’t mix my politics with my investing. If I think there is money to be made, legally, then I’m in.

And here’s the thing; I believe there is a real future for renewable energy in this country, and the world. A lot of people think President Trump will be bad for renewable energy. Maybe, maybe not. But that perception, right or wrong, might well create a long-term opportunity for those prepared for it.

That brings us to Pattern Energy Group (NASDAQ: PEGI). Pattern Energy is a yieldco that owns partial interest in 17 wind farms in the USA, Canada, Puerto Rico, and Chile, and has agreed to acquire an 18th from Pattern Development. PEGI owns 100% interest in 7 of the farms, the rest they own between 33 and 82% interest. Pattern Development actually builds the wind farms, and ‘drops’ them down to Pattern Energy through a ROFO pipeline (Right of First Offer). Pattern Development, which is not publicly traded, owns around 20% of PEGI, thereby aligning the 2 company’s interests. This is somewhat similar to First Solar’s relationship with 8point3 Energy Partners, though PEGI seems more open to acquiring projects from 3rd parties. PEGI turns around and sells wind energy from these projects to creditworthy counterparties, mainly energy companies, via long term power purchase agreements.

Pattern Development seems to be on the hunt for projects as well. Remember SunEdison? In 2016 Pattern Development acquired development rights to the proposed 600 megawatt King Pine Wind project in Maine, from SunEdison. PEGI will have ROFO if the project is developed and sold by PD. It seems PD has a opportunistic streak, which could be a very good thing for PEGI.

Another positive is that there are several solar projects on their ROFO list, though they don’t own any as yet. Also interesting are the 4 ROFO properties located in Japan, at least 2 of which are solar. There is the opportunity to diversify by energy type as well as geographically.

As I write this, PEGI is at $20.79, and yields 7.85%. The dividend has a short history, but the company seems set on growing it over time. Take a look at their latest investor presentation HERE.

But as with any investment, there are risks. I get the impression that PEGI is not quite as conservative as 8point3 Energy Partners. I believe PEGI will be more aggressive in the future, but of course the risk is that they could overextend themselves. There’s no free lunch in this game. Also, being a smallish company that isn’t really covered very well, there isn’t a lot being written about it. If I buy in, I have to believe in the story and basically be patient. I’ll keep up on what’s out there, but there probably won’t be much. What IS coming up is the 2016 year end earnings and conference call, on March 1st.

Another thing to keep an eye on is a recent disclosure about a problem with an internal control involving financial accounting… whatever that means. It SOUNDS bad, but it seems like everything is on the up and up. Of course there are lawyers all over it. It’s something to monitor, but my totally unprofessional opinion is that not much will come of it.

I don’t like much in this all-time-high market, but I do like yield. The traditional thinking is that the coming higher interest rate environment will be bad for high yielding stocks, as investors seek the steady safety of bonds. I’m not overly concerned with traditional thinking on this point, although debt becoming more expensive could be an issue for a company like PEGI. But companies with high yield that I believe is sustainable? I am comfortable starting a position now, and buying more if/when it sells off. I believe PEGI is such a company.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada