Buy The Wind Power Company Pattern Energy Group IPO

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 |  About: Pattern Energy Group Inc. (PEGI)
by: Don Dion

Pattern Energy Group (NASDAQ:PEGI), a wind electricity company with principal offices located in San Francisco, California, will attempt to raise $320 million in its upcoming IPO, offering 16 million shares at an expected price of $19-$21. The underwriters will have the opportunity to buy an additional 2.4 million shares from Pattern Energy Group, LP, though PEGI will not receive proceeds from this portion of the deal. Assuming a price of $20, OCI Resources will have a market value of about $1.0 billion.

PEGI filed on August 9, 2013.
Joint Managers: BMO Nesbitt Burns (NYSE:BMO), Morgan Stanley (NYSE:MS), RBC Dominion Securities Inc
Co-Managers: BofA Merrill Lynch (NYSE:BAC), Canaccord Genuity, CIBC World Markets, Raymond James, Scotia Capital, and Wells Fargo Securities

SUMMARY
Pattern Energy Group is a wind energy firm that owns interests in eight wind projects spread across the United States, Canada, and Chile, including six projects in current operation and two currently under construction. The pair of projects under construction are expected to be operational by the end of Q2, 2014. The company is seeking steady long-term income flows in the form of wind projects in promising markets with room for growth.

PEGI will be an attractive buy for traders seeking a stable income from their investment, as the company is offering a fairly high yield of 6.25% assuming a pricing at $20 and benefits from an experienced executive team with a history of conservative management.

VALUATION
PEGI has a history of careful expansion of its operations, and the results of its income-oriented growth are clear in its financials. Aside from its strong revenue and income figures (above), the company lists some $2.0 billion in assets compared to only $1.4 billion in liabilities.

PEGI will offer a yield of approximately 6.25% - a strong figure for those looking for regular income from their investments. The company projects that it will generate $55.4 million cash for distribution and $217.7 Adjusted EBITDA for the twelve months ending December 31, 2014.

CONCLUSION
PEGI looks like a good buy for income-oriented investors, offering a fairly strong yield on a conservatively-managed company in an industry with relatively few risks. PEGI's revenue is extremely secure, as each of its projects has secured long term deals to sell most or all power generated to credit-worthy partners. Some 95% of electricity produced by PEGI's current projects will be sold under the terms of these agreements, which have an average remaining contract life of 19 years.

Wind power has an obvious advantage over oil-fired power for investors: the price of wind doesn't fluctuate wildly in accordance with current events in the Middle East. Pattern Energy Group's project locations in Chile, Canada, and the United States are all relatively politically and economically stable. Wind power companies also need not fear the ever-present specter of sudden changes in regulations, a concern that fossil fuel-oriented energy companies must constantly be aware of.

BUSINESS
Recent and future improvements in wind turbine technology, a rapidly growing field in of itself, will only make Pattern Energy Group's projects more profitable; since the firm has already secured long-term contracts to sell its projects' electricity, improved efficiency in generating that power will translate to near pure profit, and will place the firm in a better negotiating position for future contracts.

Though the company's policies in terms of project construction and contract negotiation appear to have been extremely sound, a wind energy company does face some inevitable environmental risks. Wind patterns are variable, meaning that electricity production could vary from year to year and possibly cause risks to the company's ability to fulfill its contracts, though PEGI has no history of such issues. Shifts in global temperature also have the potential to dramatically affect wind farms' productivity.

PEGI and the wind power industry as a whole must compete with electricity produced via other sources, primarily fossil fuels. Improved technology or decreased regulation of fossil fuel production, or a prolonged, prosperous peace in the Middle East, could lead to a smaller market for wind energy.

MANAGEMENT
CEO Mike Garland's impressive resume and history of success are both promising signs. Garland has over 25 years of experience both in financial and practical elements of energy and infrastructure projects. Before forming Pattern Energy Group, Garland headed Babcock & Brown's North American Infrastructure Group, where his management of project financing, energy development and energy investment helped the Group to grow to over $12 billion in assets in under five years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written for informational purposes and is based in part on the company's S-1 which is on file with the SEC. Investors should read the prospectus and consult with their financial adviser before making any investments