INFRASTRUCTUREJOURNAL

#canpower14

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Dear Reader,

Welcome to Project Finance and Infrastructure Journal’s CanadianPower Finance Briefing. This paper draws on the data and analysis ofProject Finance, the Project Finance Deals Database, and InfrastructureJournal, which are now all part of Euromoney Institutional Investor.

This paper is designed to provide some context for the discussions of theFifth Annual Canadian Power Finance Conference, brought to you byProject Finance and Euromoney Seminars. The event will take place on28-29 January in Toronto, and will feature a more detailed look at ourmarket data.

You can find more information on the conference, and sign up athttp://www.euromoneyseminars.com/canadapower14. You can alsoget updates on the event on twitter by looking for #canpower14

We also encourage you to take a look at Project Finance’s DealsDatabase today and sign up for a free trial at:http://www.projectfinancemagazine.com/freetrial.html

Finally, you can also find more information about, and take a free trial to,Infrastructure Journal at http://www.ijonline.com

We look forward to welcoming you to the event, and answering anyquestions you might have about this paper.

Tom NelthorpeEditor, Project Finance

Manjot GobindpuriDeals Database Co-Ordinator

INFRASTRUCTUREJOURNAL

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Canadian power andrenewables market

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CANADIAN POWER INFRASTRUCTURE CONFERENCEMarket Snapshot: Infrastructure Journals Database complies information on the Canadianpower and renewables market to highlight trends within the market and the pipeline ofdeals for the future. Showcasing the biggest lenders within the market and spread oflending across the industry.

Canada power infrastructure market – 2005-2013

Source: Infrastructure Journal

0

610

1,220

1,830

2,440

3,050

3,660

4,270

4,880

5,490

6,100

2005 2006 2007 2008 2009 2010 2011 2012 2013

US$m

0

5

10

15

20

25

Total value, US$m

Deal count

Top lenders in Canadian power market – 2005-2013

Source: Infrastructure Journal

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

BTMU Scotiabank RBC Dexia CIBC Mizuho DeutscheBank

ManulifeFinancial

Bank ofMontreal

SMBC NordLB Natixis KfW

US$m

0

5

10

15

20

25

30

Deal count

Value invested, US$mDeal count

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CANADIAN POWER INFRASTRUCTURE CONFERENCE

5 largest conventional power deals –2005-2013Value Financial

Subsector US$m close SponsorsBruce-A Nuclear Power Plant Refurbishment Nuclear 1,520 10/10/2007 Borealis, TransCanada875MW Goreway CCGT Plant Refinancing Gas-fired 839 02/07/2013 Toyota, Chubu Electric Power Co875MW Goreway CCGT Plant Gas-fired 824 02/04/2006 Blackstone, Reservoir Capital570MW St Clair Ontario CCGT Plant Gas-fired 784 30/05/2007 Invenergy, Stark InvestmentsLower Manhattan Hydropower Hydro 672 17/08/2010 Ontario Power GenerationPortfolio Redevelopment

Source: Infrastructure Journal

5 largest renewables deals –2005-2013Value Financial

Subsector US$m close Sponsors272MW Seigneurie de Beaupre Wind Farm Onshore wind 863 10/11/2011 Gaz Metro, Valener, Boralex270MW South Kent Wind Farm Onshore wind 836 18/03/2013 Samsung, Pattern Energy268MW C2C Wind and Solar Portfolio PV solar, 807 19/12/2012 Mitsui & Co, GDF Suez,

onshore wind Fiera Axium Infrastructure100MW Grand Renewable PV Solar Plant PV solar 613 27/09/2013 Connor Clark & Lun Infrastructure,

Samsung150MW Grand Renewable Wind Farm Onshore wind 451 13/09/2013 Samsung, Pattern Energy

Source: Infrastructure Journal

Pipeline of power projects by value of investments

Source: Infrastructure Journal

Biofuels0%

Thermal1%

PV Solar3%

Waste-to-energy 4%

Offshore wind 6%

Hydro57%

Onshore wind12%

Gas-fired17%

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POWER

Project Borealis

DEAL ANALYSIS:Metlife and Fiera-Axium used staggered private placements – and will usestaggered follow-on financings for their Borealis solar photovoltaic portfolio.

Metlife and Fiera Axium will launch follow-on private placement financings early in2014 for the C$460 million ($430 million)Project Borealis solar photovoltaic portfolioin Ontario. The placements will provideadditional leverage on the portfolio, whichwas the subject of staggered constructionprivate placements that closed betweenMay and September 2013.

The financings illustrate that the Canadianprivate placement market is increasinglyaccommodating of the constructionfinancing requirements of solardevelopers. Banks have retained a role inconstruction financings for solar projects inthe country, even as they cede marketshare in wind to the life insurancecompanies that offer private placements.

But the financing for the four clusters ofPV projects that make up the ProjectBorealis portfolio shows that lifecompanies can offer developers somecertainty over the spread they will pay ondebt. It was also structured to allow forflexibility in how the sponsors raiseadditional debt on the assets.

The two financial investors will acquire the108MW portfolio’s four clusters fromdeveloper Recurrent Energy at commercialoperations. They announced theagreement in October, shortly after theclose of the last of the four constructionfinancings for the portfolio.

But the developer and buyers agreed formdocumentation in May for the portfolio’s $390million 19-year construction debt packagewith National Bank Financial (bookrunnerand administrative agent) and Sun Life(lead lender). Among the participants in thedebt were Sun Life, Great-West Life, SiemensFinancial, Caisse De Depot et Placement DuQuebec, Desjardins and BusinessDevelopment Bank of Canada.

The deal is structured so that the privateplacement debt funded as each clusterentered construction – in May, June, Augustand September. Cluster one is subject toC$63 million on construction financing,and will close on another C$8.5 million indebt at commercial operations. Cluster 2 issubject to C$100.5 million in constructiondebt, with C$33.6 million in debt to follow atcompletion. Cluster three has C$77.2million in construction and C$29.7 millionin follow-on debt. And cluster four has C$62

million and C$13 million in constructionand follow-on debt, respectively.

Breaking down the deal into smallerclusters eliminates some, though not all,negative carry (paying interest rates onunused proceeds greater than what theyearn on account), and, crucially, gives theborrower spread certainty. The borrowerand lenders could hedge the risk ofmovements in underlying benchmarkgovernment of Canada bonds, at leastuntil the final cluster closed.

At completion, the assets will be able tosupport a larger debt amount than wasnecessary to fund their construction, andthe new owners, Metlife Capital and theFiera Axium Infrastructure Canada II fund,can then close the additional bond issuesagainst the assets. The two sponsors arecontributing around C$77 million in equity.

The construction financing has beenstructured to accommodate the presenceof slightly different lender groups, bothfrom one cluster to another and on thefollow-on financings for each cluster, whichrequired complex intercreditor provisions.While there are no indications that any ofthe lenders are likely to leave the financingbefore the final clusters enter operations,the structure allows the new owners tomanage any changes to the group.

The financing features a mechanism thattraps cash in the event that the portfolio’spanels degrade ahead of projections andthe sponsors are unable to call on amanufacturer warranty. This reserve firstappeared on the C$195 million bondfinancing for NextEra’s 40MW St Clairproject, also in Ontario, which closed inSeptember 2012. The use of the reserve hasquickly become market standard, even fordeals like Borealis that are not rated.

The plants benefit from a 20-year feed-intariff priced at C$0.44 per kWh, and sellpower to the Ontario Power Authority undera power purchase agreement of the samelength. The plants are located in Barrie, incentral Ontario to the north of Toronto, andin London, in western Ontario.

The ability of the private placement marketto provide cost-effective and flexibleconstruction financing will create furtherpressure on bank lenders active in theCanadian market.

Recurrent EnergyBorealis Solar Portfolio

FinancingSTATUS

Construction financing terms agreedMay 2013, staggered closings for

construction debt to September 2013,additional financings at completion

still to come

SIZE

C$460 million

DESCRIPTION

108MW solar photovoltaicportfolio in Ontario, Canada

OFFTAKER

Ontario Power Authority

DEVELOPER

Recurrent Energy

SPONSORS

Metlife Capital and Fiera AxiumInfrastructure Canada II

EQUITY

C$77 million

DEBT

C$390 million

ARRANGERS

National Bank Financial and Sun Life

PARTICIPANTS

Sun Life, Great-West Life, SiemensFinancial, Caisse De Depot et

Placement Du Quebec, Desjardinsand Business Development Bank

of Canada.

ENVIRONMENTAL ADVISERHatch

INDEPENDENT ENGINEER

DNV

PANEL SUPPLIERCelestica

INSTALLATION CONTRACTORPCL

OPERATOREDF Renewables.

INSURANCE ADVISERMoore-McNeil.

DEVELOPER LEGAL COUNSELTorys

SPONSOR LEGAL COUNSELGowling Lafleur Henderson

LENDER LEGAL COUNSELBorden Ladner

EXCLUSIVE

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CANADIAN POWER

Pumped up

Northland Power continues its push into renewables as it seeks a PPA for a plannedpumped storage plant in Ontario. Its development slate will test the relationship lendersit has cultivated. By Brian Eckhouse.

Northland Power has been adding capacity at an impressive rate.The installed capacity of the Canadian independent powerproducer (IPP) stood at 742MW in 2009. But John Brace, Northland’spresident and chief executive officer, projects that it will have1,325MW in service by the end of 2013, and over 1,500MW by 2016.He expects Northland to more than double its Ebitda (earningsbefore interest, taxes, depreciation and amortisation) by 2015.

New projects, including joint venture developments, andacquisitions explain this sharp growth. The company owns 21.5MWof wind capacity in Germany – the Eckolstädt and Kavelstorffacilities – as well as a 19% stake in the 230MW Panda-Brandywineplant in Maryland, which it acquired in 2004. But its growth, andstrong bank following, both result from its record in Canada.

Northland is developing the 400MW Marmora pumped storagehydro project in Ontario, which will give lenders a chance to getto grips with a rare asset type. It will also bring 70MW of solarphotovoltaic (PV) capacity to market, probably in two clusters,and is nearing launch with a financing for the 60MW McLean’sMountain wind project on Ontario’s Manitoulin Island, for whichManulife Financial will be the lead lender. Northland isdeveloping Manitoulin with the island’s United Chiefs andCouncils of Mnidoo Mnising tribal council.

Northland rivals Brookfield, which has a larger footprint outsideCanada, and wider infrastructure and real estate interests, as atop-tier Canadian IPP. Northland is mostly agnostic about fueltypes. About three-quarters of its fleet is gas-fired and wind makesup the bulk of the rest, though it has small PV and biomassholdings, and is developing hydro.

It develops power plants with the aim of managing them over theirfull life-cycles – and seeks assets with predicatable revenues fromlong-term power purchase agreements. “Our investors are lookingfor stable, if not growing, dividends,” Brace says. “We need projectsthat can deliver that.”

uMarmora pumped storageNorthland is developing new PV and wind projects. But theproposed Marmora pumped storage hydro project, with a costbetween C$700 million ($675 million) and C$800 million, hasattracted far more attention. It would have a capacity of 400MWand a load when pumping for storage of 400MW.

Marmora would use a closed-loop open pit and an upperreservoir, and when power prices are low, it will pump water intothat reservoir. When prices are higher, the plant will release waterdownhill. An estimated 127,000MW of pumped storage is availableglobally. Brace says that Ontario in general lacks “the naturalgeography for pumped storage to be viable,” but that Marmora isfeasible. Northland proposes repurposing an old mining site,located near major power lines, between Toronto and Ottawa.Northland has argued to provincial leaders that Ontario needs a

means of offsetting the variability of the 10,700MW of renewablescapacity that it may have online by 2018.

Third-party consultant Navigant produced a report that said that,had Marmora been operational between 2009 and 2011, it wouldhave reduced curtailment of generators because of surplusbaseload generation by 35%, according to John Wright,Northland’s director of business development. Pumped storage,Northland has suggested, generally enjoys lower capital coststhan other technologies. Marmora, it says, enjoys a strong position,because it has a lower reservoir that is already filled with water,and already has the materials for the upper reservoir in place.

Northland will build the project if it can sign an offtake agreementof up to 40 years with the Ontario Power Authority, a provincialagency. While pumped storage facilities tend to be very efficientmeans of capturing differentials in market prices, Northland’sbusiness model does not allow for it to take on significantmerchant risk. Northland hopes that any PPA for Marmora wouldfeature capacity payments, and allow it to raise debt for up to 80%of project costs.

uNorthland’s back storyNorthland was founded in 1987, near the onset of independentpower production in Canada. This was no coincidence. In the mid-1980s, Ontario Hydro – a publicly-owned provincial utility – hadbegun to lose its grip on its monopoly of the power, transmissionand distribution industries. The province broke Ontario Hydro up in1999, but retains a significant role in Ontario’s power sector.

Northland’s first project was Canada’s first power plant to useunprocessed wood chips as fuel. It ran on excess wood waste froma mill in Cochrane, Ontario, that had received cease-and-desistorders for its glut of supply. “That was the genesis of Northland,”says Brace, who joined the company in 1988. A later project,Kirkland Lake, is said to be the first IPP in the country to close aproject financing with insurance companies.

“Because we were early movers in independent power production,we were national leaders from the get-go,” recalls Brace, althoughNorthland only operated in Ontario at the time. Northlanddeveloped projects that used biomass boilers, gas-fired turbines,cogeneration or a combination of these configurations. “Theopportunity to do gas-fired was vigorously pursued,” Brace adds,though that would prove difficult at first, because Western Canadapossessed much of the country’s gas reserves.

“In the early days, there was no gas market in Ontario,” Bracerecalls. “Ontario Hydro bought and sold electricity, but didn’t usenatural gas. This created a significant challenge, as there [were] nosystem/tools in place for buying natural gas or reliably predictingthe cost over the long-term, except through a direct contract.”

Northland attempted to resolve this “gas-electricity puzzle,” as

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Brace labels it. “On our 66th try, we were successful at bridging thegap between the gas producers and the electricity producers,”Brace says. Indeed, Northland helped make its name bytransporting natural gas.

In 1997, Northland set another precedent when it closed a C$308million initial public offering (IPO) for the Northland Power IncomeFund – the first public offering of an independently power projectin Canada. Some of Northland’s peers soon copied its strategy. Thefund launched as a single-asset venture, but soon bought moreassets to diversify its portfolio and limit its exposure. By 2009, itindirectly owned equity in six power projects.

In 2011, Northland merged with the fund, which it had managedthrough its wholly-owned subsidiary Northland Power IncomeFund Management, simplifying its development and operationalactivities. The fund became less useful when Canada phased outthe pass-through tax treatment of income funds. Northland had tobe nimble to seize opportunities in gas-fired generation in Ontariorenewables, where province of Ontario was using a feed-in tariff toencourage development. “It was kind of a no-brainer to put thecompanies together,” says Paul Bradley, who joined Northland aschief financial officer in 2011.

u Bradley joinsBradley had been familiar with Northland for more than adecade before he joined as CFO. He first dealt with the companywhilst at CIBC, which he had joined in 1997, just as the fund’s IPOclosed, and got to know Brace and Tony Anderson, hispredecessor as CFO.

After Bradley left CIBC, he shifted to advisory work, with Northlandas his first client. Bradley then joined the OPA, where he was acounterparty to Northland. Bradley helped launch the agency,managing the tenders for independent power production andnegotiating PPAs. Bradley then moved to Macquarie’s office inToronto after two years at the OPA.

Shortly after that, Northland called to gauge his interest inreplacing Anderson, who was retiring from that post. But Bradleyinitially declined the offer, saying he wanted to help buildMacquarie’s business in Toronto. Northland’s merger was alsolooming. But when Northland later asked Bradley to help findAnderson’s successor, he reconsidered.

u Building relationshipsNorthland depended initially on Canadian lenders for non-recourse debt, often life-insurance companies. BMO, CIBC, Manulife,Scotiabank and Sun Life are among Northland’s relationshiplenders. But as Northland and its projects gained in size, it started

building up a larger lender base beyond Canada. Its push intorenewables would require access to a wider universe of lenders.

In 2007, Northland closed a C$244 million syndicated loanpackage with four international lenders – Allied Irish Bank (AIB),Bank of Tokyo-Mitsubishi UFJ, Fortis and Union Bank. The debtsupported Northland’s 265MW Thorold cogeneration project on theCanadian side of Niagara Falls, and broke down into a C$207.5million construction and term loan, and a C$36.5 million letter ofcredit facility. The loan was part of a larger $451 million financingpackage, and complemented a C$207 million institutional trancheled by Manulife and Sun Life.

Northland added to its pool of relationship lenders in August 2010with the C$580 million debt package for its 265MW NorthBattleford combined-cycle project in Saskatchewan. Union Bankwas a lead lender in that deal, which featured a mini-perm, andattracted international lenders AIB, Bayern/LB, Helaba, Mizuho,Natixis, Siemens Financial Services, SG and Sumitomo MitsuiBanking Corporation.

North Battleford was Northland’s second Saskatchewan gas-firedproject to close a non-recourse financing in 2010. The 86MW SpyHill peaker preceded it, in the second quarter of 2010. Both plantsbenefit from 20-year power purchase agreements with SaskPower,the provincial-owned utility. “Tony’s vision at the time was this:With North Battleford being so easy to understand, you get thebanks in, then get them ready for the coming renewables deals,”Bradley says.

u Recent activitiesUnion Bank has emerged as a regular Northland lender. It alsowas a lead on a long-dated C$227 million term loan for 60MW ofground-mounted solar photovoltaic capacity, a financing thatclosed in mid-2012.

In January, Northland closed its first-ever rated project bond forSpy Hill. The A-rated private placement was 3.5x oversubscribedand had a coupon of 4.14%. Northland may look to refinanceNorth Battleford in the Canadian private placement market afteroperations begin this year. “Our goal is to close the last open switchin the project created by the spread risk on the mini-perms,”Bradley said earlier this year.

Earlier in 2013, Northland bought a controlling interest inCanadian Environmental Energy Corporation, which controls thevoting shares in Kirkland Lake Power, the owner of the 132MWKirkland Lake project. It also bought all the shares in Capais PowerServices, the owner of the 40MW Cochrane project, from theProbyn Group. Northland has been the operator of both projects.

CANADIAN POWER

The site of Northland’s proposed Marmora pumped storage project in Ontario.

www.euromoneyseminars.com/canadaoil&gas

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POWER

Spy Hill

DEAL ANALYSIS: Northland Power tempts investors hungry for rare, well-rated papersupporting gas-fired generation with its first-ever project bond issue, for its Spy Hill peakingpower plant, and strengthens its name in the Canadian private placement market.

Northland Power closed a C$156.3 million($157.3 million) private placementsupporting its 86MW Spy Hill plant on 21January. The 4.14% senior securedamortising series A bonds were 3.5xoversubscribed, thanks in part to A ratingfrom DBRS. The bonds will fully amortise inMarch 2036, six months before the expirationof the project’s offtake agreement, and havean average life of 15 years.

The PPP bond market in Canada is thehealthiest in the world, though it hassuffered from a drop in volumes in recentmonths. But investment-grade bonds forgeneration assets Canada are rare, withthe exception of hydro projects. Privateplacements for wind projects are a littlemore common, though these areessentially long-dated loans withinstitutions, and there are signs of anincrease in activity in solar, but gas-firedgenerators are infrequent borrowers

Spy Hill’s solid performance and generouspower purchase agreement with SaskPower,which is almost as friendly to lenders as aPPP contract, helped it attract an A rating.The 86MW peaking power plant startedoperations in October 2011 and is located inSaskatchewan, 230km east of Regina.

The availability component of the PPA tariffcovers about 83% of the base caserevenue, with the rest dependent onproduction levels. The 25-year PPA transfersmarket, fuel and volume risks to the utility,though Spy Hill retains performance riskand must meet minimum availability andheat rate requirements. Spy Hill hasachieved 97.6% availability at its twoLM6000-PF General Electric combustionturbines. “Effectively, the project’sprofitability does not depend on how muchelectricity is produced but only that itsgeneration is available if called upon bySaskPower,” according to the DBRS report.

The financing features a six-month debtservice reserve backed by a letter of credit,two maintenance reserves, and has aminimum debt service coverage ratio of1.7x, according to DBRS.

It will repay an existing C$110.5 millionbank financing, which closed in April 2010,and settle almost C$33 million in interestrate swaps. Northland will receive aroughly C$5.6 million distribution, anddistributions are allowed if Spy Hill’s

reserves are fully funded and if it meets a1.2x historical senior DSCR test. Since theoriginal bank deal closed, the project hasmade C$15.6 million in distributions.

Casgrain & Company and CIBC, the leadson the Spy Hill issue, held road shows inMontreal and Toronto and a national callwith investors. BMO Nesbitt Burns, NationalBank Financial and Scotiabank roundedout the bond syndicate.

Casgrain, which is based in Montreal,helped bring in several Quebecparticipants, and Quebec institutionalinvestors account for half of the issue. Thedebt attracted 26 accounts, among thempension funds, mutual funds and somesmall life insurance companies. “It’s thebeginning of the year, so a lot of investorshave funds available – and there’s a lot ofpent-up demand for gas-fired bonds,”explains a market observer.

The mini-perm financing for the plant hadfour years remaining, giving the sponsorsample time and opportunity to refinancethe debt. But Northland wants to reduce itsrefinancing risk, first with Spy Hill and soonon the bank debt for its 265MW NorthBattleford gas-fired combined-cycleproject, also in Saskatchewan. “Our goal isto close the last open switch in the projectcreated by the spread risk on the mini-perms,” says Paul Bradley, Northland chieffinancial officer in Toronto.

Spy Hill is Northland’s first-ever rated bondissue, though it has issued corporateconvertible bonds, and has received acorporate income fund stability andsustainability rating in the past. The sponsorhas relationships with the life insurancecompanies that offer placement debt togeneration projects but the rated markettypically offers cheaper pricing. A privateplacement will probably not work for therefinancing of North Battleford either, sincethat deal will be bigger and require amuch broader investor base. Spy Hill willserve to introducer Northland’s fleet to therated markets deeper pool of investors.

This wider bond market access willcomplement Northland’s efforts toexpand its bank following. When it beganthe financing process for North Battleford,it wanted to attract international lendersto join their Canadian brethren, partlybecause it needed to find C$580 million

in debt, but also because it wanted tobuild new relationships to support aplanned C$1 billion slate of greenfieldrenewables financings.

Whereas Spy Hill was a strictly Canadiandeal – CIBC, BMO and Scotiabank were thelead arrangers – North Battleford featuredUnion Bank as a lead alongside BMO andCIBC; participating banks included AlliedIrish Banks, Mizuho, Siemens, SociétéGénérale, Sumitomo Mitsui BankingCorporation, BayernLB, Helaba andNatixis. The North Battleford mini-perm,which closed in August 2010, has a tenor ofconstruction plus seven years.

Northland expects North Battleford to beginoperations in the second quarter of thisyear, and for a bond refinancing to followsoon afterwards – potentially before year-end. Its second batch of solar projects couldcome to market in the second quarter, andtheir financing will have a stronginternational presence. For the 30MW solardeal, Northland is asking banks for debtwith an 18-year tenor, about eight yearslonger than Canadian banks prefer. In July2012, Northland closed an 18-year C$227million debt financing with Union Bank,Mizuho and CIT for 60MW of ground-mounted solar projects.

Spy Hill Power LPSTATUS

Closed 21 January 2013

SIZE

C$156.3 million ($157.3 million)

DESCRIPTION

Refinancing of 86MW peaking powerplant in Saskatchewan, Canada

SPONSOR

Northland Power

BOOKRUNNERS

Casgrain & Company and CIBC

DEALERS

BMO Nesbitt Burns, National BankFinancial and Scotiabank

SPONSOR FINANCIAL ADVISERS

Casgrain & Company and CIBC

SPONSOR LEGAL ADVISER

Borden Ladner Gervais

BOOKRUNNER LEGAL ADVISER

McCarthy Tétrault