Financing in the Canadian Power Sector

Michael Badham, Partner

September 20, 2004

2 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

The Canadian Economy ProfileKey Economic Indicators / Drivers

Real GDP

Source: Statistics Canada Source: Government of Ontario

Ontario GDP by Industry, 2003 (in $1997)

Source: Government of Ontario Source: Statistics Canada

Canadian Inflation

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1999 2000 2001 2002 2003

($ m

illio

ns)

Canada Quebec Ontario BC/Alberta

1.90%

21.12%

4.94%

2.30%

3.79%

4.38%

12.25%

21.95%

7.62%

4.17%

5.37%

5.10%5.11% Primary

Manufacturing

Construction

Utilities

Transportation & Warehousing

Information & Culture

Wholesale & Retail Trade

Finance, Insurance & Real Estate

Professional & Administrative Services

Education

Health Care & Social Services

Public Administration

Other Services

15%

0%

3%

6%

9%

12%

1974 20021978 1982 1986 1990 1994 1998

TARGET LEVEL

Ontario EconomyReal growth, 2003 1.3%Nominal GDP, 2003 ($ millions) 493,416 % of Canada 40.6Personal Income ($ millions) 381,005 % of Canada 41.1Personal Income Per Capital ($) Ontario 31,133 Canada 29,341CPI Inflation 2003 2.7%Unemployment Rate 2003 7.0%

Ontario Total Trade 2003 ($ millions)Exports 308,903Imports 269,745Trade Balance 39,158

3 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

Opportunity in the Power Supply Market

• By 2014 demand could reach 32,000 MW.

• Total capacity connected to the grid is 30,501 MW.

• Accessible capacity is 27,500 MW. Typical demand is 25,000 MW.

• Goal: Refurbish, rebuild, or conserve 25,000 MW of generating capacity by 2020.

• Commitment: Eliminate coal generated electivity by 2007.

• Target: By 2010, 10% (+2,000 MW) of power will come from renewable, non-hydro sources.

• Need: To met demand and replace coal, 11,600 MW in new generation capacity by 2014.

Energy Production in OntarioBy Fuel Type

Nuclear, 46%

Hydro, 24%

Coal, 22%

Gas, 7% Other, 1%

Source: IMO

Source: IMO

Ontario Opportunity Through 2014

0

8,000

16,000

24,000

32,000

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(Cap

aci

ty -

MW

)

Nuclear Hydro Gas Non-Hydro Renewable New Renewable Coal

11,600 MW2,000 MW

Demand

4 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

Government Supply

Objective: To build non-hydro renewable energy of over 2000 MW by 2010

Capacity: RFI for 2,500 MW recently released

Opportunities

Bruce Nuclear Plant

Objective: Start-up Units A 3&4

Capacity: 750 MW X 2

Cost: $1.5 b - $2.0 b

Opportunity: Niagara Falls Hydro Plant

Objective: Additional Diversion Tunnel

Capacity: 100 – 200 MW

Cost: +$300 mm

Government Supply

Objective: To provide +300 MW of non-hydro renewable energy

Capacity: RFP (Closed August 2004)

5 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

The Value Environment

ProjectFinancingPartnerDundee

Advisory PartnerDeloitte / FMC

EngineeringPartnerAecon

Public PartnerGovernment of Ontario

6 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

The Trend Towards Private Public Partnerships

Source: The Canadian Council for Public-Private Partnerships

1996 1997 1998 ... 2003 2004

Ministry/ Department

Crown Corporation

Special Operating Agency

Privatization

Design/Build/ Operate

Design/Build/ Finance/Operate

Contract Out

Design/Build

Confederation Bridge

NAV Canada

Hwy 407

Sea to Sky Hwy

GTAA

Bruce Power LP

Deg

ree o

f R

isk T

ran

sfe

r to

Pri

vate

Secto

r

PrivateDebt/Equity

High

Low

7 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

The Deal Maker – Risk Transfer

Form

Risk Transfer (Government toPrivate Sector)

High

Ministry /Department

CrownCorporation

Design / Build

ContractOut

Design/Build/Operate

Design/Build/Finance/Operate

Privatization

IncrementallyAssumed Risks

Policy Risk &Approval Risk

RegulatoryRisk

RevenueRisk

CreditRisk

General Market& Economic Risk

Optimal Structures

Total Project Finance Risk

Low

8 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

Determining the Investment Opportunity

RiskTransfer

• User / Service Fees• Ancillary Charges

Revenue Inflow

• Operating Costs• Capital Costs• Financing Costs• Taxation Costs

Cash Outflows

Technical

Inputs

• Construction• Development• Advisory• Engineering• Other

•Debt Service

•Equity Return

• IRR Target

Financing

Government

PublicSector

Funding

PrivateSector

Funding

Bidder

ROI

9 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

Considering Public Sector Value for Money

Retained Cost/ Revenues

Raw Costs/Revenues

Risks and EfficienciesCompetitive Neutrality

Public Delivery

Risks• Opportunity Cost Risk• Efficiency Risk• Credit Rating Risk• Quality Risk• Rate Setting

• Higher Financing Costs

• Rate of Return

Cost

Costs under private delivery must be less to warrant use of private financing

Retained Cost/ Revenues

Raw Costs/Revenues

Private Delivery

10 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

Opportunity Assessment

Project Planning Go / No Go Decision Transaction Process Contract Execution Implementation

Bid Assessment Bid / No Bid Decision Bid Development Contract Negotiations Post Transaction Development

Public Sector Considerations Private Sector Considerations

• Private sector wants opportunities that:• Have a clearly articulated need• Commitment from public sector to

work with private sector and a strong ‘champion’ of the project

• Credible processes in place• Clear performance standards

• Implementation of any procurement process must consider public sector issues around

• Transparency and fairness of process• Public opinion / mood• ‘Bidabilty’ and bid costs• Requirements and realities of capital

markets

Success Factors

11 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.

An Action Plan for Canadian P3 Opportunities

Ontario BC Alberta Quebec

Establish Canadian presence to monitor developments in key

market places

Assess needs in comparison to skill sets

and capabilities – i.e. determine partnering

needs

Engineering Finance Advisory Supply

Confirms interest Leads to ‘front-end’

policy development

Present opportunities to selected provincial

governments in areas of need

Be proactive –do not wait for the opportunities to come to you.

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© 2004 Deloitte & Touche LLP and affiliated entities.