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Noble Environmental IPO Faces Crosswinds

This upcoming offering is an attractive wind-power play, but investors need to be aware of massive debt.

Noble Environmental Power's planned IPO brings good news and bad news for investors interested in the alternative energy sector.

The good news is that traders will finally have a pure-play stock in the growing market for wind power. Stocks such as

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have shown recent momentum due in large part to their respective operations in the sector.

The bad news is that, because the market is still nascent, investing in the IPO means putting money in a company with no revenue on its income statement to date -- and nearly $1 billion in debt.

The Essex, Conn., wind-energy company is filing for a public offering -- under the ticker NEPI -- only four years after it was founded. It's seeking as much as $375 million in proceeds to finance wind-turbine supply agreements and project developments.

Noble began operating its first wind parks in March 2008. So it doesn't have any revenue through its first 46 months in business. (Financials for the first quarter of 2008 aren't yet disclosed.)

But what it does have is $72 million in accumulated losses and massive debt, more than half of which comes due between one and three years from now.

And what does Noble have to offer for those losses and all that debt? A capacity to produce wind energy that will be growing for several years. Its wind farms can currently produce 282 megawatts of power from three wind farms in New York. By the end of the year, capacity will rise to 747 megawatts, as farms in New York and Texas come on line.

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That's just the start. Noble has bought turbines and secured enough land to set up another 1.2 gigawatts (1 gigawatt equals 1,000 megawatts) worth of wind farms by 2010.

And it's in the process of securing both land and turbines necessary to add another 1.9 gigawatts that are scheduled to begin operations through 2012. (Wind farms rarely produce at peak capacity, so the actual power generated is likely to be much less.)

Noble Environmental will sell the energy produced by its first three wind parks to the New York Independent System Operator, or NYISO, which oversees the state's wholesale electricity markets. This quarter, it's also selling to Babcock & Brown Renewable Holdings the assets of its wind-power projects in two Michigan counties. The company says that, at the $85.1 million price, it doesn't expect to recognize a loss.

Nearly half the $45 billion in Noble's operating expenses last year came from a change in the fair value of a derivative contract. Last June, the company entered into a 10-year hedging arrangement with Credit Suisse designed to reduce its exposure to price volatility on the spot market.

Accounting methods forced Noble to record a loss on the contract. The company explains in its prospectus, "As the wind generating assets associated with this instrument were not yet generating power at December 31, 2007, and this instrument was not designated as a hedge under SFAS 133, we recorded the decrease in the fair value as a liability and a corresponding charge to operations."

Factoring out the costs related to that contract, the company had $23.9 million in operating expenses, 8% more than in 2006. In 2006, that figure was nearly triple 2005 operating expenses of $7.6 million.

After ramping up in 2005, its first two full years in operations, Noble Environmental kept a lid on expense growth last year while still laying the groundwork to expand capacity.

Salary and wages rose to $10.6 million last year from $9.8 million in 2006 as the company's headcount grew to 138 from 91. (It has risen to 152 since the prospectus was filed.)

General and administrative costs, meanwhile, more than doubled to $8.3 million from $4.0 million, as fees for legal and accounting services as well as rent, utilities and recruiting increased.

Noble doesn't show signs of being reckless with spending the money it has raised through debt. It's also unlikely that the $375 million it could raise via the IPO would be spent frivolously.

But the prospectus does sketch a profile of a company that may be heading for the public markets a little too early: four years of operations, high debt and no revenue. Normally, those are the kinds of signs that cause prudent investors to think twice.

And they do mean that Noble Environmental will be bringing with it more risk than most IPO candidates have -- especially with the possibility that federal tax incentives for wind companies might not be renewed this year.

Still, other factors could offset that risk: An early entry into an energy niche that could see strong growth over the coming decade, and -- through its disclosures -- a glimpse into the financial condition of other wind-energy companies that may be headed for the public markets in the months ahead.