In a first-ever for the U.S., a company focused entirely on wind energy is planning to come public, with Noble Environmental Power Inc. registering an IPO to list on the Nasdaq later this year.
Based in Essex, Conn., Noble Environmental registered earlier this month with the Securities and Exchange Commission to raise as much as $375 million through an initial public offering. The amounts actually raised in IPOs can vary dramatically from the registration figure; Noble Environmental has not set a price range, share size or date yet for its offering, which it plans to list under the symbol "NEPI."
Noble Environmental currently operates 282 megawatts of electrical generating capacity in New York state and has 950 megawatts that it expects to bring online in 2008 and 2009. By the end of 2012, it expects to have 3,580 megawatts of capacity by expanding to other states, including Maine, Minnesota and Wyoming.
No other company focused exclusively on wind power generation has ever launched an IPO in the U.S., although there have been 17 such offerings in other parts of the world since 1995, according to data tracker Dealogic. But it was inevitable that a wind-related offering would come to market in the U.S., given the growth in the industry and a rise in private investments in the sector, says Randall Swisher, executive director of the American Wind Energy Association, a trade group that promotes wind power.
Europe has about three times the amount of installed wind power capacity of the U.S., but the U.S. has been the largest market in the world for new wind turbine sales in the last three years, reflecting the growth in wind farms across the country, says Swisher. Worldwide, established renewable energy companies are eyeing the U.S. as a future source of wind farm growth due to its size, the available space for wind farms and expectations for changing government policies favoring more renewable energy investment, say experts.
A report earlier this month by the U.S. Department of Energy forecasts that in 2008, wind energy will generate about 1% of the nation's electricity; it modeled a scenario under which the U.S. could generate 20% through wind energy by 2030 " if significant challenges" are overcome, including major changes to the transmission system to deliver it to the electrical grid, improved power turbine technology and expanded markets.
Political, Equipment And Location Obstacles
Wind energy has had its share of challenges already: Federal tax credits have been allowed to expire three times in the last decade, turbine production is having difficulty keeping up with demand, and environmental and local community concerns can be a barrier to locating wind farms. But supporters of wind energy say that they believe the U.S. government will soon shift toward more permanent policies to support clean energy sources and reduce carbon emissions, laying the groundwork for more industry growth.
"We already have renewable portfolio standards (that dictate how much renewable power utilities must use) in 26 states, and no matter who becomes president, there will be a national renewable portfolio standard next year. I believe with certainty that this country is ready to commit to reducing carbon emissions, and that would change the playing field for renewable energy, leveling it out" in terms of price competition with fossil fuels, says Phil Angelides, a principal at real estate investment firm Canyon Capital Realty Advisors LLC and chairman of the Apollo Alliance, a group that is focused on promoting renewable energy and job growth in the sector.
Apollo communications director Keith Schneider says Noble Environmental was established in large part because state policies in New York expanded the need for renewable energy. The company was founded in 2004, the same year the state's public service commission voted to adopt a renewable portfolio standard.
But Noble Environmental only began operating wind farms three months ago. It's hoping that growth in demand for alternative energy sources, as well as legislative incentives for wind power, will benefit its business. Increased energy demand, rising fossil fuel costs, improvements in wind energy technology and an abundance of wind in the U.S. are among the industry strengths Noble Environmental cites in its prospectus.
However, Noble Environmental has no financial track record and is essentially a development-stage company. It has never generated any annual revenue, and net losses have been rising at a fast clip, doubling to $42.5 million in 2007 from 2006. The company expects to incur "substantial" pretax losses over the next several years as it constructs new wind farms, hires new employees and expands.
Awaiting New Legislation
Legislatively, the wind farm industry is facing the possibility of losing some tax benefits. Federal production tax credits for the wind energy industry are set to expire at the end of this year. The House of Representatives passed a bill extending them this week, but President Bush has threatened to veto it unless provisions he opposes are removed. Noble Environmental doesn't have the taxable income to use the tax credits anyway, but it warns that in the future, if the credits aren't extended or are renewed at a lower rate, its financing and development options for wind farms will be hurt.
The company currently finances its wind farms with a tax equity structure that channels ownership of the farms through limited liability companies. The method allows investors of the limited liability companies to use the production tax credits and allows the company to accelerate tax depreciation.
But investors in the limited liability companies - as opposed to investors in the IPO - typically receive all of the cash flows from the wind farms until a targeted rate of return is reached, reducing the cash available to Noble Environmental. The period of time during which the cash is diverted to these investors can drag on longer than expected if the wind farms underperform, according to the company's prospectus.
Noble Environmental's primary owners, underwriter JPMorgan Chase & Co.'s (JPM) private equity division and the Canada Pension Plan, will continue to hold stakes in the company post-IPO, but that level hasn't been determined yet. In addition to JPMorgan, Lehman Brothers Holdings Inc. (LEH) and Credit Suisse Group Inc. (CS) are the co-lead managers on the offering.
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