S-1 1 d564947ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on August 9, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PATTERN ENERGY GROUP INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   4911   90-0893251

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Pier 1, Bay 3

San Francisco, CA 94111

(415) 283-4000

(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)

 

 

Daniel M. Elkort

General Counsel

Pattern Energy Group Inc.

Pier 1, Bay 3

San Francisco, CA 94111

(415) 283-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Kirk A. Davenport II

Patrick H. Shannon

Latham & Watkins LLP

885 Third Avenue
New York, NY 10022

(212) 906-1200

 

Shelley A. Barber

Brenda K. Lenahan

Vinson & Elkins L.L.P.

666 Fifth Avenue
New York, NY 10103

(212) 237-0000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

¨  Large accelerated filer   ¨  Accelerated filer   x  Non-accelerated filer   ¨  Smaller reporting company

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities

to be Registered

 

Proposed maximum
aggregate offering

price(a)(b)

 

Amount of

registration fee

Class A common stock, $0.01 par value per share

  $345,000,000   $47,058

 

 

(a) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act of 1933, as amended.
(b) Including additional shares of Class A common stock that may be purchased by the underwriters.

 


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EXPLANATORY NOTE

This registration statement contains two forms of prospectus: one to be used in connection with the offering of the securities described herein in the United States, which we refer to as the “U.S. Prospectus,” and one to be used in connection with the offering of such securities in Canada, which we refer to as the “Canadian Prospectus.” The U.S. Prospectus and the Canadian Prospectus are identical except for the cover page, the table of contents and the back page, and except that the Canadian Prospectus includes pages 163 through 165, a “Certificate of the Company and the Promoter” and a “Certificate of the Canadian Underwriters.” The form of the U.S. Prospectus is included herein and is followed by the alternate and additional pages to be used in the Canadian Prospectus. Each of the alternate pages for the Canadian Prospectus included herein is labeled “Alternate Page for Canadian Prospectus.” Each of the additional pages for the Canadian Prospectus included herein is labeled “Additional Page for Canadian Prospectus.”


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The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholder may sell these securities until this registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling shareholder are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

 

Prospectus    Subject to Completion, dated August 9, 2013

 

 

                     Shares

 

LOGO

Pattern Energy Group Inc.

Class A Common Stock

This is Pattern Energy Group Inc.’s initial public offering. We are selling              shares of our Class A common stock.

We expect the public offering price to be between $         and $         per Class A share. Currently, no public market exists for the shares.

We are an “emerging growth company” as defined in Section 2(a)(19) of the U.S. Securities Act of 1933, as amended, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002 and the Investor Protection and Securities Reform Act of 2010, subject to the disclosure requirements under Canadian securities laws. Please read “Risk Factors” and “Business Summary—Implications of Being an Emerging Growth Company.”

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” beginning on page 25 of this prospectus for a discussion of certain risks that you should consider before investing.

 

     Per Class A Share        Total        

Public offering price

  $                      $                   

Underwriters’ commissions(1)

  $                      $                   

Net proceeds to us, before expenses

  $                      $                   

 

 

(1) The underwriters will receive compensation in addition to the underwriters’ commissions. See “Underwriting” for a description of compensation payable to the underwriters.

The underwriters may also purchase up to an additional              shares of our Class A common stock from the selling shareholder named herein at the public offering price, less the underwriters’ commissions, within 30 days from the closing date of this offering to cover overallotments, if any. We will not receive any proceeds from the exercise of the underwriters’ overallotment option.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                     , 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

BMO Capital Markets    RBC Capital Markets      Morgan Stanley   

 

 

The date of this prospectus is                     , 2013.


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[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]

A copy of this preliminary prospectus has been filed with the securities regulatory authorities in each of the provinces and territories of Canada but has not yet become final for the purpose of the sale of securities. Information contained in this preliminary prospectus may not be complete and may have to be amended. The securities may not be sold until a receipt for the prospectus is obtained from the securities regulatory authorities.

This prospectus has been filed under procedures in each of the provinces and territories of Canada that permit certain information about these securities to be determined after the prospectus has become final and that permit the omission of that information from this prospectus. The procedures require the delivery to purchasers of a supplemented PREP prospectus containing the omitted information within a specified period of time after agreeing to purchase any of these securities. All of the information contained in the supplemented PREP prospectus that is not contained in this base PREP prospectus will be incorporated by reference into this base PREP prospectus as of the date of the supplemented PREP prospectus.

No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This preliminary prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and only by persons permitted to sell these securities.

We have filed a registration statement on Form S-1 with the United States Securities and Exchange Commission under the United States Securities Act of 1933, as amended, with respect to these securities.

 

Initial Public Offering

and Secondary Offering

   PRELIMINARY BASE PREP PROSPECTUS                        , 2013

Pattern Energy Group Inc.

 

LOGO

Class A Common Shares

US$            

This prospectus qualifies the distribution of an aggregate of              Class A common shares of Pattern Energy Group Inc., consisting of a new issue by us of              Class A common shares. We expect the public offering price to be between US$             and US$             per Class A share.

The Class A common shares are being offered for sale concurrently in Canada under this prospectus and in the United States under a registration statement on Form S-1 filed with the United States Securities and Exchange Commission. Our Class A common shares are being offered in Canada by BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., Morgan Stanley Canada Limited, and                                         , or the “Canadian underwriters,” and in the United States by BMO Capital Markets Corp., RBC Capital Markets, LLC and Morgan Stanley & Co. LLC and                                         , together with the Canadian underwriters, the “underwriters.”

There is currently no market through which our Class A common shares may be sold and purchasers may not be able to resell Class A common shares purchased under this prospectus. This may affect the pricing of our Class A common shares in the secondary market, the transparency and availability of trading prices, the liquidity of the securities and the extent of issuer regulation. See “Risk Factors”

 

Price:  US$                  per Class A common share


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[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]

 

     Price
    to the Public(1)    
     Underwriters’
     Commissions(2)     
     Net Proceeds
 to Pattern Energy 
Group Inc.(3)(4)
 

Per Class A Common Share

     US$                     US$                     US$               

Total Offering

     US$                     US$                     US$               

Notes:

 

  (1) 

The offering price for our Class A common shares has been determined by negotiation among us, Pattern Energy Group LP, or “PEG LP,” and the underwriters.

 

  (2) 

The underwriters will receive compensation in addition to the underwriters’ commissions. See “Underwriting” for a description of compensation payable to the underwriters.

 

  (3) 

Before deducting our expenses of the offering estimated at US$        , which together with the underwriters’ commissions in respect of the Class A common shares sold, will be paid by us out of the proceeds of the offering.

 

  (4) 

PEG LP, our promoter, or the “selling shareholder,” has granted to the underwriters an option, exercisable in whole or in part until the date which is 30 days following the closing date of this offering, to purchase up to              Class A common shares on the same terms as the offering for the purpose of covering overallotments, if any (the “overallotment option”). The selling shareholder will pay the underwriters’ commission and the expenses of the offering in respect of the Class A common shares sold on exercise of the overallotment option. If the overallotment option is exercised in full, the total price to the public will be US$        , the commissions payable to the underwriters will be US$        , the net proceeds to us will remain US$         (before deducting the expenses of the offering), and the net proceeds to the selling shareholder will be US$         (before deducting the expenses of the offering in respect of the Class A common shares sold on exercise of the overallotment option). See “Principal and Selling Shareholders.” This prospectus also qualifies the grant of the overallotment option and the distribution of the Class A common shares that are deliverable upon the exercise of the overallotment option. A purchaser who acquires Class A common shares forming part of the underwriters’ over-allocation position acquires such Class A common shares under this prospectus, regardless of whether the over-allocation position is ultimately filled through the exercise of the overallotment option or secondary market purchases. See “Underwriting.”

 

    Underwriters’ Position    

  

Maximum size or

number of

    securities available    

  

    Exercise period    

  

            Exercise price             

Overallotment option   

Option to acquire up to

          Class A common shares

  

Exercisable for a period

of 30 days after the

closing date of this

offering

   US$             per Class A common share

An investment in our Class A common shares involves a high degree of risk. See “Risk Factors” beginning on page 25 of this prospectus for a discussion of certain risks that you should consider before investing.

The Canadian underwriters, as principals, conditionally offer the Class A common shares qualified under this prospectus, subject to prior sale, if, as and when issued by us and accepted by the Canadian underwriters in accordance with the conditions contained in the underwriting agreement referred to under “Underwriting” and subject to the approval of certain legal matters on our behalf by Blake, Cassels & Graydon LLP, as to matters of Canadian law, and Latham & Watkins LLP, as to matters of U.S. law, and on behalf of the underwriters by Torys LLP, as to matters of Canadian law, and Vinson & Elkins L.L.P., as to matters of U.S. law.

Certain affiliates of BMO Nesbitt Burns Inc., RBC Dominion Securities Inc. and Morgan Stanley Canada Limited act as agents and/or are lenders, as applicable, under our revolving credit facility (as defined herein). Accordingly, we may be considered a “connected issuer” of BMO Nesbitt Burns Inc., RBC Dominion Securities Inc. and Morgan Stanley Canada Limited within the meaning of applicable Canadian securities laws. See “Description of Certain Financing Arrangements—Revolving Credit Facility” and “Underwriting.”

In connection with this offering, the underwriters may, subject to applicable laws, overallot or effect transactions that stabilize, maintain or otherwise affect the market price of our Class A common shares at levels other than those which otherwise might prevail on the open market. Such transactions, if commenced, may be discontinued at any time. See “Underwriting.” The selling shareholder has granted an overallotment option to the underwriters to cover overallotments, if any. We will not receive any proceeds from the exercise of the underwriters’ overallotment option. See “Principal and Selling Shareholders” and “Use of Proceeds.” The underwriters may offer our Class A common shares at a lower price than stated above. See “Underwriting.”


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[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]

 

Subscriptions will be received subject to rejection or allotment in whole or in part and the underwriters reserve the right to close the subscription books at any time without notice. A book entry only certificate representing the Class A common shares to be issued or sold in this offering will be issued in registered form to CDS Clearing and Depository Services Inc., or “CDS,” and deposited with CDS on the closing date of this offering which is expected to occur on or about                     , 2013 or such later date as we and the underwriters may agree, but in any event not later than                     , 2013. A purchaser of our Class A common shares in Canada will receive only a customer confirmation from a registered dealer that is a participant in CDS through which our Class A common shares are purchased, unless such purchaser requests from us the issuance of a certificate evidencing such Class A common shares.


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Projects in Operation or Under Construction South Kent Location: Ontario, Canada Net MW: 135 MW Commercial Operations: Q2 2014 Hatchet Ridge Location: California, U.S. Net Capacity: 101 MW Commercial Operations: Q4 2010 El Arrayán Location: Ovalle, Chile Net Capacity: 35 MW Commercial Operations: Q2 2014 Gulf Wind (60%) Location: Texas, U.S. Net Capacity: 170 MW Commercial Operations: Q3 2009 Santa Isabel Location: Santa Isabel, Puerto Rico Net Capacity: 101 MW Commercial Operations: Q4 2012 St. Joseph Location: Manitoba, Canada Net Capacity: 138 MW Commercial Operations: Q2 2011 Spring Valley Location: Nevada, U.S. Net Capacity: 152 MW Commercial Operations: Q3 2012 Ocotillo Location: Ocotillo, California Net Capacity: 265 MW Commercial Operations: Q4 2012 In Operation Under Construction

 

LOGO


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Santa Isabel

Gulf Wind

Ocotillo

Hatchet Ridge

 

LOGO


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*3-D visualization *3-D visualization

El Arrayán*

St. Joseph

South Kent*

Spring Valley

 

LOGO


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TABLE OF CONTENTS

 

     Page  

BUSINESS SUMMARY

     1   

THE OFFERING

     16   

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

     20   

RISK FACTORS

     25   

FORWARD-LOOKING STATEMENTS

     51   

USE OF PROCEEDS

     53   

CAPITALIZATION

     54   

DILUTION

     55   

CASH DIVIDEND POLICY

     56   

SELECTED HISTORICAL FINANCIAL DATA

     70   

UNAUDITED PRO FORMA FINANCIAL DATA

     73   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     80   

INDUSTRY

     102   

BUSINESS

     118   

INDEPENDENT ENGINEER REPORT

     141   

MANAGEMENT

     143   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     161   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     167   

STRUCTURE AND FORMATION OF OUR COMPANY

     169   

PRINCIPAL AND SELLING SHAREHOLDERS

     172   

DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS

     174   

DESCRIPTION OF CAPITAL STOCK

     184   

SHARES ELIGIBLE FOR FUTURE SALE

     188   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF OUR CLASS A COMMON SHARES

     190   

MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF OUR CLASS A COMMON SHARES

     196   

UNDERWRITING

     201   

LEGAL MATTERS

     206   

EXPERTS

     206   

WHERE YOU CAN FIND MORE INFORMATION

     206   

INDEX TO COMBINED FINANCIAL STATEMENTS

     F-1   

Subscriptions will be received subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time without notice. We expect that delivery of our Class A shares will be made against payment therefor on or about the date specified on the cover page of this prospectus, which will be the              business day following the date of pricing of our Class A shares (such settlement code being herein referred to as “T +         ”). Pursuant to SEC Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade our Class A shares on the date of pricing or the next succeeding business day will be required, by virtue of the fact that our Class A shares initially will settle T +         , to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement and should consult their own advisor.

 

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[ALTERNATE PAGE FOR CANADIAN PROSPECTUS]

TABLE OF CONTENTS

 

     Page  

BUSINESS SUMMARY

     1  

THE OFFERING

     16  

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

     20  

RISK FACTORS

     25  

FORWARD-LOOKING STATEMENTS

     51  

USE OF PROCEEDS

     53  

CAPITALIZATION

     54  

DILUTION

     55  

CASH DIVIDEND POLICY

     56  

SELECTED HISTORICAL FINANCIAL DATA

     70  

UNAUDITED PRO FORMA FINANCIAL DATA

     73  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     80  

INDUSTRY

     102  

BUSINESS

     118  

INDEPENDENT ENGINEER REPORT

     141   

MANAGEMENT

     143  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     161  

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     167  

STRUCTURE AND FORMATION OF OUR COMPANY

     169  

PRINCIPAL AND SELLING SHAREHOLDERS

     172  

DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS

     174  

DESCRIPTION OF CAPITAL STOCK

     184  

SHARES ELIGIBLE FOR FUTURE SALE

     188  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF OUR CLASS A COMMON SHARES

     190  

MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR HOLDERS OF OUR CLASS A COMMON SHARES

     196  

UNDERWRITING

     201  

LEGAL MATTERS

     206  

EXPERTS

     206  

WHERE YOU CAN FIND MORE INFORMATION

     206  

ENFORCEMENT OF LEGAL RIGHTS

     208  

NOTICE TO INVESTORS REGARDING U.S. GAAP

     208  

CONTINUOUS DISCLOSURE

     208  

PROMOTER

     208  

PRIOR SALES OF SHARES

     209  

ELIGIBILITY FOR INVESTMENT

     209  

MATERIAL CONTRACTS

     210  

AUDITORS

     210  

PURCHASER’S STATUTORY RIGHTS OF WITHDRAWAL AND RECISSION

     165  

INDEX TO COMBINED FINANCIAL STATEMENTS

     F-1  

CERTIFICATE OF THE COMPANY AND THE PROMOTER

     C-1  

CERTIFICATE OF THE CANADIAN UNDERWRITERS

     C-2  

 

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We have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectuses (in the United States) we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the Class A common shares offered hereby, but only under the circumstances and in jurisdictions where it is lawful to do so. The information in this document may only be accurate on the date of this document.

Through and including                      (the 25th day after the date of this prospectus), under U.S. securities law, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

NOTICE TO INVESTORS

We are a holding company with U.S. operating subsidiaries that are “public utilities” (as defined in the Federal Power Act, or “FPA”) and, therefore, subject to the jurisdiction of the U.S. Federal Energy Regulatory Commission, or “FERC,” under the FPA. As a result, the FPA places certain restrictions and requirements on the transfer of an amount of our voting securities sufficient to convey direct or indirect control over us. See “Risk Factors—Risks Related to this Offering and Ownership of our Class A Shares—As a result of the FPA and FERC’s regulations in respect of transfers of control, absent prior authorization by FERC, neither we nor PEG LP can convey, nor will an investor in our company generally be permitted to obtain, a direct and/or indirect voting interest in 10% or more of our issued and outstanding voting securities, and a violation of this limitation could result in civil or criminal penalties under the FPA and possible further sanctions imposed by FERC under the FPA.”

MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates as well as from industry publications and research, surveys and studies conducted by third parties, including the Global Wind Energy Council, the World Meteorological Organization, North American Electric Reliability Corporation, National Energy Technology Laboratory, the U.S. Department of Energy, the U.S. Energy Information Administration, the Federal Energy Regulatory Commission, the Electric Reliability Council of Texas, the Public Utility Commission of Texas, the Centre for Energy, Natural Resources Canada, Ontario Power Generation, Ontario Power Authority, the Government of Manitoba, the Chilean Ministry of Energy and Puerto Rico Electric Power Authority. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets.

TRADEMARKS

This prospectus includes trademarks, such as the Pattern name and the Pattern logo, which are protected under applicable intellectual property laws and are our property and/or the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may

 

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appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and tradenames. We expect to enter into an agreement with PEG LP under which PEG LP will license us the name “Pattern” and the Pattern logo and also grant us a right to acquire the name and logo, subject to our granting PEG LP a license to use the name “Pattern” and the Pattern logo after we acquire it.

CURRENCY AND EXCHANGE RATE INFORMATION

In this prospectus, references to “C$” and “Canadian dollars” are to the lawful currency of Canada and references to “$”, “US$” and “U.S. dollars” are to the lawful currency of the United States. All dollar amounts herein are in U.S. dollars, unless otherwise stated.

Our predecessor’s historical financial statements that are included elsewhere in this prospectus are presented in U.S. dollars. The following chart sets forth for each of 2010, 2011 and 2012, and each completed month to date during 2013, the high, low, period average and period end noon buying rates in the City of New York for cable transfers of Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York expressed as Canadian dollars per US$1.00.

 

     Canadian dollars per US$ 1.00  
     High      Low      Period
Average(1)
     Period End  

Year

           

2010

   C$ 1.0776       C$ 0.9960       C$ 1.0298       C$ 1.0009   

2011

     1.0605         0.9448         0.9887         1.0168   

2012

     1.0417         0.9710         0.9995         0.9958   

Month

           

January 2013

     1.0078         0.9839         0.9921         0.9992   

February 2013

     1.0286         0.9987         1.0098         1.0286   

March 2013

     1.0314         1.0155         1.0244         1.0174   

April 2013

     1.0270         1.0072         1.0187         1.0072   

May 2013

     1.0371         1.0023         1.0196         1.0337   

June 2013

     1.0532         1.0170         1.0314         1.0513   

July 2013

     1.0578         1.0259         1.0402         1.0287   

 

(1) The average of the noon buying rates on the last business day of each month during the relevant one-year period and, in respect of monthly information, the average of the noon buying rates on each business day for the relevant one-month period.

The noon buying rate in Canadian dollars on August 2, 2013 was US$1.00 = C$1.0379.

The above rates differ from the actual rates used in our predecessor’s historical financial statements and the calculation of cash available for distribution and dividends we may declare and pay, if any, described elsewhere in this prospectus. Our inclusion of these exchange rates is not meant to suggest that the U.S. dollar amounts actually represent such Canadian dollar amounts or that such amounts could have been converted into Canadian dollars at any particular rate or at all.

For information on the impact of fluctuations in exchange rates on our operations, see “Risk Factors—Risks Related to Our Projects—Currency exchange rate fluctuations may have an impact on our financial results and condition” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Risk.”

 

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CAUTIONARY STATEMENT REGARDING THE USE OF NON-GAAP MEASURES

This prospectus contains references to Adjusted EBITDA, cash available for distribution before principal payments and cash available for distribution, which are not measures under generally accepted accounting principles in the United States, or “U.S. GAAP,” and, therefore, may differ from definitions of these measures used by other companies in our industry. We disclose Adjusted EBITDA, cash available for distribution before principal payments and cash available for distribution because we believe that these measures may assist investors in assessing our financial performance and the anticipated cash flow from our projects. None of these measures should be considered the sole measure of our performance and should not be considered in isolation from, or as a substitute for, the financial statements included elsewhere in this prospectus prepared in accordance with U.S. GAAP. For further discussion of the limitations of these non-U.S. GAAP measures and the reconciliations of net income to Adjusted EBITDA and net cash provided by (used in) operating activities to each of cash available for distribution before principal payments and cash available for distribution, see footnotes 2 and 3 to the table under the heading “Summary Historical and Pro Forma Financial Data” elsewhere in this prospectus.

MEANING OF CERTAIN REFERENCES

Unless the context requires otherwise, any reference in this prospectus to:

 

   

“Class A shares” refers to shares of our Class A common stock, par value $0.01 per share;

 

   

“Class B shares” refers to shares of our Class B common stock, par value $0.01 per share;

 

   

our “construction projects” refers to the South Kent and El Arrayán projects, where we have commenced construction;

 

   

the “Conversion Event” refers to the later of December 31, 2014 and the date on which our South Kent project has achieved commercial operations;

 

   

“El Arrayán” or the “El Arrayán project” refers to the wind power project assets held by Parque Eólico El Arrayán SpA, a share company formed under the laws of Chile, which upon commencement of commercial operations will have an owned capacity of 36 MW;

 

   

“FIT” refers to feed-in-tariff regime;

 

   

“Gulf Wind” or the “Gulf Wind project” refers to the wind power project assets held by Pattern Gulf Wind LLC, a limited liability company formed under the laws of the State of Delaware, which has an owned capacity of 113 MW;

 

   

“Hatchet Ridge” or the “Hatchet Ridge project” refers to the wind power project assets held by Hatchet Ridge Wind, LLC, a limited liability company formed under the laws of the State of Delaware, which has an owned capacity of 101 MW;

 

   

“IPPs” refers to independent power producers;

 

   

“ISOs” refers to independent system organizations, which are organizations that administer wholesale electricity markets;

 

   

“ITCs” refers to investment tax credits;

 

   

“MW” refers to megawatts;

 

   

“MWh” refers to megawatt hours;

 

   

“OCC” refers to our operations control center;

 

   

“Ocotillo” or the “Ocotillo project” refers to the wind power project assets held by Ocotillo Express LLC, a limited liability company formed under the laws of the State of Delaware, which has an owned capacity of 265 MW;

 

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our “operating projects” refers to the Gulf Wind, Hatchet Ridge, St. Joseph, Spring Valley, Santa Isabel and Ocotillo projects, where we have commenced commercial operations;

 

   

“owned capacity” of any particular project refers to the maximum, or rated, electricity generating capacity of the project in MW multiplied by our percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions;

 

   

“PEG LP-owned capacity” of any particular project refers to the maximum, or rated, electricity generating capacity of the project in MW multiplied by PEG LP’s percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions;

 

   

our “predecessor” refers to our accounting predecessor, which consists of a combination of entities and assets currently owned by PEG LP;

 

   

our “projects,” “portfolio” or “project portfolio” in each case refers to our operating projects together with our construction projects;

 

   

“power sale agreements” refers to PPAs and/or hedging arrangements, as applicable;

 

   

“PPAs” refers to power purchase agreements;

 

   

“PTCs” refers to production tax credits;

 

   

“rated capacity” refers to maximum electricity generating capacity in MW;

 

   

“RECs” refers to renewable energy credits;

 

   

“RFP” refers to a request for procurement;

 

   

“RPS” refers to Renewable Portfolio Standards;

 

   

“Santa Isabel” or the “Santa Isabel project” refers to the wind power project assets held by Pattern Santa Isabel LLC, a limited liability company formed under the laws of the State of Delaware, which upon completion of this offering will have an owned capacity of 101 MW;

 

   

“shares,” “common shares” or “common stock” collectively refers to our Class A shares and Class B shares;

 

   

“South Kent” or the “South Kent project” refers to the wind power project assets held by South Kent Wind LP, a limited partnership formed under the laws of the Province of Ontario, which upon commencement of commercial operations will have an owned capacity of 135 MW;

 

   

“Spring Valley” or the “Spring Valley project” refers to the wind power project assets held by Spring Valley Wind LLC, a limited liability company formed under the laws of the State of Nevada, which has an owned capacity of 152 MW; and

 

   

“St. Joseph” or the “St. Joseph project” refers to the wind power project assets held by St. Joseph Windfarm Inc., a corporation formed under the laws of Canada, which has an owned capacity of 138 MW.

 

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BUSINESS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all the information you need to consider in making your investment decision. You should read this entire prospectus carefully and should consider, among other things, the matters set forth under “Risk Factors,” “Selected Historical Financial Data,” “Unaudited Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our and our predecessor’s financial statements and related notes thereto appearing elsewhere in this prospectus before making your investment decision. Unless the context provides otherwise, references herein to (i) “we,” “our,” “us,” “our company” and “Pattern” refer to Pattern Energy Group Inc., a Delaware corporation, together with its consolidated subsidiaries after giving effect to the Contribution Transactions and (ii) “PEG LP” refers to Pattern Energy Group LP and its subsidiaries. On or immediately prior to the completion of this offering, PEG LP will contribute to Pattern Energy Group Inc. all or a portion of its ownership interests in the entities that, directly or indirectly, own or lease and operate certain wind power projects, which we refer to as the “Contribution Transactions.” See “Structure and Formation of Our Company—The Contribution Transactions” and “Certain Relationships and Related Party Transactions.” The information contained in this prospectus assumes (A) the Contribution Transactions have been consummated, (B) the underwriters have not exercised their overallotment option and (C) an initial public offering price of $         per Class A share, which is the midpoint of the range set forth on the cover page of this prospectus. For an explanation of certain terms used in this prospectus see “Meaning of Certain References.” For recent and historical exchange rates between Canadian dollars and U.S. dollars, see “Currency and Exchange Rate Information.”

Our Business

We are an independent power company focused on owning and operating power projects with stable long-term cash flows in attractive markets with potential for continued growth of our business. We own interests in eight wind power projects located in the United States, Canada and Chile that use proven, best-in-class technology and have a total owned capacity of 1,041 MW, consisting of six operating projects and two construction projects. We expect our two construction projects will commence commercial operations prior to the end of the second quarter of 2014. Each of our 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 our projects will be sold under these power sale agreements, which have a weighted average remaining contract life of approximately 19 years.

Upon completion of this offering, we will have two classes of authorized common stock outstanding, Class A shares and Class B shares. The rights of the holders of our Class A and Class B shares will be identical other than in respect of dividends and the conversion rights of our Class B shares. Upon the later of December 31, 2014 and the date on which our South Kent project has achieved commercial operations, which we refer to as the “Conversion Event,” all of our outstanding Class B shares will automatically convert, on a one-for-one basis, into Class A shares. Our Class B shares, all of which will be held by PEG LP and members of management, will have no rights to dividends. We are using a dual-class share structure to mitigate our Class A shareholders’ risk with respect to construction of our South Kent project. See “Description of Capital Stock.”

Based on the related assumptions included in “Cash Dividend Policy—Forecasted Cash Available for Distribution” and “—Forecast Limitations, Assumptions and Other Considerations,” we forecast that we will generate cash available for distribution and Adjusted EBITDA of $55.4 million and $217.7 million, respectively, for the year ending December 31, 2014. Additionally, to illustrate the financial effect of a fully operational project portfolio, our forecast also indicates that if our construction projects (South Kent and El Arrayán) generated revenue and cash flow throughout the year ending December 31, 2014, as opposed to only during a

 

 

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portion of the year (as we currently expect), our forecasted cash available for distribution would increase from $55.4 million to $80.2 million and our forecasted Adjusted EBITDA would increase from $217.7 million to $238.2 million. We refer to these illustrative forecasted amounts as our “run-rate cash available for distribution” and our “run-rate Adjusted EBITDA,” respectively. The assumptions and estimates underlying these forecasts are inherently uncertain and our future operating results are subject to a wide variety of risks and uncertainties, any one of which could cause our actual results to differ materially from those forecasted. Prospective investors should read “Cash Dividend Policy,” including our financial forecast and related assumptions, in its entirety and are cautioned not to place undue reliance on our forecast.

We intend to use a portion of the cash available for distribution generated from our projects to pay regular quarterly dividends in U.S. dollars to holders of our Class A shares. Our quarterly dividend will initially be set at $         per Class A share, or $         per Class A share on an annualized basis. We have established our initial quarterly dividend level after considering our run-rate cash available for distribution and a targeted dividend payout ratio with respect thereto of approximately 80%.

The table below summarizes our projected cash available for distribution per Class A share for the year ending December 31, 2014 based on our 2014 and run-rate forecasts, as well as other related information:

 

(in millions, except project and per share data)

   Forecast for
Year Ending
December 31, 2014
    Run-rate  
     (unaudited)  

Assumed operational projects throughout period indicated

     6        8   

Cash available for distribution(1)

   $ 55.4      $ 80.2   

Class A shares

         (2) 
  

 

 

   

 

 

 

Cash available for distribution per Class A Share

   $        $   (2) 
  

 

 

   

 

 

 

Annual dividend per Class A share, based on initial dividend level

   $        $     

Payout ratio(3)

             %(2) 
  

 

 

   

 

 

 

Adjusted EBITDA(1)

   $ 217.7      $ 238.2   

 

(1) For a reconciliation of these forecasted non-U.S. GAAP metrics to their closest U.S. GAAP measure, see “Cash Dividend Policy—Forecasted Cash Available for Distribution” elsewhere in this prospectus.
(2) Assumes the Conversion Event has occurred.
(3) Reflects forecasted annual dividend per Class A share as a percentage of forecasted cash available for distribution per Class A share.

PEG LP has granted us preferential rights to acquire projects that it owns and chooses to sell. As a result we 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. See the table under “—Our Relationship with PEG LP” for more information about the Initial ROFO Projects. Based on our run-rate cash available for distribution and our initial quarterly dividend level, we believe that we will generate excess cash flow that we can use, together with our 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 our preferential rights to acquire the Initial ROFO Projects, we have established a three-year targeted annual growth rate in our cash available for distribution per Class A share of 8% to 10%.

 

 

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Our Core Values and Financial Objectives

We intend to maximize long-term value for our shareholders in an environmentally responsible manner and with respect for the communities in which we operate. Our business is built around the core values of creating a safe, high-integrity and exciting work environment; applying rigorous analysis to all aspects of our business; and proactively working with our stakeholders to address environmental and community concerns.

Our financial objectives, which we believe will maximize long-term value for our shareholders, are to:

 

   

produce stable and sustainable cash available for distribution;

 

   

selectively grow our project portfolio and our dividend; and

 

   

maintain a strong balance sheet and flexible capital structure.

Our Management Team

The executive officers who make up our management team have on average over 20 years of experience in all aspects of the independent power industry, including development, commercial contracting, finance, construction, operations and management, and are dedicated to protecting the long-term value of our projects. Almost all of the members of our and PEG LP’s management teams have worked together since 2002 and have a proven track record of successfully identifying new opportunities, investing, constructing projects and operating energy assets during periods of both favourable and challenging economic conditions. While working together at PEG LP and prior to its formation, members of our management team were responsible for, and successfully financed and managed, over $12 billion of infrastructure assets, including over 3,000 MW of wind power projects (representing a wind business compound annual growth rate, or “CAGR,” of 32% from 2003 to 2014, measured by cumulative wind MW installed), several independent transmission projects and other conventional power assets. Since the formation of PEG LP in 2009, the PEG LP management team has acquired and developed the operational and in-construction wind power projects that will comprise our owned capacity of 1,041 MW upon completion of the Contribution Transactions, representing a CAGR of 42%, and a more than 3,000 MW portfolio of development assets. We believe our management team, along with our talented staff, as well as the management team and staff at PEG LP, provide our company with the depth of experience and breadth of skills to meet our financial objectives and successfully grow our business both domestically and internationally. In addition, we believe we are among the leaders in our industry in areas such as environmental mitigation, financing and commercial management, and we have built a team of highly skilled professionals dedicated to delivering high-quality, well-structured operating power projects.

 

 

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Our Projects

Upon completion of this offering, we will own interests in eight wind power projects, consisting of six operating projects and two construction projects. The following table provides an overview of our projects:

 

                

Capacity (MW)

 

Power Sale Agreements

Projects

 

Location

 

Construction
Start(1)

 

Commercial
Operations(2)

 

Rated(3)

 

Owned(4)

 

Type

 

Contracted
Volume(5)

 

Counterparty

 

Counterparty
Credit

Rating(6)

  Expiration

Operating Projects

Gulf Wind   Texas   Q1 2008   Q3 2009   283   113   Hedge(7)   ~58%   Credit Suisse Energy LLC   A/A1   2019
Hatchet Ridge   California   Q4 2009   Q4 2010   101   101   PPA   100%   Pacific Gas & Electric   BBB/A3   2025
St. Joseph   Manitoba   Q1 2010   Q2 2011   138   138   PPA   100%   Manitoba Hydro   AA/Aa1(8)   2039
Spring Valley   Nevada   Q3 2011   Q3 2012   152   152   PPA   100%   NV Energy  

BBB-/Baa2

  2032
Santa Isabel   Puerto Rico   Q4 2011   Q4 2012   101   101   PPA   100%   Puerto Rico Electric Power Authority   BBB/Baa3   2037

Ocotillo(9)

  California   Q3 2012   Q4 2012  

223

 

223

  PPA   100%   San Diego Gas & Electric   A/A2   2033
      Q3 2013  

42

 

42

  PPA   100%   San Diego Gas & Electric   A/A2   2033
       

 

 

 

         
        1,040   870          
       

 

 

 

         

Construction Projects

South Kent   Ontario   Q1 2013   Q2 2014   270   135   PPA   100%   Ontario Power Authority   AA-/Aa2(10)   2034
El Arrayán   Chile   Q3 2012   Q2 2014   115   36   Hedge(11)   ~75%   Minera Los Pelambres   NA   2034
       

 

 

 

         
        385   171          
       

 

 

 

         
        1,425   1,041          
       

 

 

 

         

 

(1) Represents date of commencement of construction.
(2) Represents date of actual or anticipated commencement of commercial operations.
(3) Rated capacity represents the maximum electricity generating capacity of a project in MW. As a result of wind and other conditions, a project or a turbine will not operate at its rated capacity at all times and the amount of electricity generated will be less than its rated capacity. The amount of electricity generated may vary based on a variety of factors discussed elsewhere in this prospectus. See “Risk Factors.”
(4) Owned capacity represents the maximum, or rated, electricity generating capacity of the project in MW multiplied by our percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions.
(5) Represents the percentage of a project’s total estimated average annual MWh of electricity generation contracted under power sale agreements.
(6) Reflects the counterparty’s corporate credit ratings issued by S&P/Moody’s as of the date of this prospectus.
(7) Represents a 10-year fixed-for-floating swap. See “Business—Operating Projects—Gulf Wind.”
(8) Reflects the corporate credit ratings of the Province of Manitoba, which owns 100% of Manitoba Hydro-Electric.
(9) We initially commenced commercial operations on 223 MW of electricity generating capacity in the fourth quarter of 2012 and commenced commercial operations on the remaining 42 MW of electricity generating capacity from Ocotillo’s additional 18 turbines in July 2013.
(10) Reflects the corporate credit ratings of the Province of Ontario, which owns 100% of the Ontario Power Authority.
(11) Represents a 20-year fixed-for-floating swap. See “Business—Construction Projects—El Arrayán.”

Each of our projects has gone through a rigorous vetting process in order to meet our investment and our lenders’ financing criteria. The development of each project was managed and overseen by our management team over a period of several years and each project was designed to meet or exceed industry, environmental, community and safety standards applicable for industrial-scale power projects. As a result, our projects generally have the following characteristics: multi-year, on-site wind data analysis; long-term contracts for our power sale, interconnection and real estate rights; fixed-price, construction contracts with specified completion dates; all necessary construction and operating permits; a comprehensive operations and maintenance service program; and safety, environmental and community programs.

For additional information regarding each of our projects, see “Business—Our Projects.” Our ability to begin commercial operation of our construction projects and to achieve anticipated power output at our projects is subject to numerous risks and uncertainties as described under “Risk Factors.”

 

 

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Our Strategy

We intend to make profitable investments in environmentally responsible power projects, while embracing a long-term commitment to the communities in which we operate. To achieve our financial objectives while adhering to our core values, we intend to execute the following business strategies:

 

   

maintaining and increasing the value of our projects, by focusing on value-oriented project availability (by ensuring our projects are operational when the wind is strong and PPA prices are at their highest) and by regularly scheduled and preventative maintenance and by investing in our key personnel;

 

   

completing our construction projects on schedule and within budget, by having our highly experienced construction team closely overseeing construction-contractor and turbine-vendor activities, which are subject to fixed-price contracts with guaranteed completion dates;

 

   

maintaining a prudent capital structure and financial flexibility, by seeking to match our long-term assets with long-term liabilities, limiting exposure to commodity and interest rate risk and ensuring a prudent level of leverage in our business;

 

   

working closely with our stakeholders, including suppliers, power sale agreement counterparties and the local communities where we are located to best support our projects; and

 

   

selectively growing our business, by leveraging our management team’s extensive relationships, experience and highly disciplined approach to evaluating and facilitating new business opportunities, including through collaboration with PEG LP and other developers to advance their development pipelines, and by focusing on projects and regions where we believe we can add value.

For more information about our business strategy, see “Business—Our Strategy.”

Our Competitive Strengths

We believe our key competitive strengths include:

 

   

our high-quality projects, which we believe provide the foundation for the stable long-term cash flows required to operate our business, service our debt and achieve our financial objectives;

 

   

our strong reputation in the industry, which we believe is derived from our integrity, expertise, solutions-oriented approach and record of success, which attracts talented people and opportunities;

 

   

our approach to project selection, which aims to deliver superior financial results and minimize long-term operating risks, by employing a highly disciplined, timely and comprehensive analysis of projects using our in-house experts;

 

   

our relationship with PEG LP, which enhances our ability to operate our projects and provides us with access to a pipeline of acquisition opportunities, including the Initial ROFO Projects (see “—Our Relationship with PEG LP”); and

 

   

our proven management team, which has extensive experience in all aspects of the independent power business, a demonstrated track record of successfully developing, constructing and operating wind power projects and a history of prudent financial and technological innovation in the power industry.

For more information about our competitive strengths, see “Business—Competitive Strengths.”

 

 

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Market Opportunity

Wind power has been one of the fastest growing sources of electricity generation in North America and globally over the past decade. According to the Global Wind Energy Council, or “GWEC,” from 2001 through 2012, total net electricity generation from wind power in the United States and Canada grew at a CAGR of 27% and 37%, respectively. The growth in the industry is largely attributable to renewable energy’s increasing cost competitiveness with other power generation technologies, the advantages of wind power over other renewable energy sources and growing public support for renewable energy driven by concerns regarding security of energy supply and the environment. As global demand for electricity generation from wind power has increased, technology enhancements—supported by U.S. government incentives – have reduced the cost of wind power by more than 80% over the last twenty years, according to the American Wind Energy Association, or “AWEA.”

The United States is the second largest market for wind power in the world by electricity generating capacity. According to the U.S. Department of Energy, or “DoE,” wind power was the second largest source of new electricity generating capacity in the United States after natural gas for six of the seven years between 2005 and 2011. According to AWEA, wind power became a leading source of new electricity generating capacity in the United States for the first time in 2012. The success of wind power in the United States is evidenced by over $120 billion in investments to date, according to AWEA.

The Canadian wind power industry has also experienced dramatic growth in recent years. In 2012, Canada experienced 936 MW of new installed wind power generating capacity, representing an investment of approximately C$2 billion. This investment resulted in wind power generating capacity in Canada reaching approximately 6,500 MW as of January 2013. According to the Canadian Wind Energy Association, or “CanWEA,” new installed wind power generating capacity is expected to average 1,500 MW annually over the next four years. Ontario, one of our markets, is the national leader in installed capacity, with approximately 2 gigawatts, or “GW,” of wind power generating capacity, although recent changes to the Ontario government FIT regime may make future projects less attractive and PPAs more difficult to obtain. CanWEA forecasts total wind power generating capacity in Canada to exceed 12 GW by 2016.

Chile, also one of our markets, has an abundant wind resource, which GWEC estimates could provide the potential for more than 40 GW of generating capacity. As of the end of 2011, Chile had approximately 200 MW of installed wind power generating capacity, representing approximately 1% of total electricity generating capacity and, according to GWEC, approximately 200 MW of wind power projects were under construction in Chile and an additional 2,700 MW were under development.

Given supply diversity requirements, falling equipment costs, the inherent stability of the cost of wind power as an energy resource and an active market for the purchase and sale of power projects, we believe that our markets present a substantial opportunity for growth. We require a relatively small share of a very large market to meet our growth objectives and we believe we will achieve growth through the acquisition of operational and construction-ready projects from PEG LP and other third parties.

While we currently operate solely in wind power markets, we expect to continue to evaluate other types of independent power projects for possible acquisition, including renewable energy projects other than wind power projects, non-renewable energy projects and transmission projects.

Our Relationship with PEG LP

We were incorporated as a Delaware corporation by PEG LP in October 2012 with the intent that we will own, operate and construct power projects and that PEG LP will focus on its extensive development pipeline. We and PEG LP have agreed that we will transfer PEG LP’s employees to our company, at no cost, once we reach $2.5 billion in total market capitalization, which we believe is a sufficient size to undertake development of future projects. Since it was formed, PEG LP has been very active in developing project opportunities.

 

 

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Key members of our management team, together with certain other executives at PEG LP and investment funds managed by Riverstone Holdings LLC, or “Riverstone,” formed PEG LP in June 2009. Upon its formation, PEG LP acquired a portfolio of development projects, but did not own any operating or construction projects. In late 2009, PEG LP closed financing for its first construction project, Hatchet Ridge. In 2010, PEG LP acquired the Gulf Wind project, completed construction of the Hatchet Ridge project, commenced construction of the St. Joseph project and formed a joint venture with a subsidiary of Samsung C&T Corporation, or “Samsung,” to develop at least 1,000 MW of wind power projects located in Ontario. Since 2010, PEG LP also successfully completed construction and commenced operation of the St. Joseph, Spring Valley, Santa Isabel and Ocotillo projects and commenced construction of the El Arrayán and South Kent projects. Certain members of PEG LP’s management team who will not be part of our management team, including John Calaway, PEG LP’s Senior Vice President—Wind Development, and George Hardie and Colin Edwards, each a Vice President—Development, intend to continue in their current roles at PEG LP. These individuals have been key contributors to PEG LP’s success and to the more than 3,000 MW portfolio of development assets that includes the Initial ROFO Projects.

Upon completion of this offering, PEG LP will hold approximately     % of our outstanding Class A shares and     % of our outstanding Class B shares (or     % and     %, respectively, if the underwriters exercise their overallotment option in full), representing in the aggregate an approximate     % voting interest in our company (or     % if the underwriters exercise their overallotment option in full). The remaining     % of our outstanding Class B shares will be held by members of our management. Until the Conversion Event, neither PEG LP nor the management holders of our Class B shares will be entitled to receive any dividends on their Class B shares.

We will initially own, acquire and operate projects for which the development risks have been substantially reduced in order to generate stable long-term cash flows, and we expect that PEG LP will invest in and deploy its staff to engage in higher-risk project development activities. At the completion of this offering, PEG LP will hold a retained interest of approximately 27% in Gulf Wind, representing approximately 76 MW of PEG LP-owned capacity, which we refer to as the “PEG LP retained Gulf Wind interest” and interests in development projects with an expected total rated capacity of more than 3,000 MW, including wind power and solar power projects, as well as certain transmission development projects. Five of these development projects, together with the PEG LP retained Gulf Wind interest, constitute the Initial ROFO Projects, and are predominantly operational or construction ready.

 

                        Capacity (MW)  

Initial ROFO Projects

  Status   Location   Construction
Start(1)
  Commercial
Operations(2)
  Contract
Type
  Rated(3)     PEG LP-
Owned(4)
 

Gulf Wind

  Operational   Texas   2008   2009   Hedge     283        76   

Grand Renewable

  Construction financing
  Ontario   2013   2014   PPA     149        67   

Panhandle(5)

  Construction financing   Texas   2013   2014   Hedge     318        248   

Armow

  Construction ready   Ontario   2014   2015   PPA     180        90   

K2

  Construction ready   Ontario   2014   2015   PPA     270        90   

Meikle

  Securing final permits   British Columbia   2015   2016   PPA     175        175   
           

 

 

   

 

 

 
              1,375        746   
           

 

 

   

 

 

 

 

(1) Represents date of actual or anticipated commencement of construction.
(2) Represents date of actual or anticipated commencement of commercial operations.
(3) Rated capacity represents the maximum electricity generating capacity of a project in MW. As a result of wind and other conditions, a project or a turbine will not operate at its rated capacity at all times and the amount of electricity generated will be less than its rated capacity. The amount of electricity generated may vary based on a variety of factors discussed elsewhere in this prospectus. See “Risk Factors” beginning on page 17 of this prospectus.

 

 

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(4) PEG LP-owned capacity represents the maximum, or rated, electricity generating capacity of the project multiplied by PEG LP’s percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions.
(5) We expect the first phase of the Panhandle project, representing approximately 170 MW of PEG LP-owned capacity, to close financing before the completion of this offering; documentation for the balance of the project is in an early stage of discussion with financial counterparties.

Our Purchase Rights

To promote our growth strategy, concurrently with the completion of this offering, we will enter into a purchase rights agreement with PEG LP and its equity owners that will provide us with three distinct avenues to grow our business through acquisitions:

 

   

the right to acquire the PEG LP retained Gulf Wind interest at any time between the first and second anniversary of the completion of this offering at its then current fair market value, which we refer to as our “Gulf Wind Call Right;”

 

   

a right of first offer with respect to any power project that PEG LP decides to sell, including the Initial ROFO Projects, which we refer to as our “Project Purchase Right;” and

 

   

a right of first offer with respect to PEG LP itself, or substantially all of its assets, if the equity owners of PEG LP decide to sell PEG LP or substantially all of its assets, which we refer to as our “PEG LP Purchase Right.”

We refer to these rights as our “Purchase Rights.” Our Gulf Wind Call Right will terminate on the second anniversary of the completion of this offering. Our Project Purchase Right and PEG LP Purchase Right will terminate together upon the fifth anniversary of the completion of this offering, but are subject to automatic five-year renewals unless either party dissents at the time of renewal. In addition, PEG LP will have the right to terminate our Project Purchase Right and PEG LP Purchase Right together upon the third occasion (within any five-year initial or renewal term) on which we have elected not to exercise our Project Purchase Right with respect to an operational or construction-ready project and following which PEG LP has sold the project to an unrelated third party.

Although we have no commitments to make any such acquisitions, we consider it reasonably likely that we may have the opportunity to acquire the Initial ROFO Projects under our Purchase Rights at various times within the 18-month period following the completion of this offering. In particular, we have commenced a dialogue with PEG LP in connection with an interest in the Panhandle project, which PEG LP has notified us that it wishes to sell and which we may acquire shortly after the completion of this offering, although we have not yet determined our offer price. For more information about this potential acquisition, the Initial ROFO Projects and our Purchase Rights, see “Certain Relationships and Related Party Transactions—Our Relationship with PEG LP—Our Purchase Rights.”

Shareholder Approval Rights Agreement

We will enter into a shareholder approval rights agreement, or the “Shareholder Agreement,” with PEG LP concurrently with the consummation of this offering. Pursuant to the Shareholder Agreement, for so long as PEG LP beneficially owns at least 33 1/3% of our shares, PEG LP’s consent will be necessary for us to take certain material corporate actions, including: (i) our consolidation with or merger into an unaffiliated entity; (ii) certain acquisitions of stock or assets of a third-party; (iii) our adoption of a plan of liquidation, dissolution or winding up; (iv) certain dispositions of our or our subsidiaries’ assets; (v) the incurrence of indebtedness in excess of a specified amount, (vi) a change in the size of our board of directors (subject to certain exceptions) and (vii) issuing equity securities with preferential rights to our common shares. See “Certain Relationships and Related Party Transactions—Shareholder Agreement.”

Non-Competition Agreement

We will enter into a non-competition agreement, or the “Non-Competition Agreement,” with PEG LP concurrently with the consummation of this offering. Pursuant to the Non-Competition Agreement, PEG LP will

 

 

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agree that, for so long as any of our Purchase Rights are exercisable, it will not compete with us for acquisitions of power generation or transmission projects from third parties. In addition, PEG LP will notify us of opportunities to acquire power generation or transmission projects that it wishes to pursue and, should we be interested in acquiring all or a portion of such projects, we may direct PEG LP to forego such opportunities. We may also elect to collaborate with PEG LP to jointly pursue acquisition opportunities from time to time. Riverstone will not be subject to the Non-Competition Agreement.

Management Services Agreement and Shared Management

We intend to grow our assets until we have sufficient size and cash flow to undertake development activities. Until such time, we will contract for certain services pursuant to the terms of a bilateral services agreement with PEG LP, or the “Management Services Agreement,” that we will enter into upon the completion of this offering. However, under the terms of the Management Services Agreement, upon the completion of the first 20 consecutive trading day period during which our total market capitalization is no less than $2.5 billion, such event, the “reintegration event,” the employees of PEG LP will become our employees, which we refer to as the “employee reintegration.”

Our project operations and maintenance personnel and executive officers will be solely compensated by us and their employment with PEG LP will terminate. These executives will lead our business functions and rely on support from PEG LP employees for certain administrative functions. PEG LP will retain only those employees whose primary responsibilities relate to project development or legal, financial or other administrative functions. The Management Services Agreement will provide for us and PEG LP to benefit, primarily on a cost-reimbursement basis, from the parties’ respective management and other professional, technical and administrative personnel, all of whom will report to and be managed by our executive officers. In the event that PEG LP is, or substantially all of its assets are, acquired by an unrelated third party, we will have the unilateral right to terminate the Management Services Agreement.

Pursuant to the Management Services Agreement, certain of our executive officers, including our Chief Executive Officer, will also serve as executive officers of PEG LP and devote their time to both our company and PEG LP as is prudent in carrying out their executive responsibilities and fiduciary duties. We refer to our employees who will serve as executive officers of both our company and PEG LP as the “shared PEG executives.” The shared PEG executives will have responsibilities for both us and PEG LP and, as a result, these individuals will not devote all of their time to our business. Under the terms of the Management Services Agreement, PEG LP will be required to reimburse us for an allocation of the compensation paid to such shared PEG executives reflecting the percentage of time spent providing services to PEG LP. For more information on management and management’s relationship with PEG LP, see “Conflicts of Interest and Fiduciary Duties” and “Management.”

Upon employee reintegration, we expect that our principal focus will continue to be owning operational and under construction power projects. However, reintegration is expected to enhance our long-term ability to independently develop projects and grow our business. Following the employee reintegration, we will continue to provide management services to PEG LP (including services from the reintegrated departments of PEG LP) to the extent required by PEG LP’s remaining development activities and the consideration for such services would continue to be paid primarily on a cost reimbursement basis. See “Certain Relationships and Related Party Transactions—Management Services Agreement and Shared Management” for a further discussion of the Management Services Agreement and the employee reintegration.

 

 

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The Contribution Transactions

On or immediately prior to the completion of this offering, pursuant to the terms of a contribution agreement between us and PEG LP, which we refer to as the “Contribution Agreement,” we will enter into a series of transactions with PEG LP, or the “Contribution Transactions.” In connection with the Contribution Transactions, PEG LP will contribute to us all of our projects, including the related properties and other assets that will be used in our business, together with liabilities and obligations to which such projects are subject. PEG LP currently holds its interests in these projects through one or more holding companies, the sole purposes of which are to hold such interests or to obtain related financing.

As consideration for the assets contributed to us by PEG LP in the Contribution Transactions, we will pay approximately $         million from the proceeds of this offering to PEG LP and issue to PEG LP              of our Class A shares and              of our Class B shares. As a result, PEG LP will hold approximately     % of our outstanding Class A shares and     % of our outstanding Class B shares (or     % and     %, respectively, if the underwriters exercise their overallotment option in full), representing in the aggregate an approximate     % voting interest in our company (or     % if the underwriters exercise their overallotment option in full). The remaining     % of our outstanding Class B shares will be held by members of our management. Until the Conversion Event, neither PEG LP nor the management holders of our Class B shares will be entitled to receive any dividends on their Class B shares. In connection with the Contribution Transactions, PEG LP also will receive customary resale registration rights with respect to our Class A shares. See “Shares Eligible for Future Sale—Registration Rights Agreement.”

In connection with the Contribution Transactions, we will also assume certain indemnities previously granted by PEG LP for the benefit of the Spring Valley, Santa Isabel and Ocotillo project finance lenders. These indemnity obligations consist principally of indemnities that protect the project finance lenders from the potential effect of any recapture by the U.S. Department of the Treasury, or “U.S. Treasury,” of any amount of the ITC cash grants previously received by the projects. Following the Contribution Transactions, we will have assumed ITC cash grant indemnity obligations in amounts that are up to the greater of the respective cash grant loans or the amounts of any cash grant subsequently recaptured. Such maximum indemnity amounts are currently estimated to be approximately $116 million, $80 million and $58 million for the Ocotillo, Spring Valley and Santa Isabel projects, respectively. In addition, we will also assume an indemnity that was granted by PEG LP to our Ocotillo project finance lenders in connection with certain legal matters, which is limited to the amount of certain related costs and expenses. See “Risk Factors—We are subject to various indemnity obligations,” “Business—Legal Proceedings” and “Description of Certain Financing Arrangements—Santa Isabel Senior Financing Agreement and —Ocotillo Senior Financing Agreement.”

 

 

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The following diagram summarizes our ownership structure upon completion of this offering and the Contribution Transactions. Except as specified below, each of our subsidiaries is wholly owned.

LOGO

 

(1) These funds and employees hold indirect interests in PEG LP.
(2) Represents              Class A shares and              Class B shares issued to PEG LP in connection with the Contribution Transactions, net of the shares distributed by PEG LP to certain members of management as described in clause (ii) of note 3 below. Holders of Class B shares are not entitled to receive dividends. However, the Class B shares automatically convert, on a one-for-one basis, into Class A shares upon the Conversion Event. See “Description of Capital Stock.”
(3) Represents (i)              Class A shares sold to the public in this offering and (ii)              Class A shares and              Class B shares distributed by PEG LP to certain members of management immediately following the Contribution Transactions in connection with the redemption of such individuals’ interests in PEG LP, based on an initial public offering price of $             per Class A share (the midpoint of the range set forth on the cover page of this prospectus), which represents the same ratio of Class A shares to Class B shares that will be issued to PEG LP in the Contribution Transactions.
(4) At the completion of this offering, PEG LP will hold an interest of approximately 27% in Gulf Wind, representing PEG LP-owned capacity of 76 MW.

 

 

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Riverstone

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 & production, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London and Houston, the firm has committed approximately $22.8 billion to 102 investments in North America, Latin America, Europe, Africa and Asia.

Conflicts of Interest and Fiduciary Duties

While we believe our relationship with PEG LP provides us with a significant advantage, it is also a potential source of conflicts of interest. Prior to the completion of this offering, all of our executive officers were employees of PEG LP. In addition, three of our seven directors will not qualify as independent directors under applicable Canadian securities laws and stock exchange rules due to their affiliation with PEG LP. See “Management.” While all of our executive officers will terminate their employment with PEG LP prior to the completion of this offering, pursuant to the terms of the Management Services Agreement, the shared PEG executives will also serve as executive officers of PEG LP and will continue to provide services to PEG LP and, as a result, will have fiduciary or other obligations to PEG LP and its equity owners. None of our officers will receive any compensation paid by PEG LP after the completion of this offering, but some of our executive officers will continue to have economic interests in PEG LP. For example, each of Michael M. Garland, our Chief Executive Officer (and one of our directors), Hunter H. Armistead, our Executive Vice President, Business Development, Daniel M. Elkort, our Executive Vice President and General Counsel, and Dean S. Russell, our Senior Vice President, Engineering and Construction, will continue to have economic interests in PEG LP. In addition, Messrs. Garland and Armistead will continue to serve as directors of, and will therefore have certain fiduciary duties to, PEG LP. As a result of these relationships, conflicts of interest may arise in the future between us (and our shareholders other than PEG LP) and PEG LP (and its owners and affiliates).

The officers and directors of PEG LP have a fiduciary duty to manage its business in a manner beneficial to its owners and, in connection with fulfilling this duty, PEG LP’s ownership and management may compete with us for the time and focus of the shared PEG executives or for employment of other talented individuals, or may develop PEG LP’s business plan in a manner that is incompatible with our objectives, any of which might result in our failure to realize the full benefits of the relationship that we currently contemplate and jeopardize our ability to execute our growth plan. In addition, although we believe that PEG LP will continue to focus its efforts on power project development and not on our core business function of operating and constructing commercially viable power projects, other than during the term of the Non-Competition Agreement, PEG LP will not be restricted from competing with us and we cannot assure you that PEG LP’s business focus will not change over time. See “Certain Relationships and Related Party Transactions—Non-Competition Agreement.” Pursuant to the Shareholder Agreement, for so long as PEG LP beneficially owns at least 33 1/3% of our shares, PEG LP’s consent will be necessary for us to take certain material corporate actions, which could adversely affect our business. See “Certain Relationships and Related Party Transactions—Shareholder Agreement.”

Given that PEG LP will beneficially own a majority of our voting securities following the completion of this offering, PEG LP will effectively control our company and will also be a related party. As a result, any material transaction between us and PEG LP, including transactions relating to our Purchase Rights, will be subject to our corporate governance guidelines and the prior approval of the conflicts committee, which will be comprised solely of independent members of our board of directors. Because certain of our directors and executive officers will continue to have economic interests in PEG LP, these individuals will have an interest in any transaction between our company and PEG LP in proportion to their respective economic interests in PEG LP. As a result,

 

 

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these individuals may be conflicted when advising the conflicts committee or otherwise participating in the negotiation or approval of such transactions on our behalf. The conflicts committee will have the ability to consult with those of our executive officers and operating personnel who do not have economic interests in PEG LP, including Michael J. Lyon, our Chief Financial Officer, and Esben W. Pedersen, our Chief Investment Officer, as well as other external advisors that the conflicts committee deems appropriate, in connection with reviewing a transaction with PEG LP. In addition, in some cases, transactions between our company and PEG LP will be related party transactions for the purposes of Multilateral Instrument 61-101—Protection of Minority Security Holders in Special Transactions, or “MI 61-101,” of the Canadian Securities Administrators. MI 61-101 provides, among other things, that in certain circumstances a transaction between an issuer and a related party of the issuer is subject to formal valuation and minority shareholder approval requirements. See “Conflicts of Interest and Fiduciary Duties.”

Summary Risk Factors

An investment in our shares involves risks. Below is a summary of certain key risk factors that you should consider in evaluating an investment in our shares. This list is not exhaustive. Please read the full discussion of these risks and other risks described under “Risk Factors.”

Risks Related to Our Projects, Acquisition Strategy and Financial Activities

 

   

Electricity generated from wind energy depends heavily on suitable wind conditions and wind turbines being available for operation. If wind conditions are unfavourable or below our expectations, or our wind turbines are not available for operation, our projects’ electricity generation and the revenue generated from our projects may be substantially below our expectations.

 

   

Our cash available for distribution may not be sufficient to pay dividends to shareholders at expected levels or at all.

 

   

The assumptions underlying the forecast of cash available for distribution that we include in “Cash Dividend Policy” may prove inaccurate and are subject to significant risks and uncertainties, which could cause actual results to differ materially from our forecasted results.

 

   

We have a limited operating history and our growth may make it difficult for us to manage our projects efficiently.

 

   

We may be unable to complete our current and any future construction projects on time, and our construction costs could increase to levels that make a project too expensive to complete or make the return on our investment in that project less than expected.

 

   

Our operating projects are, and other future projects may be, subject to various governmental regulations, approvals, and compliance requirements that regulate the sale of electricity, which could have a material adverse effect on our business, financial condition and results of operations.

 

   

Our hedging activities may not adequately manage our exposure to commodity and financial risk, which could result in significant losses or require us to use cash collateral to meet margin requirements, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flow. Liquidity constraints could impair our ability to execute favourable financial hedges in the future.

 

   

The growth of our business depends on locating and acquiring interests in additional attractive independent power and transmission projects at favourable prices.

 

 

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Risks Inherent in an Investment in Our Company

 

   

PEG LP’s general partner and its officers and directors have fiduciary or other obligations to act in the best interests of PEG LP and PEG LP’s equity owners, which could result in a conflict of interest with us and our shareholders.

 

   

Certain of our executive officers will continue to have economic interests in, and provide services to, PEG LP, which could result in conflicts of interest and have a material adverse effect on our business, financial condition and results of operations.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” under the rules and regulations of the U.S. Securities and Exchange Commission, or the “SEC.” An emerging growth company may take advantage of specified reduced reporting in the United States and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

an election to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

   

no requirement for non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions for up to five years if we continue to be an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have availed ourself of the exemption from disclosing certain executive compensation information in this prospectus pursuant to Title 1, Section 102 of the JOBS Act. Additionally, we have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the U.S. Securities Act of 1933, as amended, or the “U.S. Securities Act,” for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in U.S. Securities Act Section 7(a)(2)(B). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for a further discussion of this exemption.

Canadian securities laws require three years of audited financial statements to be included in this prospectus and, as a result, will not permit us to take advantage of the reduced financial statement requirements permitted under the JOBS Act. In addition, for so long as we are an “SEC foreign issuer” under Canadian securities laws, we will be exempt from the continuous disclosure requirements of Canadian securities laws, subject to limited exceptions, if we comply with the reporting requirements applicable in the United States, including the provisions of the JOBS Act described above, and file our disclosure documents with Canadian securities regulatory authorities. See “Risk Factors—Risks Related to this Offering and Ownership of our Class A Shares—We will be an SEC foreign issuer under Canadian securities laws and, therefore, be exempt from certain requirements of Canadian securities laws applicable to other Canadian reporting issuers.”

 

 

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Corporate Information

Our principal executive offices are located at Pier 1, Bay 3, San Francisco, California 94111, and our telephone number is (415) 283-4000. Our website is www.                    .com. We expect to make our periodic reports and other information filed or furnished to the SEC or Canadian Securities Administrators available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC or Canadian Securities Administrators. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

Class A shares.

 

Common stock outstanding after this offering

             shares.(x)

 

Class A common stock to be outstanding after this offering Class B common stock to be outstanding after this offering

             Class A shares.

 

               Class B shares. The rights of the holders of our Class A and Class B shares will be identical other than in respect of dividends and the conversion rights of the Class B shares. While each Class A and Class B share will have one vote on all matters submitted to a vote of our shareholders, our Class B shares will have no rights to dividends or distributions (other than upon liquidation). Upon the Conversion Event, all of our outstanding Class B shares will automatically convert, on a one-for-one basis, into Class A shares. See “Description of Capital Stock.”

 

Conversion Event

Our Amended and Restated Certificate of Incorporation will provide that all of our Class B shares will automatically convert into Class A shares on a one-for-one basis upon the later of December 31, 2014 and the date on which our South Kent project has achieved “Commercial Operations.” For the purposes of our Amended and Restated Certificate of Incorporation, “Commercial Operations” will refer to the date upon which our South Kent project has achieved commercial operations under its power purchase agreement. See “Description of Capital Stock.”

 

Overallotment option

PEG LP, or the “selling shareholder,” has granted the underwriters an option, exercisable within 30 days following the closing date of this offering, to purchase up to an additional          Class A shares at the initial public offering price to cover overallotments, if any. We will not receive any proceeds from the exercise of the underwriters’ overallotment option. See “Use of Proceeds.”

 

Use of proceeds

We estimate we will receive net proceeds of approximately $         million from this offering, based on an assumed public offering price of $         per Class A share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting underwriting commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering (i) to provide $         million (i.e., the cash portion) of the consideration to be paid to PEG LP in connection with the Contribution Transactions and (ii) the remainder for working capital and general corporate purposes. See “Use of Proceeds” for additional information. Certain of our executive officers have an economic interest in PEG LP and, as a result, these individuals will have an interest in the proceeds from this offering received by PEG LP in proportion to their respective economic interest in PEG LP. See “Certain Relationships and Related Party Transactions.”

 

 

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PEG LP retained interest

Upon completion of this offering, PEG LP will hold approximately     % of our outstanding Class A shares and     % of our outstanding Class B shares (or     % and     %, respectively, if the underwriters exercise their overallotment option in full), representing in the aggregate an approximate     % voting interest in our company (or     % if the underwriters exercise their overallotment option in full). The remaining     % of our outstanding Class B shares will be held by members of our management. Until the Conversion Event, neither PEG LP nor the management holders of our Class B shares will be entitled to receive any dividends on their Class B shares.

 

Dividends

We intend to pay regular quarterly dividends in U.S. dollars to holders of our Class A shares. Our quarterly dividend will initially be set at $         per Class A share, or $         per Class A share on an annualized basis, and the amount may be changed in the future without advance notice. We expect to pay a quarterly dividend on or about the 30th day following each fiscal quarter to shareholders of record on the last day of such quarter. With respect to our first dividend payable on or about January 30, 2014 to holders of record on December 31, 2013, we intend to pay a pro-rated dividend covering the period from the completion of this offering through December 31, 2013, based on our initial dividend level and the actual length of that period.

 

  Our ability to pay our initial and subsequent dividends, if any, is subject to various restrictions and other factors. For a detailed discussion of the basis upon which we established our initial quarterly dividend and factors that could affect our ability to pay dividends at that level or at all, see “Cash Dividend Policy.”

 

U.S. Taxation of Dividends to U.S. Holders and Non-U.S. Holders

The distributions that we will make to our shareholders will be treated as dividends under U.S. tax law only to the extent that they will be paid out of our current or accumulated earnings and profits computed under U.S. tax principles, which we refer to herein as “earnings and profits.” Our earnings and profits, as calculated under U.S. tax principles, may be negative at times due to various deductions, for example, depreciation. If the cash dividends paid to our shareholders exceed our current and accumulated earnings and profits for a taxable year, the excess cash dividends would not be taxable as a dividend but rather be treated as a return of capital for U.S. federal income tax purposes, which would result in a reduction in the adjusted tax basis of our shares to the extent thereof, and any balance in excess of adjusted basis would be treated as a gain for U.S. federal income tax purposes. As a result, U.S. Holders (as defined under “Material U.S. Federal Income Tax Considerations for Holders of Our Class A Common Shares”) may receive cash dividends from us that represent a non-taxable return of capital to the extent thereof (and gain thereafter), although no assurance can be given in this regard. For

 

 

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Non-U.S. Holders (as defined under “Material U.S. Federal Income Tax Considerations for Holders of Our Class A Common Shares”), cash dividends that are treated as dividends would normally be subject to U.S. federal withholding tax at the rate of 30% (or at a reduced rate under an applicable income tax treaty, such as a 15% rate generally applicable under the income tax treaty between the United States and Canada). However, such U.S. withholding tax may not apply to cash dividends to the extent they are treated as a return of capital or gain with respect to the shares for U.S. federal income tax purposes. In the event there is any excess withholding, a Non-U.S. Holder should be able to obtain a refund of any over-withheld tax by filing the appropriate tax forms.

 

  For more information, see “Material U.S. Federal Income Tax Considerations for Holders of Our Class A Common Shares.”

 

Canadian Taxation of Dividends to Canadian Resident Shareholders and Non-Canadian Resident Shareholders

Shareholders resident in Canada will generally be required to include in their income any dividends, including any amounts deducted for U.S. withholding tax, if any, received on the shares whether or not treated as dividends under U.S. tax law. Such shareholders may be eligible for a foreign tax credit or deduction in respect of any U.S. withholding tax in computing their Canadian tax liability.

 

  Dividends paid in respect of our shares to shareholders not resident in Canada will not be subject to Canadian withholding tax or, generally, other Canadian income tax.

 

  For more information, see “Material Canadian Federal Income Tax Considerations for Holders of Our Class A Common Shares.”

 

FERC-Related Purchase Restrictions

As a result of the FPA and FERC’s regulations in respect of transfers of control, consistent with the requirements for blanket authorizations granted under or exemptions from FERC’s regulations, absent prior authorization by FERC, no purchaser in this offering will be permitted to purchase an amount of our Class A shares that would cause such purchaser and its affiliate and associate companies in aggregate to hold 10% or more of our common shares outstanding after this offering. See “Risk Factors—Risks Related to this Offering and Ownership of our Class A Shares—As a result of the FPA and FERC’s regulations in respect of transfers of control, absent prior authorization by FERC, neither we nor PEG LP can convey, nor will an investor in our company generally be permitted to obtain, a direct and/or indirect voting interest in 10% or more of our issued and outstanding voting securities, and a violation of this limitation could result in civil or criminal penalties under the FPA and possible further sanctions imposed by FERC under the FPA.”

 

(x)

Includes (i) (a)              Class A shares offered by us to the public hereby, (b)              Class A shares and              Class B shares to be issued to PEG LP in connection with the Contribution Transactions and (c)

 

 

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               Class A shares and             Class B shares distributed by PEG LP to certain members of management immediately following the Contribution Transactions in connection with the redemption of such individuals’ interests in PEG LP, based on an initial public offering price of $         per Class A share (the midpoint of the range set forth on the cover page of this prospectus), which represents the same ratio of Class A shares to Class B shares that will be issued to PEG LP in the Contribution Transactions, and (ii) 100 shares representing our initial capitalization, and excludes              Class A shares available for future issuance, or issuable pursuant to outstanding but unexercised awards, under our 2013 Equity Incentive Award Plan.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

We were incorporated in October 2012 by PEG LP for the purpose of this offering and do not have historical financial operating results. Therefore, in this prospectus, we present the historical financial statements of our predecessor, which consist of the combined financial statements of a combination of entities and assets currently owned by PEG LP. Throughout this prospectus, we refer to these entities collectively as our “predecessor.” PEG LP will contribute to us the entities and assets that will make up our projects in connection with the Contribution Transactions, which entities and assets are the same as those of our predecessor with the exception of the PEG LP retained Gulf Wind interest.

The following table presents summary historical and pro forma combined financial data of our predecessor as of the dates and for the periods indicated. The summary historical combined financial data as of December 31, 2010, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 have been derived from the audited historical combined financial statements of our predecessor included elsewhere in this prospectus. The summary historical combined financial data as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 have been derived from the unaudited historical combined financial statements of our predecessor included elsewhere in this prospectus.

In order to present the financial effect of the Contribution Transactions, the following table presents unaudited pro forma balance sheet data as of June 30, 2013, and statement of operations and other financial and operating data for the six months ended June 30, 2013 and the year ended December 31, 2012, based upon the combination of Pattern Energy Group Inc. and our predecessor’s combined historical financial statements after giving pro forma effect to (i) PEG LP’s retention of the PEG LP retained Gulf Wind interest and (ii) the estimated tax effects of the Contribution Transactions. The pro forma balance sheet, statement of operations and other financial and operating data presented are not necessarily indicative of what our actual results of operations would have been as of the date and for the periods indicated, nor does it purport to represent our future results of operations.

The historical financial statements of our predecessor, from which the summary unaudited pro forma financial data have been derived, are presented in U.S. dollars and have been prepared in accordance with U.S. GAAP, which differ in certain material respects from Canadian GAAP applicable to publicly accountable enterprises (International Financial Reporting Standards as issued by the International Accounting Standards Board, or “IFRS”). For recent and historical exchange rates between Canadian dollars and U.S. dollars, see “Currency and Exchange Rate Information.”

You should read the following table in conjunction with “Structure and Formation of Our Company,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical combined financial statements of our predecessor and the notes thereto included elsewhere in this prospectus.

 

 

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    Predecessor     Pro Forma Pattern  
    Three Months
Ended June 30,
    Six Months Ended
June 30,
    Year Ended December 31,     Six Months
Ended
June 30,
    Year
Ended
December  31,
 
    2013     2012     2013     2012     2012     2011     2010     2013     2012  
    (U.S. dollars in thousands, except MWh sold and $/MWh)  

Statement of Operations Data:

                 

Revenue:

                 

Electricity sales

  $ 47,351      $ 23,015      $ 92,583      $ 49,874      $ 101,835      $ 108,770      $ 24,669      $ 92,583      $ 101,835   

Energy derivative settlements

    4,809        5,918        10,217        11,659        19,644        9,512        10,905        10,217        19,644   

Unrealized (loss) gain on energy derivative

    (5,078     (3,995     (11,881     1,746        (6,951     17,577        14,000        (11,881     (6,951

Related party revenue

    263        —          263        —          —          —          —          263        —     

Other revenue

    11,367        —          11,367        —          —          —          —          11,367        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    58,712        24,938        102,549        63,279        114,528        135,859        49,574        102,549        114,528   

Cost of revenue:

                 

Project expenses

    14,492        7,910        27,469        15,758        34,843        31,343        18,530        27,469        34,843   

Depreciation and accretion

    17,998        10,853        40,564        21,736        49,027        39,424        12,951        40,564        49,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    32,490        18,763        68,033        37,494        83,870        70,767        31,481        68,033        83,870   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    26,222        6,175        34,516        25,785        30,658        65,092        18,093        34,516        30,658   

Total operating expenses

    2,904        2,861        5,710        5,264        11,629        9,668        10,155        5,710        11,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    23,318        3,314        28,806        20,521        19,029        55,424        7,938        28,806        19,022   

Total other income (expense)

    12,982        (3,665     (10,996     (11,524     (36,002     (28,829     (1,572     (10,996     (36,002
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax

    36,300        (351     17,810        8,997        (16,973     26,595        6,366        17,810        (16,980

Tax (benefit) provision

    (7,688     224        (7,396     1,004        (3,604     689        (672     676        818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    43,988        (575     25,206        7,993        (13,369     25,906        7,038        17,134        (17,798

Net (loss) income attributable to noncontrolling interest (1)

    (359     (2,928     (3,938     1,552        (7,089     16,981        2,474        (5,438     (8,244
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interest (1)

  $ 44,347      $ 2,353      $ 29,144      $ 6,441      $ (6,280   $ 8,925      $ 4,564      $ 22,572      $ (9,554
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma net income (loss) after tax:

                 

Net income (loss) before income tax

      $ 17,810        $ (16,973        

Pro forma tax provision

        674          818           
     

 

 

     

 

 

         

Pro forma net income (loss)

      $ 17,136        $ (17,791        
     

 

 

     

 

 

         

Other Financial Data:

                 

Adjusted EBITDA(2)

  $ 45,965      $ 18,352      $ 80,404      $ 40,683      $ 75,248      $ 77,258      $ 6,899      $ 80,404      $ 75,241   

Cash available for distribution(3)

  $ 16,206      $ 90      $ 30,676      $ 10,853      $ 17,692      $ 18,530      $ (17,830   $ 29,742      $ 16,654   

Cash available for distribution before principal payments(3)

  $ 31,790      $ 13,823      $ 52,491      $ 28,025      $ 45,238      $ 40,860      $ (4,089   $ 51,557      $ 44,200   

Net cash provided by (used in):

                 

Operating activities

  $ 33,268      $ 11,506      $ 41,659      $ 24,808      $ 35,050      $ 46,930      $ (3,011   $ 41,657      $ 35,050   

Investing activities

  $ 124,130      $ (183,743   $ 63,414      $ (241,439   $ (638,953   $ (340,977   $ (460,207   $ 63,414      $ (638,953

Financing activities

  $ (144,111   $ 124,217      $ (79,772   $ 217,694      $ 573,167      $ 331,336      $ 472,321      $ (79,770   $ 573,167   

Operating Data:

                 

MWh sold(4)

    658,243        429,350        1,261,876        874,331        1,673,413        1,568,022        643,477        1,261,876        1,673,413   

Average realized electricity price ($/MWh)(5)

  $ 79      $ 67      $ 81      $ 70      $ 73      $ 75      $ 55      $ 81      $ 73   

 

 

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                                 Pro
Forma
 
     Predecessor      Pattern  
     As of
June 30,
     As of December 31,      As of
June 30,
 
     2013      2012      2011      2010      2013  
     (U.S. dollars in thousands)  

Balance Sheet Data:

              

Cash

   $ 41,774       $ 17,573       $ 47,672       $ 8,928       $ 41,775   

Construction in progress

   $ 69,769       $ 6,081       $ 201,245       $ 291,089       $ 69,769   

Property, plant and equipment , net

   $ 1,441,319       $ 1,668,302       $ 784,859       $ 500,403       $ 1,441,319   

Total assets

   $ 2,010,053       $ 2,035,729       $ 1,390,426       $ 1,058,493       $ 1,998,315   

Long-term debt

   $ 1,315,810       $ 1,290,570       $ 867,548       $ 637,964       $ 1,315,810   

Total liabilities

   $ 1,445,179       $ 1,446,311       $ 943,728       $ 722,549       $ 1,445,622   

Total equity before noncontrolling interest

   $ 491,103       $ 514,117       $ 362,226       $ 255,160       $ 450,770   

Noncontrolling interest(1)

   $ 73,771       $ 75,301       $ 84,472       $ 80,784       $ 101,923   

Total equity

   $ 564,874       $ 589,418       $ 446,698       $ 335,944       $ 552,693   

 

(1) Prior to the completion of this offering, as reflected in the combined historical financial statements of our predecessor, our predecessor and its joint venture partner hold interests in approximately 67% and 33% of the distributable cash flow of Gulf Wind, respectively, together with certain allocated tax items. For more information about the allocation of the distributable cash flow and tax items of Gulf Wind, and their variability over time, see “Description of Certain Financing Arrangements—Gulf Wind Tax Equity Partnership Transaction.” In connection with the Contribution Transactions, PEG LP will retain a 40% portion of the interest in Gulf Wind previously held by our predecessor such that, at the completion of this offering, we, PEG LP and our joint venture partner will hold interests of approximately 40%, 27% and 33%, respectively, of the distributable cash flow of Gulf Wind, together with certain allocated tax items. The summary pro forma financial data presented above reflects the adjustment to noncontrolling interest due to the retention by PEG LP of an approximate 27% interest in Gulf Wind. Gulf Wind is consolidated in the combined historical financial statements of our predecessor and the pro forma financial data included in this prospectus and will continue to be consolidated in our financial statements following the Contribution Transactions.
(2) Adjusted EBITDA represents net income before net interest expense, income taxes and depreciation and accretion, including our proportionate share of net interest expense, income taxes and depreciation and accretion for joint venture investments that are accounted for under the equity method. Adjusted EBITDA also excludes the effect of certain mark-to-market adjustments and infrequent items not related to normal or ongoing operations, such as early payment of debt and realized derivative gain or loss from refinancing transactions, and gain or loss related to acquisitions or divestitures. We disclose Adjusted EBITDA, which is a non-U.S. GAAP measure, because management believes this metric assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that our management believes are not indicative of our core operating performance. We use Adjusted EBITDA to evaluate our operating performance. You should not consider Adjusted EBITDA as an alternative to net income (loss), determined in accordance with U.S. GAAP, or as an alternative to net cash provided by operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flows.

Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

 

   

Adjusted EBITDA

 

   

does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

does not reflect changes in, or cash requirements for, our working capital needs;

 

   

does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

does not reflect our income tax expense or the cash requirement to pay our taxes; and

 

   

does not reflect the effect of certain mark-to-market adjustments and non-recurring items;

 

   

although depreciation and accretion are non-cash charges, the assets being depreciated and accreted will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP.

 

 

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The most directly comparable U.S. GAAP measure to Adjusted EBITDA is net income (loss). The following table is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:

 

    Predecessor     Pro forma Pattern  
    Three Months
Ended
June 30,
    Six Months
Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended

June  30,
    Year Ended
December 31,
 
    2013     2012     2013     2012     2012     2011     2010     2013     2012  
    (U.S. dollars in thousands)              

Net income (loss)

  $ 43,988      $ (575   $ 25,206      $ 7,993      $ (13,369   $ 25,906      $ 7,038      $ 25,204      $ (17,798

Plus:

                 

Interest expense, net of interest income

    15,788        7,835        31,672        15,696        35,457        28,285        10,869        31,672        35,457   

Tax provision (benefit)

    (7,688     224        (7,396     1,004        (3,604     689        (672     (7,394     818   

Depreciation and accretion

    17,998        10,853        40,564        21,736        49,027        39,424        12,951        40,564        49,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 70,086      $ 18,337      $ 90,046      $ 46,429      $ 67,511      $ 94,304      $ 30,186      $ 90,046      $ 67,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized loss (gain) on energy derivative

    5,078        3,995        11,881        (1,746     6,951        (17,577     (14,000     11,881        6,951   

Unrealized (gain) loss on interest rate derivatives

    (8,202     115        (10,133     95        4,953        345        289        (10,133     4,953   

Early extinguishment of debt

    —          —          —          —          —          —          5,837        —          —     

Realized loss on interest rate derivatives

    —          —          —          —          —          —          6,596        —          —     

Gain on transactions(a)

    (7,200     (4,173     (7,200     (4,173     (4,173     —          (22,009     (7,200     (4,173

Plus, our proportionate share in the following from our equity accounted investments:

                 

Interest expense, net of interest income

    (50     0        (52     0        44        —          —          (52     44   

Tax (benefit) provision

    (12     56        (48     56        (65     —          —          (48     (65

Depreciation and accretion

    10        0        11        0        —          186        —          11        —     

Unrealized (gain) loss on interest rate and currency derivatives

    (13,731     18        (3,948     18        27        —          —          (3,948     27   

Realized (gain) loss on interest rate and currency derivatives

    (14     4        (153     4        —          —          —          (153     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 45,965      $ 18,352      $ 80,404      $ 40,683      $ 75,248      $ 77,258      $ 6,899      $ 80,404      $ 75,241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Represents gains related to the sale of a portion of our investment in the El Arrayán project in 2012 and 2010 plus a gain on the acquisition of Gulf Wind in 2010.

 

(3) Cash available for distribution represents cash provided by (used in) operating activities as adjusted to (i) add or subtract changes in operating assets and liabilities, (ii) subtract net deposits into restricted cash accounts, which are required pursuant to the cash reserve requirements of financing agreements, to the extent they are paid from operating cash flows during a period, (iii) subtract cash distributions paid to noncontrolling interests, which currently reflects the cash distributions to our joint venture partners in our Gulf Wind project in accordance with the provisions of its governing partnership agreement and may in the future reflect distribution to other joint-venture partners, (iv) subtract scheduled project-level debt repayments in accordance with the related loan amortization schedule, to the extent they are paid from operating cash flows during a period, (v) subtract non-expansionary capital expenditures, to the extent they are paid from operating cash flows during a period, and (vi) add or subtract other items as necessary to present the cash flows we deem representative of our core business operations. Cash available for distribution before principal payments represents the sum of cash available for distribution and scheduled project-level debt repayments in accordance with the related loan amortization schedules, to the extent they are paid from operating cash flows during a period.

We disclose cash available for distribution before principal payments and cash available for distribution because management recognizes that they will be used as supplemental measures by investors and analysts to evaluate our liquidity. However, cash available for distribution before principal payments and cash available for distribution have limitations as analytical tools because they exclude depreciation and accretion, do not capture the level of capital expenditures necessary to maintain the operating performance of our projects, are not reduced for principal payments on our project indebtedness except, with respect to cash available for distribution, to the extent they are paid from operating cash flows during a period, and exclude the effect of certain other cash flow items, all of which could have a material effect on our financial condition and results from operations. Cash available for distribution before principal payments and cash available for distribution are non-U.S. GAAP measures and should not be considered alternatives to net income, net cash provided by (used in) operating activities or any other liquidity measure determined in accordance with U.S. GAAP, nor are they indicative of funds available to fund our cash needs. In addition, our calculations of cash available for distribution before principal payments and cash available for distribution are not necessarily comparable to cash available for distribution before principal payments and cash available for distribution as calculated by other companies. Investors should not rely on these measures as a substitute for any U.S. GAAP measure, including net income (loss) and net cash provided by (used in) operating activities.

 

 

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The most directly comparable U.S. GAAP measure to both cash available for distribution before principal payments and cash available for distribution is net cash provided by (used in) operating activities. The following table is a reconciliation of our net cash provided by (used in) operating activities to both cash available for distribution before principal payments and cash available for distribution for the periods presented:

 

    Predecessor     Pro forma Pattern  
    Three Months
Ended
June 30,
    Six Months
Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended
June 30,
    Year Ended
December  31,
 
    2013     2012     2013     2012     2012     2011     2010     2013     2012  
    (U.S. dollars in thousands)              

Net cash provided by (used in) operating activities

  $ 33,268      $ 11,506      $ 41,659      $ 24,808      $ 35,050      $ 46,930      $ (3,011   $ 41,659      $ 35,050   

Changes in current operating assets and liabilities

    (940     (768     11,757        640        6,893        3,237        (836     11,757        6,893   

Network upgrade reimbursement(a)

    618        4,409        618        4,409        6,263        —          —          618        6,263   

Use of operating cash to fund maintenance and debt reserves

    —          (525     —          (525     (1,047     (1,048     —          —          (1,047

Operations and maintenance capital expenditures

    (156     (66     (375     (254     (623     (1,101     (20     (375     (623

Less:

                  —       

Distributions to noncontrolling interests(b)

    (1,000     (733     (1,168     (1,053     (1,298     (7,158     (222     (2,102     (2,336
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution before principal payments

    31,790        13,823        52,491        28,025        45,238        40,860        (4,089     51,557        44,200   

Principal payments paid from operating cash flows

    (15,584     (13,733     (21,815     (17,172     (27,546     (22,330     (13,741     (21,815     (27,546
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution

  $ 16,206      $ 90      $ 30,676      $ 10,853      $ 17,692      $ 18,530      $ (17,830   $ 29,742      $ 16,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) During the construction of the Hatchet Ridge project, we funded the costs to construct interconnection facilities in order to connect to the utility’s power grid and we will be reimbursed from the utility for those costs during the years 2013 to 2015. We carry a network upgrade reimbursements receivable in prepaid expenses and other current assets and other assets on our balance sheet.
  (b) $0.9 million and $1.0 million for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively, on a pro forma basis after giving effect to the adjustment to non-controlling interest due to the PEG LP retained Gulf Wind interest. See “Unaudited Pro Forma Financial Data.”

 

(4) For any period presented, MWh sold represents the amount of electricity measured in MWh that our projects generated and sold.
(5) For any period presented, average realized electricity price represents total revenue from electricity sales and energy derivative settlements divided by the aggregate number of MWh sold.

 

 

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RISK FACTORS

An investment in our shares involves a high degree of risk. You should carefully consider the following risks, together with other information provided to you in this prospectus, in deciding whether to invest in our Class A shares. If any of the following risks were to occur, our business, financial condition, results of operations and liquidity could be materially adversely affected. In that case, we might have to decrease, or may not be able to pay, dividends on our Class A shares, the trading price of our Class A shares could decline and you could lose all or part of your investment.

Risks Related to Our Projects

Electricity generated from wind energy depends heavily on suitable wind conditions and wind turbines being available for operation. If wind conditions are unfavourable or below our expectations, or our wind turbines are not available for operation, our projects’ electricity generation and the revenue generated from our projects may be substantially below our expectations.

The revenue generated by our projects is principally dependent on the number of MWh generated in a given time period and the quantity of electricity generation from a wind power project depends heavily on wind conditions, which are variable. Variability in wind conditions can cause our project revenues to vary significantly from period to period. We base our decisions about which projects to acquire as well as our electricity generation estimates, in part, on the findings of long-term wind and other meteorological studies conducted on the project site and its region, which measure the wind’s speed, prevailing direction and seasonal variations. Projections of wind resources also rely upon assumptions about turbine placement, interference between turbines and the effects of vegetation, land use and terrain, which involve uncertainty and require us to exercise considerable judgment. We may make incorrect assumptions in conducting these wind and other meteorological studies. Any of these factors could cause our projects to generate less electricity than we expect and reduce our revenue from electricity sales, which could have a material adverse effect on our business, financial condition and results of operations.

Even if an operating project’s historical wind resources are consistent with our long-term estimates, the unpredictable nature of wind conditions often results in daily, monthly and yearly material deviations from the average wind resources we may anticipate during a particular period. If the wind resources at a project are materially below the average levels we expect for a particular period, our revenue from electricity sales from the project could correspondingly be less than expected. A diversified portfolio of projects located in different climates tends to reduce the magnitude of the deviation, but material deviations may still occur. As illustrated in the forecast presented elsewhere in this prospectus, our cash available for distribution is most directly affected by the volume of electricity generated and sold by our projects. However, for a static portfolio of projects, our consolidated expenses, including operating expenses and interest payments on indebtedness, have less variability than the volume of electricity generated and sold. Accordingly, decreases in the volume of electricity generated and sold by our projects typically result in a proportionately greater decrease in our cash available for distribution. See “Cash Dividend Policy—Forecasted Cash Available for Distribution.”

A reduction in electricity generation and sales, whether due to the inaccuracy of wind energy assessments or otherwise, could lead to a number of material adverse consequences for our business, including:

 

   

our projects’ hedging arrangements being ineffective or more costly;

 

   

our projects’ failure to produce sufficient electricity to meet our commitments under our PPAs, hedge arrangements or contracts for sale of RECs, which could result in our having to purchase electricity or RECs on the open market to cover our obligations or result in the payment of damages or the termination of a PPA; and

 

   

our projects not generating sufficient cash flow to make payments of principal and interest as they become due on project-related debt, or to pay dividends to holders of our Class A shares.

 

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Table of Contents

We may be unable to complete our current and any future construction projects on time, and our construction costs could increase to levels that make a project too expensive to complete or make the return on our investment in that project less than expected.

There may be delays or unexpected developments in completing our current and any future construction projects, which could cause the construction costs of these projects to exceed our expectations. Most of our construction projects are constructed under fixed-price and fixed-schedule contracts with construction and equipment suppliers. However, these contracts provide for limitations on the liability of these contractors to pay us liquidated damages for cost overruns and construction delays. We may suffer significant construction delays or construction cost increases as a result of underperformance of these contractors and equipment suppliers, as well as other suppliers, to our projects. Additionally, various other factors could contribute to construction-cost overruns and construction delays, including:

 

   

inclement weather conditions;

 

   

failure to receive turbines or other critical components and equipment necessary to maintain the operating capacity of our projects, in a timely manner or at all;

 

   

failure to complete interconnection to transmission networks, which relies on several third parties, including interconnection facilities provided by local utilities;

 

   

failure to maintain all necessary rights to land access and use;

 

   

failure to receive quality and timely performance of third-party services;

 

   

failure to maintain environmental and other permits or approvals;

 

   

appeals of environmental and other permits or approvals that we hold;

 

   

lawful or unlawful protests by or work stoppages resulting from local community objections to a project;

 

   

shortage of skilled labour on the part of our contractors;

 

   

adverse environmental and geological conditions; and

 

   

force majeure or other events out of our control.

Any of these factors could give rise to construction delays and construction costs in excess of our expectations. These circumstances could prevent our construction projects from commencing operations or from meeting our original expectations about how much electricity they will generate or the returns they will achieve. In addition, substantial delays could cause defaults under our financing agreements or under PPAs that require completion of project construction by a certain date at specified performance levels or could result in the loss or reduction of expected tax benefits. Our inability to transition our construction projects into financially successful operating projects would have a material adverse effect on our business, financial condition and results of operations and our ability to pay dividends.

Our projects rely on a limited number of key power purchasers.

There are a limited number of possible power purchasers for electricity and RECs produced in a given geographic location. Because our projects depend on sales of electricity and RECs to certain key power purchasers, our projects are highly dependent upon these power purchasers fulfilling their contractual obligations under their respective PPAs. Our projects’ power purchasers may not comply with their contractual payment obligations or may become subject to insolvency or liquidation proceedings during the term of the relevant contracts and, in such event, we may not be able to find another purchaser on similar or favourable terms or at all. In addition, we are exposed to the creditworthiness of our power purchasers and there is no guarantee that any power purchaser will maintain its credit rating, if any. To the extent that any of our projects’ power purchasers are, or are controlled by, governmental entities, our projects may also be subject to legislative or other political

 

26


Table of Contents

action that impairs their contractual performance. Failure by any key power purchasers to meet its contractual commitments or the insolvency or liquidation of one or more of our power purchasers could have a material adverse effect on our business, financial condition and results of operations.

A prolonged environment of low prices for natural gas, or other conventional fuel sources, could have a material adverse effect on our long-term business prospects, financial condition and results of operations.

Historically low prices for traditional fossil fuels, particularly natural gas, could cause demand for wind power to decrease and adversely affect both the price available to us under power sale agreements that we may enter into in the future and the price of the electricity we generate for sale on a spot-market basis. Approximately 5% of the electricity generated from our projects will be subject to spot-market pricing through at least April 2019. Low spot market power prices, if combined with other factors, could have a material adverse effect on our results of operations and cash available for distribution. Additionally, cheaper conventional fuel sources could also have a negative impact on the power prices we are able to negotiate upon the expiration of our current power sale agreements or upon entering into a power sale agreement for a subsequently acquired power project. As a result, the price of our power subject to the open market could be materially and adversely affected, which could, in turn, have a material adverse effect on our results of operations and cash available for distribution. Accordingly, in such event, our future growth prospects could be adversely affected if we remain solely focused on renewable energy projects and are unable to transition to conventional power projects such as gas-fired power projects.

Natural events and operational problems may cause our power production to fall below our expectations.

Our electricity generation levels depend upon our ability to maintain the working order of our wind turbines and substations. A natural disaster, severe weather, accident, failure of major equipment, shortage of or inability to acquire critical replacement or spare parts, failure in the operation of any future transmission facilities that we may acquire, including the failure of generator leads to available electricity transmission or distribution networks, could damage or require us to shut down our turbines or related equipment and facilities, impeding our ability to maintain and operate our facilities and decreasing electricity generation levels and our revenues. In addition, climate change may have the long-term effect of changing wind patterns at our projects. Changing wind patterns could cause changes in expected electricity generation. These events could also degrade equipment or components and the interconnection and transmission facilities’ lives or maintenance costs. Even though our projects enter into warranty agreements with the turbine manufacturer for two- to five-year terms, such agreements are typically subject to an aggregate maximum cap that is a portion of the total purchase price of the turbines, and there can be no assurance that the supplier will be able to fulfill its contractual obligations.

In addition, replacement and spare parts for wind turbines and key pieces of electrical equipment may be difficult or costly to acquire or may be unavailable. Sources for some significant spare parts and other equipment are often located outside of the jurisdictions in which our power projects operate. Additionally, our operating projects generally do not hold spare substation main transformers. These transformers are designed specifically for each wind power project, and order lead times can be lengthy. If one of our projects had to replace any of its substation main transformers, it would be unable to sell power until a replacement is installed. To the extent we experience a prolonged interruption at one of our operating projects due to natural events or operational problems and such events are not fully covered by insurance, our electricity generation levels could materially decrease, which could have a material adverse effect on our business, financial condition and results of operation.

We have a limited operating history and our growth may make it difficult for us to manage our project expansion efficiently.

We have a relatively new portfolio of assets, including several projects that have only recently commenced commercial operations or that we expect will commence commercial operations prior to the end of 2014. You should consider our prospects in light of the risks and uncertainties growing companies encounter in rapidly evolving industries such as ours. Also, our anticipated near-term growth could make it difficult for us to manage

 

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our project expansion efficiently due to an inability to employ a sufficient number of skilled personnel or otherwise to effectively manage our capital expenditures and control our costs, including the requisite general and administrative costs necessary to achieve our anticipated growth. These challenges could adversely affect our ability to manage our current or future operating projects in an efficient manner and complete construction of our construction projects in a timely manner, either of which could have a material adverse effect on our business, financial condition and results of operation.

Our operations are subject to numerous environmental, health and safety laws and regulations.

Our projects are subject to numerous environmental, health and safety laws and regulations in each of the jurisdictions in which our projects operate or will operate. These laws and regulations require our projects to obtain and maintain permits and approvals, undergo environmental impact assessments and review processes and implement environmental, health and safety programs and procedures to control risks associated with the siting, construction, operation and decommissioning of power projects. For example, to obtain permits some projects are, in certain cases, required to undertake programs to protect and maintain local endangered species. If such programs are not successful, our projects could be subject to increased levels of mitigation, penalties or revocation of our permits.

If our projects do not comply with applicable laws, regulations or permit requirements, we may be required to pay penalties or fines or curtail or cease operations of the affected projects. Violations of environmental and other laws, regulations and permit requirements, including certain violations of laws protecting wetlands, migratory birds, bald and golden eagles and threatened or endangered species, may also result in criminal sanctions or injunctions.

Certain environmental laws impose liability on current and previous owners and operators of real property for the cost of removal or remediation of hazardous substances, even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. In addition to actions brought by governmental agencies, private plaintiffs may also bring claims arising from the presence of hazardous substances on a property or exposure to such substances. Our projects’ liabilities at properties we own or operate arising from past releases of, or exposure to, hazardous substances could have a material adverse effect on our business, financial condition and results of operations.

Environmental, health and safety laws, regulations and permit requirements may change or become more stringent. Any such changes could require our projects to incur additional material costs. Our projects’ costs of complying with current and future environmental, health and safety laws, regulations and permit requirements, and any liabilities, fines or other sanctions resulting from violations of them, could have a material adverse effect on our business, financial condition and results of operations.

Our projects rely on interconnections to transmission lines and other transmission facilities that are owned and operated by third parties. Our projects are exposed to interconnection and transmission facility development and curtailment risks, which may delay the completion of our construction projects or reduce the return to us on those investments.

Our projects depend upon interconnection to electric transmission lines owned and operated by regulated utilities to deliver the electricity we generate. A failure or delay in the operation or development of these interconnection or transmission facilities could result in our losing revenues because such a failure or delay could limit the amount of power our operating projects deliver or delay the completion of our construction projects. In addition, certain of our operating projects’ generation of electricity may be curtailed without compensation due to transmission limitations or limitations on the electricity grid’s ability to accommodate intermittent electricity generating sources, reducing our revenues and impairing our ability to capitalize fully on a particular project’s potential. Such a failure or curtailment at levels above our expectations could have a material adverse effect on our business, financial condition and results of operations.

 

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In the future we may acquire projects with their own generator leads to available electricity transmission or distribution networks. In some cases, these facilities may cover significant distances. A failure in our operation of these facilities that causes the facilities to be temporarily out of service, or subject to reduced service, could result in lost revenues because it could limit the amount of electricity our operating projects are able to deliver. In addition, should there be any excess capacity available in those generator lead facilities, and should a third party request access to such capacity, FERC would, or other authorities might, require our projects to provide service over such facilities for that excess capacity to the requesting third party at regulated rates. Should this occur, the projects could be subject to additional regulatory risks and costly compliance burdens associated with being considered the owner and operator of a transmission facility.

The loss of one or more of our executive officers or key employees may adversely affect our ability to effectively manage our operating projects and complete our construction projects on schedule.

We depend on our experienced management team and the loss of one or more key executives could have a negative impact on our business. We also depend on our ability to retain and motivate key employees and attract qualified new employees. Because the wind power industry is relatively new, there is a scarcity of experienced employees in the wind power industry. We may not be able to replace departing members of our management team or key employees. Integrating new executives into our management team and training new employees with no prior experience in the power industry could prove disruptive to our projects, require a disproportionate amount of resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient technical and managerial personnel could limit our ability to effectively manage our operating projects and complete our construction projects on schedule and within budget, which could have a material adverse effect on our business, financial condition and results of operations.

The reintegration event may adversely affect our costs.

Following the occurrence of the reintegration event, we may be faced with increased costs associated with employing a larger number of employees. If PEG LP reduces the scope of its development activities and is therefore not paying us for the services of the reintegrated employees pursuant to the terms of the Management Services Agreement and our development activities remain insignificant, we may not immediately require the services of all such employees. Such events could have a material adverse effect on our business, financial condition and results of operation.

Our use and enjoyment of real property rights for our projects may be adversely affected by the rights of lienholders and leaseholders that are superior to those of the grantors of those real property rights to our projects.

Our projects generally are, and any of our future projects are likely to be, located on land occupied pursuant to long-term easements, leases and rights of way. The ownership interests in the land subject to these easements, leases and rights-of-way may be subject to mortgages securing loans or other liens (such as tax liens) and other easement, lease rights and rights-of-way of third parties (such as leases of oil or mineral rights) that were created prior to our projects’ easements, leases and rights-of-way. As a result, certain of our projects’ rights under these easements, leases or rights-of-way may be subject, and subordinate, to the rights of those third parties. We perform title searches, obtain title insurance and enter into non-disturbance agreements to protect ourselves against these risks. Such measures may, however, be inadequate to protect our operating projects against all risk of loss of our rights to use the land on which our projects are located, which could have a material adverse effect on our business, financial condition and results of operations. In addition, certain lands, such as lands under the jurisdiction of the U.S. Department of Interior’s Bureau of Land Management, or the “Bureau of Land Management,” are subject to contractual rights that permit the Bureau of Land Management to adjust rent due on properties to market terms. Any such loss or curtailment of our rights to use the land on which our projects are located and any increase in rent due on such lands could have a material adverse effect on our business, financial condition and results of operations.

 

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Our operating projects are, and other future projects may be, subject to various governmental regulations, approvals, and compliance requirements that regulate the sale of electricity, which could have a material adverse effect on our business, financial condition and results of operations.

Our current projects in operation in the United States are operating as “Exempt Wholesale Generators,” or “EWGs,” as defined under the Public Utility Holding Company Act of 2005, as amended, or “PUHCA,” and therefore are exempt from certain regulation under PUHCA. Other than Gulf Wind, our operating projects in the United States are, however, public utilities under the Federal Power Act subject to rate regulation by FERC. Our future projects in the United States will also likely be subject to such rate regulation once they are placed into service. Our projects in the United States that are subject to FERC rate regulation are required to obtain acceptance of their rate schedules for wholesale sales of energy (i.e., not retail sales to consumers), capacity and ancillary services, including their ability to charge “market-based rates.” FERC may revoke or revise an entity’s authorization to make wholesale sales at market-based rates if FERC subsequently determines that such entity and its affiliates can exercise horizontal or vertical market power, create barriers to entry or engage in abusive affiliate transactions or market manipulation. In addition, public utilities in the United States are subject to FERC reporting requirements that impose administrative burdens and that, if violated, can expose the company to criminal and civil penalties or other risks.

Most of our North American projects are located in regions in which the wholesale electric markets are administered by ISOs and Regional Transmission Organizations, or “RTOs.” Several of our current operating projects are subject to the California ISO, or “CAISO,” which is the ISO that prescribes rules for the terms of participation in the California energy market, the Electric Reliability Council of Texas, or “ERCOT,” which is the ISO that prescribes the rules for and terms of participation in the Texas energy market and the Independent Electricity System Operator, or “IESO,” which is the ISO that administers the wholesale electricity market in Ontario. Many of these entities can impose rules, restrictions and terms of service that are quasi-regulatory in nature and can have a material adverse impact on our business. For example, ISOs and RTOs have developed bid-based locational pricing rules for the energy markets that they administer. In addition, most ISOs and RTOs have also developed bidding, scheduling and market behaviour rules, both to curb the potential exercise of market power by electricity generating companies and to ensure certain market functions and system reliability. These actions could materially adversely affect our ability to sell, and the price we receive for, our energy, capacity and ancillary services.

All of our current operating projects located in North America are also subject to the reliability standards of the North American Electric Reliability Corporation, or “NERC.” If we fail to comply with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties. Although our U.S. projects are not subject to state utility regulation because our projects sell power exclusively on a wholesale basis, we are subject to certain state regulations that may affect the sale of electricity from our projects, the operations of our projects, as well as the potential for state electricity taxes. Changes in regulatory treatment at the state level are difficult to predict and could have a significant impact on our ability to operate and on our financial condition and results of operations.

Our current wind power projects and any potential future wind power projects in Ontario could be affected by market rule changes intended to address surplus baseload generation.

Market rule changes recently approved in Ontario, one of the markets in which we operate, could have a significant effect on the economics of renewable energy projects, particularly certain current and planned wind power and solar power projects. These rule changes are intended to address surplus baseload generation, or “SBG,” in Ontario, given the speed of investment in renewable energy projects under Ontario’s current renewable power programs and the relative inflexibility of existing nuclear, run-of-river hydro and certain other must-run electricity generation resources. The IESO is engaging in discussions with stakeholders under the IESO Renewable Integration (SE-91) process, or “SE-91,” regarding a process through which certain renewable energy resource projects would be actively dispatched. This may result in such facilities being curtailed before either

 

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nuclear or hydroelectric resources during conditions of SBG. Market Rule Amendment MR-00381, or “MR-00381,” was approved on November 29, 2012 by the Board of Directors of the IESO and is scheduled to take effect in the fall of 2013. MR-00381 includes amendments providing for the active dispatch of variable generation, including, in particular, wind and solar facilities that are market participants and directly connected to the IESO-controlled grid. Stakeholder discussions will continue under the SE-91 process in respect of implementing MR-00381 over the coming 12-18 months. As part of MR-00381, the IESO will actively dispatch all variable generation projects that are registered market participants through five-minute constrained economic dispatch. The implementation of MR-00381 will likely impact wind power and solar projects that have contracts under a FIT program or similar PPAs with the Ontario Power Authority, or “OPA,” because these projects sell only the electricity they generate and successfully deliver. Although the contractual provisions included in our and PEG LP’s PPAs with the OPA provide significant limitations on exposure to dispatch, implementation of MR-00381 may limit the revenues we derive from our projects in Ontario, which could have a material adverse effect on our business, financial condition and results of operations.

Our industry could be subject to increased regulatory oversight.

Our industry could be subject to increased regulatory oversight. Changing regulatory policies and other actions by governments and third parties with respect to curtailment of electricity generation, electricity grid management restrictions, interconnection rules and transmission may all have the effect of limiting the revenues from, and increasing the operating costs of, our projects which could have a material adverse effect on our business, financial condition and results of operations.

Due to regulatory restructuring initiatives at the federal, provincial and state levels, the electricity industry has undergone changes over the past several years. Future government initiatives will further change the electricity industry. Some of these initiatives may delay or reverse the movement towards competitive markets. We cannot predict the future design of wholesale power markets or the ultimate effect that on-going regulatory changes will have on our business, financial condition and results of operations.

Our projects are not able to insure against all potential risks and may become subject to higher insurance premiums.

Our projects are exposed to the risks inherent in the construction and operation of wind power projects, such as breakdowns, manufacturing defects, natural disasters, terrorist attacks and sabotage. We are also exposed to environmental risks. We have insurance policies covering certain risks associated with our business. Our insurance policies do not, however, cover losses as a result of force majeure. In addition, our insurance policies for some of our projects cover losses as a result of certain types of natural disasters, terrorist attacks or sabotage, among other things, but such coverage is not always available in the insurance market on commercially reasonable terms and is often capped at predetermined limits. In addition, our insurance policies are subject to annual review by our insurers and may not be renewed on similar or favourable terms or at all. A serious uninsured loss or a loss significantly exceeding the limits of our insurance policies could have a material adverse effect on our business, financial condition and results of operations.

Currency exchange rate fluctuations may have an impact on our financial results and condition.

We have exposures to currency exchange rate fluctuations related to buying, selling and financing our business in currencies other than the local currencies of the countries in which we operate. A portion of our revenue for the year ended December 31, 2012 was denominated in currencies other than the U.S. dollar, and we expect net revenue from non-U.S. dollar markets to continue to represent a portion of our net revenue. Currency exchange rate fluctuations may disrupt the business of our suppliers by making their purchases of raw materials more expensive and more difficult to finance. Historically, we have reduced our exposure by aligning our costs with the currency in which we obtain revenues or, if that is impracticable, through financial instruments that provide offsets or limits to our exposures. However, any measures that we may implement in the future to reduce

 

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the effect of currency exchange rate fluctuations and other risks of our global operations may not be effective or may be expensive. We cannot provide assurance that currency exchange rate fluctuations will not otherwise have a material adverse effect on our financial condition or results of operations or cause significant fluctuations in quarterly and annual results of operations.

In addition, foreign currency translation risk arises upon the translation of statement of financial position and income statement items of our foreign subsidiaries whose functional currency is a currency other than the U.S. dollar into U.S. dollars for purposes of preparing the combined financial statements included elsewhere in this prospectus, which are presented in U.S. dollars. The assets and liabilities of our non-U.S. dollar denominated subsidiaries are translated at the closing rate at the date of reporting and income statement items are translated at the average rate for the period. All resulting exchange differences are recognized in a separate component of equity, “Foreign currency translation reserve,” and are recorded in “Other comprehensive income.” These currency translation differences may have significant negative or positive impacts. Upon the disposal of a non-U.S. dollar denominated subsidiary, the cumulative amount of exchange differences relating to that non-U.S. dollar denominated subsidiary are reclassified from equity to profit or loss. Our foreign currency translation risk mainly relates to our operations in Canada and Chile. Foreign currency transaction risk arises when we or our subsidiaries enter into transactions where the settlement occurs in a currency other than the functional currency of us or our subsidiary. Exchange differences (gains and losses) arising on the settlement of monetary items or on translation of monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements are recognized in profit or loss in the period in which they arise. In order to reduce significant foreign currency transaction risk from our operating activities, we may use forward exchange contracts to hedge forecasted cash inflows and outflows. Furthermore, most non-U.S. dollar denominated debts are held by non-U.S. dollar denominated subsidiaries in the same functional currency of those subsidiary operations.

Our cross-border operations require us to comply with anti-corruption laws and regulations of the U.S. government and various non-U.S. jurisdictions.

Doing business in multiple countries requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various non-U.S. jurisdictions. Our failure to comply with these rules and regulations may expose us to liabilities. These laws and regulations may apply to our companies, individual directors, officers, employees and agents and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our non-U.S. operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the Foreign Corrupt Practices Act of 1977, or the “FCPA.” The FCPA prohibits U.S. companies and their officers, directors, employees and agents acting on their behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favourable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately and fairly reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. As a result, business dealings between our employees and any such foreign official could expose our company to the risk of violating anti-corruption laws even if such business practices may be customary or are not otherwise prohibited between our company and a private third-party. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and non-U.S. laws and regulations; however, we cannot assure you that these policies and procedures will completely eliminate the risk of a violation of these legal requirements, and any such violation (inadvertent or otherwise) could have a material adverse effect on our business, financial condition and results of operations.

 

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Upon the completion of this offering, we will own, and in the future may acquire, certain projects in joint ventures, and our partners’ interests may conflict with our and our shareholders’ interests.

Upon the completion of this offering, we will own, and in the future may acquire, certain projects in joint ventures, including South Kent, in which we have a 50% interest, and El Arrayán, in which we have a 31.5% interest. In the future, we may invest in other projects with a joint venture partner, including certain PEG LP-owned development projects. Joint ventures inherently involve a lesser degree of control over business operations, which could result in an increase in the financial, legal, operational or compliance risks associated with a project, including, but not limited to, variances in accounting internal control requirements. To the extent we do not have a controlling interest in a project, our joint venture partners could take actions that decrease the value of our investment and lower our overall return. In addition, conflicts of interest may arise in the future between our company and our shareholders, on the one hand, and our joint venture partners, on the other hand, where our joint venture partners’ business interests are inconsistent with our and our shareholders’ interests. Further, disagreements or disputes between us and our joint venture partners could result in litigation, which could increase our expenses and potentially limit the time and effort our officers and directors are able to devote to our business, all of which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Acquisition Strategy and Future Growth

The growth of our business depends on locating and acquiring interests in additional attractive independent power and transmission projects at favourable prices.

Our business strategy includes acquiring power and transmission projects that are either operational, construction-ready, or in limited circumstances, under development. We intend to pursue opportunities to acquire projects from third-party IPPs and from PEG LP pursuant to our Purchase Rights. Various factors could affect the availability of attractive projects to grow our business, including:

 

   

competing bids for a project, including a project subject to our Purchase Rights, from other IPPs, including companies that may have substantially greater capital and other resources than we do;

 

   

fewer third-party acquisition opportunities than we expect, which could result from, among other things, available projects having less desirable economic returns or higher risk profiles than we believe suitable for our business plan and investment strategy;

 

   

PEG LP’s failure to complete the development of (i) the Initial ROFO Projects, which could result from, among other things, permitting challenges, failure to procure the requisite financing, equipment or interconnection, or an inability to satisfy the conditions to effectiveness of project agreements such as PPAs and (ii) any of the other projects in its development pipeline, in a timely manner, or at all, in either case, which could limit our acquisition opportunities under our Purchase Rights;

 

   

our failure to exercise our Purchase Rights or acquire assets from PEG LP;

 

   

our failure to successfully develop and finance projects, to the extent that we decide to pursue development activities with respect to new power projects; and

 

   

local opposition to wind turbine installations is growing in certain markets due to concerns about noise, health and other alleged impacts of wind power projects. In addition, indigenous communities in the United States and Canada, including Native Americans and First Nations, are becoming more involved in the development of wind power projects and have certain treaty rights that can negatively affect the viability of power projects. As a result, for these and other reasons, litigation and challenges to wind power projects has increased.

Any of these factors could prevent us from executing our growth strategy or otherwise have a material adverse effect on our business, financial condition and results of operations.

 

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Additionally, even if we consummate acquisitions that we believe will be accretive to cash available for distribution per share, those acquisitions may in fact result in a decrease in cash available for distribution per Class A share as a result of incorrect assumptions in our evaluation of such acquisitions, unforeseen consequences or other external events beyond our control. Furthermore, if we consummate any future acquisitions, our capitalization and results of operations may change significantly, and shareholders will not generally have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

Acquisition of existing wind power projects involves numerous risks.

Our strategy includes acquiring existing wind power projects. The acquisition of existing wind power projects involves numerous risks, many of which may not be able to be discovered through our due diligence process, including exposure to previously existing liabilities and unanticipated costs associated with the pre-acquisition period; difficulty in integrating the acquired projects into our existing business; and, if the projects are in new markets, the risks of entering markets where we have limited experience. While we will perform our due diligence on prospective acquisitions, we may not be able to discover all potential operational deficiencies in such projects or problematic wind characteristics. A failure to achieve the financial returns we expect when we acquire wind power projects could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition and results of operations.

Our growth strategy is dependent upon the acquisition of attractive power projects developed by third-parties, including PEG LP, and an inability of such development companies to obtain the requisite financing to develop and construct projects could have a material adverse effect on our ability to grow our business.

Power project development is a capital intensive, high-risk business that relies heavily on and, therefore, is subject to the availability of debt and equity financing sources to fund projected construction and other projected capital expenditures. As a result, in order to successfully develop a power project, development companies, including PEG LP, from which we may seek to acquire power projects, must obtain at-risk funds sufficient to complete the development phase of their projects. We, on the other hand, must anticipate obtaining funds from equity or debt financings, including tax equity transactions, or from government grants in order to successfully complete our acquisitions and fund the required construction and other capital costs of the acquired projects. We currently intend to acquire power projects that are construction-ready, which is generally the point in time when the project is able to procure construction financing. Any significant disruption in the credit and capital markets, or a significant increase in interest rates, could make it difficult for development companies to successfully develop attractive projects as well as limit a project’s ability to obtain financing to complete the construction of a project we may seek to acquire. If development companies from which we seek to acquire projects are unable to raise funds when needed or if we or they are unable to secure construction financing, the ability to grow our project portfolio may be limited, which could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition and results of operations.

Our ability to grow our cash available for distribution is substantially dependent on our ability to make acquisitions from PEG LP or third parties on economically favourable terms.

Our goal of growing our cash available for distribution and increasing dividends to our Class A shareholders is substantially dependent on our ability to make and finance acquisitions on terms that result in an increase in cash available for distribution per Class A share. We have established a three-year targeted annual growth rate in our cash available for distribution per Class A share of 8% to 10%. To grow our cash available for distribution per Class A share through acquisitions, we must be able to acquire new generation assets, such as the Initial ROFO Projects, on economically favourable terms. If we are unable to make accretive acquisitions from PEG LP or third parties because we are unable to identify attractive acquisition opportunities, negotiate acceptable purchase contracts, obtain financing on economically acceptable terms (as a result of the then current market value of our Class A shares or otherwise) or are outbid by competitors, we may not be able to realize our targeted growth in cash available for distribution per Class A share.

 

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The energy industry in Canada, the United States and Chile benefits from governmental support that is subject to change.

The energy industry in Canada and the United States, including both fossil fuel and renewable energy sources, in general benefits from various forms of governmental support. Renewable energy sources in Canada benefit from federal and provincial incentives, such as RPS programs, accelerated cost recovery deductions, the availability of off-take contracts through RFPs and the Ontario FIT program and other commercially oriented incentives. Renewable energy sources in the United States also currently benefit from various federal and state governmental incentives, such as PTCs, ITCs, ITC cash grants, loan guarantees, RPS programs and accelerated tax depreciation. ITC cash grants expired with respect to wind energy on December 31, 2012. PTCs and ITCs for wind energy currently are scheduled to expire on December 31, 2013. Renewable energy sources in Chile benefit from the Renewable and Non-Conventional Energy Law, which guarantees a fixed-price for renewable energy until 2024. The existence of these incentives is reflected in, and allows us to reduce, the price we charge for electricity generated by our projects. To the extent that these governmental incentive programs are not renewed or similar incentives are not made available, new wind power projects may need to increase the price of electricity sold to power purchasers, which could result in decreased demand for wind power, and could reduce the number of projects available to us for acquisition which could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition and results of operations.

Wind power procurement in Canada is a provincial matter, with relatively irregular, infrequent and competitive procurement windows.

Each province in Canada has its own regulatory framework and renewable energy policy, with few material federal policies to drive the growth of renewable energy. Renewable energy developers must anticipate the future policy direction in each of the provinces, secure viable projects before they can bid to procure a PPA through highly competitive PPA auctions. Most markets are relatively small. Energy policy in our key market of Ontario is subject to a political process, including with respect to its FIT program, and renewable energy procurements may change dramatically as a result of changes in the provincial government or political climate.

We face competition primarily from other renewable energy IPPs, in particular, other wind power companies.

We believe our primary competitors are infrastructure funds and some wind power companies or IPPs focused on renewable energy generation. We compete with these companies to acquire well-developed projects with projected stable cash flows that can be built in a cost-effective manner. We also compete with other wind power developers for the limited pool of personnel with requisite industry knowledge and experience. Furthermore, in recent years, there have been times of increased demand for wind turbines and their related components, causing turbine suppliers to have difficulty meeting the demand. If these conditions return in the future, turbine and other component manufacturers may give priority to other market participants, including our competitors, who may have resources greater than ours.

We compete with other renewable energy companies (and power companies in general) for the lowest cost financing, which provides the highest returns for our projects. Once we have acquired a construction project and put it into operation, we may compete on price if we sell electricity into power markets at wholesale market prices. Depending on the regulatory framework and market dynamics of a region, we may also compete with other wind power companies and other renewable energy generators, when our projects bid on or negotiate for long-term power sale agreements or sell electricity into the spot market. Our ability to compete on price with other wind power companies and other renewable energy IPPs may be negatively impacted if the regulatory framework of a region favours other sources of renewable energy over wind power.

We have no control over where our competitors may erect wind power projects. Our competitors may erect wind power projects adjacent to our wind projects that may cause upwind array losses to occur at our wind

 

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projects. Upwind array losses reflect the diminished wind resource available at a project resulting from interference with available wind caused by adjacent wind turbines. An adjacent wind power project that causes upwind array losses could have a material adverse effect on our revenues and results of operations.

Any change in power consumption levels could have a material adverse effect on our business, financial condition and results of operations.

The amount of wind power consumed by the electric utility industry is affected primarily by the overall demand for electricity, environmental and other governmental regulations and the price and availability of fuels such as nuclear, coal, natural gas and oil as well as other sources of renewable energy. A decline in prices for these fuels could cause demand for wind power to decrease and adversely affect the demand for renewable energy. For example, low natural gas prices have led, in some instances, to increased natural gas consumption by electricity-generating utilities in lieu of other power sources. To the extent renewable energy and wind power, in particular, becomes less cost-competitive on an overall basis as a result of a lack of governmental incentives, cheaper alternatives or otherwise, demand for wind power and other forms of renewable energy could decrease. Slow growth in overall demand for electricity or a long-term reduction in the demand for renewable energy could have a material adverse effect on our plan to grow our business and could, in turn, have a material adverse effect on our results of operations and cash available for distribution.

Some states and provinces with RPS programs have met, or will in the near future, meet such targets through projects under contract, which could cause demand for new wind power and other power capacity to decrease.

Some states with RPS targets have met, or in the near future will meet, their targets through the recent increase in renewable energy development activity. For example, California, which has one of the most aggressive RPS in the United States, is poised to meet its current target of 25% renewable energy generation by 2016 and has the potential to meet its goal of 33% renewable power generation by 2020 with already-proposed new renewable power projects. Ontario anticipates meeting its renewable energy target of 10.7 GW by 2018. As a result of achieving these targets, and if these U.S. states and Canadian provinces do not increase their targets in the near future, demand for additional wind power generating capacity could decrease. To the extent other states and provinces do not become market leaders in their stead or increase their RPS targets, demand for power from wind power and other renewable energy projects could decrease in the future, which could have a material adverse effect on our business and our growth.

New projects being developed that we may acquire may need governmental approvals and permits, including environmental approvals and permits, for construction and operation. Any failure to obtain necessary permits could adversely affect the amount of our growth.

The design, construction and operation of wind power projects are highly regulated, require various governmental approvals and permits, including environmental approvals and permits, and may be subject to the imposition of related conditions that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal and a subsequently issued permit may not be consistent with the permit initially issued. We cannot predict whether all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial or loss of a permit essential to a project or the imposition of impractical conditions upon renewal could impair our ability to construct and operate a project. In addition, we cannot predict whether the permits will attract significant opposition or whether the permitting process will be lengthened due to complexities, legal claims or appeals. Delay in the review and permitting process for a project can impair or delay our ability to construct or acquire a project or increase the cost such that the project is no longer attractive to us.

In developing certain of our projects PEG LP experienced delays in obtaining non-appealable permits and we may experience delays in the future. For example, our Ocotillo project is currently the subject of five active

 

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lawsuits brought by a variety of project opponents, all of which have challenged the prior issuance of Ocotillo’s primary environmental analysis and right-of-way entitlement. We have commenced construction of, and closed project financing for, the Ocotillo project in anticipation of securing favourable rulings on these lawsuits. See “Business—Legal Proceedings.” In Ontario, an anti-wind advocacy group opposed the environmental permit granted to our South Kent project. The permit was appealed before the Environmental Review Tribunal, which dismissed the appeal on December 5, 2012. We are subject to the risk of being unable to complete our projects if any of the key permits are revoked. If this were to occur at the Ocotillo project or at any future project, we would likely lose a significant portion of our investment in the project and could incur a loss as a result, which would have a material adverse effect on our business, financial condition and results of operations.

Our strategic relationship with PEG LP through which we expect PEG LP to help us locate and obtain new projects is limited. Our Purchase Rights may expire and if we do not exercise our Project Purchase Right or if we are not competitive with third party offers, PEG LP is generally not restricted from competing with us, other than with respect to the Non-Competition Agreement, and, in certain circumstances, PEG LP may sell its projects to third parties.

To the extent we do not exercise our Purchase Rights (or upon their expiration), PEG LP may sell its projects (including the PEG LP retained Gulf Wind interest) or PEG LP itself or substantially all of its assets may be sold to third parties, including our competitors. Even if we are interested in acquiring an asset or investing in an opportunity offered to us by PEG LP, PEG LP may offer at an inopportune time for us, or we may not be able to reach an agreement on pricing or other terms. If we are unable to reach an agreement with PEG LP or its equity owners or if we decline to make an offer, PEG LP or its equity owners may seek alternative buyers, which could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition and results of operations.

Additionally, our Gulf Wind Call Right terminates upon the second anniversary of the completion of this offering; and our Project Purchase Right and our PEG LP Purchase Right terminate upon the fifth anniversary of the completion of this offering, but are subject to automatic five-year renewals unless either party dissents at the time of renewal. In addition, our Project Purchase Right and our PEG LP Purchase Right terminate upon the third occasion on which we decline to exercise our Project Purchase Right with respect to an operational or construction-ready project and following which PEG LP has sold the project to an unrelated third party. Following termination of our Project Purchase Right and our PEG LP Purchase Right, PEG LP will be under no obligation to offer any of its projects to us, which could have a material adverse effect on our ability to implement our growth strategy and ultimately on our business, financial condition and results of operations.

Once our Purchase Rights terminate, the Non-Competition Agreement with PEG LP will also terminate, and at such time, PEG LP will no longer be restricted from competing with us for acquisitions.

The loss of one or more of our or PEG LP’s executive officers or key employees may adversely affect our ability to implement our growth strategy.

In addition to relying on our management team for managing our projects, our growth strategy relies on our and PEG LP’s executive officers and key employees for their strategic guidance and expertise in the selection of projects that we may acquire in the future. Because the wind power industry is relatively new, there is a scarcity of experienced executives and employees in the wind power industry. As a result, if one or more of our or PEG LP’s executive officers or key employees leaves and neither we nor PEG LP are able to find a suitable replacement, our ability to implement our growth strategy may be diminished, which could have a material adverse effect on our business, financial condition and results of operations.

 

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While we currently own only wind power projects, in the future, we may decide to expand our acquisition strategy to include other types of power projects or transmission projects. Any future acquisition of non-wind power projects or transmission projects may present unforeseen challenges and result in a competitive disadvantage relative to our more-established competitors.

In the future, we may expand our acquisition strategy to include other types of power projects or transmission projects. There can be no assurance that we will be able to identify attractive non-wind or transmission acquisition opportunities or acquire such projects at a price and on terms that are attractive or that, once acquired, such projects will operate profitably. Additionally, these acquisitions could expose us to increased operating costs, unforeseen liabilities or risks, and regulatory and environmental concerns associated with entering new sectors of the power industry, including requiring a disproportionate amount of our management’s attention and resources, which could have an adverse impact on our business as well as place us at a competitive disadvantage relative to more established non-wind energy market participants. A failure to successfully integrate such acquisitions into our existing project portfolio as a result of unforeseen operational difficulties or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

We are subject to risks associated with litigation or administrative proceedings that could materially impact our operations, including proceedings in the future related to power projects we subsequently acquire.

We are subject to risks and costs, including potential negative publicity, associated with lawsuits, in particular, with respect to environmental claims and lawsuits or claims contesting the construction or operation of our projects. See “Business—Legal Proceedings.” The result of and costs associated with defending any such lawsuit, regardless of the merits and eventual outcome, may be material and could have a material adverse effect on our operations. In the future, we may be involved in legal proceedings, disputes, administrative proceedings, claims and other litigation that arise in the ordinary course of business related to a power project that we subsequently acquire. For example, individuals and interest groups may sue to challenge the issuance of a permit for a power project or seek to enjoin construction or operation of a power project. We may also become subject to claims from individuals who live in the proximity of our power projects based on alleged negative health effects related to acoustics caused by wind turbines. In addition, we have been and may subsequently become subject to legal proceedings or claims contesting the construction or operation of our power projects. See “Certain Relationships and Related Party Transactions—Other Contractual Arrangements with Related Persons.” Any such legal proceedings or disputes could delay our ability to complete construction of a power project in a timely manner or at all, or materially increase the costs associated with commencing or continuing commercial operations at a power project. Settlement of claims and unfavourable outcomes or developments relating to these proceedings or disputes, such as judgments for monetary damages, injunctions or denial or revocation of permits, could have a material adverse effect on our ability to implement our growth strategy and, ultimately, our business, financial condition and results of operations.

Risks Related to Our Financial Activities

Our substantial amount of indebtedness may adversely affect our ability to operate our business and impair our ability to pay dividends.

After giving effect to the Contribution Transactions, this offering and the use of proceeds therefrom, our pro forma consolidated indebtedness as of June 30, 2013 would have been approximately $         million, or approximately     % of our total pro forma capitalization of $         million at such date. See “Capitalization” and “Use of Proceeds” for a discussion of the related pro forma adjustments and assumptions.

Of this amount, approximately $         million represents project-level debt that matures prior to                                 . We do not have available cash or short-term liquid investments sufficient to repay all of this medium-term indebtedness and we have not obtained commitments for refinancing this debt. Therefore, we may not be able to extend the maturity of this indebtedness or to otherwise successfully refinance current maturities if the project finance markets deteriorate substantially or we choose not to raise corporate-level debt in place of project-level debt. Refinancing such indebtedness may force us to accept then-prevailing market terms that are less favourable than the existing indebtedness. If, for any reason, we are unable to refinance the existing

 

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indebtedness, those projects may be in default of their existing obligations, which may result in a foreclosure on the project collateral and loss of the project. Any such events could have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness could have important consequences, including, for example:

 

   

failure to comply with the covenants in the agreements governing these obligations could result in an event of default under those agreements, which could be difficult to cure, or result in our bankruptcy;

 

   

our debt service obligations require us to dedicate a substantial portion of our cash flow to pay principal and interest on our debt, thereby reducing the funds available to us and our ability to borrow to operate and grow our business;

 

   

our limited financial flexibility could reduce our ability to plan for and react to unexpected opportunities; and

 

   

our substantial debt service obligations make us vulnerable to adverse changes in general economic, credit and capital markets, industry and competitive conditions and adverse changes in government regulation and place us at a disadvantage compared with competitors with less debt.

Any of these consequences could have a material adverse effect on our business, financial condition and results of operations. If we do not comply with our obligations under our debt instruments, we may be required to refinance all or part of our existing debt, borrow additional amounts or sell securities, which we may not be able to do on favourable terms or at all. In addition, increases in interest rates and changes in debt covenants may reduce the amounts that we can borrow, reduce our cash flows and increase the equity investment we may be required to make to complete construction of our projects. These increases could cause some of our projects to become economically unattractive. If we are unable to raise additional capital or generate sufficient operating cash flow to repay our indebtedness, we could be in default under our lending agreements and could be required to delay construction of our wind power projects, reduce overhead costs, reduce the scope of our projects or abandon or sell some or all of our projects, all of which could have a material adverse effect on our business, financial condition and results of operations.

If our subsidiaries default on their obligations under their project-level debt, we may decide to make payments to lenders to prevent foreclosure on the collateral securing the project-level debt, which would, without such payments, cause us to lose certain of our wind power projects.

Our subsidiaries incur various types of debt. Non-recourse debt is repayable solely from the applicable project’s revenues and is secured by the project’s physical assets, major contracts, cash accounts and, in many cases, our ownership interest in the project subsidiary. Limited recourse debt is debt where we have provided a limited guarantee, and recourse debt is debt where we have provided a full guarantee, which means if our subsidiaries default on these obligations, we will be liable directly to those lenders, although in the case of limited recourse debt only to the extent of our limited recourse obligations. To satisfy these obligations, we may be required to use amounts distributed by our other subsidiaries as well as other sources of available cash, reducing our cash available to execute our business plan and pay dividends to holders of our Class A shares. In addition, if our subsidiaries default on their obligations under non-recourse financing agreements, we may decide to make payments to prevent the lenders of these subsidiaries from foreclosing on the relevant collateral. Such a foreclosure would result in our losing our ownership interest in the subsidiary or in some or all of its assets. The loss of our ownership interest in one or more of our subsidiaries or some or all of their assets could have a material adverse effect on our business, financial condition and results of operations and, in turn, on our cash available for distribution.

We are subject to indemnity obligations.

We provide a variety of indemnities in the ordinary course of business to contractual counterparties and to our lenders and other financial partners. For example, the Hatchet Ridge indemnity indemnifies the lender under

 

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the Hatchet Ridge Wind Lease Financing against certain tax losses. In March 2013, we became aware of potential tax indemnity obligations in respect of the Hatchet Ridge indemnity triggered by an upstream owner of PEG LP and us inadvertently failing to file an election to not be treated as a tax-exempt entity under section 168(h)(6) or 168(h)(5) of the Internal Revenue Code. As a result, certain of our assets are currently subject to less favourable tax depreciation treatment than we had anticipated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingent Tax Indemnity Obligations.”

In addition, although we primarily rely on limited recourse or non-recourse financing at our project-level entities we sometimes provide specific indemnities to support such financings. For example, some of our subsidiaries in the United States have obtained construction bridge loans to finance a portion of project construction costs, and in certain cases, such loans are secured by the ITC cash grant proceeds anticipated to be received from the U.S. Treasury. We have assumed certain indemnities that were originally provided by PEG LP to certain of these bridge lenders and other on-going term lenders in the event that the ITC cash grant is recaptured by the U.S. Treasury, in whole or in part. The cash grant indemnities are in effect for five years from the date the relevant project commences commercial operations. If, for any of those subsidiaries which received the ITC cash grant, the ITC cash grant is recaptured, in whole or in part, we may be required to make payments under the indemnities to prevent the lenders of those subsidiaries from foreclosing on the relevant project collateral. Payment by us under a cash grant indemnity could have a material adverse effect on our business, financial condition and results of operations and, in turn, on our cash available for distribution.

Our failure to pay any of these indemnities would enable the applicable project lenders to foreclose on the project collateral. The payments we may be obligated to make pursuant to these indemnities could have a material adverse effect on our business, financial condition and results of operations and, in turn, on our cash available for distribution. See “Description of Certain Financing Arrangements” elsewhere in this prospectus.

Our hedging activities may not adequately manage our exposure to commodity and financial risk, which could result in significant losses or require us to use cash collateral to meet margin requirements, each of which could have a material adverse effect on our business, financial condition, results of operations and liquidity, which could impair our ability to execute favourable financial hedges in the future.

Certain of the electricity we generate is sold on the open market at spot-market prices. In order to stabilize all or a portion of the revenue from such sales, we have entered, and may in the future enter, into financial swaps, day-ahead sales transaction or other hedging arrangements. We may acquire additional assets in the future with similar hedging agreements. In an effort to stabilize our revenue from electricity sales from these projects, we evaluate the electricity sale options for each of our projects, including the appropriateness of entering into a PPA or a financial swap, or both. If we sell our electricity into an ISO market without a PPA, we may enter into a financial swap to stabilize all or a portion of our estimated revenue stream. Under the terms of our existing financial swaps, we are not obligated to physically deliver or purchase electricity. Instead, we receive payments for specified quantities of electricity based on a fixed-price and are obligated to pay our counterparty the market price for the same quantities of electricity. These financial swaps cover quantities of electricity that we estimate we are highly likely to produce. As a result, gains or losses under the financial swaps are designed to be offset by decreases or increases in our revenues from spot sales of electricity in liquid ISO markets. However, the actual amount of electricity we generate from operations may be materially different from our estimates for a variety of reasons, including variable wind conditions and wind turbine availability. If a project does not generate the volume of electricity covered by the associated swap contract, we could incur significant losses if electricity prices in the market rise substantially above the fixed-price provided for in the swap. If a project generates more electricity than is contracted in the swap, the excess production will not be hedged and the related revenues will be exposed to market-price fluctuations.

We would also incur financial losses as a result of adverse changes in the mark-to-market values of the financial swaps or if the counterparties to our hedging contracts fail to make payments when due. We could also

 

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experience a reduction in cash flow if we are required to post margin in the form of cash collateral to secure our payment obligations under these hedging agreements. We are not currently required to post cash collateral or issue letters of credit to backstop our obligations under our hedging arrangements, but we may be required to do so in the future. However, if we were required to do so, our available cash or available borrowing capacity under the credit facilities under which these letters of credit are issued would be correspondingly reduced.

We enter into PPAs when we sell our electricity into non-ISO markets or where we believe it is otherwise advisable. Under a PPA, we contract to sell all or a fixed proportion of the electricity generated by one of our projects, sometimes bundled with RECs and capacity or other environmental attributes, to a power purchaser, often a utility. We do this to stabilize our revenues from that project. We are exposed to the risk that the power purchaser will fail to perform under a PPA, with the result that we will have to sell our electricity at the market price, which could be substantially lower than the price provided in the applicable PPA. In most instances, we also commit to sell minimum levels of generation. If the project generates less than the committed volumes, we may be required to buy the shortfall of electricity on the open market or make payments of liquidated damages or be in default under a PPA, which could result in its termination.

We sometimes seek to sell forward a portion of our RECs or other environmental credits to fix the revenues from those attributes and hedge against future declines in prices of RECs or other environmental attributes. If our projects do not generate the amount of electricity required to earn the RECs or other environmental attributes sold forward or if for any reason the electricity we generate does not produce RECs or other environmental attributes for a particular state, we may be required to make up the shortfall of RECs or other environmental attributes through purchases on the open market or make payments of liquidated damages. Further, current market conditions may limit our ability to hedge sufficient volumes of our anticipated RECs or other environmental attributes, leaving us exposed to the risk of falling prices for RECs or other environmental attributes. Future prices for RECs or other environmental attributes are also subject to the risk that regulatory changes will adversely affect prices.

Risks Related to this Offering and Ownership of our Class A Shares

We are a holding company with no operations of our own, and we will depend on our power projects for cash to fund all of our operations and expenses, including to make dividend payments.

Our operations are conducted entirely through our power projects and our ability to generate cash to meet our debt service obligations or to pay dividends is dependent on the earnings and the receipt of funds from our project subsidiaries through distributions or intercompany loans. Our power projects’ ability to generate adequate cash depends on a number of factors, including wind conditions, timely completion of our construction projects, the price of electricity, payments by key power purchasers, increased competition, foreign currency exchange rates, compliance with all applicable laws and regulations and other factors. See “—Risks Related to Our Projects.” Our ability to declare and pay regular quarterly cash dividends will be subject to our obtaining sufficient cash distributions from our project subsidiaries after the payment of operating costs, debt service and other expenses. See “Cash Dividend Policy.” We may lack sufficient available cash to pay dividends to holders of our Class A shares due to shortfalls attributable to a number of operational, commercial or other factors, including insufficient cash flow generation by our projects, as well as unknown liabilities, the cost associated with governmental regulation, increases in our operating or general and administrative expenses, principal and interest payments on our and our subsidiaries’ outstanding debt, tax expenses, working capital requirements and anticipated cash needs.

We cannot guarantee that our forecast will prove to be accurate. Our actual results of operations for the forecast period will likely be different than the results disclosed in the forecast and the variations may be material.

The forecast presented elsewhere in this prospectus was prepared using assumptions that our management believes are reasonable. See “Cash Dividend Policy—Forecasted Cash Available for Distribution—Forecast

 

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Limitations, Assumptions and Other Considerations.” These include assumptions regarding the future composition of our project portfolio, future operating costs of our projects, our projects’ future level of electricity generation, interest rates, foreign currency exchange rates, administrative expenses, tax treatment of income, future capital expenditure requirements and the absence of material adverse changes in economic conditions or government regulations. They also include assumptions about wind patterns (which are variable and difficult to predict) and availability of our equipment.

In particular, our cash available for distribution is most directly affected by the volume of electricity generated and sold by our projects because revenue from electricity sales and energy derivative settlements is the most significant component of our net income and net cash provided by operating activities. However, for a static portfolio of projects, our consolidated expenses, including operating expenses and interest payments on indebtedness, have less variability than the volume of electricity generated and sold. Accordingly, decreases in the volume of electricity generated and sold by our projects typically result in a proportionately greater decrease in our cash available for distribution. For example, if the forecasted volume of electricity generated by our projects for the year ended December 31, 2014 decreased by 5% (corresponding to a P75 output, after taking account of the portfolio effect), we estimate that our forecasted net income, Adjusted EBITDA, net cash provided by operating activities and cash available for distribution would correspondingly decrease by approximately $11 million (or approximately 20% with respect to forecasted cash available for distribution) for each such metric during the year ending December 31, 2014. See “Cash Dividend Policy—Forecasted Cash Available for Distribution.” For an explanation of the portfolio effect on our projected output, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that Significantly Affect our Business—Factors Affecting Our Operational Results—Electricity Sales and Energy Derivative Settlements of our Operating Projects.”

In addition, the forecast assumes that no unexpected risks materialize during the forecast period. Any one or more than one of these assumptions may prove to be incorrect, in which case our actual results of operations will be different from, and possibly materially worse than, those contemplated by the forecast. There can be no assurance that the assumptions underlying the forecast will prove to be accurate. Actual results for the forecast period will likely vary from the forecast results and those variations may be material. We make no representation that actual results achieved in the forecast period will be the same, in whole or in part, as those forecasted herein.

Our cash available for distribution to holders of our Class A shares may be reduced as a result of restrictions on our subsidiaries’ cash distributions to us under the terms of their indebtedness.

Following completion of this offering, we intend to declare and pay regular quarterly cash dividends on all of our outstanding Class A shares. However, in any period, our ability to pay dividends to holders of our Class A shares depends on the performance of our subsidiaries and their ability to distribute cash to us as well as all of the other factors discussed under “Cash Dividend Policy.” The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of existing and future indebtedness.

Restrictions on distributions to us by our subsidiaries under our revolving credit facility and the agreements governing their respective project-level debt could limit our ability to pay anticipated dividends to holders of our Class A shares. These agreements contain financial tests and covenants that our subsidiaries must satisfy prior to making distributions. If any of our subsidiaries is unable to satisfy these restrictions or is otherwise in default under such agreements, it would be prohibited from making distributions to us that could, in turn, limit our ability to pay dividends to holders of our Class A shares. The terms of our project-level indebtedness typically require commencement of commercial operations prior to our ability to receive cash distributions from a project. The terms of any such indebtedness also typically include cash management or similar provisions, pursuant to which revenues generated by projects subject to such indebtedness are immediately, or upon the occurrence of certain events, swept into an account for the benefit of the lenders under such debt agreements. As a result, project revenues typically only become available to us after the funding of reserve accounts for, among other

 

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things, debt service, taxes and insurance at the project level. In some instances, projects may be required to sweep cash to reserve funds intended to mitigate the results of pending litigation or other potentially adverse events. If our projects do not generate sufficient cash available for distribution, we may be required to fund dividends from working capital, borrowings under our revolving credit facility, proceeds from this offering, the sale of assets or by obtaining other debt or equity financing, which may not be available, any of which could have a material adverse effect on the price of our Class A shares and on our ability to pay dividends at anticipated levels or at all. See “Description of Certain Financing Arrangements.”

Our ability to pay regular dividends on our Class A shares is subject to the discretion of our board of directors.

Our Class A shareholders will have no contractual or other legal right to dividends. The payment of future dividends on our Class A shares will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Our board of directors will have the authority to establish cash reserves for the prudent conduct of our business, and the establishment of or increase in those reserves could result in a reduction in cash available for distribution to pay dividends on our Class A shares at anticipated levels. Accordingly, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our Class A shares, which could adversely affect the market price of our Class A shares.

There is no existing market for our Class A shares, and we do not know if one will develop with adequate liquidity to sell our Class A shares at prices equal to or greater than the offering price.

Prior to this offering, there has not been a public market for our Class A shares. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on any stock exchanges or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling our Class A shares that you purchase in this offering. The initial public offering price for our Class A shares was determined by negotiations between us, PEG LP and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our Class A shares at prices equal to or greater than the price you paid in this offering or at all.

We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Class A shares less attractive to investors.

We are an emerging growth company. For as long as we are an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” certain reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. See “Business Summary—Implications of Being an Emerging Growth Company.” We cannot predict if investors will find our Class A shares less attractive because we may rely on these exemptions. If some investors find our Class A shares less attractive as a result, there may be a less active trading market for our Class A shares and our Class A share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such standards apply to private companies. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in

 

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Section 7(a)(2)(B) of the U.S. Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies. In other words, an emerging growth company can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opt outs of the extended transition period provided in U.S. Securities Act Section 7(a)(2)(B). We have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the U.S. Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies and, as a result, our financial statements may not be comparable to the financial statements of other public companies. In addition, we have availed ourselves of the exemption from disclosing certain executive compensation information in this prospectus pursuant to Title 1, Section 102 of the JOBS Act. We cannot predict if investors will find our Class A shares less attractive because we will rely on these exemptions. If some investors find our Class A shares less attractive as a result, there may be a less active trading market for our Class A shares and our Class A share price may be more volatile.

We will be an SEC foreign issuer under Canadian securities laws and, therefore, be exempt from certain requirements of Canadian securities laws applicable to other Canadian reporting issuers.

Although we will be a reporting issuer in Canada, we will be an SEC foreign issuer and will be exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation if we comply with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the SEC are filed in Canada and sent to our Class A shareholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. In some cases the disclosure obligations applicable in the United States are different or less onerous than the comparable disclosure requirements applicable in Canada for a Canadian reporting issuer that is not exempt from Canadian disclosure obligations. Therefore, there may be less or different publicly available information about us than would be available if we were a Canadian reporting issuer that is not exempt from such Canadian disclosure obligations.

PEG LP’s general partner and its officers and directors have fiduciary or other obligations to act in the best interests of PEG LP’s owners, which could result in a conflict of interest with us and our shareholders.

Upon completion of this offering, PEG LP will hold approximately     % of our outstanding Class A shares and     % of our outstanding Class B shares (or     % and     %, respectively, if the underwriters exercise their overallotment option in full), representing in the aggregate an approximate     % voting interest in our company (or     % if the underwriters exercise their overallotment option in full). The remaining     % of our outstanding Class B shares will be held by members of our management. Until the Conversion Event, neither PEG LP nor the management holders of our Class B shares will be entitled to receive any dividends on their Class B shares. Prior to the completion of this offering, we will enter into the Management Services Agreement, pursuant to which each of our executive officers (including our Chief Executive Officer), with the exception of our Chief Financial Officer and Senior Vice President, Operations, will also be shared PEG executives and devote their time to both our company and PEG LP as needed to conduct our respective businesses. As a result, these shared PEG executives will have fiduciary and other duties to PEG LP. Conflicts of interest may arise in the future between our company (including our shareholders other than PEG LP) and PEG LP (and its owners and affiliates). Our directors and executive officers owe fiduciary duties to the holders of our shares. However, PEG LP’s general partner and certain of its officers and directors also have a fiduciary duty to act in the best interest of PEG LP’s limited partners, which interest may differ from or conflict with that of our company and our other shareholders.

The concentration of our share ownership following the offering will limit your ability to influence corporate matters.

Upon completion of this offering, PEG LP or its affiliates will hold approximately     % of the combined voting power of our shares, or approximately     % of the combined voting power of our shares if the underwriters exercise their overallotment option in full, and this concentration of voting power will limit your ability to

 

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influence corporate matters, and as a result, actions may be taken that you may not view as beneficial. As a result of its ownership in our company, PEG LP will continue to have significant influence over all matters that require approval by our shareholders, including the election of directors. As a result, PEG LP or its affiliates will have the ability to exercise substantial influence over our company, including with respect to decisions relating to our capital structure, issuing additional Class A shares or other equity securities, paying dividends on our Class A shares, incurring additional debt, making acquisitions, selling properties or other assets, merging with other companies and undertaking other extraordinary transactions. In any of these matters, the interests of PEG LP and its affiliates may differ from or conflict with the interests of our other shareholders. Pursuant to the Shareholder Agreement, for so long as PEG LP beneficially owns at least 33 1/3% of our shares, PEG LP’s consent will be necessary for us to take certain material corporate actions. PEG LP may withhold its consent, which could adversely affect our business. See “Certain Relationships and Related Party Transactions—Share Ownership—Shareholder Agreement.”

Certain of our executive officers will continue to have an economic interest in, as well as provide services to PEG LP, which could result in conflicts of interest.

Following the completion of this offering, certain of our executive officers will continue to provide services to PEG LP pursuant to the terms of the Management Services Agreement between our company and PEG LP and, as a result, will, in some instances, have fiduciary or other obligations to PEG LP. Additionally, our Chief Executive Officer, Executive Vice President, Business Development, Executive Vice President and General Counsel, Senior Vice President, Fiscal and Administrative Services and Senior Vice President, Engineering and Construction will continue to have economic interests in PEG LP and, accordingly, the benefit to PEG LP from a transaction between PEG LP and our company will proportionately inure to their benefit as holders of economic interests in PEG LP. Following the completion of this offering, PEG LP will be a related party under the applicable securities laws governing related party transactions and, as a result, any material transaction between our company and PEG LP (except the occurrence of the reintegration event) will be subject to our corporate governance guidelines, which will require prior approval of any such transaction by the conflicts committee, which is comprised solely of independent members of our board of directors. Those of our executive officers who will continue to have economic interests in PEG LP following the completion of this offering may be conflicted when advising the conflicts committee or otherwise participating in the negotiation or approval of such transactions. These executive officers have significant project- and industry-specific expertise that could prove beneficial to the conflicts committee’s decision-making process and the absence of such strategic guidance could have a material adverse effect on our company’s ability to evaluate any such transaction and, in turn, on our business, financial condition and results of operations.

Riverstone is under no obligation to offer us an opportunity to participate in any business opportunities that it may consider from time to time, including those in the energy industry, and, as a result, Riverstone’s existing and future portfolio companies may compete with us for investment or business opportunities.

Conflicts of interest could arise in the future between us, on the one hand, and Riverstone, including its portfolio companies, on the other hand, concerning among other things, potential competitive business activities or business opportunities. Riverstone is a private equity firm in the business of making investments in entities primarily in the energy industry. As a result, Riverstone’s existing and future portfolio companies (other than PEG LP, which will be subject to the Non-Competition Agreement) may compete with us for investment or business opportunities. These conflicts of interest may not be resolved in our favour.

Subject to the terms of the Non-Competition Agreement with, and our Purchase Rights granted to us by, PEG LP (see “Certain Relationships and Related Party Transactions”), we have expressly renounced any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may be from time to time presented to Riverstone or any of its officers, directors, agents, shareholders, members or partners or business opportunities that such parties participate in or desire to participate in, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so, and

 

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no such person shall be liable to us for breach of any fiduciary or other duty, as a director or officer or controlling shareholder or otherwise, by reason of the fact that such person pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us unless, in the case of any such person who is our director or officer, any such business opportunity is expressly offered to such director or officer solely in his or her capacity as our director or officer. Riverstone has advised us that it does not have a formal policy regarding business opportunities presented to the investment funds managed or advised by it and their respective portfolio companies, but Riverstone’s practice has been that any business opportunities may be pursued by any such fund or directed to any such portfolio company except when the business opportunity has been presented to an employee of Riverstone or its affiliates solely in his or her capacity as a director of a portfolio company.

As a result, Riverstone may become aware, from time to time, of certain business opportunities, such as acquisition opportunities, and may direct such opportunities to other businesses in which it has invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunities. Further, such businesses may choose to compete with us for these opportunities. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to Riverstone could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours. See “Description of Capital Stock—Corporate Opportunity.”

Our actual or perceived failure to deal appropriately with conflicts of interest with PEG LP could damage our reputation, increase our exposure to potential litigation and have a material adverse effect on our business, financial condition and results of operations.

Following the completion of this offering, the conflicts committee will be required to review, and make recommendations to the full board of directors regarding, any future transactions involving the acquisition of an asset or investment in an opportunity offered to us by PEG LP to determine whether the offer is fair and reasonable (including any acquisitions by us of assets of PEG LP pursuant to our Purchase Rights). However, our establishment of a conflicts committee may not prevent holders of our shares from filing derivative claims against us related to these conflicts of interest and related party transactions. Regardless of the merits of their claims, we may be required to expend significant management time and financial resources on the defense of such claims. Additionally, to the extent we fail to appropriately deal with any such conflicts, it could negatively impact our reputation and ability to raise additional funds and the willingness of counterparties to do business with us, all of which could have a material adverse effect on our business, financial condition and results of operations.

Market interest and foreign exchange rates may have an effect on the value of our Class A shares.

One of the factors that will influence the price of our Class A shares will be the effective dividend yield of our Class A shares (i.e., the yield as a percentage of the then market price of our Class A shares) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our Class A shares to expect a higher dividend yield and, our inability to increase our dividend as a result of an increase in borrowing costs, insufficient cash available for distribution or otherwise, could result in selling pressure on, and a decrease in the market price of, our Class A shares as investors seek alternative investments with higher yield. Additionally, we intend to pay a regular quarterly dividend in U.S. dollars and, as a result, to the extent the value of the U.S. dollar dividend decreases relative to Canadian dollars, the market price of our Class A shares in Canada could decrease.

The price of our Class A shares may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our shares may prevent you from being able to sell your Class A shares at or above the price you paid for your shares. The market price of our Class A shares could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual results of operations or those of other companies in our industry;

 

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a change in interest rates or changes in currency exchange rates;

 

   

the public’s reaction to our press releases, our other public announcements and our filings with the Canadian securities regulators and the SEC;

 

   

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our Class A shares or the stock of other companies in our industry;

 

   

the failure of research analysts to cover our Class A shares;

 

   

strategic actions by us, our power purchasers or our competitors, such as acquisitions or restructurings;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

material litigation or government investigations;

 

   

changes in applicable tax laws;

 

   

changes in general conditions in the United States, Canadian and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

   

changes in key personnel;

 

   

sales of Class A shares by us or members of our management team;

 

   

termination of lock-up agreements with our management team and principal shareholders;

 

   

the granting or exercise of employee stock options;

 

   

volume of trading in our Class A shares; and

 

   

the realization of any risks described under “Risk Factors.”

In addition, volatility in the stock markets has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Class A shares could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce the share price of our Class A shares and cause you to lose all or part of your investment. Further, in the past, market fluctuations and price declines in a company’s stock have led to securities class action litigation. If such a suit were to arise, it could have a substantial cost and divert our resources regardless of the outcome.

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

U.S. securities laws require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, once we are no longer an emerging growth company as defined in the JOBS Act, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we are not able to comply with these requirements in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our shares could decline and we could be subject to sanctions or investigations by the stock exchanges on which we list, the SEC, the Canadian Securities Administrators or other regulatory authorities, which would require additional financial and management resources. However, for as long as we remain an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We may take advantage of

 

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these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years, although if the market value of our shares that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

Our ability to successfully implement our business plan and comply with Section 404 of the Sarbanes-Oxley Act requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective as required under Section 404 of the Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our Class A shares, and could adversely affect our ability to access the capital markets.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results, and such costs may increase when we cease to be an emerging growth company.

As a public company, we will incur significant legal, accounting, investor relations and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, Section 404 and other provisions of the Sarbanes-Oxley Act and the Dodd-Frank Act of 2010, as well as rules implemented by the SEC, the Canadian Securities Administrators and the stock exchanges on which we expect our Class A shares will be traded.

Such costs may increase when we cease to be an emerging growth company. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company for up to five years unless we no longer qualify for such status prior to that time. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. If the market value of our shares that is held by non-affiliates exceeds $700 million as of any June 30, before that time, we would cease to be an emerging growth company as of the following December 31. After we are no longer an emerging growth company, we expect to incur additional expenses and devote substantial management effort toward ensuring compliance with those requirements applicable to companies that are not emerging growth companies.

The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We expect these rules and regulations to increase our legal and financial compliance costs substantially and to make some activities more time consuming and costly. We are currently unable to estimate these costs with a high degree of certainty. Greater expenditures may be necessary in the future with the advent of new laws and regulations pertaining to public companies. If we are not able to comply with these requirements in a timely manner, the market price of our Class A shares could decline and we could be subject to sanctions or investigations by the SEC, the Canadian Securities Administrators, the applicable stock exchanges or

 

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other regulatory authorities, which would require additional financial and management resources. Because the JOBS Act has only recently been enacted, it is not yet clear whether investors will accept the more limited disclosure requirements that we may be entitled to follow while we are an emerging growth company. To the extent investors are not comfortable with a more limited disclosure regime, they may not be comfortable purchasing and holding our Class A shares if we elect to comply with the reduced disclosure requirements. We also expect that, as a public company, it will be more expensive for us to obtain director and officer liability insurance.

You will suffer immediate and substantial dilution.

The initial public offering price per Class A share is substantially higher than our net tangible book value per Class A share immediately after the offering. As a result, you will pay a price per Class A share that substantially exceeds the book value of our assets after subtracting our liabilities. At our offering price of $         per Class A share, you will incur immediate and substantial dilution in the amount of $         per Class A share. See “Dilution.”

As a result of the FPA and FERC’s regulations in respect of transfers of control, absent prior authorization by FERC, neither we nor PEG LP can convey, nor will an investor in our company generally be permitted to obtain, a direct and/or indirect voting interest in 10% or more of our issued and outstanding voting securities, and a violation of this limitation could result in civil or criminal penalties under the FPA and possible further sanctions imposed by FERC under the FPA.

We are a holding company with U.S. operating subsidiaries that are “public utilities” (as defined in the FPA) and, therefore, subject to FERC’s jurisdiction under the FPA. As a result, the FPA requires us or PEG LP, as the case may be, either to (i) obtain prior authorization from FERC to transfer an amount of our voting securities sufficient to convey direct or indirect control over any of our public utility subsidiaries or (ii) qualify for a blanket authorization granted under or an exemption from FERC’s regulations in respect of transfers of control. Similar restrictions apply to purchasers of our voting securities who are a “holding company” under the Public Utility Holding Company Act of 2005, or “PUHCA,” in a holding company system that includes a transmitting utility or an electric utility, or an “electric holding company,” regardless of whether our voting securities are purchased in this offering, subsequent offerings by us or PEG LP, in open market transactions or otherwise. A purchaser of our voting securities would be a “holding company” under the PUHCA and an electric holding company if the purchaser acquired direct or indirect control over 10% or more of our voting securities or if FERC otherwise determined that the purchaser could directly or indirectly exercise control over our management or policies (e.g., as a result of contractual board or approval rights). Under the PUHCA, a “public-utility company” is defined to include an “electric utility company,” which is any company that owns or operates facilities used for the generation, transmission or distribution of electric energy for sale, and which includes EWGs such as our U.S. operating subsidiaries. Accordingly, absent prior authorization by FERC or a general increase to the applicable percentage ownership under a blanket authorization, for the purposes of sell-side transactions by us or PEG LP and buy-side transactions involving purchasers of our securities that are electric holding companies, no purchaser can acquire 10% or more of our issued and outstanding voting securities. A violation of these regulations by us or PEG LP, as sellers, or an investor, as a purchaser of our securities, could subject the party in violation to civil or criminal penalties under the FPA, including civil penalties of up to $1 million per day per violation and other possible sanctions imposed by FERC under the FPA.

As a result of the FPA and FERC’s regulations in respect of transfers of control, and consistent with the requirements for blanket authorizations granted thereunder or exemptions therefrom, absent prior authorization by FERC, no purchaser of our common shares in this offering, or subsequent offerings of our voting securities, will be permitted to purchase an amount of our securities from us that would cause such purchaser and its affiliate and associate companies to collectively hold 10% or more of our voting securities outstanding on a post-offering basis. Additionally, purchasers in this offering should manage their investment in us in a manner consistent with FERC’s regulations in respect of obtaining direct or indirect “control” of our company. Accordingly, following the completion of this offering, absent prior authorization by FERC, investors in our common shares that are electric holding companies are advised not to acquire a direct and/or indirect voting interest in 10% or more of our issued and outstanding voting securities, whether in connection with an offering by us or PEG LP, open market purchases or otherwise.

 

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Provisions of our organizational documents and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our Class A shares.

Upon the completion of this offering, we anticipate our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the shareholders of our company may deem advantageous. These provisions will:

 

   

authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

   

limit the ability of shareholders to remove directors only “for cause” if PEG LP and its respective affiliates (other than our company) collectively cease to own more than 50% of our shares;

 

   

prohibit our shareholders from calling a special meeting of shareholders if PEG LP and its respective affiliates (other than our company) collectively cease to own more than 50% of our shares;

 

   

prohibit shareholder action by written consent, which requires all shareholder actions to be taken at a meeting of our shareholders if PEG LP and its respective affiliates (other than our company) collectively cease to own more than 50% of our shares;

 

   

provide that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings.

These anti-takeover defences could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire. See “Description of Capital Stock.”

Future sales of our shares in the public market could lower our Class A share price, and any additional capital raised by us through the sale of equity or convertible debt securities may dilute your ownership in us and may adversely affect the market price of our Class A shares.

We may issue and PEG LP may sell additional shares in subsequent public offerings. We may also issue additional shares, convertible debt securities or other types of securities which are convertible or exchangeable into our shares to finance future acquisitions. After the completion of this offering, we will have              Class A shares authorized and              Class A shares outstanding. The number of outstanding shares includes              Class A shares that we are selling in this offering, which may be resold immediately in the public market. All of the remaining Class A shares, or approximately             , or     % of our total outstanding shares, are restricted from immediate resale under the lock-up agreements between our current shareholders and the underwriters described in “Underwriting,” but may be sold into the market in the near future. These Class A shares will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of the underwriters, is 180 days after the date of the closing of this offering, subject to compliance with the applicable requirements under Rule 144 of the U.S. Securities Act and under Canadian securities laws relating to sales by a control person.

We cannot predict the size of future issuances of our Class A shares or the effect, if any, that future issuances and sales of our shares will have on the market price of our shares. Sales of substantial amounts of our shares (including sales pursuant to PEG LP’s registration rights and shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our Class A shares. See “Certain Relationships and Related Party Transactions” and “Shares Eligible for Future Sale.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical fact included in this prospectus are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements in this prospectus speak only as of the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to:

 

   

our ability to complete construction of our construction projects and transition them into financially successful operating projects;

 

   

fluctuations in supply, demand, prices and other conditions for electricity, other commodities and RECs;

 

   

our electricity generation, our projections thereof and factors affecting production, including wind and other conditions, other weather conditions, availability and curtailment;

 

   

changes in law, including applicable tax laws;

 

   

public response to and changes in the local, state, provincial and federal regulatory framework affecting renewable energy projects, including the potential expiration or extension of the U.S. federal PTC, ITC, and the related U.S. Treasury grants and potential reductions in RPS requirements;

 

   

the ability of our counterparties to satisfy their financial commitments or business obligations;

 

   

the availability of financing, including tax equity financing, for our wind power projects;

 

   

an increase in interest rates;

 

   

our substantial short-term and long-term indebtedness, including additional debt in the future;

 

   

competition from other power project developers;

 

   

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

   

development constraints, including the availability of interconnection and transmission;

 

   

potential environmental liabilities and the cost and conditions of compliance with applicable environmental laws and regulations;

 

   

our ability to operate our business efficiently, manage capital expenditures and costs effectively and generate cash flow;

 

   

our ability to retain and attract executive officers and key employees;

 

   

our ability to keep pace with and take advantage of new technologies;

 

   

the effects of litigation, including administrative and other proceedings or investigations, relating to our wind power projects under construction and those in operation;

 

   

conditions in energy markets as well as financial markets generally, which will be affected by interest rates, currency exchange rate fluctuations and general economic conditions;

 

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the effective life and cost of maintenance of our wind turbines and other equipment;

 

   

the increased costs of, and tariffs on, spare parts;

 

   

scarcity of necessary equipment;

 

   

negative public or community response to wind power projects;

 

   

the value of collateral in the event of liquidation; and

 

   

other factors discussed under “Risk Factors.”

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions, including industry data referenced elsewhere in this prospectus. While we believe our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors”, “Cash Dividend Policy—Forecasted Cash Available for Distribution—Forecast Limitations, Assumptions and Other Considerations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements in this prospectus as well as other cautionary statements that are made from time to time in our other filings with the SEC and applicable Canadian securities regulatory authorities or public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if those results or developments are substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect.

 

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USE OF PROCEEDS

We estimate the net proceeds to us from this offering will be approximately $         million, based on an assumed public offering price of $         per Class A share, which is the midpoint of the price range set forth on the cover page of this prospectus and after deducting underwriting commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering (i) to provide $         million (i.e., the cash portion) of the consideration to be paid to PEG LP in connection with the Contribution Transactions and (ii) the remainder for working capital and general corporate purposes. Certain of our executive officers have an economic interest in PEG LP and, as a result, these individuals will have an interest in the proceeds from this offering received by PEG LP in proportion to their respective economic interest in PEG LP. See “Conflicts of Interest and Fiduciary Duties.”

In connection with the Contribution Transactions referred to in (i) above, we will also issue to PEG LP              Class A shares and              Class B shares as consideration for the assets it will contribute to us. See “Certain Relationships and Related Party Transactions” and “Structure and Formation of our Company.”

The underwriters may also purchase up to an additional              Class A shares from the selling shareholder at the public offering price, less the underwriting commissions, within 30 days from the closing date of this offering to cover overallotments, if any. We estimate that the net proceeds to the selling shareholder will be approximately $         million, based on an assumed public offering price of $         per Class A share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting commissions and assuming the exercise in full of the underwriters’ overallotment option. We will not receive any proceeds from the exercise of the underwriters’ overallotment option. The selling shareholder will pay the underwriters’ commissions and the expenses of the offering applicable to the sale of shares pursuant to the exercise of the underwriters’ overallotment option.

Upon completion of this offering, PEG LP will hold approximately     % of our outstanding Class A shares and     % of our outstanding Class B shares (or     % and     %, respectively, if the underwriters exercise their overallotment option in full), representing in the aggregate an approximate     % voting interest in our company (or     % if the underwriters exercise their overallotment option in full). The remaining     % of our outstanding Class B shares will be held by members of our management. Until the Conversion Event, neither PEG LP nor the management holders of our Class B shares will be entitled to receive any dividends on their Class B shares.

Each $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds to us by approximately $         million, after deducting underwriting commissions and estimated offering expenses payable by us, assuming the number of Class A shares offered by us, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1.0 million in the number of Class A shares offered by us would increase (decrease) the net proceeds to us by approximately $         million, after deducting underwriting commissions and estimated offering expenses payable by us, assuming the assumed public offering price of $         per Class A share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and the capitalization as of June 30, 2013 on (i) a historical basis from our predecessor’s financial statements, (ii) a pro forma basis to reflect the Contribution Transactions and other pro forma adjustments and assumptions set forth under the heading “Unaudited Pro Forma Financial Data” as if each has occurred on such date and (iii) the pro forma basis described in the immediately preceding (ii), as adjusted to give effect to the filing of our amended and restated certificate of incorporation, this offering and the use of the proceeds therefrom as set forth under “Use of Proceeds.”

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our predecessor’s historical financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Structure and Formation of Our Company,” “Use of Proceeds,” “Selected Historical Financial Data,” “Unaudited Pro Forma Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2013
     Historical
Predecessor
    Pro forma
Pattern
    Pro Forma, As Adjusted
Pattern
     (U.S. dollars in thousands, except share data)

Cash and cash equivalents

   $ 41,774      $ 41,775     
  

 

 

   

 

 

   

 

Long-term debt

   $ 1,210,564      $ 1,210,564     

Current portion of long term debt

     105,246        105,246     

Revolving credit facility

     56,000        56,000     

Total stockholders’ equity:

      

Class A common stock, $0.01 par value per share: no shares authorized or issued and outstanding, pro forma;          shares authorized and          shares issued and outstanding, pro forma, as adjusted(1)

     —          —       

Class B common stock, $0.01 par value per share: no shares authorized or issued and outstanding, pro forma;          shares authorized and          shares issued and outstanding, pro forma, as adjusted(2)

     —          —       

Preferred stock, $0.01 par value per share: no shares authorized or issued and outstanding, pro forma;          shares authorized and no shares issued and outstanding, pro forma, as adjusted

     —          —       

Additional paid-in capital

     —          —       

Capital

     477,028        478,007     

Accumulated income (deficit)

     32,054        (12,184  

Accumulated other comprehensive loss

     (17,979     (15,053  

Noncontrolling interest

     73,771        101,923     
  

 

 

   

 

 

   

 

Total equity

     564,874        552,693     
  

 

 

   

 

 

   

 

Total capitalization

   $ 1,936,684      $ 1,924,503     
  

 

 

   

 

 

   

 

 

(1) Includes (i) (a)              Class A shares offered by us to the public hereby, (b)              Class A shares to be issued to PEG LP in connection with the Contribution Transactions and (c)              Class A shares distributed by PEG LP to certain members of management immediately following the Contribution Transactions in connection with the redemption of such individuals’ interests in PEG LP, in each case, based on an initial public offering price of $         per Class A share (the midpoint of the range set forth on the cover of this prospectus), and (ii) 100 shares representing our initial capitalization, and excludes              Class A shares available for future issuance, or issuable pursuant to outstanding but unexercised awards, under our 2013 Equity Incentive Award Plan.
(2) Includes (i)              Class B shares to be issued to PEG LP in connection with the Contribution Transactions, and (ii)              Class B shares distributed by PEG LP to certain members of management immediately following the Contribution Transactions in connection with the redemption of such individuals’ interests in PEG LP, based on an initial public offering price of $         per Class A share (the midpoint of the range set forth on the cover page of this prospectus),.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of our Class A shares sold in this offering will exceed the pro forma net tangible book value per share of our Class A shares after the offering. Prior to the Contribution Transactions, PEG LP will not own any of our Class A shares or Class B shares and, accordingly, in order to more meaningfully present the dilutive impact on the purchasers in this offering, we have presented dilution in net tangible book value per Class A share to investors in this offering assuming that the issuance of our shares in connection with the Contribution Transactions has occurred and all Class B shares issued in connection therewith have been exchanged for Class A shares on a one-for-one basis. At June 30, 2013, our predecessor would have had a net tangible book value of approximately $         million, or $         per Class A share to be held by PEG LP after giving effect to the Contribution Transactions (but not this offering), and assuming all of the Class B shares issued in connection therewith are exchanged for our Class A shares a one-for-one basis. After giving further effect to this offering and the use of proceeds therefrom, the pro forma net tangible book value at June 30, 2013 attributable to our Class A shares would have been $         million, or $         per Class A share. Purchasers of our Class A shares in this offering will experience substantial and immediate dilution in net tangible book value per Class A share for financial accounting purposes, as illustrated in the following table:

 

(U.S. dollars)       

Assumed initial public offering price per Class A share

      $                

Net tangible book value per share of our predecessor as of June 30, 2013, assuming the issuance of our shares to PEG LP in the Contribution Transactions, but before the issuance and sale of shares in connection with this offering and the use of proceeds therefrom(1)

   $                   

Increase in net tangible book value per share attributable to purchasers in this offering

     
  

 

 

    

Pro forma net tangible book value per share after the Contribution Transactions, issuance and sale of shares in connection with this offering and the use of proceeds therefrom(2)

     
     

 

 

 

Immediate dilution in net tangible book value per share to new investors(3)

      $                
     

 

 

 

 

(1) Net tangible book value per share is determined by dividing net tangible book value of our predecessor as of June 30, 2013 by the number of our shares to be held by PEG LP following the Contribution Transactions, but before this offering, and assuming all of the Class B shares issued in connection with the Contribution Transactions are exchanged for our Class A shares on a one-for-one basis.
(2) Based on pro forma net tangible book value of approximately $         million divided by              of our shares to be outstanding after this offering.
(3) Dilution is determined by subtracting the net tangible book value per share after giving effect to the Contribution Transactions (but before this offering) from the initial public offering price per Class A share paid by a new investor in this offering.

 

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CASH DIVIDEND POLICY

The following discussion includes forward-looking statements relating to our cash dividend policy as well as an illustrative forecast of our possible future operating results for each of the years ending December 31, 2013 and 2014. This forecast of future operating results and cash available for distribution in future periods is based on the assumptions described below and other assumptions believed by us to be reasonable as of the date of this prospectus. However, we cannot assure you that any or all of these assumptions will be realized. These forward-looking statements are based upon estimates and assumptions about circumstances and events that have not yet occurred and are subject to all of the uncertainties inherent in making projections. This forecast should not be relied upon as fact or as an accurate representation of future results. Future results will be different from this forecast and the differences may be materially less favourable. Our operations are subject to numerous risks and uncertainties, including those discussed above under the caption “Risk Factors” and “Forward-Looking Statements.” You should not place undue emphasis on these forward-looking statements.

Our actual results in future periods may also be materially different than our predecessor’s historical financial results. For additional information regarding our predecessor’s historical financial results, you should refer to our predecessor’s audited historical combined financial statements as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012, included elsewhere in this prospectus.

General

Our Cash Dividend Policy

We intend to pay regular quarterly dividends in U.S. dollars to holders of our Class A shares. Our quarterly dividend will initially be set at $         per Class A share, or $         per Class A share on an annualized basis, and the amount may be changed in the future without advance notice. We have established our initial quarterly dividend level after considering the annual cash available for distribution that we expect our projects will be able to generate following the commencement of commercial operations at all of our construction projects and with due regard to retaining a portion of the cash available for distribution to grow our business. We intend to grow our business primarily through the acquisition of operational and construction-ready power projects, which, we believe, will facilitate the growth of our cash available for distribution and enable us to increase our dividend per Class A share over time. However, the determination of the amount of cash dividends to be paid to holders of our Class A shares will be made by our board of directors and will depend upon our financial condition, results of operations, cash flow, long-term prospects and any other matters that our board of directors deem relevant.

We expect to pay a quarterly dividend on or about the 30th day following each fiscal quarter to holders of record of our Class A shares on the last day of such quarter. With respect to our first dividend payable on or about January 30, 2014 to holders of record on December 31, 2013, we intend to pay a pro-rated dividend covering the period from the completion of this offering through December 31, 2013, based on our initial dividend level and the actual length of that period.

Our cash available for distribution is likely to fluctuate from quarter to quarter, perhaps significantly, as a result of variability in wind conditions and other factors. Accordingly, during quarters in which we generate cash available for distribution in excess of the amount required to pay our stated quarterly dividend, we may reserve a portion of the excess to fund dividends in future quarters. In addition, we may use sources of cash not included in our calculation of cash available for distribution, such as certain net cash provided by financing and investing activities, to pay dividends to holders of our Class A shares in quarters in which we do not generate sufficient cash available for distribution to fund our stated quarterly dividend. Although these other sources of cash may be substantial and available to fund a dividend payment in a particular period, we exclude these items from our calculation of cash available for distribution because we consider them non-recurring or otherwise not representative of the operating cash flows we typically expect to generate.

 

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Estimate of Future Cash Available for Distribution

Our management team considered various financial performance and liquidity measures, including net income, Adjusted EBITDA and cash available for distribution, in assessing the amount of cash that we expect our projects will be able to generate during the forecast period. Adjusted EBITDA and cash available for distribution are non-U.S. GAAP financial measures that we intend to use to assist us in determining whether we are generating cash flow at a level that can sustain, or support an increase in, our dividend.

We believe that an understanding of cash available for distribution is useful to investors in evaluating our ability to pay dividends pursuant to our stated cash dividend policy. We define “cash available for distribution” as net cash provided by operating activities, determined in accordance with U.S. GAAP, as adjusted by:

 

   

subtracting net deposits into restricted cash accounts, which are required pursuant to the cash reserve requirements of financing agreements, to the extent they are paid from operating cash flows during a period;

 

   

subtracting cash distributions paid to noncontrolling interests, which currently reflects the cash distributions to our joint venture partners in our Gulf Wind project in accordance with the provisions of its governing partnership agreement and may in the future reflect distribution to other joint venture partners;

 

   

subtracting scheduled project-level debt repayments in accordance with the related loan amortization schedule, to the extent they are paid from operating cash flows during a period; and

 

   

adding or subtracting other items as necessary to present the cash flows we deem representative of our core business operations.

For a further discussion of Adjusted EBITDA and cash available for distribution and their limitations as analytical tools, please see “Summary Historical and Pro Forma Financial Data”.

Risks Regarding Our Cash Dividend Policy

We do not have a sufficient operating history as an independent company upon which to rely in evaluating whether we will have sufficient cash available for distribution and other sources of liquidity to allow us to pay dividends on our Class A shares at our initial quarterly dividend level on an annualized basis. While we believe that we will have sufficient available cash to enable us to pay the aggregate dividend on our Class A shares for the years ending December 31, 2013 and 2014, we may be unable to pay the quarterly dividend or any amount on our Class A shares during these periods or any subsequent period. Holders of our Class A shares have no contractual or other legal right to receive cash dividends from us on a quarterly or other basis and, while we currently intend to maintain our initial dividend following the completion of this offering and to grow our business and increase our dividend per Class A share over time, our cash dividend policy is subject to all the risks inherent in our business and may be changed at any time. Some of the reasons for such uncertainties in our stated cash dividend policy include the following factors:

 

   

Our $120.0 million revolving credit facility with a four-year term, includes customary affirmative and negative covenants that will subject certain of our project subsidiaries to restrictions on making distributions to us. See “Description of Certain Financing Arrangements—Revolving Credit Facility.” Our subsidiaries are also subject to restrictions on distributions under the agreements governing their respective project-level debt. Additionally, we may incur debt in the future to acquire new power projects, the terms of which will likely require commencement of commercial operations prior to our ability to receive cash distributions from such acquired projects. These agreements likely will contain financial tests and covenants that our subsidiaries must satisfy prior to making distributions. The current financial tests and covenants applicable to our subsidiaries are described in “Description of Certain Financing Arrangements.” If any of our subsidiaries is unable to satisfy these restrictions or is otherwise in default under our financing agreements, it would be prohibited from making distributions to us, which could, in turn, limit our ability to pay dividends to holders of our Class A shares at our intended level or at all.

 

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Our board of directors will have the authority to establish cash reserves for the prudent conduct of our business, and the establishment of or increase in those reserves would reduce the cash available to pay our dividends.

 

   

We may lack sufficient cash available for distribution to pay our dividends due to operational, commercial or other factors, some of which are outside of our control, including insufficient cash flow generation by our projects, as well as unexpected operating interruptions, insufficient wind resources, legal liabilities, the cost associated with governmental regulation, changes in governmental subsidies or regulations, increases in our operating or selling, general and administrative expenses, principal and interest payments on our and our subsidiaries’ outstanding debt, tax expenses, working capital requirements and anticipated cash reserve needs. See “Risk Factors” for a discussion of the risks to which our business is subject. Our other sources of liquidity may also be insufficient to fund shortfalls in cash available for distribution to pay our dividend.

Forecasted Cash Available for Distribution

Forecast Summary

Based upon the assumptions described below and other assumptions that we believe to be reasonable as of the date of this prospectus, the forecast indicates that we will generate cash available for distribution during the years ending December 31, 2013 and 2014 of $44.5 million and $55.4 million, respectively.

Year ending December 31, 2013

Our forecast for the year ending December 31, 2013 indicates that we expect to generate cash available for distribution during the period of $44.5 million. We received approximately $173 million in cash proceeds from ITC cash grants during the second quarter of 2013 as a result of commencing commercial operations of our Santa Isabel project and a portion of our Ocotillo project during the year ended December 31, 2012 and approximately $7 million from the sale of certain local tax credits at our Santa Isabel project in the second quarter of 2013, and we expect to receive an approximately $59 million network upgrade reimbursement at our Ocotillo project in the third quarter of 2013. We expect that these cash proceeds will be reduced to a net amount of approximately $115 million after using approximately $125 million to repay or otherwise service our project-level indebtedness at these two projects. We intend to use this net amount for general corporate purposes and, if necessary, to supplement any shortfall in cash available for distribution to pay our dividends in 2014. We have excluded the impact of the ITC cash grants, local tax credit sale and the Ocotillo network upgrade reimbursement from our forecast of cash available for distribution because we do not consider these items to be representative of the cash generating ability of our business. See “Risk Factors—Risks Related to Our Financial Activities—We are subject to indemnity obligations.”

Year ending December 31, 2014

During the year ending December 31, 2014, the forecast indicates that we expect to generate cash available for distribution of $55.4 million as compared to our aggregate annual dividends payable for the period of $         million. To the extent that there is a shortfall in cash available for distribution generated by our operations during any quarter in the year ending December 31, 2014, we expect to fund any shortfall from other sources of available cash, which could include cash on hand and borrowings under our $120 million revolving credit facility. We also expect to receive a special distribution of approximately $13 million from our South Kent project in the third quarter of 2014 in part as a result of certain local tax refunds. We have excluded the impact of this distribution from our forecast of cash available for distribution because we do not consider this item to be representative of the cash generating ability of our business.

 

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Pattern Energy Group Inc.

Forecasted Cash Available for Distribution for the

Fiscal Years Ending December 31, 2013 and 2014

 

     Forecast
Year Ending December 31,
 
                 2013                              2014               
    

(U.S. dollars in thousands, except $/MWh,
share data, and as otherwise  noted)

(unaudited)

 

Operating Data:

    

MWh sold

     2,422,600        2,810,412   

Average realized electricity price ($/MWh)

   $ 86      $ 90   

Revenue:

    

Electricity sales and energy derivative settlements

   $ 208,560      $ 251,928   

Unrealized loss on energy derivative

     (18,334     (14,350

Other revenue

     20,027        2,142   
  

 

 

   

 

 

 

Total revenue

     210,253        239,720   
  

 

 

   

 

 

 

Cost of revenue:

    

Project expense

     60,210        69,244   

Depreciation and accretion

     83,216        84,644   
  

 

 

   

 

 

 

Total cost of revenue

     143,426        153,888   
  

 

 

   

 

 

 

Gross profit

     66,827        85,832   

Total operating expenses

     14,201        14,917   
  

 

 

   

 

 

 

Operating income

     52,626        70,915   

Other income (expense):

    

Interest expense

     (67,851     (65,978

Unrealized gain on interest rate derivative

     12,105        3,501   

Realized loss on interest rate derivative

     (2,071     (3,584

Equity in earnings in unconsolidated investments

     3,218        16,816   

Other income, net

     8,880        673   
  

 

 

   

 

 

 

Total other income (expense)

     (45,719     (48,572
  

 

 

   

 

 

 

Net income (loss) before income tax

     6,907        22,343   

Tax provision (benefit)

     804        1,728   
  

 

 

   

 

 

 

Net income (loss)

     6,103        20,615   

Net loss attributable to noncontrolling interest

     (10,644     (5,439
  

 

 

   

 

 

 

Net income attributable to controlling interest

   $ 16,747      $ 26,054   
  

 

 

   

 

 

 

Adjusted EBITDA(1)

   $ 153,009      $ 217,656   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net income

   $ 6,103      $ 20,615   

Deferred taxes

     774        1,698   

Unrealized gain on energy derivative

     18,334        14,350   

Unrealized gain on interest rate derivative

     (12,105     (3,501

Changes in operating assets and liabilities

     (13,647     (498

Depreciation, amortization and accretion

     89,508        89,609   

Deferred compensation expense

     610        1,220   

Distributions from unconsolidated investments

     —          6,877   

Equity in losses (earnings) in unconsolidated investments

     (3,218     (16,816
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 86,359      $ 113,554   
  

 

 

   

 

 

 

Adjustments to reconcile net cash provided by Operating Activities to Cash Available for Distribution:

    

Net cash provided by operating activities

   $ 86,359      $ 113,554   

Network upgrade reimbursements

     2,447        2,507   

Changes in operating assets and liabilities

     13,647        498   

Non-expansionary capital expenditures

     (500     (500

Sale of investment tax credits

     (7,200     —     

Distributions to noncontrolling partners

     (5,772     (6,596
  

 

 

   

 

 

 

Cash available for distribution before principal payments

     88,981        109,463   

Principal payments paid from operating cash flows

     (44,519     (54,025
  

 

 

   

 

 

 

Cash available for distribution(1)

   $ 44,462      $ 55,438   
  

 

 

   

 

 

 

Aggregate annual dividend

   $        $     

Shares of common stock, basic and diluted

    

Annual dividend per share of common stock

   $        $     

 

(1) Adjusted EBITDA, cash available for distribution before principal payments and cash available for distribution are non-U.S. GAAP measures; you should not consider Adjusted EBITDA as an alternative to net income (loss), determined in accordance with U.S. GAAP, or either cash available for distribution or cash available for distribution before principal payments as an alternative to net cash provided by operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flows. For definitions of Adjusted EBITDA and both cash available for distribution and cash available for distribution before principal payments and a complete discussion of their limitations, see footnotes 2 and 3, respectively, under the heading “Summary Historical and Pro Forma Financial Data” elsewhere in this prospectus.

 

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The following table reconciles our estimated net income to estimated Adjusted EBITDA for the forecast periods presented.

 

     Forecast Year Ending
December 31,
 
     2013     2014  
    

(U.S. dollars in thousands)

(unaudited)

 

Net income (loss)

   $ 6,103      $ 20,615   

Plus:

    

Interest expense, net of interest income

     66,170        65,305   

Tax provision

     804        1,728   

Depreciation and accretion

     83,216        84,644   
  

 

 

   

 

 

 

EBITDA

   $ 156,293      $ 172,292   
  

 

 

   

 

 

 

Unrealized loss on energy derivative

     18,334        14,350   

Unrealized gain on interest rate derivative

     (12,105     (3,501

Realized loss on interest rate derivative

     2,071        3,584   

Sales of investment tax credits

     (7,200     —     

Plus, our proportionate share in the following from our equity accounted investments:

    

Interest expense, net of interest income

     (111     14,048   

Tax provision (benefit)

     (61     285   

Depreciation and accretion

     3        16,408   

Unrealized loss (gain) on interest rate derivatives

     (3,954     (3,634

Realized loss (gain) on derivatives

     (261     3,824   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 153,009      $ 217,656   
  

 

 

   

 

 

 

Forecast Limitations, Assumptions and Other Considerations

While we believe that the assumptions underlying the forecast are reasonable in light of management’s current expectations concerning future events, we can give you no assurance that our assumptions will be realized or that we will generate cash available for distribution during the forecast periods at the levels forecasted, in which event we may not be able to pay cash dividends on our Class A shares at our initial dividend level or at all. Assumptions and estimates underlying the forecast are inherently uncertain and our future operating results are subject to a wide variety of risks and uncertainties, including significant business, economic, and competitive risks and uncertainties described under the headings “Risk Factors” and “Forward-Looking Statements” elsewhere in this prospectus. Any one of these risks or uncertainties could cause our actual results to differ materially from those contained in the forecast. Accordingly, we cannot assure you that the prospective results in the forecast above are indicative of our future performance. Our actual results will differ from those presented, and the differences could be material. Investors in our Class A shares should not regard inclusion of the forecast in this prospectus as a representation by any person that the results contained in the forecast will be achieved.

We do not undertake any obligation to release publicly the results of any future revisions we may make to our forecast or to update this forecast to reflect events or circumstances after the date of this prospectus, except as required by applicable law. In light of the above, the statement that we believe that we will have sufficient cash available for distribution, together with other sources of cash available to us, to allow us to pay our initial quarterly dividend on all of our outstanding Class A shares for the years ending December 31, 2013 and 2014 should not be regarded as a representation by us, the underwriters or any other person that we will actually generate such amount of cash available for distribution or pay such dividends.

 

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The accompanying forecast was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. The forecast included in this prospectus has been prepared by, and is the responsibility of, our management. No independent registered public accounting firm, has examined, compiled or performed any procedures with respect to the forecast, and accordingly, no independent registered public accounting firm has expressed an opinion or any other form of assurance with respect thereto.

The forecast has been prepared using assumptions that we believe to be reasonable and that are consistent with our intended course of action for the periods presented, except that they exclude any acquisitions, and all other non-recurring or unexpected charges or events. The key assumptions upon which the forecast is based are as follows:

Potential Risks

Our business is exposed to numerous risks that could have a material adverse effect on our business, financial condition, results of operations or cash available for distribution. However, we have assumed that no such risks will materialize for the purposes of preparing the forecast. For a discussion of the important factors that could cause actual results to differ materially from our forecast, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this prospectus.

Initial Public Offering and Contribution Transactions

The forecast assumes that on                     , 2013, our company will raise net proceeds of $         million in this offering through the issuance of              of our Class A shares at a price of $         per Class A share (these proceeds and share amounts are based on the midpoint of the range set forth on the cover of this prospectus). The forecast also assumes that the proceeds of this offering will be used as described in “Use of Proceeds” elsewhere in this prospectus and that in connection with the completion of this offering, we will enter into the Contribution Transactions with PEG LP. See “Structure and Formation of Our Company.”

 

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Our Projects

The forecast assumes that our projects will be comprised, during the relevant periods, of the projects set forth in the table below. We have assumed that each of our construction projects will be completed on schedule for the budgeted construction costs. Although making acquisitions is part of our strategy, we have assumed we will not make any acquisitions during the forecast period.

 

Projects

 

Location

 

Commercial
Operations

  Owned
Capacity
(MW)(1)
   

Type

  Contracted
Volume
   

Counterparty

Operating Projects

         

Gulf Wind

  Texas   Q3 2009     113      Hedge(2)     ~58   Credit Suisse Energy LLC

Hatchet Ridge

  California   Q4 2010     101      PPA     100   Pacific Gas & Electric

St. Joseph

  Manitoba   Q2 2011     138      PPA     100   Manitoba Hydro

Spring Valley

  Nevada   Q3 2012     152      PPA     100   NV Energy

Santa Isabel

  Puerto Rico   Q4 2012     101      PPA     100   Puerto Rico Electric Power Authority

Ocotillo(3)

  California   Q4 2012     223      PPA     100   San Diego Gas & Electric
    Q3 2013     42      PPA     100   San Diego Gas & Electric
     

 

 

       
        870         
     

 

 

       

Construction Projects

         

South Kent

  Ontario   Q2 2014     135      PPA     100   Ontario Power Authority

El Arrayán

  Chile   Q2 2014     36      Hedge(4)     ~75   Minera Los Pelambres
     

 

 

       
        171         
     

 

 

       
        1,041         
     

 

 

       

 

(1) Owned capacity represents the maximum, or rated, electricity generating capacity of the project in MW multiplied by our percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions.
(2) Represents a 10-year fixed-for-floating swap. See “Business—Operating Projects—Gulf Wind.”
(3) We initially commenced commercial operations on 223 MW of electricity generating capacity in the fourth quarter of 2012 and commenced commercial operations on the remaining 42 MW of electricity generating capacity from Ocotillo’s additional 18 turbines in July 2013.
(4) Represents a 20-year fixed-for-floating swap. See “Business—Construction Projects—El Arrayán.”

MWh Sold

Our ability to generate sufficient cash available for distribution to pay dividends to holders of our Class A shares is primarily a function of the volume of electricity generated and sold by our projects, which, in turn, is impacted by wind levels and the availability of our equipment to generate and transmit electricity. The volume of electricity generated and sold by our projects during a particular period is also impacted by the number of projects that have commenced commercial operations. Ninety-five percent of the electricity to be generated across our projects is committed for sale pursuant to long-term, fixed-price power sale agreements.

The forecast above for each of the years ending December 31, 2013 and 2014 is based on an assumption as to the annual electricity generation from our projects, which we refer to as the “P50 output.” The P50 output assumption reflects our management’s estimate that during the forecast periods presented, there is a 50% probability that the electricity generated across our projects will exceed the amount of MWh set forth opposite the line item “MWh sold” for each of the periods in the table above. We have adjusted our 2013 P50 output estimate to reflect actual production in the first two quarters of the year and a reduction of output with respect to certain turbine outages. In the third quarter of 2013, we are receiving payments for warranty liquidated damages

 

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with respect to turbine outages at our Ocotillo and Santa Isabel projects (see “Management Discussion and Analysis—Factors that Significantly Affect our Business—Factors Affecting Our Operational Results—Electricity Sales and Energy Derivative Settlements of Our Operating Projects”), which we have included in our forecast as other revenue.

The P50 output assumption is based on our management’s estimates of likely electricity generation during extended periods of time, including the forecast period, which is based on internal and third-party long-term wind and other meteorological studies, and the further assumption that there will be no unusual or unexpected business interruptions. Wind conditions are variable, and we have, from time to time, experienced unexpected outages. We have assumed availability level of 96.5% for wind turbine equipment across our projects, which level is consistent with and based upon our availability levels since the commencement of operations across our operating projects. We have also made allowance for a ramp-up of each project’s operation by reducing output in its first year of operations by 0.5%.

The following tables indicate our estimates of the volume of electricity that we would expect to sell at each of our projects during a typical year after all of our projects have commenced commercial operations, based upon the P50 output assumption described above.

P50 Electricity Generation at Our Projects

 

     Capacity (MW)         

Project

   Rated(1)      Owned(2)      Projected MWh  Generation(3)  

Consolidated Investments

        

Gulf Wind

     283         113         869,593   

Hatchet Ridge

     101         101         290,400   

St. Joseph

     138         138         490,420   

Spring Valley

     152         152         347,478   

Santa Isabel

     101         101         171,061   

Ocotillo(4)

     265         265         641,460   
  

 

 

    

 

 

    

 

 

 

Total for consolidated investments

     1,040         870         2,810,412   
  

 

 

    

 

 

    

 

 

 

Unconsolidated Investments

        

South Kent(5)

     270         135         456,445   

El Arrayán(5)

     115         36         116,980   
  

 

 

    

 

 

    

 

 

 

Total for unconsolidated investments

     385         171         573,425   
  

 

 

    

 

 

    

 

 

 
     1,425         1,041         3,383,837   
  

 

 

    

 

 

    

 

 

 

 

(1) Rated capacity represents the maximum electricity generating capacity of a project in MW. As a result of wind and other conditions, a project or a turbine will not operate at its rated capacity at all times and the amount of electricity generated will be less than its rated capacity. The amount of electricity generated may vary based on a variety of factors discussed elsewhere in this prospectus. See “Risk Factors.”
(2) Owned capacity represents the maximum, or rated, electricity generating capacity of the project in MW multiplied by our percentage ownership interest in the distributable cash flow of the project immediately following the Contribution Transactions.
(3) Represents our proportional share of projected MWh generation in the case of unconsolidated investments.
(4) We initially commenced commercial operations on 223 MW of electricity generating capacity in the fourth quarter of 2012 and commenced commercial operations on the remaining 42 MW of electricity generating capacity from Ocotillo’s additional 18 turbines in July 2013.
(5) Scheduled to commence commercial operations in the second quarter of 2014.

 

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Our cash available for distribution is most directly affected by the volume of electricity generated and sold by our projects because revenue from electricity sales and energy derivative settlements is the most significant component of our net income and net cash provided by operating activities. However, for a static portfolio of projects, our consolidated expenses, including operating expenses and interest payments on indebtedness, have less variability than the volume of electricity generated and sold. Accordingly, increases or decreases in the volume of electricity generated and sold by our projects typically result in a proportionately greater increase or decrease, respectively, in our cash available for distribution. For example, if the forecasted volume of electricity generated by our projects for the year ending December 31, 2014 increased by 5% or decreased by 5% (a 5% decrease corresponds to a P75 output, after taking account of the portfolio effect), we estimate that our forecasted net income, Adjusted EBITDA, net cash provided by operating activities and cash available for distribution would correspondingly increase or decrease by approximately $12 million (or approximately 20% with respect to forecasted cash available for distribution) for each such metric during the year ending December 31, 2014. For an explanation of the portfolio effect on our projected output, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that Significantly Affect our Business—Factors Affecting Our Operational Results—Electricity Sales and Energy Derivative Settlements of our Operating Projects.”

Revenues

The electricity pricing used in the forecast is based on our expected annual electricity generation and four revenue sources:

 

   

long-term, contracted sales under PPAs;

 

   

long-term, contracted sales under hedging agreements;

 

   

real-time sales in electricity spot markets; and

 

   

the sale of environmental attributes, including RECs.

The forecast assumes long-term, contracted revenues will be determined pursuant to the pricing terms of the PPAs and hedging agreements that are currently in place, that our power purchasers and hedge counterparties will fulfil their obligations under such agreements and that the exchange rate between U.S. dollars and Canadian dollars will not materially change after the date of this prospectus. With respect to an operating project’s power output not covered by PPAs or hedging agreements, the forecast assumes that such power will be sold in the spot electricity market or in REC contract sales at future spot market and REC prices, respectively, determined by reference to third-party industry forecasts, which are considered by management to be reasonable.

Project Expense

Project expense is comprised of the direct costs of operating and maintaining our projects, including labour, turbine service arrangements, land lease royalty payments, property taxes, insurance, power scheduling and forecasting, environmental costs and contractual administration. Expenses are forecast based on historical experience, land contracts, contracted service arrangements and other management estimates.

The forecast assumes our operating projects will operate within budgeted operating costs, including with respect to repair and maintenance costs, and that there will be no unusual, non-recurring or unexpected operating, repair or maintenance charges.

Derivatives

To mitigate our market risks, we have entered into, and expect to enter into, derivatives to hedge against risks related to fluctuations in energy prices at Gulf Wind and El Arrayán, interest rates on our project loans and foreign currency exchange rates. U.S. GAAP requires that, in certain circumstances, we make mark-to-market

 

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adjustments related to these derivatives. The forecast assumes that the market value of our energy derivatives will decline, and our interest rate derivatives will change, throughout the forecast period in a manner that is consistent with the forward electricity price curve and forward interest rate curves, respectively, used in our most recent month-end derivative valuation.

Depreciation and Accretion

The depreciation and accretion expense reflected in the forecast is based on the carried historical cost basis of our individual projects as reduced, where applicable, by related ITC cash grants. Depreciation is calculated using the straight-line method and an estimated useful life of 20 years. Accretion is calculated for the asset retirement or decommissioning obligation over an estimated operational life of 20 years.

Total Operating Expenses

Total operating expenses consist principally of related party general and administrative and other general and administrative expenses which reflect an estimate prepared by our management in a manner that is consistent with the historical allocations of shared costs between PEG LP and our predecessor and in accordance with the Management Services Agreement. We have also included an estimate of the incremental costs of being a public company of approximately $2 million per year.

Interest Expense

The forecast assumes that interest expense is based on the expected level of interest paid on our project-level debt facilities, fees on approximately $45 million of issued letters of credit and only limited short-term borrowings under our $120 million revolving credit facility. For each of our projects, project-level debt facilities include a fixed-loan amortization schedule, such that loan balances at any point in time are known. The project-level financings are either based on fixed interest rates or floating London Interbank Offered Rate, or “LIBOR,”—based interest rates. In the case of LIBOR-based interest rates, we have entered into interest rate swap agreements to hedge the risk of fluctuations in LIBOR.

The forecast makes the following assumptions regarding our revolving credit facility and project-level debt facilities:

 

   

our project-level debt facilities will bear interest at the rates currently applicable to our project-level facilities; and

 

   

we and our subsidiaries will remain in compliance with, and not be in default under, our revolving credit facility or any project-level debt facilities during the forecast periods.

See “Description of Certain Financing Arrangements” for a description of our project-level financing arrangements, including applicable interest rates.

 

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Our estimate of interest expense during the forecast periods and thereafter, including our proportional share of interest expense reflected in our equity in earnings in unconsolidated investments, is based on the estimated scheduled amortization for project-level indebtedness shown in the following tables:

Our Scheduled Amortization of Indebtedness(1)

 

     Forecast Year Ending December 31,         

Project

           2013                      2014              Thereafter  
     (U.S. dollars in thousands)  

Consolidated Investments

        

Gulf Wind

   $ 9,361       $ 10,275       $ 155,333   

Hatchet Ridge

     11,254         11,577         228,288   

St. Joseph

     8,196         8,690         221,851   

Spring Valley

     5,790         5,849         167,261   

Santa Isabel

     3,315         3,112         112,608   

Ocotillo

     7,293         15,640         331,166   

ITC and network upgrade bridge loans

     114,056         —           —     

Unconsolidated Investments(1)

        

El Arrayán

     2,483         3,659