Pattern Energy Group (NASD:PEGI,
TSX:PEG) completed a very successful Initial Public Offering (IPO) on the Nasdaq
and Toronto stock exchanges on September 27th.
Not only did the shares price at $22, near the top of the
expected range, but the underwriters exercised their full over
allotment option to purchase 2.4 million shares in addition to the
initial 16 million offered.
Total proceeds from the offering
were $404.8 million. Most of the proceeds went
to Pattern Energy Group, LP (PEGLP) in consideration for a
number of contributions and class A shares sold in the offering,
but $56 million will be used to pay down debt and $60.2 million
will be retained for general corporate purposes. Investors greeted the offering enthusiastically, and the stock is
trading comfortably above the offering price at around $23 per
share since the IPO.
The Company
Pattern owns six wind power projects in the US and Canada with
total capacity of 1040 MW and two development projects in Ontario
(270 MW) and Chile (115 MW) which are expected to enter production
in 2014. Post-IPO, public shareholders will control only a
minority of the company’s common stock. Control of the
company is held by PEGLP, which, along with its partners, will
control 63.1% of voting rights through as combination 47.4% of
Class A shares and 99% of Class B shares. Management owns
the remaining 1% of Class B shares. Class B shares do not
currently pay a dividend, but will convert into Class A shares at
the end of 2014, or upon commercial operation of the Ontario Wind
farm, if that has not yet occurred.
Distributable cash flow for 2014 is expected to be approximately
$55 million,80% of which the company plans to pay to shareholders
as a quarterly dividend of $0.3125 per share. Achieving this
cash flow will depend on the on-time completion of the Ontario and
Chilean wind projects. At $23 a share, $0.3125 quarterly
amounts to a 5.4% annual dividend.
While completion of the Ontario and Chilean wind projects in 2014
can be expected to increase distributable income, conversion of
Class B into Class A shares will offset this in 2015 by increasing
dividend-paying shares by 29%. As a back-of-the-envelope
estimate, if the income from the new wind farms is comparable to
the existing wind farms on a per MW basis, we can expect
distributable income to be increased by 37%. Given the wide
range in profitability of wind farms, however, I feel it is safer
to assume that the increased income from the Ontario and Chilean
wind farms will only serve to offset the share dilution.
After the transaction, Pattern’s capitalization will be
approximately 67% debt, and 33% equity, which is stronger than its
closest comparable, Brookfield Energy Partners (NYSE:BEP,
TSX:BEP-UN), which has about 20% equity and preferred equity.
Brookfield’s longer track record and larger and more
diversified portfolio of hydropower, wind, and solar assets should
allow it to offer a lower yield than Pattern, but at $27.43,
Brookfield’s yield of 5.3% is almost identical to Pattern’s.
Conclusion
Pattern’s shareholders seem to be betting on Pattern achieving
rapid growth, or at least faster growth than comparable companies
such as Brookfield. However, most of its growth in
distributable income over the next two years is likely to be
offset by the increased number of shares paying dividends, when
class B shares convert to class A shares.
At the current price, Pattern Energy Group seems fully valued
relative to its US-listed peers, and expensive relative to clean
energy power producers with only Canadian listings. As
such, the stock may be useful to increase the diversification and
income in a clean energy stock portfolio, but it will probably not
produce much share price growth in the near future. This article was first
published on the author's Forbes.com blog, Green Stocks
on October 22nd.
http://www.altenergystocks.com/archives/2013/11/investors_expect_rapid_growth_at_patter n_energy_group_1.html
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