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Several Headwinds Sent Pattern Energy's Q4 Results in Reverse

Matthew DiLallo, The Motley Fool

Pattern Energy (NASDAQ: PEGI) is in the middle of reshuffling its portfolio so that it can recharge its growth rate. This transition had a negative impact on the company's fourth-quarter results, which showed a decline year over year. However, the wind and solar power generator still achieved its full-year growth forecast and anticipates cash flow will expand at a healthy clip over the next two years. 

A look at the numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Gigawatt hours sold

1,967 GWh

2,130 GWh

(7.7%)

Adjusted EBITDA

$81 million

$100 million

(19%)

Cash available for distribution (CAFD)

$35 million

$42 million

(16.7%)

CAFD per share

$0.36

$0.44

(18.2%)

Dividend coverage ratio

0.85

1.04

(18.3%)

Data source: Pattern Energy.

Pattern Energy's power generation declined about 8% year over year, due to the sale of its El Arrayan wind facility in Chile, lower interest in the Panhandle 2 facility, and smaller-than-expected output from its facilities in the eastern and western U.S. regions as wind production was 14% below the long-term average forecast for the quarter. Full-year power generation, however, rose 2% thanks to the positive effect of acquisitions.

The lower power production, as well as higher project expenses, drove the quarterly decline in CAFD. Full-year CAFD, on the other hand, came in at $167 million, above the midpoint of the company's $151 million to $181 million guidance range, and a 14% increase from 2017, powered mainly by acquisitions. That was enough cash to cover the company's dividend, though its 99% payout ratio for the year was well off its 80% target level.

Several wind turbines in a field with a bright sun in the background.

Image source: Getty Images.

A look at what's ahead

Pattern Energy's sale of two assets in 2018 for $230 million provided the company with the funding to make several acquisitions, including the Japan portfolio, without having to sell any stock to finance those deals. Given the late-year timing of those sales, they'll remain a near-term headwind, as will the roll-off of the power price hedges supporting its Gulf Wind facility and continued grid congestion in Texas.

However, the company expects that it will be able to maintain its dividend and complete some of the identified acquisition candidates where it holds the right of first offer, so that it can continue growing cash flow without needing to sell any more stock. Pattern Energy estimates that these future acquisitions will increase its CAFD to a range of $160 million to $190 million this year and to between $185 million and $225 million in 2020. At the midpoint of this projection, Pattern Energy's CAFD per share would expand at a 10% annual rate, which puts the company on track to achieve its targeted 80% dividend payout ratio by 2020. This outlook suggests the company could restart dividend growth as early as 2021.

Heading in the right direction 

While Pattern Energy's fourth-quarter results were lower year over year, that's due mainly to asset sales, which have provided it with the cash to reinvest in higher-returning opportunities. The company believes that those future acquisitions will power double-digit annual cash flow growth and thus significantly improve its dividend payout ratio. However, there's plenty of variability within this forecast, which is why investors should keep this renewable energy stock on their watch list for now until there's more clarity on whether it can achieve its optimistic outlook.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.