PRE-FEASIBILITY ASSESSMENTS & PROJECT FINANCE FEBRUARY 7 TH, 2018 CALGARY, AB

PRE-FEASIBILITY ASSESSMENTS & PROJECT FINANCE FEBRUARY 7 TH, 2018 CALGARY, AB

Your Speakers Jai Roberts, Renewable Energy Project Manager 10 years in manufacturing 10 years in industrial project management Darren Huculak, Business Development Manager, AB 15 Years in renewable energy development, partnership development, community engagement (including indigenous communities), project finance and market development

Today s Session 1. Pre-Feasibility Assessments: 1. Community Energy vs. Utility Scale Projects 2. Overview of Project Phases 3. What is a Pre-Feasibility Assessment? 4. Pre-feasibility vs Feasibility 5. Funding a Pre-Feasibility Assessment 2. Key Project Considerations 3. Introduction to Project Finance 4. Wrap-Up

Community Energy vs. Utility Scale Community Energy Projects Reduce costs of operating buildings Match energy production to local need and available energy source Quick timeline: 3-6 months to completion Low risk opportunity Visual representation of community commitment to environment/sustainability Maximise local ownership and decision making Generate local community jobs (1-3) Energy independence Utility Scale Energy Projects Generate revenue on a $/MW production basis Get involved in big business development Long timelines: 3-6 years to completion High risk opportunity Highly technical, requiring a highly technical team from start through commissioning Generate local community jobs (10-20) Develop strong business and investment partnerships

Project Phases Idea / Concept Pre- Feasibility Feasibility Development Construction Operations

What is a pre-feasibility assessment? Pre-feasibility assessment - preliminary study undertaken to assess viability of renewable energy projects. The project assessment provides: Technical overview Economic potential Key issues to be resolved for a successful project It is specifically designed to be shorter and less expensive than a full feasibility study.

Pre-feasibility or Feasibility Pre-Feasibility Is the Project Possible? Project overview and scope Potential challenges Capital cost estimate (e.g. +/- 30 50% range) Next steps and resources required Important information to the decision-making process Feasibility Is the Project Viable? In-depth report Risk identification & mitigation measures Clear understanding of key project drivers and variables Market research Capital cost estimate (eg. +/-20 30% range) and base schedule Critical study for the project go / no go decision

Important Considerations: Funding for pre-feasibility assessments Provincial Funding Indigenous Climate Leadership Initiative Federal Funding INAC, etc. Partnership Funding Private Partners

Key Components

Energy Resource & Location Important Considerations: Within an area of high solar irradiance Flat or slightly south facing, well drained lands Few obstruction (trees, building, etc.) that may cause shading Close to a distribution or interconnect point with capacity On Nation or Off Nation

Energy Resource & Location

Interconnections Important Considerations: Distribution (mid-sized) or transmission (large) connected projects Capacity on the distribution and / or transmission system Entering the AESO s project list / queue Understanding financial / commitment milestones

Interconnections Electrical System Generators Independent System Operator Transmission System > 69 kv Transformer Transformer Commercial Customer Distribution System < 69 kv Residential Customer

Environmental Important Considerations: Compatible Land Use (cultivated / brownfield vs. native grass or sensitive lands Avian wildlife Sensitive wildlife or plant species Post construction monitoring

Stakeholders Important Considerations: Community consultation / input Possible ownership / involvement (capacity building, employment) Stable revenue and / or financial investment for the community Community Support in transition to cleaner / sustainable energy sources

Permitting Important Considerations: AUC application Rule 007 (Power Plant) & Rule 012 (Noise) Historical Resources Assessment AB Transportation (if within 800m of a numbered highway) On Nation Band Council Resolution, Land Designation, Government/Permitting/Financial Approvals Off Nation - Municipal consultation (are solar projects a permitted use within the county)

Energy Off-Take Important Considerations: Distribution (mid-sized) or transmission (large) connected projects Capacity on the distribution and / or transmission system Entering the AESO s project list / queue Understanding financial / commitment milestones

Revenue vs Costs Cost develop, construct, and operate the project Revenue (energy and carbon credits sold) will the project provide over it s entire lifetime? Important Considerations: Capital Expenditure (CapEx) Operational Expenditure (OpEx) Incentives / Subsidies / Rebates Off-take agreement Comprehensive and realistic economic model

INTRODUCTION TO PROJECT FINANCE FEBRUARY 7TH, 2018 GREY EAGLE RESORT, AB

Compelling Economics Wind & solar costs have dramatically decreased in past 30 years Cost per unit of solar & wind electricity is now competitive with natural gas Source: Pembina Institute (2016)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mt CO2 Environmental Benefit Paris Accord limits increase in global temperature to lower than 2.0C above pre-industrial levels Power generation contribution to GHG has been in steady decline since 2000 140 120 100 80 60 Annual GHG Emissions Electricity Generation Canada Power generation still contributes ~ 11% to Canada s annual Green House Gas emissions (GHGs) 40 20 0 Source: Environment & Climate Change Canada(2017)

Indigenous Value Focus Renewable Energy Projects are consistent with indigenous values Respect for land and traditional ways of life Triple E Bottom Line Triple E Bottom Line Objective - Finance, Environmental & Social goals all in balance

Renewable Energy Triple E Bottom Line focus benefits everybody Renewable energy projects are obvious examples of this How do we develop our renewable energy potential? Prefeasbility assessment / Community Energy Plans: Availability of renewable resources The type of power generation best suited for your area (wind, solar, hydro etc) Construction Costs and Annual Operating Costs At this stage, a basic understanding of the project s ability to attract bank capital (Project Finance) is also important for utility scale projects. A full financing plan can wait for the feasibility study.

Project Finance Not much different than a home mortgage! Home Mortgage Banks provide up to ~75% of purchase price Buyer provide the other ~25% Credit Assessment Based on buyer Job / Earnings history of the buyer Current debt of the buyer Loan provided by a single bank Project Finance Banks provide up to ~90% of purchase price Project Owners provide the other ~25% Credit Assessment Based on the project itself Banks need to understand project costs, revenues and performance Multiple banks typically involved

Special Features of Project Finance Since loan is to the project itself (not to its owners), a separate company it typically set up (called a Special Purpose Vehicle or SPV) Equity Investment Bank Loan PROJECTCO (SPV)

Implications for Project Development Lenders need a very though understanding of all aspects of the project Renewable resources; technology; customers; construction contract etc. Very lawyer and contract intensive process Pre-feasibility assessments for utility scale projects should include high level analysis of project credit worthiness Credit Analysis Basics The Cash Flow Waterfall Why it is important Cash Flow Risk Debt Service Coverage Ratios (DSCR)

Project Stylized Cash Flow Waterfall Revenues Operating Expense Project Reinvestment Taxes Loan Repayment Increasing Risk Dividends

Cash Flow Waterfall Any impact to Revenues cascades down the waterfall putting loan repayment at risk Solar Project Revenues much greater than debt payment Good Credit Project will attract loans at lower interest Solar Project debt payments much greater than Revenues Bad Credit Project will not attract bank financing Good DSCR Bad DSCR

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 Hypthetical Solar Project - DSCR Example Plant Maximum Production (MW) 20 Power Price ($/MWh) 70 Construction Cost $40,000,000 Loan Amount $28,000,000 Operating and Maintenance Cost ($MWh) $375,000 Annual Project Reinvestment $125,000 Loan Repayment $2,246,792 Tax Rate 26.0% Total Number of Hours in Year 8,760 Average % of Time Sunshines 42.0% Minimum % of Time Sun Shines 29.0% Highest % of Time Sun Shines 50.0% Cash Flow Waterfall Year 2018 2019 2020 2021 2022 Project Revenues $ - $ 5,150,880 $ 5,150,880 $ 5,150,880 $ 5,150,880 Operating & Maintenance Cost $ - $ 375,000 $ 375,000 $ 375,000 $ 375,000 Project Reinvestment $ - $ 125,000 $ 125,000 $ 125,000 $ 125,000 Taxes $ - $ 877,729 $ 888,737 $ 900,296 $ 912,432 Loan Repayment $ - $ 2,246,792 $ 2,246,792 $ 2,246,792 $ 2,246,792 Dividend $ - $ 1,526,359 $ 1,515,350 $ 1,503,792 $ 1,491,655 $0.0 $3,409,151.2 $3,409,151.2 $3,409,151.2 $3,409,151.2 Annual DSCR 1.00x 1.52x 1.52x 1.52x 1.52x CFADS $4,000,000 $3,500,000 DSCR 1.60x 1.40x Worked Example #1 Sun shines on average for 42% of the time DSCR of 1.52x Project is very financeable Will attract banks loans $3,000,000 1.20x $2,500,000 1.00x $2,000,000 0.80x $1,500,000 0.60x $1,000,000 0.40x $500,000 0.20x $0 0.00x Axis Title Interest Principal

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 Hypthetical Solar Project - DSCR Example Plant Maximum Production (MW) 20 Power Price ($/MWh) 70 Construction Cost $40,000,000 Loan Amount $28,000,000 Operating and Maintenance Cost ($MWh) $375,000 Annual Project Reinvestment $125,000 Loan Repayment $2,246,792 Tax Rate 26.0% Total Number of Hours in Year 8,760 Average % of Time Sunshines 42.0% Minimum % of Time Sun Shines 29.0% Highest % of Time Sun Shines 50.0% Cash Flow Waterfall Year 2018 2019 2020 2021 2022 Project Revenues $ - $ 3,556,560 $ 3,556,560 $ 3,556,560 $ 3,556,560 Operating & Maintenance Cost $ - $ 375,000 $ 375,000 $ 375,000 $ 375,000 Project Reinvestment $ - $ 125,000 $ 125,000 $ 125,000 $ 125,000 Taxes $ - $ 463,206 $ 474,214 $ 485,773 $ 497,909 Loan Repayment $ - $ 2,246,792 $ 2,246,792 $ 2,246,792 $ 2,246,792 Dividend $ - $ 346,562 $ 335,554 $ 323,995 $ 311,858 $0.0 $2,229,354.4 $2,229,354.4 $2,229,354.4 $2,229,354.4 Annual DSCR 1.00x 0.99x 0.99x 0.99x 0.99x CFADS $2,500,000 DSCR 1.00x Worked Example #2 Sun shines on average for 29% of the time DSCR of 0.99X Likely not financeable without credit support $2,000,000 1.00x 1.00x $1,500,000 1.00x $1,000,000 0.99x 0.99x $500,000 0.99x $0 0.99x Axis Title Interest Principal

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 Hypthetical Solar Project - DSCR Example Plant Maximum Production (MW) 20 Power Price ($/MWh) 70 Construction Cost $40,000,000 Loan Amount $28,000,000 Operating and Maintenance Cost ($MWh) $375,000 Annual Project Reinvestment $125,000 Loan Repayment $2,246,792 Tax Rate 26.0% Total Number of Hours in Year 8,760 Average % of Time Sunshines 42.0% Minimum % of Time Sun Shines 29.0% Highest % of Time Sun Shines 50.0% Cash Flow Waterfall Year 2018 2019 2020 2021 2022 Project Revenues $ - $ 6,132,000 $ 6,132,000 $ 6,132,000 $ 6,132,000 Operating & Maintenance Cost $ - $ 375,000 $ 375,000 $ 375,000 $ 375,000 Project Reinvestment $ - $ 125,000 $ 125,000 $ 125,000 $ 125,000 Taxes $ - $ 1,132,820 $ 1,143,828 $ 1,155,387 $ 1,167,524 Loan Repayment $ - $ 2,246,792 $ 2,246,792 $ 2,246,792 $ 2,246,792 Dividend $ - $ 2,252,388 $ 2,241,379 $ 2,229,821 $ 2,217,684 $0.0 $4,135,180.0 $4,135,180.0 $4,135,180.0 $4,135,180.0 Annual DSCR 1.00x 1.84x 1.84x 1.84x 1.84x CFADS $4,500,000 DSCR 2.00x Worked Example #3 Sun shines on average for 50% of time DSCR of 1.84x Very attractive likely to get funded at attractive terms $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 1.80x 1.60x 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x Axis Title Interest Principal

KeyTake Aways First priority of pre-feasibility analysis is to understand market, renewable resource, and costs But for utility scale projects, a basic idea of the project s ability to attract loans should not be far behind Project components are interrelated Market Demand Price CapEx Proceed to Full Feasibility? Return OpEx DSCR

Conclusion FNPA Not Investment Bankers but can help you assess your project s financability and economics Financial Model Rates of return Credit Worthiness and likely terms of loan Knowledge Transfer! Thank you!