DEALTALK-Financing squeeze to push Canada green-power M&A

* Small green developers need cash, seen as prime targets

* Debt financing demand seen outstripping supply

* Deep-pocketed producers, utilities likely buyers

By Susan Taylor and Nicole Mordant

OTTAWA/VANCOUVER, July 12 (BestGrowthStock) – Conditions are ripe
for consolidation in Canada’s green energy sector as small,
cash-hungry developers seek scarce capital to advance
government power contracts through to project construction.

These companies make alluring targets for deeper-pocketed
players seeking to expand their green-power portfolios with
profitable, shovel-ready and secure projects.

“We have a surplus of power, we have a number of large
contracts already awarded, and we could see fewer contracts
awarded soon,” National Bank Financial analyst Rupert Merer
said.

“So any company that’s interested in greening their
portfolio, or continuing to grow, is going to have to look to
acquisition,” he said.

With 184 green-power projects approved in the province of
Ontario and 23 in British Columbia since March, demand for debt
financing is expected to far exceed still-stingy supply as the
market continues to recover from the credit crunch.

“We’re definitely looking at some consolidation,” NCP
Northland Capital Partners Inc analyst Tania Maciver said.
“It’s probably a necessity.”

Considered individually, each project awarded under
Ontario’s lucrative fee-in tariff program for green energy and
British Columbia’s clean power call likely merits financing,
Jacob Securities power and infrastructure analyst Bill Cabel
said.

The problem is timing. All told, the projects represent
more than 3,500 megawatts of power and most are expected to
start operating between 2011 and 2013.

Capital spending will be in the C$13 billion ($12.5
billion) range, Cabel estimates, which means developers could
be shopping for close to C$10 billion in debt financing over
the next several years.

In recent years, however, domestic banks and insurance
companies have only provided, on average, about C$600 million
annually for the debt portion of renewable power developments,
Cable said. In 2007, the amount rose to a high of C$2.7
billion.

Traditional lenders could “step up” and reallocate
resources to match demand, and nontraditional lenders, such as
European banks or mezzanine funds may fill the void, he said.

But if there is a funding shortage for the glut of projects
on the horizon, developers may be forced to sell or seek
partnerships with bigger, more mature companies that can
self-finance or secure financing easily.

GOLD-PLATED DEAL

Small power developer Finavera Renewables Inc (FVR.V: ) said
the phone was “ringing off the hook” after it won 25-year
contracts for four wind farms from government-owned utility BC
Hydro in March. It expects to announce a partner by summer’s
end, news that may give a jolt to its anemic stock, which has
been trading around just 8 Canadian cents a share.

Finavera is undervalued, said its chief executive, Jason
Bak, because the market is overly worried about how it will
secure financing.

“We have 300 megawatts of gold-plated electricity purchase
agreements that are issued by a Triple-A rated utility that
will yield over C$2.5 billion in revenue over the next 25
years,” he said.

“I believe the market is waiting for us to have the
financing partner in place before it starts giving us credit
for the asset.”

Many of Canada’s mid-sized power developers have said they
are looking for deals to acquire projects awarded to smaller
companies in Ontario and British Columbia. Potential buyers
include Brookfield Renewable Power Fund (BRC_u.TO: ), Innergex
Renewable Energy Inc (INE.TO: ), Northland Power Income Fund
(NPI_u.TO: ), Plutonic Power Corp (PCC.TO: ) and Algonquin Power
and Utilities Corp (AQN.TO: ).

Foreign companies are also expected to cast a keen eye on
Canada, notably European operators and financiers with
green-power project experience.

“I know some developers out of Spain who are looking at
Canada, looking for solar projects that they can buy,” Merer
said.

Of the 200-plus renewable power contracts recently awarded,
Merer estimates that 10 to 20 smaller projects could be picked
up in the next year.

Tiny Swift Power Corp (SPC.V: ), which won a 20 MW purchase
deal in March from BC Hydro, recently agreed to be acquired by
Fort Chicago Energy Partners (FCE_u.TO: ) for about C$9.7
million, or 35 Canadian cents a share.

Fort Chicago, with annual revenues of more than C$600
million, will take over development of Swift’s C$60 million
hydroelectric project.

“To the point that you’ve won a contract, you’ve spend very
little money,” Cabel said. “The big money is at the time of
construction.”

($1=$1.04 Canadian)
(Editing by Peter Galloway)

DEALTALK-Financing squeeze to push Canada green-power M&A