EUCI FIT 2 PROGRAM M & A Activities

How We Got There

(It seemed like a good idea at the time)

&

Where We Go From Here

(Look what you got us into Ollie!) Toronto, Ontario

July 20, 2012

Basic Presentation Approach

• Define M & A – For purposes of this presentation, does not mean Mergers and Acquisitions but financing and associated activities

• In the context of the FIT 1 program means financing of a FIT project to satisfy the requirements of NTP

• Expanded under FIT 2 because of rule changes and changing nature of Ontario power market

• Includes debt and equity and focuses on (i) requirements for launch FIT 1 projects and (ii) financing requirements under FIT 2 environment

Who Is ORTECH

• Head office in Mississauga with satellite offices in Windsor and

Sarnia

• Predecessor is Ontario Research Foundation

• Active in atmospheric sciences since mid 1970’s; privatized in 1999

• Staff of 40 professionals and technicians in two divisions ORTECH

Environmental & ORTECH Power

• Principals of ORTECH Power have backgrounds as renewable

energy developers with experience in small hydro and wind –

developed, constructed & operated 3.3 MW small hydro project near

Englehart & developed Wolfe Island Ecocentre now owned and

operated by TransAlta

• Focused on consulting in 2005 after acquisition of development

business by Canadian Hydro Developers

Who Is ORTECH • ORTECH Power has two classes of clients: (i) Private

developers who use ORTECH to provide technical and

financial analytical services and (ii) financial institutions and

infrastructure investors who have financial skills but need

technical advice

• One of few renewable energy consulting firms that take

technical information and apply it to financial models to

assess economic viability of renewable projects

• Have evaluated onshore and offshore wind, hydro and solar

projects throughout North America and Europe

• Practical experience as developers and operators gives

sensitivity to unknowns such as O & M Costs and component

life cycles; special skills at finding plugged numbers

Current Ontario Power

Market • Period of falling industrial demand and increasing non-dispatchable

renewable supply

• Fixed price contracts for renewables exceeds hourly spot market price

(HOEP) by large margin

• Rapidly increasing Global Adjustment (GA) is a sensitive political

issue threatening FIT Program

• GA is difference between fixed price FIT program pricing and HOEP;

for onshore wind under FIT 1 current price in excess of $140 MWh;

HOEP averages $30-$40/MWh which means GA will increase by

$100/ MWh as FIT 1 projects reach COD

• Problem will intensify as more FIT 1 projects come on line

• Rising power prices will determine M & A activity for next few

years

Ontario Power Prices

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Ontario Market Prices

HOEP

GA

Op Reserve

on-peakminus off-peak

FIT 1 M & A Activities

• Launch Period Projects approaching NPT

• Facing Liquidated Damages over failure to meet Milestone COD

• Two principal reasons (i) over-optimistic belief in ability to complete projects on an accelerated basis and (ii) failure of REA process to live up to streamlined approval process – see demise of REA co-ordinator from expediter to receptionist

FIT 1 M & A Activities

OPA Potential Responses

• Under FIT 1 rules failure to meet Milestone NTP Date can result in cancellation of contract

• Form of Waiver precludes Supplier claiming force majeure for permitting reasons

• Unclear whether elevation of REA to the Environmental Tribunal qualifies as force majeure claim

• Given oversupply of renewable energy capacity, no incentive for OPA to be lenient

• But cancellation of FIT contracts with Domestic Content requirements will impact job creation targets under Green Energy & Economy Act.

• Classic “rock and hard place” competing policies dilemma

FIT 1 M & A Activities

• One possibility is in Section 2.4 (f) is a

NTP Deferral Notice

• Second approach is horse trading with

respect to Domestic Content levels

• Conclusion: FIT Launch projects may

be high risk leading to contingent

payments and development fees offset

by liquidated damages.

• Buyer beware.

FIT 2 M & A Activities

What’s New • Backlog of microFIT Projects – OPA reports 49,000 microFIT

applications plus additional 12,000 in draft contract stage

• Priority Point system for FIT 2 Projects: Minimum 1 point

necessary to qualify for FIT Contract. Highest point level for

Community, Aboriginal and MUSH sector projects

• microFIT Projects present opportunity to broaden base of

support for FIT Program with minimal increase in Global

Adjustment

• Community, Aboriginal and MUSH sector projects also

increase FIT support, serve broader social objectives, but less

Global Adjustment neutral

FIT 2 M & A Activities Opportunities & Fearless Forecasts

• 192 FIT 1 projects had reached COD

as of December 31, 2011

• As of December 31, 2011 the OPA had awarded

1,968 FIT Contracts leaving 1,772 to reach NTP. Of

the 1,968, 1,792 or 91% were solar PV

• Given FIT 2 price reductions and falling module

prices these contracts are extremely valuable

• Watch for intense competition for these contracts as

they approach NTP and are required to submit

financial plans

FIT 2 M & A Activities

More Fearless Forecasts

• Emphasis on microFIT is an opportunity for

aggregators and mortgage lenders

• Aggregators will require debt funding; due

diligence activity for banks and other lenders to

assess economic and technical merits of microFIT

projects

• Community and Aboriginal projects will require

innovative financial structures to ensure maximum

adders

FIT 2 M & A Activities Land Mines, Booby Traps & Roadside IED’s

• Given oversupply and falling demand large scale

projects likely to be deferred – possibly until 2017

when SBG issue is expected to disappear

• Failure to meet Milestone COD cannot be redeemed

through repurchase of missed days

• For Priority Point projects, drop in Participation

Level = Event of Default

• Annual Pricing Review adds further uncertainty

• Long-term project planning and development

expenditures threatened by inherent political risk

FIT 2 M & A Activities

Thank you for your attention

Copies of this presentation are available on the ORTECH website –

www.ortech.ca

Or email or telephone achant@ortech.ca

905-822-4120 ext. 463