Based in San Francisco, CA, Pattern Energy Group (PEGI) scheduled a $320 million IPO with a market capitalization of $1.03 billion at a price range mid-point of $20, for Friday September 27, 2013.
Twelve IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.
S-1 filed September 9, 2013.
Manager, Joint Managers: BMO Capital; RBC Capital; Morgan Stanley, BofA Merrill Lynch
Co-Managers: CIBC, Scotiabank, Wells Fargo, Canaccord Genuity, Raymond James
PEGI was incorporated in October 2012 by PEG LP for the purpose of a private equity-funded IPO.
PEGI is a conglomeration of eight wind farms in unrelated geographical territories in the United States, Canada and Chile.
There are a number of factors that may limit growth of a public wind farm vehicle:
(1) The most favorable wind farm locations in the US have been taken.
(2) The wind farm investment tax credit is periodically up for renewal in Congress and sometimes is delayed. Without investment tax credits new wind farms are not economical.
(3) There is no synergy gained by adding more wind farms to the conglomeration.
(4) Power purchase agreements have limited upside potential.
(5) The only visible path to grow is through roll-up acquisitions, which is uncertain at best in a market as well developed as wind farms.
PEGI intends initially to pay a 6.25% dividend at the price range mid-point of $20. Upon analysis (see below), it appears that the anticipated $1.25 per share dividend rate is based on risky assumptions.
For example, according to PEGI's own estimates, there is a 50% of a forecasted revenue shortfall. There are other issues that suggest PEGI's anticipated dividend is not necessarily secure, i.e. it is based on risky assumptions.
annualizing June 6 mos '13
Pattern Energy Group (PEGI)
Pass on the PEGI IPO.
To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:
PEGI is a wind farm company, and owns interests in eight wind power projects located in the United States, Canada and Chile that have a total owned capacity of 1,041 MW, consisting of six operating projects and two projects under construction.
PEGI expects that its two construction projects will commence commercial operations prior to the end of the second quarter of 2014. Each of the projects has contracted to sell all or a majority of its output pursuant to a long-term, fixed-price power sale agreement with a creditworthy counterparty. Ninety-five percent of the electricity to be generated by projects will be sold under these power sale agreements which have a weighted average remaining contract life of approximately 19 years.
Dividend growth plan
PEG LP has granted PEGI preferential rights to acquire projects that it owns and chooses to sell. As a result PEGI will have preferential purchase rights in respect of various projects owned by PEG LP, including, among others, 746 MW of PEG LP-owned capacity, or the "Initial ROFO Projects," which are predominantly operational or construction ready.
Based on anticipated cash available for distribution and the initial quarterly dividend level, PEGI believes that it will generate excess cash flow that PEGI can use, together with initial cash on hand and the proceeds of any potential future debt or equity issuances, to invest in accretive project acquisition opportunities, including the Initial ROFO Projects. Considering PEGI's preferential rights to acquire the Initial ROFO Projects, PEGI has established a three-year targeted annual growth rate in cash available for distribution per Class A share of 8% to 10%.
PEG LP owns 15.5 million shares of class B stock that will be converted to class A stock by December 31, 2014, or the completion of the South Kent project, whichever is later. Once those shares are converted, then to maintain a $1.25 dividend PEGI will have to generate $63 million in cash to be distributed, because there will be 52 million shares issued and outstanding.
The target payout ratio is going to be 80%. Therefore PEGI will need to generate $80 million in distributable cash in order to pay out $63 million assuming an 80% payout ratio.
For the 12 months ending December 2014 PEGI is forecasting only $55.4 million in distributable cash. The $80 million target is 44% higher, which seems to be an assumptive stretch.
In addition, management states in the S-1 filing that there is a 50% probability of a revenue shortfall.
There is considerable risk that PEGI cannot maintain a $1.25 per share dividend, let alone increase it.
PEG LP was formed in June 2009 by the executive management team of PEG LP and investment funds managed by Riverstone. Riverstone is an energy and power-focused private equity firm founded in 2000 with approximately $25 billion of equity capital raised across seven investment funds and related coinvestments, including the world's largest renewable energy fund. Riverstone conducts buyout and growth capital investments in the midstream, exploration and production, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London and Houston, the firm has committed approximately $23.7 billion to 102 investments in North America, Latin America, Europe, Africa and Asia.
5% stockholders pre-IPO
Pattern Energy Group LP, nearly 100%
Cash distribution policy
The initial quarterly dividend will be set at $0.3125 per Class A share, or $1.25 per Class A share on an annualized basis - which is 6.25% annualized payout at the price range mid-point of $20.
The target distribution payout ratio is 80% both prior to and following the Conversion Event.
"Management estimates that during the forecast periods presented, there is a 50% probability that the electricity generated across the projects will exceed the amount of MWh set forth opposite the line item 'MWh sold' for each of the periods in the table above."
Conversely, there is a 50% probability of a revenue shortfall.
Use of proceeds
From the sale of 16 million shares, PEGI expects to net $288.4 million at the price range mid-point.
Proceeds are to repay $202 million in cash to PEG LP, repay $56 million debt, the remainder for working capital and general corporate purposes.
Disclaimer: This PEGI IPO report is based on a reading and analysis of PEGI's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.