T-Net British Columbia: Home Member Login | Employer Login

A monthly column focusing on new and emerging BC publicly listed technology companies     Technology Futures:     November 3, 2008 By Michael Volker Investing in BC's New Power Producers In the last week of October, I checked out the 6th annual Independent Power Producers Association of B.C. (IPPBC) Conference in Vancouver. While the mood at the conference was not overly up-beat due to the current economic crisis and the declining commodity (including energy) prices, it occurred to me that this might just be a great time to look at making some energy investments. I believe that, because valuations are down today, and energy needs will not disappear, it's a good time to consider taking some equity positions. Power demand will only increase. At the same time, the Province has a goal of achieving energy self-sufficiency by 2016. The Joint Industry Electricity Steering Committee (JIESC) forecasts that BC Hydro's average cost per MWh will increase to about $125 per MWh by 2016 from $60 per MWh in 2007, and to over $140 per MWh by the early 2020s, generally growing at 3x inflation. In the near term, JIESC expects the average BC Hydro cost per MWh to increase by 3.75% in 2009 and by 10.17% in 2010. Remember that on October 1st of this year, BC Hydro introduced a 2-step conservation rate for its residential customers. Previously, we've been lucky to pay only 6.55 cents per KWh (Kilowatt-hour), i.e. $65.50 per MWh. Now, we're going to pay 5.98 cents per KWh for the first 1,350 KWh and then 7.21 cents after that - still cheap. In California, it's double that (the US residential average is 11.05 cents). In November, 2008, BC Hydro will be accepting Requests for Proposals from independent power producers to supply 5,000 GWh per year. Let's take a look at a few of B.C.'s publicly-traded power (and related) companies. I've picked one from each of the three more popular renewable resources: Water, Wind, and Sun. These are:  Company Current Price 52-wk lo/hi Plutonic Power Corp (TSX: PCC) 2.80 1.77 - 9.14 Naikun Wind Energy Group (TSXV: NKW) .35 .24 - 3.75 Day4 Energy Inc (TSX: DFE)  1.90 1.61 - 7.20 Plutonic Power Corp (TSX: PCC) started life in 1999 as a Capital Pool Company (CPC) on the Venture Exchange. In June, 2007 it graduated to the TSX. Originally, it was seeking a technology acquisition but when the dot-coms bombed in 2000, founder and entrepreneur Donald McInnes decided to stick with his expertise in natural resources and ultimately jumped on the opportunity to become a hydro power utility as the B.C. Government encouraged private companies to take the risks involved in the exploration, analysis, and development of new power projects. Here in B.C., our mountainous geography endows us with many glacially-fed rivers that, unlike dams, can be tapped to drive high-efficiency turbines. These so-called "Run-of-River" projects are totally green, and once constructed, can provide an almost perpetual source of energy that can be fed into the BC power grid. Much like a high-tech company, there's a great deal of up-front development work and feasibility analysis that has to be done. Many people think that one only need apply to the government for a water license but there's much more to it than that! There are numerous regulatory bodies and groups that one must deal with - ranging from the department of Fisheries and Oceans (to ensure that fish are safe) to aboriginal groups in whose territories these projects fall.  Then, when these hurdles are all overcome, the question of project financing comes up. These are not projects that you can bootstrap and fund in steps as milestones are reached. The whole financing package has to be secured at the outset. Of course, it also takes millions of dollars of risk capital just to get to the project finance stage.  So like high-tech, it's risky. And, like high tech the rewards can be substantial. There is one huge difference and this is what hooked me: once the end product starts shipping, Energy - in this case, it will always be consumed and will provide the company with a long-term annuity.  In order to get to the point of submitting a proposal - which is no small task - the Company completed a couple of private placements in late 2004 and early 2006 providing around $5 million in working capital. Flow-through tax credits were helpful in raising some of this money. For Plutonic, the hard work paid off in mid-2006 when BC Hydro entered into an Electricity Purchase Agreement ("EPA") with Plutonic. Under the EPA, BC Hydro will purchase 752 GWH (Gigawatt-hours) of electricity annually ($60-$70 million/yr in revenue) over a 35-year period starting in 2010. At a construction cost of approximately $500 million, that's a healthy and reliable ROI. The site for this is north of Powell River on the East Toba river and Montrose Creek. McInnes pulled off a major financing coup by getting GE Energy Financial Services to put up this amount in a general partnership that gives GE a 49% equity interest and 60% economic interest in return for $100 million of equity and $400 million of debt arranged by GE. After the initial 35 year period, GE's economic interest drops to 49%. This means that Plutonic gets 40% of the revenue. With just under 50 million shares (fully diluted), that works out to $0.56 per share for Plutonic's shareholders. And that's just one EPA on two rivers. There are 38 more sites being worked on which, together with the two in hand, can generate 6,335 GWh of energy, more than eight times its first EPA. To get these additional 38 projects going, Plutonic financed the high-risk up-front expenses with a couple of equity offerings - $20M in November, 2006 and $32M in April, 2007. This funding also allowed McInnes to attract a stellar management team. The Company won't need to raise more equity capital till late 2009. In the meantime, GE has agreed to provide financing on subsequent projects on somewhat similar terms. Potential project funding of $4 billion will allow Plutonic to deliver on the next round of EPAs that BC Hydro will be announcing in the late spring on proposals that it will receive this November. By the way, for those investors who might worry about cost overruns - Plutonic Power and GE Energy Financial Services' Toba Montrose Run-of-River hydroelectric project is on budget and on schedule heading into the winter season in the Toba Valley. Even so, The Partnership executed a $497 million fixed-price contract with Kiewit for the construction of Toba Montrose. As at June 30, 2008, $160.4 million was spent under the Kiewit contract. The project is now one-third complete. With all of the major civil road and bridge access finalized, a focus on key groundwork preparation for the powerhouse, penstocks and intake structures is the next phase of the project. Toba Montrose is on target for operation to begin mid-2010, creating enough energy for 75,000 homes. 250 fulltime jobs will be created over the three year term for Plutonic's first of many projects. What are the chances of Plutonic getting more EPAs from BC Hydro? With respect to the previous contracts announced in 2006, it should be noted that there is an expected attrition rate of more than 50% in projects that were announced due mainly to a lack of financing.  Because of Plutonic's financing agreement with GE for future projects, this will bode well for it in the current bidding process. The stock is trading around $3.00. Eight analysts are calling for one-year target prices ranging from $7.75 to $16.00 per share. Plutonics' website has some spectacular photos and videos that help to illustrate the magnitude of this opportunity. NaiKun Wind Energy Group (TSXV: NKW) NaiKun Wind Energy Group is proposing to construct and operate a renewable wind energy project off the north-west coast of British Columbia. The large-scale offshore wind farm will provide a cost-effective, clean, domestic energy source to serve the growing electricity market in British Columbia. NaiKun was previously known as Uniterre Resources Inc and has been around since 1967. It had some brand-name people associated with it such as Senator Jack Austin. Like a Capital Pool Company (such as Plutonic once was), it had become a shell looking for a deal. In 2002 the company decided to explore the feasibility of building a wind farm on the north end of Haida Gwai (Hecate Strait). Eventually, the Company changed its name to NaiKun Wind Energy Group. Wind is getting a lot of attention as a resource that can be tapped to produce electricity. The problem with wind is that its availability is far less predictable than water (especially here in B.C.!). However, some regions of BC, such as the Hecate Strait - the site for NaiKun's first project, are quite windworthy. Thanks to new technology, today's wind turbines can produce 200 times more power than they did a couple of decades ago. With renewable energy resources such as wind and water, a major factor in determining the actual cost of electricity on a per GWh basis, is location (sounds like real estate: location, location, location) and the cost of delivering the power. For that reason, it is very difficult to compare projects, i.e. wind vs water. Obviously, capital cost amortization periods vary as well. Nonetheless BC Hydro and the BC Government are keen to go green and diversify their input sources. The first phase of Naikun's project will be for 320 MW providing electricity to 120,000 British Columbia homes. NaiKun is preparing to bid into BC Hydro’s Clean Power Call Request for Proposals (RFP) as the first phase of this offshore wind energy project. The RFP was issued in June and proposals are due by late November, 2008. Like Plutonic, Naikun has assembled a capable team with impressive credentials to move it forward. Naikun also raised $5M in 2006 and another $4M (initially $3M - it was oversold due to the use of flow-through tax credits - same as Plutonic). It goes to show how well tax-credits can work! This allowed the Company to engage Sandwell Engineering Inc to do the technical studies. In August, 2007 a $35M private placement was completed by Cormark Securities at $3.35 per share. Then, in December, Joe Houssian, Intrawest's founder, joined NaiKun's board of directors. NaiKun has successfully raised a lot of cash to take that up-front risk that's typical of these projects. As of June 30th, the Company had $30.78 million in cash and cash equivalents. It's not clear from the Company's website or its SEDAR filings just how it will finance the building of the wind farms if it wins a BC Hydro contract. One might infer that its partnership with ENMAX Corporation is a step in that direction. If it receives an EPA from Hydro, it will likely be able to secure debt financing for the project. During 2008 NaiKun made many announcements regarding appointments, First Nations deals and the upcoming Call by Hydro. NaiKun trades on the Venture Exchange and its share price has fallen steadily from over $3.00 earlier this year to trade in the 30-cent range. If it gets back up to its most recent private placement pricing, that's a 10X return. We'll know in June, 2009 who gets the BC Hydro EPAs. Will NaiKun be one? Well, Plutonic took that risk, too and is now well on its way to becoming a substantial provider of green power. Day4 Energy Inc (TSX: DFE) Day4 Energy Inc makes solar panels. Unlike Plutonic and NaiKun, it is not a power utility. It is a supplier of power-generating hardware to utilities who, in turn, will sell the power using technology supplied by Day4. In this regard, it is more like the typical high tech company that I often write about in this space. Instead of securing an EPA, Day4 will get its green power "annuity" by supplying independent power producers with a superior product that keeps competitive suppliers at bay through innovative technology and patent protection. Day4's high performance photovoltaic (PV) modules  feature the company's proprietary Day4 Electrode, an innovative approach to module construction that directly replaces decades-old soldering methods, improving the efficiency, durability and lifetime energy output. Traditionally, PV cells have been plagued by high internal resistance meaning low current-delivery capabilities. Day4's technology requires a smaller foot-print for the same energy output giving it an edge. The team is led by technology industry pioneer and icon, Dr. John MacDonald, co-founder and the former Chief Executive Officer and Chairman of MacDonald Dettwiler & Associates Ltd., one of Canada's leading aerospace and information technology firms. He is an accomplished technology leader and has received eight Honourary Degrees and is an Officer of the Order of Canada. The brain behind the technology is Dr. Leonid Rubin, a professor of biophysics at Moscow State University who took early retirement in 1993. He has invented numerous technologies, 21 of which have been patented and primarily relate to solar energy conversion. His son, George Rubin, is Day4's President and brings his past experience in the financial industry and six years of experience in the PV industry to the table. He worked in corporate finance at Goepel McDermid Inc. and at Yorkton Securities Inc. where he participated in a number of public and private fund raising and merger and acquisition activities. He is a CFA charterholder with  a degree in accounting from the British Columbia Institute of Technology. He also has a physics degree from Moscow State University. In October, Day4 announced the completion of Mexico's largest industrial off-grid photovoltaic system, a 56 kW installation for L'Oreal Group, the world's leading cosmetics company. Solar power lends itself well to these types of applications where companies can generate their own power rather than taking it from the grid. In a similar fashion, wood mills used small run-of-river generators to power their plants. Conversely, smaller power producers can sell solar energy to their customers very effectively in remote communities poorly served by transmission lines or in tropical regions that lack power resources. Unlike the power producers, Day4 has revenues. In fact, in the first half of 2008, it reported sales of $28.5 million, up from only $3.4 million for the first half of 2007 - that's an increase of more than 700%. That's great, but the Company still reported a net loss of $3.2 million for the period. The cost of goods sold seems exceptionally high producing a mere 2.5% in gross margin (previously, gross margin was negative by 9%). Day4's MD&A (Management Discussion and Analysis) as reported on SEDAR does not really explain why the margin is so low. One can only infer that it could be due to the costs associated with increasing production capacity and capital cost amortizations. It may also be due to aggressive pricing to catapult it to high revenues and market share. It should also be noted that the Company reports that its capacity for 2008 is pretty well sold-out. To meet the demand, capacity is being doubled in the second half of 2008 to 97MW. It was only a year ago this month that the Company netted $92.7 million from an Initial Public Offering on the TSX Exchange (no CPCs or RTOs for this Company!). It's unusual to see an IPO but when you do see one, it's encouraging. The IPO price was $7.25 per share and the stock is now trading in the $2 range having hit a low of $1.61. It hasn't traded above the IPO price which must upset the IPO buyers but clearly this is a longer-term play and if the IPO was overpriced, this may be an opportunity to average down. For first-time investors, it appears there's lots of upside based on the bookings the Company is getting. [Disclosure Note: The writer is a shareholder and director of Plutonic Power Corporation.] It's about "TIME" Simon Fraser University's TIME Centre in downtown Vancouver recently expanded to SFU's Burnaby campus (Discovery Park) to offer incubator offices to entrepreneurs at both locations. TIME is an acronym for Technology, Innovation, Mentorship, and Entrepreneurship. It's more than just an incubator. Complete, ready-to-go furnished offices with high speed internet, servers, telephone and fax, printing, etc. are only the beginning. New Ventures BC, the Vancouver Enterprise Forum, the VANTEC Angel Network and WUTIF Capital all make TIME their home. Within TIME there is also the TIME Business Centre (a little like an airport business lounge but without booze) that is open to technology entrepreneurs and business people to use as a drop-in downtown office facility. Need to plug-in? Make some calls? Do some work? Hold a meeting? There are some great facilities for holding your company's AGM. Why hang out at MacDonald's when you can work productively at the TIME Centre? Drop by and check it out! It is located at SFU's downtown campus at 515 West Hastings St. You won't believe the price!  Check www.sfu.ca/time for info. Michael Volker, a technology entrepreneur, is Director of the University-Industry Liaison Office at Simon Fraser University and President of the Western Universities Technology Innovation Fund. He is a founder of the Vancouver Angel Network and past Chair of the Vancouver Enterprise Forum and past Chair of the B.C. Advanced Systems Institute. He owns shares in many of the companies he writes about. Copyright, 2008. What Do You Think? Talk Back To Mike Volker   Contact: mike@volker.org Tech Futures Archive B.C. High Tech Links