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iGreen Energy 2013 |

Green Energy 2013Renewable energy M&A activity in the Americas

A CohnReznick report produced by Clean Energy Pipeline

iGreen Energy 2013 |

About the research

This report provides insight into mergers and acquisitions (M&A) activity in the renewable energy sector in the Americas. The findings are based on a survey of over 800 senior executives in the renewable energy industry worldwide. Survey respondents include corporates, investors, service providers, debt providers and governments.

The report was written in collaboration with Clean Energy Pipeline, a specialist renewable energy research, data and financial news provider. Transaction data and statistics included in this report have been extracted directly from Clean Energy Pipeline’s databases. Clean Energy Pipeline is a division of VB/Research.

This report was completed between April and May 2013 and covers views from across the renewables industry, including corporates, financial investors, debt providers, governments and service providers. Survey respondents were spread across North America (30%), Europe (30%), and Asia-Pacific (30%), with the Middle East, Africa and South America accounting for the remainder.

To supplement the results, interviews were conducted with the following executives:

● Karl Olsoni, Managing Director, Capital Dynamics ● Scott Mackin, Managing Partner and Co-President, Denham Capital ● Hugo Bouchard, Chief Investment Officer and General Manager, Eolectric ● Alejandro Burgaleta, CFO, Gestamp Wind ● Fintan Whelan, Co-founder and Corporate Finance Director, Mainstream Renewable Power ● Bill Sutherland, Senior Managing Director – Project Finance, Manulife Financial Corporation ● Marc Schmitz, Senior Vice President, Rabobank ● Paul Walker, CFO, RES Americas ● Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance

Division, Union Bank

30%North

America

10% Other

30%Europe 30%

AsiaPacific

Regional breakdown

1Green Energy 2013 |

Contents

Foreword ....................................................................................................... 3

Executive summary ...................................................................................... 4

Putting 2012 into perspective ..................................................................... 6 ● Global installation hits new high but M&A volumes decline ● Global Clean Energy M&A will keep growing ● The Americas in focus

Looking ahead – global shift towards emerging markets .................... 10 ● Renewables now competing in emerging markets without subsidies ● Retroactive subsidies have far reaching consequences ● The USA – an unclear subsidy future ● Subsidies in emerging markets – just getting going ● Low natural gas prices may boost M&A activity in the USA ● It’s all about acquisition finance

Who’s buying and selling? ........................................................................ 20 ● Financial investors are the likeliest buyers ● The rise of the pension fund ● Utilities: divestment for re-investment continues ● International markets continue to benefit from Asia-Pacific interest ● USA looks inward while Canada sets sights overseas

Focusing in on deal terms ......................................................................... 32 ● Banks are becoming more aggressive ● US pre-construction stage solar PV assets command a premium

The renewables country A-list ................................................................... 36 ● USA: still way out in front despite subsidy cuts ● Canada: ranked in the top five for the first time ● Mexico: primed for renewables push

Sectors in focus ........................................................................................... 43 ● Solar - the hottest sector ● Biomass still has its fans but deal activity waning ● Onshore wind

2 | Green Energy 2013


Foreword

It is the right time to be involved in renewable energy in the Americas. Annual installed wind and solar capacity broke a new record last year, system costs continue to fall, and technology risk has declined significantly. Such is the growing maturity of the sector that bellwether institutional investors now view operational renewable assets as a safe haven.

That said, investing or acquiring in the renewable sector hasn’t been an easy ride recently and the journey isn’t over yet. During the past few years, a series of subsidy mechanisms have ended or been curtailed in the USA. The low price of natural gas continues to gnaw at the competitiveness of new build projects. Meanwhile, the supply chain across the Western world has come under intense competition from Asia. The backdrop behind this is the worst financial crisis for decades, which continues to impact the ability of projects to raise financing.

Weighing up these positives and negatives, we are hugely encouraged by the optimism apparent in the findings of this report. One of the main causes for optimism is that renewable energy is now competing directly, and without subsidies, with new build fossil fuel-power projects in many emerging markets around the world. A prime example was the $88 million sale and leaseback transaction of the 23.4MW Punta Lima wind farm situated in Puerto Rico, where we advised Gestamp Wind.

It is also positive news that the USA remains, by some margin, the most attractive country globally for renewables investment and M&A. This finding echoes the many conversations we and our colleagues at CohnReznick have had with international investors.

Indicative of the health of the sector are the 591 transactions that were announced in 2012 globally. This represented a 58% increase on the 375 deals announced in 2009. We are encouraged by the fact that 90% of survey respondents predict that the number of sub-$500 million deals will increase, or at the very least be maintained, at this high level during the next 18 months.

We would like to thank everyone who participated in this survey and the interviewees that have given up their valuable time to contribute to the report. We would also like to thank Clean Energy Pipeline for assisting us in producing this report. We hope you find it insightful.

Timothy Kemper CPA, Partner Co-National Director Renewable Energy Industry Practice

Anton Cohen CPA, Partner Co-National Director Renewable Energy Industry Practice


Executive summary

M&A activity will keep growing

Global renewable energy M&A activity has grown at a steady pace during the past four years. A total of 591 acquisitions valued at $37.8 billion were announced in 2012, a 58% increase by number on the 375 deals totalling $42.1 billion announced in 2009. An absence of large deals resulted in the decline in the total value of announced transactions.

Survey respondents expect this level of activity to continue – c.90% predict the number of sub-$500 million M&A transactions to increase or at the very least remain stable during the next 18 months. Given that deals of this size accounted for 97% of all M&A deals globally in 2012, 2013 looks set to be another strong year.

The Americas accounted for 42% of the total value of M&A deal activity last year. Some 217 renewable energy M&A deals valued at $15.9 billion were announced in 2012, representing a 9% increase in value on the 225 deals totalling $14.6 billion announced in 2011. Wind and solar were the most active sectors, accounting for a combined 78% of the total value of all transactions.

The USA – still the undisputedleaderThe USA is by far the most attractive country for global corporates and investors. Almost 45% of survey respondents plan to invest in or acquire in the US renewable energy sector during the next 18 months, more than double the number targeting 2nd placed Germany. The USA is highly attractive due to its strong economy and attractive long term incentive frame work.

Transaction activity underlines the growing attractiveness of the US – US M&A deals totalled $10.1 billion in 2012, more than twice the

$4.8 billion announced in 2011. The surge was fuelled by a rush to acquire and finance pre-operational wind farms in anticipation of the expiration of the US wind energy production tax credit in December 2012 and growing interest in pre-construction stage solar projects.

The US is also attractive to institutional investors due to its large number of operating renewable energy assets that are being put up for sale by their original developers. Some 60GW of wind capacity was operational at the end of 2012, more than in any other country bar China.

However, challenges are bubbling up to the surface. Another lively debate regarding the wind energy PTC renewal will almost certainly take place at the end of this year. Attacks on renewable portfolio standards are also creating uncertainty in some states. Ongoing low natural gas prices remain a thorn in the side of new renewables development.

Canada – a new globalrenewables leader Canada shot up the Renewables Country A-list in the last 12 months – 20% of survey respondents are targeting Canada for clean energy investments during the next 18 months, significantly more than 12% last year. In fact, Canada is now the fifth most attractive country globally for renewable energy investment, behind only the USA, Germany, China and the UK.


The opportunity for renewables investment in Canada is compelling but it varies significantly by province. Most opportunities lie in Ontario, where there exists a large number of projects with locked in feed-in tariffs that are ready to be built. Illustrating this point, only c.2,000MW of wind and c.500MW of solar capacity was operational at the beginning of 2013. However, the province expects to install 10.7GW of non-hydro renewable energy capacity by the end of 2015.

Other provinces offer longer term growth potential. Quebec awarded 800MW of wind capacity in May 2013 to help meet its 2015 target of 4,000MW installed capacity. Similarly, British Columbia is considering procuring a sizeable volume of wind energy in the next decade to meet the growing power demands of its burgeoning population and industrial base, in addition to a series of large-scale liquefied natural gas terminals.

Renewables offer real alternative to fossil fuels in Latin AmericaRenewable energy projects are now cost competitive with newly built fossil fuel power plants in many Latin American countries including Mexico, Brazil, Chile, Ecuador and the Caribbean. In Brazil, wind has been so successful competing against combined cycle gas turbine (CCGT) plants on price that the government has implemented measures to ensure wind does not win all new auctioned capacity.

Renewables hitting grid parity is only one reason why many Latin American countries have become more attractive from an investment standpoint. Some 70% of survey respondents

believe renewable energy assets in emerging markets represent attractive investment propositions even without subsidies, given prevailing high energy prices.

Survey respondents are particularly enamoured with Mexico. Some 12% plan to acquire and or invest in Mexico in the next 18 months, significantly more than the 3% in last year’s survey. Mexico is also attractive following implementation of national climate change legislation in October 2012, which legally binds the country to reduce its carbon emissions by 30% by 2020 and 50% by 2050.

Solar - the hottest ticket

Solar is the most attractive sector for North American survey respondents. Some 63% of survey respondents are targeting investments or acquisitions in solar PV, more than the number targeting biomass (45%), onshore wind (41%) or biofuels (39%). Solar’s attraction lies in the plethora of subsidy mechanisms available throughout the Americas including the solar US investment tax credit (ITC) and Ontario’s feed-in tariff. System costs also continued to decrease rapidly in 2012, increasing prospective returns for investors in new build assets.

In the longer term, Latin America will undoubtedly become even more attractive for solar investment. Many countries across Latin America are blessed with fantastic solar resources and a growing number, including Brazil, Mexico, Chile and Uruguay, have now established solar subsidy mechanisms or development frameworks.

The rush to acquire solar PV assets across the Americas has already begun. Some 68 solar M&A deals were announced in the Americas totalling $5.0 billion in 2012, representing a 61% increase by value on the $3.1 billion worth of solar acquisitions announced in 2011.


Putting 2012 into perspective

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Global renewable energy M&A activity

Source: Clean Energy Pipeline

Global installation hits new high but M&A volumes decline

Installed new renewable energy capacity continued to grow rapidly in 2012. A record 44.8GW of wind capacity was installed globally in 2012, representing a 10% increase on the 40.6GW brought online in 2011. Not quite as impressive but following a similar trend, new solar PV capacity reached 30GW in 2012 matching the record-breaking volumes achieved in 2011.

From an M&A perspective, the sector was less active. After a 42% increase in the value of M&A activity in 2011, the value of announced

deals fell 14% to $37.8 billion in 2012. This was caused by a 4% decline in the number of announced deals and an absence of $1 billion+ deals. Only five $1 billion+ deals with a total combined value of $8.6 billion were announced in 2012, compared with seven similar sized transactions (total value: $14.3 billion) in 2011. However, looking over a longer timeframe, last year’s M&A activity looks healthy based on historic trends – 591 acquisitions were announced in 2012, a 58% increase on the 375 deals announced in 2009.


Global Clean Energy M&A will keep growing

Looking at 2013 and beyond, survey respondents are almost unanimous in predicting that M&A activity will remain buoyant – nine out of ten survey respondents believe that the number of sub-$500 million M&A transactions will increase or at the very least remain stable during the next 18 months. Given that deals of this size accounted for 97% of all transactions globally in 2012, 2013 looks set to be another bumper year.

However, when it comes to larger $1 billion+ deals there is no consensus – 37% of survey respondents predict that the number of mega deals will decrease in the next 18 months, slightly more expect the number to be maintained (43%) and the remainder (20%) forecast an increase.

How do you expect the following aspects of the renewable energy M&A environment to evolve during the next 18 months?


Deals involving delayed and / or contingent payments rather than up front lump sums

58% 35% 7%

60% 31% 9%

61% 30% 9%

54% 36% 10%

43% 45% 12%

44% 31% 25%

26% 48% 26%

40% 32% 28%

20% 43% 37%

Competition for targets

Number of deals of less than $50 million

Size of deals

Number of deals between $50 million and $0.5 billion

Valuations for renewable energy projects

Number of deals between $0.5 billion and $1 billion

Valuations for renewable energy companies

Number of deals of more than $1 billion

Increase Stay the same Decrease


The Americas in focus

In 2012 217 renewable energy M&A deals valued at $15.9 billion were announced in the Americas, representing a 9% increase in value on the 225 deals totalling $14.6 billion announced in 2011. Growth was underpinned by US deals, which accounted for $10.1 billion of total activity last year, more than twice the $4.8 billion announced in 2011. The surge in US activity was fuelled by two factors; a rush to acquire and finance pre-

TArgET(S) STAKE ACquirErS(S) DATE AnnOunCED

EnTErPriSE VALuE SELLEr(S)

MuLTiPLE (OPErATiOnAL PrOjECTS OnLy)

579MW Antelope Valley Solar Project (AVSP) consisting of two solar plants (Under-Construction)

100% MidAmerican Renewables LLC

December 2012

$2,500 million SunPower Corp. n/a

680MW Canadian wind portfolio comprising 363MW of operational capacity and 317MW of planned capacity

60% Mitsui & Co Ltd., Fiera Axium Infrastructure Inc.

December 2012

$2,030 million GDF SUEZ SA n/a

Wind farms Minonk, Sandy Ridge and Senate (400MW)

60% Algonquin Power & Utilities Corp.

March 2012 $1,230 million Gamesa Corporacion Tecnologica SA

$3.1 million/MW

Abengoa transmission concessions (STE, ATE, ATE II and ATE III)

50% Compania Energetica de Minas Gerais (CEMIG)

March 2012 $982 million Abengoa SA n/a

351MW portfolio of 19 hydroelectric facilities

100% Brookfield Renewable Energy Partners LP

December 2012

$760 million NextEra Energy Resources LLC

$2.16 million/MW

BVP SA (including its four wind farms with a capacity of 157.5MW)

100% CPFL Energias Renováveis S.A.

February 2012

$621 million Servtec, Fundo de Investimentos e Participacoes Amazonia Energia

n/a

Tapoco (four station hydroelectric project - 378MW)

100% Brookfield Renewable Energy Partners LP

June 2012 $600 million Alcoa Power Generating Inc.

$1.58 million/MW

1500MW portfolio of operational wind farms

Minority Caisse de dépôt et placement du Québec

January 2013 $500 million Invenergy LLC n/a

Iberoamericana de IBENER SA (including its run-of-river hydroelectric powerplants - Peuchén and Mampil with a capacity of 140MW)

100% Duke Energy Corp.

December 2012

$415 million CGE Generacion

$2.96 million/MW

Wind farms Papalote Creek I, Papalote Creek and Stony Creek (432.5MW)

50 PensionDanmark A/S

October 2012

Undisclosed E.ON Climate & Renewables

n/a


operational wind farms in anticipation of the expiration of the US wind energy production tax credit in December 2012; and growing interest in acquiring pre-construction stage solar projects due to a combination of falling equipment costs and regulatory uncertainty surrounding the solar PV investment tax credit. A table of some of the most notable M&A transactions announced in the Americas in 2012 and early 2013 is outlined below.

● ▲


Sector breakdown – Americas M&A activity in 2012

Wind

46%Solar

32%Hydro

16%

Biofuels4%

Biomass2%

Country breakdown – Americas M&A activity in 2012



Chile$450 million

Brazil$2.1 billion

USA$10.2 billion

Canada$2.9 billion

DEAL VALuE

Peru $138.6 million

Colombia $73.5 million

Argentina $30.9 million

Mexico $28.9 million

Panama $15.4 million

Uruguay $15.4 million

Nicaragua $12.0 million


In this section we examine the principal issues that are affecting the sector, how they might influence its development and in turn how this could impact M&A transaction activity.

Renewables now competing in emerging markets without subsidies

One of the principal reasons why M&A activity is predicted to remain buoyant during the next 18 months is the ongoing decline in equipment and system costs.

Costs for a number of renewable energy technologies continued to fall significantly in 2012. Solar PV crystalline modules are currently priced on the spot market at Eur1.02 per watt in Germany and Eur 0.74 per watt in China (Source: pvXchange), equating to a 37% and 46% decline, respectively, on the price 12 months ago.

Costs have fallen to such an extent that renewable energy has now achieved grid parity in a number of emerging markets. This means that, depending on the country, renewables new build can compete directly against fossil fuels new build without subsidies. In Brazil wind has been so successful in competing with combined cycle gas turbine (CCGT) plants that regulators have separated wind and CCGT auctions this year so wind does not secure all the auctioned capacity.

“In Brazil, they are separating out wind into its own auction distinct from CCGT and hydro,”

confirmed Scott Mackin, Managing Partner and Co-President of Denham Capital. “In the past people would have said this is being done as wind needs higher prices to sustain itself. But, actually, in this case wind has been winning more MWs in these auctions so consistently that the market regulators have to protect CCGT and hydro from wind to ensure diversity of supply.”

Renewable energy has now achieved grid parity in Chile. For example, Mainstream Renewable Power recently closed a $70 million project financing for its 33MW Negrete Cuel wind farm in southern Chile without securing a PPA. Wind power is cheap relative to current energy prices in Chile so any electricity generated can be sold directly on the spot market.

“Wind power is already operating at grid parity in Chile,” confirmed Fintan Whelan, Co-founder and Corporate Finance Director at Mainstream Renewable Power, which has a large pipeline of Chilean renewable energy projects. “Diesel generation is very fuel-expensive and there are the transport logistics of taking it from the coast to where new mines may be located.

“ ”

Looking ahead – global shift towards emerging markets

The marginal cost of energy generation with fuel on the island of Puerto Rico is very high. Wind is delivering to the grid at a high discount to the retail cost of energy.

Alejandro Burgaleta, CFO of Gestamp Wind


To what extent do you agree that renewable energy projects are attractive investment opportunities even without subsidy in emerging markets due to high energy prices?

Wind and solar farms located right next to a mine can displace a lot of uncertainty around logistics and fuel price.”

Renewable energy is also at grid parity in many other Latin American countries including Mexico, Ecuador and the Caribbean. “The marginal cost of energy generation with fuel on the island of Puerto Rico is very high. Wind is delivering to the grid at a high discount to the retail cost of energy,” explained Alejandro Burgaleta, CFO of Gestamp Wind. “We are 20-30% lower than the avoided generation cost. In Mexico the regulation means you have to have a PPA with a private company that wants its own consumption. You can still say that renewables is at grid parity in Mexico as the projects are offering lower prices than what companies were paying before.”


Survey respondents agree – 70% believe that renewable energy assets in emerging markets represent attractive investment propositions even without subsidies, given high energy prices in many emerging markets.

In established markets, where there is often excess power supply, the situation is entirely different. In these markets new build renewable energy is usually in direct competition with operational fossil fuel projects. “One needs subsidies to support new renewables development in Europe and North America given the state of the power markets today, but it is important to consider that just about all rational new energy build needs some sort of government support when competing with existing operational assets in those markets,” explained Scott Mackin, Managing Partner and Co-President of Denham Capital.

Agree

Disagree

Stro

ngly

disa

gree

19% 51% 26%

Strongly agree

4%


Retroactive subsidies have far reaching consequences

To what extent do you agree with the statement that Spain’s planned 7% energy tax is damaging your confidence in investing in other European countries with large national debts?

Strongly agree

Agree

Disagree

Strongly disagree

25%

55%

17%3%


Although renewable energy costs continued to decline in 2012, investment in a number of core markets was undermined by retroactive changes to subsidies. The most extreme example was in Spain, where the Government announced the introduction of a 7% tax on electricity sales in December 2012 to reduce its Eur24 billion tariff deficit. The tax effectively functions as a retroactive cut to feed-in tariff subsidies by lowering the revenue an asset can generate over the course of its life and in turn reducing investors’ rate of return. The tax followed the announcement in January 2012 that feed-in tariffs would be suspended for all new projects.

Spain is not unique in introducing retroactive cuts. Both Bulgaria and Romania announced retroactive cuts in 2012. Even Germany proposed a one year 1.5% retroactive cut to subsidy payments for all operating renewable energy projects, although this plan has since been shelved.

Put simply, retroactive policies undermine investor confidence beyond the countries where they are applied – 80% of surveyed respondents are no longer confident about investing in European countries with large national debts due to Spain’s 7% energy tax.

“Subsidy schemes are certainly under more pressure,” confirms Marc Schmitz, Senior Vice President at Rabobank. “Spain is essentially closed for business at the moment due to their retrospective changes in regulations, and there is also less activity in Italy. Banks are withdrawing from markets where there are fears over subsidy schemes but they are still willing to finance projects where there is a stable regime and good projects.”


The USA – an unclear subsidy future

To what extent do you agree with the statement that the one year extension of the US wind energy Production Tax Credit (PTC) has renewed your interest in the US market?

Strongly agree

Agree

Disagree

Strongly disagree

9%

54%

32%

5%


The USA also suffered from subsidy uncertainty in 2012. The wind energy production tax credit (“PTC”), which provides a 2.2 cent tax credit for each kilowatt-hour of electricity generated from a wind farm during the first ten years of operation, was due to expire at the end of 2012. Although it was finally extended for a further year in January 2013, the uncertainty surrounding its renewal meant that many projects were delayed or mothballed in 2012. This explains why the pipeline of financeable projects is unusually weak. According to the American Wind Energy Association, only 43MW of wind capacity was under construction at the end of 4Q12. This is a fraction of the 13,131MW installed during 2012.

The only good news is that projects can now qualify for the PTC provided they have commenced construction by the end of 2013. Previously, projects only qualified if they had commenced operations by the PTC expiry date. This effectively gives developers a further two years to prepare projects for financing and construction.

Despite the delay in renewing the PTC, 63% of survey respondents that were not previously targeting wind energy in the US have renewed their interest following the extension. One large investor that has returned to the US market is the Canadian LifeCo Manulife. “After an absence we have returned to the US wind market and are considering a number of projects,” confirmed Bill Sutherland, Senior Managing Director - Project Finance, at Manulife Financial Corporation. “I think activity will be muted given the urgent build-out of projects last year in response to the expiry of the PTC and the time required to re-build the construction-ready pipeline now that the PTC has been extended.”

The PTC aside, a number of key US renewable energy subsidies ceased during the past two


years. The much maligned 1705 loan guarantee program, which guaranteed loans to utility-scale renewable energy projects and companies, expired in September 2011. Three months later the 1603 cash grant program, which gave generators a cash grant in lieu of tax credits, also ended.

Worryingly,there are concerns today that certain US states may scale back their Renewable Portfolio Standards (RPS), which require utilities to generate a certain proportion of their energy from renewable sources. For example, a series of bills were put forward in North Carolina in May 2013 to maintain renewables at current levels and override the existing mandate to source 12.5% of the state’s electricity from renewables by 2021. None of these bills were passed before the deadline of North Carolina’s current legislative season, although the intent of public representatives to repeal the RPS is indicative of similar plans across the US. For example, an Ohio state senator is currently trying to repeal the state’s Alternative Energy Portfolio Standard, which calls for 25% of energy to come from renewable sources by 2025. RPS are also under pressure in New Jersey, New Mexico, Kansas and Arizona.

“There are certainly concerns about the long term structure of the PTC and state RPS targets,” confirmed Paul Walker, CFO of RES Americas. “A lot of utilities have adequate renewable energy certificates for the short term so don’t need to install renewables right now. Most RPS targets really start to bite over the second half of this decade. If there were any reductions or removals in state RPS targets these would have the most significant effect on renewables towards the second half of the decade. However, wind installations will still be very much affected in the short term if these targets were reduced.”


Subsidies in emerging markets – just getting going

Outside Europe and North America, subsidy frameworks and procurement processes are just starting to be rolled out. Brazil was one of the first countries to actively encourage investment in renewable energy and has managed a series of regular renewable energy tender auctions since December 2009. More recently, South Africa awarded preferred bidder status to 28 renewable energy projects during the first renewable energy IPP procurement round. All 28 projects secured financing totalling $5.7 billion in November 2012.

Interestingly, many emerging markets have opted not to introduce European style feed-in tariffs to subsidise renewable energy investment. “South Africa has done well to choose the right framework,” explained Scott Mackin, Managing

Partner and Co-President of Denham Capital. “They thought about a feed-in tariff, but the price movements on solar and wind were so radical that the concept you could put a feed-in tariff out there for a year or two and then revisit it, as is the case in Europe, seemed to have passed the market by.”

Mexico has also introduced a range of subsidies as part of its climate change bill, which was enacted in April 2012 and legally binds the country to a 50% cut in carbon emissions by 2050. This explains why these markets are grabbing the attention of international developers. “Mexico has a great framework for renewable energy and will be one of our key markets in the future,” explained Hugo Bouchard, Chief Investment Officer and General Manager of Eolectric, a developer of wind energy projects in Canada. “Industrial and commercial users pay a high price for electricity that is close to 15 cents per KWh in some regions of Mexico. The country also has a great wind resource and has set up a system that enables electricity users to sign PPAs with private producers and then to secure the electricity from the grid with a discount of up to 10% of the price they pay the Federal Electricity Commission. The grid operator is also obliged to provide access to everyone. It is simply a system that works. There will be a lot more capacity there in the next five years.”

“”

Mexico has also introduced a range of subsidies as part of its climate change bill, which was enacted in April 2012 and legally binds the country to a 50% cut in carbon emissions by 2050.

$5.7 billionTotal financing secured by the 28 renewable energy projects during South Africa’s first renewable energy IPP procurement round


Low natural gas prices may boost M&A activity in the USA

The pace of new global renewable energy installations is heavily influenced by the cost of traditional fossil fuels. This is perhaps most evident in North America, where low natural gas prices have reduced the relative competitiveness of utility-scale renewable energy projects markedly since 2009.

In 2012 the price of natural gas fell to an average of US$2.75/mmBtu. Most industry observers expect prices to rise during the next 24 months but not to return to the historic levels of US$8-$12/mmBtu witnessed in 2007–2008.

“I think it is important to note how renewable energy is much more competitive than it was five years ago as a provider of power,” explained Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance Division of Union Bank. “However, the problem is that natural gas prices and resultant power prices are so low that it inhibits the opportunity for new generation, particularly renewables. There is therefore a bit of a lull in the market. If natural gas prices go back to where they were five years ago you would see a big

push toward renewables, but I really don’t see that happening near term.”

Low natural gas prices directly impact renewable energy through lowering the price of PPAs utilities are willing to offer developers. Karl Olsoni, Managing Director of Capital Dynamics, puts the impact into context. “Wholesale prices are low given low gas prices,” he said. “Developers used to be able to get PPAs from utilities at around 10% discounts to retail prices. Now prices are at a 40-50% discount to utility prices. This isn’t really a good value proposition for us.”

Paradoxically, low natural gas prices may be good news for US M&A activity. “I think M&A activity will increase in the US,” predicts Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance Division of Union Bank. “We have already seen a lot of assets change hands recently and I expect this to continue. When a lot of new projects are being built people are focused on greenfield projects. But when things slow down as they are now, companies start to look around at their competitors and try to optimise their portfolio through M&A.”

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It’s all about acquisition finance

According to survey respondents, the availability of acquisition finance (debt and equity) has the greatest impact on M&A activity. It is more important than the need to meet regulatory targets; the need for consolidation; or the need to improve green credentials. Unfortunately, the availability of acquisition finance has not improved during the last 18 months – almost 85% of surveyed respondents believe that acquisition

finance is either less available or that availability has not improved.

The level of M&A activity is also heavily influenced by the availability of project debt finance. If project finance is restricted, small developers may be forced to sell to larger developers with larger balance sheets, increasing M&A activity in the short term.

93%

91%

86%

90%

76%

77%

73%

56%

Very significant factor Significant factor

Improving green credentialsImproving green credentials

Meeting regulatory targetsMeeting regulatory targets

Accessing new marketsAccessing new markets

Distressed assets coming to marketDistressed assets coming to market

Availability of good quality opportunitiesAvailability of good quality opportunities

Need for consolidationNeed for consolidation

Desire for assets with long term stable returnsDesire for assets with long term stable returns

Availability of fundingAvailability of funding

53% 40%

52% 39%

43% 43%

37% 53%

28% 48%

25% 52%

22% 51%

15% 41%

How significant will the following factors be in driving M&A activity in the renewable energy sector over the next 18 months?



However, over the longer term an absence of project finance reduces the number of projects commencing operations and as a result the stock of acquirable assets and M&A activity.

Project debt finance is also showing signs of weakness. Only $156 billion of project finance was invested in renewable energy assets globally in 2012, a 13% decrease on the $180 billion invested in 2011. This is the first time that project finance has posted an annual decrease. In 2013 this trend shows no signs of abating. Only $24 billion of project finance was invested globally in 1Q13, the lowest quarterly level since the beginning of 2009.

Which option best describes your experience of securing finance for acquisitions of renewable energy projects or companies now compared to 12 months ago?

Much harder

Moderately harderNo measurable difference

Easier

15%

34%34%

17%



Global renewable energy project finance


0

100

200

300

400

500

600

0

10

20

30

40

50

60

Rest of the world

Asia

North America

Europe

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

4Q09

3Q09

2Q09

1Q09

Number of deals

Deal

val

ue ($

bill

ion) N

umber of deals


Who’s buying and selling?

Financial investors are the likeliest buyers

Financial investors are the most active acquirers of renewable energy assets. In 2012 financial investors, including private equity funds, infrastructure funds, pension funds and life insurance companies announced 124 acquisitions valued at $9.7 billion, less than the 111 acquisitions totalling $12.6 billion announced in 2011, but significantly ahead of the $6.1 billion and $5.0 billion announced in 2010 and 2009, respectively.

Survey respondents are confident that financial investors will remain active – over 50% anticipate that infrastructure funds will be very active in acquiring and investing in renewable energy assets in the next 18 months, making them the top ranked potential investor. Last year they were ranked second behind independent power producers.

How active will the following institutions be in acquiring and investing in the renewable energy sector over the next 18 months?


Hedge fundsHedge funds

GovernmentsGovernments

Pension fundsPension funds

Sovereign wealth fundsSovereign wealth funds

Multilateral financial organisations (e.g. EIB, IFC)Multilateral financial organisations (e.g. EIB, IFC)

Renewable energy equipment manufacturersRenewable energy equipment manufacturers

UtilitiesUtilities

Independent power producers (IPP)Independent power producers (IPP)

Infrastructure fundsInfrastructure funds

97%

Very active Some activity

94%

94%

91%

90%

87%

84%

75%

73%

51% 46%

48% 46%

37% 57%

34% 57%

30% 60%

27% 60%

27% 57%

21% 54%

15% 58%


As the sector’s technology has matured and the volume of operating assets has increased, infrastructure funds have become more active. Longer term investors including pension funds and life insurance companies are also getting involved. They are being lured by the stable, often inflation-linked returns offered by operational renewable assets given the current low bond yield environment.

“Ultimately the best long term holders of solar and wind assets will be institutional investors and large strategics looking for inflation protected stable cash flows,” explained Scott Mackin, Managing Partner and Co-President of Denham Capital.“In Europe, over 50% of installed wind turbines

“”

Ultimately the best long term holders of solar and wind assets will be institutional investors and large strategics looking for inflation protected stable cash flows. In Europe, over 50% of installed wind turbines are owned by institutional investors. We are seeing the same trend globally whether it is the US or an emerging market such as South Africa.

are owned by institutional investors. We are seeing the same trend globally whether it is the US or an emerging market such as South Africa.”

Among the investment community only private equity funds are reducing their exposure in the sector. “There have never been a whole lot of private equity firms that are willing to take development risk on renewable energy projects,” explained Scott Mackin, Managing Partner and Co-President of Denham Capital. “However, the number has probably gone down in the past two years because there is really no juice left in developing renewable energy projects in the US and Western Europe, which is where most private equity firms are focused.”

Scott Mackin, Managing Partner and Co-President of Denham Capital


The rise of the pension fund

Pension funds are poised to increase their investment activity – 27% of surveyed participants expect pension funds to be very active acquirers of renewable energy assets in the next 18 months,

almost double the percentage recorded in last year’s survey. A table of ten of the most notable investments by pension funds and life insurance companies in 2012 and early 2013 is shown below:

inVESTOr/ACquirEr STAKE TArgET/FunDing rECiPiEnT

DATE AnnOunCED DEAL VALuE DEAL TyPE

Friends Life Group N/A Drax – coal to biomass conversion project (UK)

April 2013 $115 million Corporate debt

Metal Industries Benefit Funds Administrators (MIBFA)

N/A Mergence Renewable Energy Debt Fund (South Africa)

April 2013 $109 million Fund investment

Caisse de dépôt et placement du Québec*

25% 630MW London Array offshore wind farm – phase one (UK)

February 2013 $786 million Acquisition

Industriens Pensionsforsikring A/S, PKA A/S

22.5% each 288MW Butendiek offshore wind farm (Germany)

February 2013 Undisclosed Project equity investment

Caisse de dépôt et placement du Québec

Minority (exact stake undisclosed)

1.5GW portfolio of operational wind capacity (USA and Canada)

January 2013 $500 million Acquisition

PensionDanmark A/S 50% 433MW portfolio of three wind farms (USA)

October 2012 Undisclosed Acquisition

Public Sector Pension Investment Board

N/A Isolux Corsán (Spain) July 2012 $633 million Equity investment

Caisse de dépôt et placement du Québec

10% Innergex Renewable Energy (Canada)

July 2012 $98 million Private placement

PensionDanmark A/S N/A 216MW Northwind offshore wind farm (Belgium)

June 2012 $44 million Project debt finance

PGGM 33.75% 396MW Marenas Renovables wind farm (Mexico)

February 2012 Undisclosed Acquisition

Notes: This table only includes direct investments and acquisitions by pension funds and insurance companies into renewable energy projects and companies. It does not include investments made by infrastructure funds that are in part backed by pension funds and insurance companies. *It has been widely reported that this acquisition is close to being officially announced, but it has not yet been confirmed by either parties

▲27%of surveyed participants expect pension funds to be very active acquirers of renewable energy assets in the next 18 months



When it comes to pension funds, the most significant recent development in the past year is that they are starting to assume construction-stage risk. By way of example, two Danish pension funds Industriens Pension and PKA A/S participated in the equity financing of the 288MW Butendiek offshore wind farm situated in German waters in February 2013. Construction of the project commences in the spring of 2014 and the project is not scheduled to be operational before the summer of 2015.

As expected, long term financial investors are most interested in the mature renewable sectors - onshore wind, hydro and solar PV.

However, offshore wind is becoming much more appealing – 76% of survey respondents believe that operating offshore wind assets will be attractive to long term investors in the next 18 months, a 41% increase on the proportion recorded in last year’s survey.

To date, pension funds have invested equity in renewable energy assets either through investing in infrastructure funds or through direct investments in large-scale projects. Marc Schmitz, Senior Vice President at Rabobank, believes that pension funds are ready to go one step further and start investing in renewable energy debt. “Pension funds will become more active lenders

To what extent are the following operating renewables assets attractive to investors seeking long-term low-risk returns, such as pension or infrastructure funds?


90%

89%

87%

76%

74%

65%

Very attractive Somewhat attractive

Solar thermal

Biomass

Offshore wind

Solar PV

Hydro

Onshore wind 46% 44%

42%

36%

50%

54%

48%

47%

51%

26%

20%

17%


Utilities: divestment for re-investment continues

To what extent do you agree with the statement that major European utilities will continue to divest non-core renewables assets to bolster balance sheets and to free up capital for new offshore wind investments?

Strongly agree

Agree

Disagree

Strongly disagree

16%

59%

23%2%


One of the key findings of last year’s report was that major utilities were divesting non-core renewable energy assets to rebuild their balance sheets and free up capital to invest in offshore wind assets. This trend accelerated in 2012 – last year major utilities announced the sale of 32 renewable energy asset portfolios valued at $12.5 billion, more than double the $5.4 billion of asset sales announced in 2011. In the first quarter of 2013, utilities have announced disposals of 16 renewable energy asset portfolios valued at $2.0 billion. Survey respondents expect this trend to continue.

In 2012 European utilities or subsidiaries of European utilities accounted for 87% of all assets

divested by utilities ($10.9 billion). However, these utilities own renewable energy assets worldwide, meaning utilities’ divestment strategies have generated significant dealflow globally. For example, French utility GDF Suez agreed to sell a 60% stake in its 680MW Canadian renewable energy portfolio, valued at over C$2 billion (US$2.03 billion), to Japanese conglomerate Mitsui & Co. and Canada-based asset management firm Fiera Axium Infrastructure in December 2012. Similarly, German utility company E.ON announced the sale in October 2012 of 50% stakes in three US wind farms totalling 433MW to Danish pension fund PensionDanmark. A table of notable utility divestments is shown opposite.

in the next three years,” he said. “Their attitude has changed since 2009. Pension funds need to be compensated for inflation and renewable energy assets with inflation-linked tariffs can do

this. They want an annual 5% return and this is not available through many traditional investments. Sustainability is also becoming a higher priority for pension funds.”


SELLEr ASSETS DiVESTED STAKE DiVESTED

EnTErPriSE VALuE ACquirEr DATE

AnnOunCED

MuLTiPLE (OPErATiOnAL PrOjECT OnLy)

GDF Suez SA 680MW Canadian wind portfolio comprising 363MW of operational capacity and 317MW of planned capacity (Canada)

60% $2.00 billion Mitsui & Co. Ltd., Fiera Axium Infrastructure Inc.

December 2012

n/a

DONG Energy A/S

277MW Borkum Riffgrund offshore wind farm (pre-construction)(Germany)

50% $1.70 billion KIRKBI A/S, Oticon Foundation

February 2012

n/a

EDP Renováveis S.A.

599MW portfolio of wind farms (USA)

49% $1.45 billion Borealis Infrastructure

November 2012

$2.4 million per MW

EDP Renováveis S.A.

644MW portfolio of wind projects comprising 615MW of operational capacity and 29MW of planned capacity (Portugal)

49% $1.34 billion China Three Gorges

December 2012

$2.2 million per MW, 8.7xEBITDA

E.ON AG E.ON Energy from Waste (Germany)

51% $1.30 billion EQT Infrastructure II

December 2012

1.8xRevenues

GDF Suez SA IP Maestrale Investments Ltd (comprising 550MW installed wind capacity in Italy and 86MW installed wind capacity in Germany) (Italy & Germany)

80% $1.18 billion ERG SpA December 2012

$1.9 million per MW, 8.2xEBITDA

NextEra Energy Resources LLC

White Pine Hydro Investments LLC (comprising 351MW operating hydro capacity in the USA)(USA)

100% $760 million Brookfield Renewable Energy Partners

December 2012

$2.2 million per MW

Iberdrola SA Iberdrola Renovables France SAS (comprising 321.4MW of operational wind capacity) (France)

100% $529 million GE Energy Financial Services, MEAG, EDF Energies Nouvelles

December 2012

$1.6 million per MW

Iberdrola SA IBERDROLA Renewables Polska (comprising 184.5MW of operational wind capacity and a wind project of undisclosed assets) (Poland)

75% $356 million Energa SA, PGE Energia Odnawialna SA

February 2012

$1.9 million per MW

Electricite de France SA

150MW Massif du Sud wind farm (Canada)

50% $344 million Enbridge Inc. December 2012

$2.3 million per MW

DONG Energy A/S

111.5MW portfolio of three operating wind farms and a 700MW development portfolio (Poland)

100% $319 million Energa SA, PGE Energia Odnawialna SA

February 2013

n/a

Iberdrola SA 62.9MW of operational wind capacity (Germany)

100% $81.9 million MVV Windenergie GmbH

December 2012

$1.3 million per MW

E.ON AG 433MW US wind portfolio comprising the Papalote Creek I & II and the Stony Creek wind farms (USA)

50% Undisclosed PensionDanmark A/S

October 2012

n/a


205.5MW Lakefield wind farm (USA)

50% Undisclosed Abu Dhabi National Energy Company (TAQA)

January 2013

n/a


205.5MW Lakefield wind farm (USA)

50% Undisclosed Marubeni Corp. October 2012

n/a



In many cases, the proceeds from renewables divestments are being reinvested to develop large-scale offshore wind farms. For example, Danish state-owned power producer DONG Energy sold a 50% stake in its 277MW Borkum Riffgrund I offshore wind farm in May 2012. Three months later, Dong acquired a portfolio of three offshore wind projects in Germany from PNE Wind AG for an upfront cash consideration of Eur57 million and deferred payments of up to Eur100 million. “It is really balance sheet repair,” confirmed Scott Mackin, Managing Partner and Co-President of Denham Capital. “They all have separate reasons to shore up their balance sheets. They are picking and choosing where they will go and are trying to align their existing portfolio to where their growth is going to be.”

“”The $12.5 billion worth of divestments announced by utilities in 2012 represented a third of the total value of all M&A activity globally.

While these divestments really only represent asset pruning for the major utilities, the sheer quantity of assets divested has a significant impact on overall M&A activity levels. To put this in context, the $12.5 billion worth of divestments announced by utilities in 2012 represented a third of the total value of all M&A activity globally.

In parallel, utilities are expected to rein in new acquisitions. According to survey respondents utilities are now ranked third most active acquirer behind infrastructure funds and independent power producers. Two years ago they were ranked most likely active acquirer.


International markets continue to benefit from Asia-Pacific interest

Last year Asia-Pacific acquirers started to make significant investments outside their domestic markets. Asia-Pacific companies participated in 38 acquisitions in 2012 (36 in 2011) valued at $6.0 billion ($1.9 billion in 2011) outside Asia.

Japanese acquirers lead the way, with the likes of Marubeni Corp., Innovation Network

Corporation of Japan, Mitsui, Mitsubishi and Sumitomo all acquiring renewable energy assets in North American and/or Europe in 2012. In fact, international acquisitions by Japanese firms represented 45% ($2.7 billion) of all Asian international M&A activity in 2012. A table of the most notable international acquisitions by these companies in 2012 and early 2013 is shown below.

inVESTOr/ACquirEr STAKE TArgET/FunDing rECiPiEnT DATE AnnOunCED

EnTErPriSE VALuE

Mitsubishi Corp, Innovation Network of Japan (INCJ)

Joint 85% stake

Solar Holding, owner of a 42MW portfolio of operational solar plants (Italy)

March 2013 Undisclosed

Mitsubishi Corp 50% 55MW Tranche 1 of the Toul–Rosières solar project – operational (France)

January 2013 Undisclosed

Mitsubishi Corp 50% 129MW Eneco Luchterduinen offshore wind farm – pre-construction (The Netherlands)


Mitsui & Co 50% 164MW Bii Stinu wind farm –construction stage (Mexico)


Mitsui & Co 30% 680MW wind portfolio comprising 363MW of operational capacity and 317MW of planned capacity (Canada)

December 2012 $2,030 million

Mitsubishi Corp Undisclosed Star Energy Geothermal, owner of the 227MW Wayang Windu geothermal plant (Indonesia)

December 2012 Undisclosed

Sumitomo Corp 25% 550MW Desert Sunlight solar project – pre-construction (USA)

October 2012 Undisclosed

Marubeni Corp 50% 206MW Lakefield wind farm – operational (USA)

October 2012 Undisclosed

Mitsubishi Corp* Undisclosed 100MW portfolio of operational solar capacity (Canada)

June 2012 Undisclosed

Mitsubishi Corp 49% HelWin 2 and DolWin 2 offshore wind transmission projects (Germany)

March 2012 $916 million

Sumitomo Corp 50% 299MW portfolio of two planned wind farms (USA)

March 2012 Undisclosed

Marubeni Corp, Innovation Network of Japan (INCJ)

100% Seajacks International (UK) March 2012 $850 million

Mitsubishi Corp 49% Borwin 1 & 2 offshore wind transmission projects (Germany)

February 2012 $649 million

Mitsubishi Corp 33.75% 396MW Marenas Renovables wind farm (Mexico)

February 2012 Undisclosed


Note: *The projects were at the construction stage when the deal was announced. The acquisition will be complete when the projects reach commercial operations.


Survey respondents are confident that Japanese investors will remain active during the next 18 months – 28% of survey respondents expect new

acquirers and investors to emerge from Japan, placing the country in fifth place, up from seventh place last year.

From which regions or countries are new investors and acquirers most likely to enter the global renewable energy market over the next 18 months?


OtherOther

ItalyItaly

SpainSpain

Central AmericaCentral America

FranceFrance

Central & Eastern EuropeCentral & Eastern Europe

Other Western EuropeOther Western Europe

AustralasiaAustralasia

AfricaAfrica

Southeast AsiaSoutheast Asia

KoreaKorea

UKUK

CanadaCanada

South AmericaSouth America

IndiaIndia

JapanJapan

GermanyGermany

Middle EastMiddle East

USAUSA

ChinaChina 71%

62%

37%

37%

28%

22%

21%

20%

18%

14%

12%

12%

11%

8%8%

7%7%

6%6%

5%5%

5%5%

2%2%

25%

“”

28% of survey respondents expect new acquirers and investors to emerge from Japan, placing the country in fifth place, up from seventh place last year.


Japan is not just a source of equity. Japanese banks allocated $2.3 billion of project debt finance to renewable energy projects in North America and Europe in 2012, over 3x the volume invested in 2009. In North America, the landmark deal was the project financing of a portfolio of three Canadian wind farms totalling 248MW and two Canadian solar PV farms totalling 20MW by Japan Bank for International Cooperation and a group of Japanese commercial banks including The Bank of Tokyo-Mitsubishi UFJ, Ltd., Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation.

$2.3 billionTotal project debt finance allocated by Japanese banks to renewable energy projects in North America and Europe in 2012.

Chinese companies are still expected to be active but less so than in prior years. Some 71% of survey respondents expect new investors and acquirers to emerge from China (84% last year). There are essentially two reasons why Chinese companies acquire in this sector: solar module manufacturers want to acquire pre-construction stage projects so they can deploy their equipment; and equipment manufacturers want to acquire distressed manufacturing assets to obtain a physical presence in Europe and North America.


USA looks inward while Canada sets sights overseas

North American acquirers were particularly active in 2012, announcing 167 acquisitions totalling $13.3 billion globally, a 7% increase on the $12.4 billion worth of acquisitions announced in 2011 and significantly more than the $7.4 billion of acquisitions announced in 2010. Acquisitions by North American companies and investors accounted for 35% of the total value of M&A activity globally in 2012.

Looking at 2012, the big change is that most US acquisitions were domestic. Last year US companies and investors only announced 32 acquisitions totalling $2.0 billion of assets situated outside the US, significantly less than the $6.8 billion worth of acquisitions of non-US assets announced in 2011. The significant disparity in cross-border activity is partly due to a small number of large cross-border acquisitions in 2011, including GE’s $3.2 billion acquisition of French renewable component supplier Converteam, and Universal Resources Development’s $1.7 billion acquisition of Philippine clean energy developer True Green Energy Group. However, survey respondents confirm that acquirers from the US are becoming less active internationally - 62% of survey respondents expect new investors and acquirers to emerge from the USA in the next 18 months, significantly less than the 81% recorded in last year’s survey.

In contrast, Canadian investors are increasingly targeting overseas markets. Canadian acquirers announced 21 acquisitions totalling $2.9 billion of non-Canadian renewable energy assets in 2012, a significant increase on the 19 acquisitions totalling $424 million announced in 2011. The increase has been underpinned by Canadian power producers and financial investors acquiring stakes in operational US projects. Notable transactions include Algonquin Power & Utilities’ $238 million acquisition of a 60% stake in 350MW of operational US wind capacity from Gamesa in December 2012 and Brookfield Renewable Energy Partners’ $760 million purchase of 19 hydro facilities situated in Maine USA, in December 2012.

In 2012 most Canadian outbound investment was allocated to the USA – 97% ($2.8 billion) of the total value of all international investment by Canadian companies and investors. However there are signs that this may change in 2013. For example, Canadian pension fund Caisse de dépôt et placement du Québec is reportedly on the verge of acquiring a £500 million ($786 million) stake in the 630MW London Array UK offshore wind farm, the world’s largest operating offshore wind farm.

167The number of acquisitions announced by North American acquirers, totalling $13.3 billion.


Focusing in on deal terms

Banks are becoming more aggressive

The cost of project finance debt varies significantly by region and technology. In Europe, solar PV farms, onshore wind farms and biomass plants are currently financed at an average of 320 bps above Libor. In North America similar projects expect to secure better terms by on average 40 bps.

Rates are low in North America because Life Insurance Companies are now allocating significant capital to renewables and the banking sector has rebounded more quickly than in Europe. The decline in the number of projects seeking financing has also forced banks to offer more competitive rates. “Historically, a lot of the debt financing capacity in this market has come from European banks,” explained Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance Division of Union Bank.

“Eighteen months ago their pricing was inhibited by what was going on in Greece and other countries. While pricing had momentarily tightened it once again increased reflecting

funding difficulties of various market participants. Banks are now being much more aggressive on pricing and terms. The banks that are still in the market seem to be on a more solid footing. More importantly, there are not really a lot of projects in the US seeking debt financing right now. There is a dearth of quality deals and banks are eager to get their share. We were in the 275-325bps above Libor range 12-18 months ago with lots of mini-perm structures. Today the market is plus or minus 50 basis points below with much longer tenors being offered.”

The expiration of the 1603 cash grant program is also inhibiting developers from raising project debt financing, since the equity requirement now needs to be financed through tax equity. There is limited scope for debt to be brought into tax equity-financed projects since the cash flows are swallowed up by tax equity investors and are therefore unavailable to be used to repay debt. This is forcing banks to compete more aggressively to participate in transactions. “A lot of wind projects were financed utilising the cash grant, which has now expired. Now we are

0 50 100 150 200 250 300 350 400

Offshore wind farms

Biomass plants

Onshore wind farms

Solar PV projects

Average bps above Libor

Global average Europe North America

What is the current cost of non-recourse construction term loans for the following technologies in the markets in which you operate?



On average, what valuation multiples on a per MW basis are the following assets currently being transacted at in the markets in which you operate?

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

Pre-construction stageonshore wind projects

Pre-construction stagesolar PV projects

Construction stageonshore wind projects

Construction stagesolar PV projects

Operationalonshore wind projects

Operationalsolar PV projects

$ million per MW

Global average Europe North America


largely focused on projects that include PTCs as part of their economics,” continued Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance Division of Union Bank. “As a result, most wind projects are now being financed utilizing unlevered partnership flip structures, where the debt opportunity is more limited. In this structure debt is really limited to construction financing and possibly a back leverage of the sponsor’s investment. That is one reason why the banks are so aggressive when they do have an opportunity.”

Anecdotal evidence suggests tax equity margins are also decreasing due to a reduction in PPA prices. “The margins that tax equity players were working with are not sustainable now as energy prices in PPAs have dropped significantly,” confirmed Alejandro Burgaleta, CFO of Gestamp Wind. “There is just less of the pie to share. Tax equity providers have adjusted their expectations as otherwise projects just would not have got built. With projects being so tight the returns that were available last year are not anymore.”

US pre-construction stage solar PV assets command a premium

There is limited disparity in valuations between Europe and America except when it comes to pre-construction stage solar PV assets. According to survey respondents, in North America these assets are currently being

acquired for $1.2 million per MW, 3x the $0.4 million per MW average valuation in Europe.

This is essentially because the US solar investment tax credit, which provides


investors with a 30% tax credit on residential and commercial projects, and is not due to expire until 2016. This has triggered a series of acquisitions of pre-construction stage assets. Most notably, MidAmerican Renewables acquired the planned 579MW Antelope Valley Solar Projects (AVSP) from SunPower Corp in December 2012 for an undisclosed sum. The co-located projects, which are located in Kern and Los Angeles Counties, are the largest permitted projects in the world.

Appetite for pre-construction stage solar PV is much more muted in Europe because subsidies are under threat. In March 2012, Germany enacted feed-in tariff cuts of 20% - 30% for sub-5MW solar PV projects and

removed subsidies entirely for new projects larger than 10MW. In August, Italy cut subsidies for solar PV projects by an average of 35% as its new Conto Energia V subsidy programme came into effect. This prompted a marked decrease in the valuation of planned projects - according to surveyed respondents, valuations of pre-construction stage solar PV projects in Europe fell by an average of 8% in the last 18 months.

It is a similar story in the supply chain. According to survey respondents, EBITDA-positive European renewable energy companies are currently being acquired for a multiple of 4.7x revenues, which is at a discount to exit multiples achieved by North American (5.1x) and Asian (5.2x) companies.

What valuation multiples on a revenue basis are renewable energy companies at the following stage currently being transacted at in the markets in which you operate?

0 1 2 3 4 5 6

Europe

North America

Asia Pacific

Revenue multiples

EBITDA positive Revenue generating but pre-EBITDA



The renewables country A-list

The top five countries and regions for M&A and investment globally in the next 18 months are the USA, targeted by 44% of survey respondents, Germany (21%), China (21%), the UK (20%) and Canada (20%). The most significant risers were the UK, which was only selected by 12% of survey respondents last year, Canada (selected by 12% of respondents last year), Central

In which geographies are you seeking to invest and/or acquire in the renewable energy sector during the next 18 months? (Global corporates and investors)

USA Germany

UK

South America

France Central America

Australasia Southeast Asia Italy Japan

Spain Korea

Central and Eastern Europe

India Africa Middle East

Canada

China

44% 21%

20%

18%

12% 12% 12% 12% 11% 9%

6% 4%

17% 14% 13% 13%

20%

21%


America (selected by 12% of respondents this year, 3% last year) and South America (selected by 18% of respondents this year, 13% last year). The biggest faller was India, which is now being targeted by 14% of survey respondents, well below the 23% achieved last year. This section explains why corporates and investors favour certain countries within the Americas.


USA: still way out in front despite subsidy cuts

The US is by far the most attractive country for financial investors and corporates. Almost 45% of survey respondents plan to invest in or acquire in the US renewable energy sector during the next 18 months, more than double the number targeting 2nd placed Germany. The US benefits from a stable economy and attractive incentive frameworks, including the solar investment tax credit and the wind production tax credit. The parlous state of the European clean energy sector also explains why survey respondents are so enamoured with the USA.

By European standards US subsidies look stable but clouds are gathering. There is likely to be a fierce debate over the renewal of the wind energy PTC before the end of this year. Growing attacks on state renewable portfolio standards are also a concern. From a cost perspective, the

low level of natural gas prices continues to make it difficult for renewables to compete from a cost of energy perspective. None of these are positive forward looking indicators. “The driver behind a slowing in the marketplace is that power prices are very low and a lot of renewables mandates have already been satisfied or otherwise are expected to be met,” explained Lance Markowitz, Senior Vice President and Manager of the Leasing and Asset Finance Division of Union Bank. “So there is not the same push to build renewable energy projects.”

On a more positive note, the tax equity market for US renewable energy projects seeking financing is fairly strong, with a large number of financial and non-financial investors eager to participate. A table of recent notable tax equity transactions is outlined below:

PrOjECT LOCATiOn DEVELOPEr FinAnCing AMOunT TAX EquiTy PrOViDEr FinAnCing

DATE

Limon Wind Energy Center (400MW)

Colorado NextEra Energy Resources LLC

$884 million Bank of America Corp. / NextEra Energy Resources LLC / Wells Fargo & Company / JPMorgan Chase Bank NA / State Street Corp.

October 2012

Mountain Wind II wind farm (79.8MW)

Wyoming Edison Mission Group $400 million TIAA-CREF / Cook Inlet Region Inc.

February 2012

Prairie Rose wind farm (200MW)

Minnesota Enel North America Inc. $305 million GE Energy Financial Services August 2012

Post Rock wind farm (201MW)

Kansas RMT Inc. $247 million GE Capital / Union Bank / MetLife Inc.

December 2012

Canadian Hills wind farm (298.45MW)

Oklahoma Apex Wind Energy Inc. $225 million JPMorgan Capital Corp. / Metlife Capital Credit / Union Bank

November 2012

21%



“The supply of tax equity has grown and the terms remain similar to 12-18 months ago,” confirmed Markowitz. “With the expiry of the cash grant, the amount of tax equity required for each transaction has increased. So both supply and demand have gone up in certain ways. The banking community is recovering so they are able to play much more actively in the tax equity space. There are also more non-financial participants in the tax equity market. The likes of GE and Google for example are being quite active, but the non-financials don’t really move the market as they tend to be less aggressive from a pricing standpoint.”

The US is also attractive due to its large number of operational utility scale solar and wind projects. As outlined earlier, these assets are highly attractive to institutional investors seeking

long term yields. At the beginning of 2013 there was 60GW of wind and 7.7GW of solar capacity operating in the US. This is significantly more than the volume of wind capacity that was operational in Germany (31.3GW), Spain (22.8GW) and India (18.4GW) at the end of 2012.

The long run outlook for renewables in the USA is strong. Renewables will become more competitive as costs continue to decline and natural gas prices start to increase, as is expected by most industry experts. In addition, stricter Environmental Protection Agency regulations are forcing many coal-fired plants to be shut down, which will create significant demand for new capacity.

“An important trend is that there are EPA regulations coming out that are driving US coal plants out of business,” confirmed Karl Olsoni, Managing Director of Capital Dynamics. “Very large coal utilities are shutting down plants. This capacity will have to be replaced with something. It will either be renewables, natural gas or possibly nuclear. Renewables will certainly plug some of the gap. The coal will have to be replaced with something that can be quickly permitted and built. You can build a solar or wind farm within 12 months of securing permits. Gas takes a little longer at 18-24 months, so renewables certainly has an advantage from a timing perspective.”


Canada: ranked in the top five for the first time

Canada is the fifth most attractive country in the world for renewable energy M&A and investments, after being selected by 20% of survey respondents globally. This is a significant increase on last year, when Canada was only chosen by 12% of participants.

Looking at the Canadian market from a provincial perspective provides the best indicator of where the opportunities lie for clean energy companies and investors during the next 18 months.

Ontario is the most advanced, having introduced a renewable energy feed-in tariff in 2009 and a target of 10.7GW of non-hydro installed capacity by 2018. This target has since been brought forward to 2015. Ontario is confident of meeting this target, even though only c.2,000MW of wind and c.500MW of solar capacity was operational at the start of this year. Consequently, there exists a considerable volume of projects with locked in feed-in tariffs that still need to be financed and built. Once the frontrunner, the potential for renewables investment in Ontario is now less compelling than in other provinces. The Province’s second feed-in tariff program, unveiled in early 2012, featured significant feed-in tariff cuts and prioritised small-scale projects owned by local or Aboriginal communities.

Irrespective of the deteriorating environment in Ontario, Canada should retain its position among the top five countries in our Renewables Country A-list because other provinces including British Columbia, Quebec and Alberta all promise significant long-term growth potential.

British Columbia intends to procure many hundreds of megawatts of renewables capacity in the next ten years to meet rapidly growing energy demand fuelled by population growth and the build-out of a series of energy-intensive large-scale liquefied natural gas facilities, while it is widely anticipated that Quebec launched a new 800MW wind energy request for proposals in May 2013.

M&A activity in Canada will likely take the form of utilities divesting stakes in operational projects to financial investors and smaller cash-strapped developers selling pre-construction stage projects to larger competitors. Recent notable transactions include GDF Suez’s sale of a 60% stake in its Canadian renewable energy project portfolio (with an enterprise value of $2.0 billion) to Mitsui & Co and Fiera Axium Infrastructure and Caisse de dépôt et placement du Québec’s acquisition of two operational Canadian wind farms, including the 138.6MW Le Plateau wind farm, for an undisclosed sum.

“Most projects in Quebec already have a lot of financial muscle behind them as most of the projects developed by smaller developers have already been acquired by the larger players,” confirmed Hugo Bouchard, Chief Investment Officer and General Manager of Eolectric. “There might be some M&A activity in Ontario though, where a lot of projects are being developed by very small and inexperienced developers. I expect to see a lot of projects changing hands when they come online to give developers an exit.”

10.7GWOntario’s target for installed renewable energy capacity (excluding hydro) by 2015.


Mexico: primed for renewables push

Central America is the fastest growing region in the Americas according to survey participants. Some 12% plan to acquire and or invest in Central America in the next 18 months. This compares with a mere 3% in last year’s survey. Mexico’s stock is rising due to its implementation of national climate change legislation in October 2012. This will legally bind the country to reduce its carbon emissions by 30% by 2020 and by 50% by 2050. The law also requires the country to generate 35% of its energy from renewable sources by 2024.

To complement these ambitious targets, the Government has introduced a system whereby generators are able to enter into PPAs directly with private electricity consumers, known as self-supply PPAs. In some circumstances, the power producer is also given a discount of up to 10% on energy prices when entering into PPAs with renewable energy projects. In addition, the Mexican grid operator CFE is obliged to provide developers with a grid connection, which reduces a project’s risk enormously.

“Mexico is attractive to us as we are able to sign bilateral agreements directly with consumers,” explained Scott Mackin, Managing Partner and Co-President of Denham Capital. “I have seen wind PPAs in Mexico where the price is less than they would be paying from the grid. There are also some buyers of electricity who are motivated by green elements and want to take a certain amount of their energy from renewables, even if it is slightly more expensive.”

Some 1,370MW of onshore wind capacity was operational in Mexico at the beginning of 2012, meaning that there is also scope for international institutional investors to acquire operating assets. However, we expect most M&A activity in Mexico to take the form of international energy companies acquiring planned projects. A table of notable transactions in Latin America announced in 2012 and early 2013 is shown opposite.


inVESTOr/ACquirEr STAKE TArgET/FunDing rECiPiEnT DATE AnnOunCED EnTErPriSE VALuE

MuLTiPLE (OPErATiOnAL PrOjECTS OnLy)

Cemig 17.9% Consorcio Capim Branco Energia, owner of a 450MW portfolio of operational hydro assets (Brazil)

December 2012 $872 million $1.9 million/MW

CPFL Renováveis 100% BVP, which owns a 157.5MW portfolio of operational wind farms (Brazil)

February 2012 $536 million $3.4 million/MW

Duke Energy International

100% Iberoamericana de Energía Ibener SA, which owns 140MW of installed hydro capacity (Chile)

December 2012 $415 million $3.0 million/MW

Enerplan, FIP 100% 136.5MW portfolio of operational wind farms (Brazil)

March 2012 $301 million $2.2 million/MW

Energisa Undisclosed 170MW of operational biomass capacity (Brazil)

August 2012 $74 million N/A

E.ON, MPX 100% 600MW portfolio of pre-construction wind farms (Brazil)

November 2012 $10.9 million N/A

Iberdrola 100% 70MW Dos Arbolitos wind farm – pre-construction (Mexico)

May 2013 Undisclosed N/A

Latin America Power 100% 46MW Totoral wind farm – operational (Chile)

April 2013 Undisclosed N/A

Renovalia Reserve 100% 90MW operational wind farm and 137.5MW construction-stage wind farm (Mexico)

April 2013 Undisclosed N/A

Sovereign Bank N.A 100% 23.4MW Punta Lima operational wind farm (Puerto Rico)

March 2013 Undisclosed N/A

Mitsubishi Corp 33.75% 396MW Marenas Renovables wind farm (Mexico)

February 2012 Undisclosed N/A

Mitsui & Co 50% 164MW Bii Stinu wind farm –construction stage (Mexico)

January 2013 Undisclosed N/A



Sectors in focus

Solar - the hottest sector

Solar is the most attractive sector for North American corporates and investors. Targeted by 63% of survey respondents, it stands far ahead of biomass (45%), onshore wind (41%) and biofuels (38%) not least because of the long term subsidy mechanisms available in North America (US solar investment tax credit and the solar feed-in tariff in Ontario). This strong policy setting combined with ever decreasing installation costs resulted in a record year of installation in the US in 2012. Some 3,313MW of solar PV capacity was brought online in the US in 2012, a 76% increase on the volume installed in 2011. During the same period, the average cost of turnkey solar PV systems fell 27%, according to the Solar Energy Industries Association.

Last year 68 solar M&A deals were announced in the Americas totalling $5.0 billion, representing a 61% increase on the $3.1 billion

worth of acquisitions announced in 2011. The long term growth potential in solar means that there ought to be significant ongoing M&A activity centred around portfolios of pre-construction and construction stage assets.

“The long term support in the form of the ITC is certainly important but there is also a general feeling that solar is a good form of energy,” confirmed Paul Walker, CFO, RES Americas. “Panel prices continue to reduce and the quality is improving, so the economics are continuing to improve. I think investors will primarily come in for new projects. But I don’t expect to see much M&A activity around operational solar PV assets.”

Given the current lack of utility-scale solar PV projects in North America, most M&A activity will be around smaller commercial-

Solar PV

63%Biomass

45%Onshore wind

41%

Biofuels

38%Geothermal

27%Hydro

23%

Biogas

17%

Tidal / wave

20%

Offshorewind

23%

In which sectors are you targeting acquisitions of renewable energy projects or companies in the next 18 months? (North American respondents)



scale assets. “The ones (utility scale solar PV projects) you do see are out in California and Arizona,” explained Karl Olsoni, Managing Director of Capital Dynamics. “You can’t really do these projects in the East coast due to space constraints. Also many large scale solar PV projects can’t qualify for renewable energy certificates in certain markets, so that drives down the size. So most M&A activity in solar PV will involve commercial-scale assets. I am seeing some investors roll these assets up so that they become utility-scale.”

Consolidation in the supply chain is also making a positive impact on solar M&A activity. This will either take the form of distressed assets being snapped up by manufacturers with big balance sheets or large strategic acquirers purchasing established manufacturers. The most notable recent deal last year was Switzerland-based power automation technology group ABB’s announced acquisition of US-based solar inverter producer Power-One for $1.03 billion in April 2012.

In the long term, the real growth market for solar (installation and M&A) will be Latin America. High energy costs and a strong solar resource has enabled solar to achieve grid parity with conventional new build fossil fuels in certain parts of the region. As a further incentive to international developers and investors, many Latin American countries have approved subsidies for solar PV or issued tenders, including Brazil, Mexico and Uruguay. The gold rush has begun!

Another attraction is that unlike in North America, a significant number of solar PV projects will be built with PPAs with industrial and commercial off-takers such as mining companies. First Solar announced in April 2013 that it is planning to build out 1.5GW of solar capacity in Chile by 2020 to service the country’s mining industry. The solar plants offer a substantial saving to mining companies, providing electricity at the rate of $100 per MWh rather than the $350 per MWh rate the industry currently pays for diesel.

Sector breakdown – 2012 M&A activity by sector as a percentage of deal value

Sector breakdown – 2011 M&A activity by sector as a percentage of deal value

M&A activity by sector as a percentage of deal numbers

M&A activity by sector as a percentage of deal numbers

Wind

4%

46%

16%

32% Solar

Hydro

Biomass

Biofuels2%

Wind

4%

46%

16%

32% Solar

Hydro

Biomass

Biofuels2%

WindSolarHydroBiomassBiofuels

36%

13%10%

7%

34%WindSolarHydroBiomassBiofuels

36%

13%10%

7%

34%

WindSolarHydroBiomassBiofuels

23%

21%13%

9%

34% WindSolarHydroBiomassBiofuels

23%

21%13%

9%

34%

Wind

Solar

Hydro

Biomass

Biofuels8%

11%20%

27%34% Wind

Solar

Hydro

Biomass

Biofuels8%

11%20%

27%34%




Biomass still has its fans but deal activity waning

Biomass is the second most attractive sector for North American corporates and investors, being targeted by 45% of respondents. Biomass’ lure lies in its capacity to act as a base load power source. However, this benefit is more than countered by risks over feedstock supply. This is the reason why biomass investment activity waned in 2012. Only 15 biomass M&A transactions totalling $356 million were announced across the Americas in 2012, a significant decrease on the 18 deals valued at $3.3 billion announced in 2011. Project finance activity followed a similar trend – 38 biomass projects in the Americas region secured a total of $1.8 billion project finance in 2012, 25% below the $2.4 billion invested in 2011.

Notable transactions in 2012 include Energisa’s $74.2 million acquisition of interests in four biomass-fired thermoelectric power plants in the southern states of São Paulo and Mato Grosso do Sul with a total capacity of 170MW from Tonon Bioenergia and Emera’s announced $25 million acquisition of Brooklyn Energy, a 30MW biomass electrical co-generation facility, located in Brooklyn, Nova Scotia.


Onshore wind

Some 41% of North American survey respondents are targeting investments in onshore wind, making it the third most attractive sector behind solar PV and biomass.

Wind M&A activity across the Americas totalled $7.4 billion in 2012, a 48% increase on the $5.0 billion worth of deals announced in 2011. This increase was a direct result of energy companies rushing to acquire planned and construction-stage wind farms that could be built before the US wind energy production tax credit expired. It was also boosted by institutional investors acquiring stakes in operating assets.

Last year was a particularly strong year for wind energy development across the Americas. A total of 16,085MW was installed across North America and Latin America in 2012, increasing the total volume of installations by 29%. Motivated by the threatened expiration of the PTC, the USA was the most active region for new wind installation in the Americas in 2012 and wind was the number one source of new generation capacity in the USA for the first time ever.

This growth will not be maintained in 2013 not least because the delayed approval of the PTC means that the pipeline of projects in the USA is severely depleted. Fortunately, wind projects only need to commence construction by the end of 2013 to qualify for the PTC so there should be an uptick again in installations in 2014.

inSTALLED CAPACiTy AT THE EnD OF 2011 (MW)

nEW inSTALLED CAPACiTy in 2012 (MW)

TOTAL inSTALLED CAPACiTy AT THE EnD OF 2012 (MW)

USA 46,929 13,124 60,007

Canada 5,265 935 6,200

Mexico 569 801 1,370

Brazil 1,431 1,077 2,508

Argentina 113 54 167

Costa Rica 132 15 147

Nicaragua 62 40 102

Venezuela 0 30 30

Uruguay 43 9 52

Carribean 271 0 271 Source: gWEC

The extension means that some larger developers without significant project pipelines may seek to acquire pre-construction stage assets from smaller developers. “A lot of small developers have some decent and large development portfolios that will be attractive to larger ones,” confirmed Paul Walker, CFO of RES Americas. “Larger developers may well acquire these assets and then secure the PTC for themselves this year. Uncertainty over further PTC extensions is a problem for both investors and developers, so there is a definite move to establishing positions in new projects starting construction this year as opposed to mopping up existing projects.”

As with solar, over the long term the fastest growing wind markets will be in Latin America. Mexico brought online 801MW during 2012, bringing total capacity to 1,370MW, while 1,077MW was installed in Brazil, a considerable volume given that only 1,431MW was operational at the start of 2012. Growth in these countries is being underpinned by the combination of high power prices and rising demand from dynamic industrial sectors. “We are seeing utilities taking positions in Brazil through acquisitions as it is a huge growth market,” explained Alejandro Burgaleta, CFO of Gestamp Wind. “Mexico is at an earlier stage but this will also happen there.”


Cohnreznick national renewable Energy Practice

Today’s renewable energy industry is a complex and evolving landscape of change, growth and opportunity. As a top accounting, tax, and advisory firm, CohnReznick is recognized as a leader in the renewable energy industry, helping clients effectively navigate multifaceted business and financial issues. Our renewable energy practice is comprised of an integrated professional team that is focused on helping our clients grow and succeed.

We provide industry-specific solutions ranging from traditional audit and tax assurance services to advisory services such as transaction structuring and tax advisory, tax equity services, optimization of federal and state energy tax credits, valuations, and due diligence on mergers and acquisitions. Our clients represent a cross-section of organizations active in renewable energy that include project developers, tax equity investors, financial institutions, and independent power producers – both domestic and foreign. Cohnreznick is at the forefront of thought leadership in the industry, including the exploration and evaluation of alternative financing mechanisms.

Our approach to merger and acquisition services in renewable energy is based on the experience we have advising clients in areas such as purchase price and contract negotiations, market analysis, liquidity event consultation, buy and sell side advisory and post transaction analysis.

Cohnreznick is a proud member of nexia international, the tenth largest provider of audit and advisory services in the world.


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