First Wind Holdings Review and Analysis – Pure Play USA Green Utility IPO looks a risky leveraged bet

Wind Energy Companies in the Developed Markets have taken it on the chin in 2010.Companies dependent on the Wind Energy Markets in the West like Vestas,Gamesa,Suzlon,Iberdola Renewables etc. have had a very bad 2010 as their stocks price keep finding new lows.A Combination of Tough Financing Markets,Low Gas Prices and Declining Electricity Demand has made the livers of Wind Executives hellish in recent times.More competition in terms of Chinese heavyweights like Sinovel,Goldwind and Koean shipbuidlers precludes an easy recovery.Green IPOs in recent times have faced huge volatility with some managing success while others have led to huge losses.China’s Ming Yang Power which is a Chinese Turbine Manufacturer has seen a  30% erosion of its IPO stock price of $14 as it was priced a tad too aggressively.First Wind which  is a bit different being a Wind Energy Developer similar to renewable energy developers like Enel Green Power,EDF Novellas might face a frosty reception as well.Its not a good time to be in the wind energy business as increasing competition and declining demand cause problems.Note John Deere sold off its Renewable Energy Arm for a bargain as US  Climate Change Legislation seems stuck in an everlasting limbo.Without a Federal RPS and an expiring 30% Treasury Cash Grant for Wind Farms,2011 is very uncertain for Wind Energy in the USA.

First Wind Holdings Inc. is offering 12 million Class A Shares which will indirectly give them around 25% of economic interest in First Wind Holdings LLC which owns and operates the wind farms.The Shares will be offered between $24-26/share giving the company roughly market cap of $1.2 bb and EV of $1.8 bb.Here are the key advantages/drawbacks of First Wind Holdings.

Advantages

1) Decent amount of Wind Capacity in Good Markets – First Wind owned 7 projects with 508 MW of Capacity in high electricity paying states like New York,Maine and Hawaii.It is building 4 more projects with 268 MW of capacity to be up and running by end 2010 to give it a combined capacity of 776 MW.The Company plans to add  200-400 MW projects each year with a total capacity of 1900 MW by end 2014

2) 90% of 2011 Revenues are Hedged plus PPAs – The company has hedged 90% of its revenues for 2011 by entering into swap and pre sales agreement with banks and financial investors.This should provide some certainty to its future wind revenues.The Company has also singed long term Power Purchase Agreements (PPAs) with Californian and Hawaiian utilities.

3)  Project Management Expertise,Government Grants and Excess Transmission Capacity – The Company has shown good project management expertise as building,permitting,financing,selling of Wind Energy is a complex process involving multiple counter parties and needs diverse skills.The Company has been one of the first Wind Developers to benefit from ARRA stimulus and has received more than $250 million in grants till date.The Company has excess transmission capacity at its wind farms which would allow it to expand wind capacity at its existing sites which is a huge plus as these would come at substantially lower costs.

Disadvantages

1) Valuation – Considering the Wind Energy situation in the USA and some of the recent wind farm deals,the company is pricing its 2010 Wind Energy Capacity at around $1.5/watt.The EV/watt pricing is even higher at more than $2/watt.Compare that to the recent John Deere sales of its Wind Energy Unit to Exelon which was done at around $1/MW .Pre IPO P/B would be 1.5x while post IPO it would fall to 1.2x.

2) High G&A Expenses and Losses – The company has bee continuously making losses since its inception.Though that it is acceptable given the rapid growth,the G&A expenses seems quite high to me at around $25 million (for first 9 months of 2010).The Company has managed to generate a decent annual income of $20 million/quarter in 2010 with 504 MW of capacity (approx).Considering that they manage $160 million in revs with a 1000 MW of capacity in 2010 that givens them a EV/sales valuation of more than 10x which is quite high

3) Falling Average Realized Energy Price – The company’s energy realized price has been falling quite sharply and continuously over the last 3 years.From 10.3c/Kwh in 2007 it has fallen to 7.8c/Kwh in 2010 which means a 20% drop in 3 years which is quite sharp.Part of this can be explained by falling natural gas prices but  alarming all the same.

4) Liquidity Risk – The company faces a liquidity risk given the high debt $582 million it has on the balance sheet and may be forced to sell off assets it does not meet its obligations.The $275 mm net of  expenses raised by the IPO would be crucial .

Of this amount, approximately $112.0 million matures prior to October 1, 2011. We do not have available cash or short-term liquid investments sufficient to repay all of this indebtedness and we have not obtained commitments for refinancing all of this debt. Therefore, we may not be able to extend the maturity of this indebtedness or to otherwise successfully refinance current maturities. If we are unable to repay or further extend the maturity on the $94.1 million of turbine supply loans ($161.4 million total at September 30, 2010, less $67.3 million repaid with proceeds from the Milford II construction loan, which closed on October 20, 2010) included in this current indebtedness, we would be in default on these loans. In that event, we may be forced to sell the collateral securing the loans or surrender the collateral to the lender, which would result in a loss for financial reporting purposes and could have an adverse effect on our longer term operations, including a potential delay in completion of one or more of our Tier 1 projects.

5) Holding Structure gives benefits of tax and depreciation to promoters DE Shaw and Madison Dearborn who will continue to own 70% of the Company post IPO –

We expect that any future exchanges of Series B Membership Interests (together with an equal number of shares of our Class B common stock) for shares of our Class A common stock will result in increases in the tax basis in the tangible and intangible assets of First Wind Holdings, LLC. Any such increases in tax basis would reduce the amount of tax that we would otherwise be required to pay in the future. We will be required to pay a portion of the cash savings we actually realize from such increase to certain holders of the Series B Membership Interests, which include our Sponsors and certain of our employees and current investors, pursuant to a tax receivable agreement. See “The Reorganization and Our Holding Company Structure—Tax Receivable Agreement.”

Summary

First Wind does not look a very attractive buy as it has risks of a new age Green company but none of the upsides .It may gain in an age of very high oil/gas prices but that is true for all energy companies.It can give returns at best like a utility but the risks are much higher.Given the high debt,losses,bad environment for wind energy in the USA,First Wind does not seem to be a buy at the current prices of $24-26.However if the bankers are forced to sell at much lower prices like Daqo (DQ) then it might merit a second look.For investors looking to put money into Green Utilities there exists several more attractive Green Utilities both in Europe (Enel Green Power) ,Iberdola,EDF and EDP Renewable Subsidies and in Asia like Orient Green Power and the upcoming IPOs of  Chinese Giant Utilities like Datang .