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Second wind

20 Aug 2013 By Christopher Swann

Pattern Energy’s initial public offering has a market breeze at its back. Previous efforts to lure public investors to the wind sector have been met with a stiff back-draft. A rally in renewable stocks this year gives Pattern a chance to break the mold. Despite a heavy debt load, the company’s solid cash flow and tax breaks make the sales pitch more than just hot air.

More and more opportunities have become available to put money into a less carbon-focused future, including the likes of Tesla and First Solar. Wind generation is a notable gap, even though turbines supply 30 times more energy in America than photovoltaic panels. The last proposed share sale in the industry, by First Wind Holdings, was yanked in November 2010 when investors balked at an unprofitable company with aggressive expansion plans.

Riverstone, Pattern Energy’s private equity backer, is less likely to be blown off course. For a start, market conditions could scarcely be more favorable. Clean energy shares in the WilderHill index are up by a third so far this year, rising twice as fast as the S&P 500.

The company also has more to offer than just its eco-friendly credentials. Pattern Energy’s projects are solidly profitable. Better still, it boasts many of the characteristics of a gas pipeline master limited partnership – including solid cash flow, protection from commodity price swings and access to generous tax advantages. Accelerated depreciation, a federal perk for renewable energy, means the company won’t face a meaningful bill from Uncle Sam for several years.

Long-term contracts to supply electricity put it on track for $218 million of EBITDA in 2014. The company’s closest peer, NRG Yield, which combines wind, solar and gas generation, has an enterprise valued at about 11 times 2014 EBITDA. At the same multiple, after backing out net debt of $1.3 billion, Pattern Energy would fetch a market capitalization of $1 billion.

Assuming cash flow after debt payments of $55 million, as estimated by Tudor Pickering, that would leave the company with a dividend yield of about 5.5 percent. It’s the kind of math that makes it easier for investors to be green.


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