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Situational Analysis

Vision
To be one of the worlds foremost producers of clean, renewable energy.
Mission
As one of the worlds foremost producers of clean, renewable energy, the
company strives to produce energy with a minimal impact on the environment
and ultimately provide a fair return to all stakeholders.
- Who: stakeholders
- What: Get a fair return through a renewable source
Key Stakeholder Preferences:
Board: There preference is to focus on renewable sources of energy
First Nation:
Energy Financial Ltd.
Key Success Factors (internal):

Strong relationships with the government, financial institutions,


communities and the industry

Very experienced management team

Strong technical expertise (ability to regulate complex regulatory


environment)

ability to provide Clean safe reliable

Able to secure PPAs which leads to financing which cannot be obtained


without PPAs

Key Success Factors (industry):

Work with the surrounding community in approaching new project and


strive to minimize the impact on local ecology (page 8)

Easy access to finance and capital allocation capabilities for viable


projects

Stakeholder management to maintain good relationships with key


stakeholders i.e. government, local communities (first nations) and
financial institutions

Key Risk Factor:

Asset retirement obligations or oppositions to certain environmental


projects (communities may be against some of the projects)

Shift in political environment. What the government can give, they can
take it away.

Economic downturn could lead to loss of financing for REC

Non-renewable energy sources prices can go down making this a less


attractive business (the fact for this is the energy index drop by 5%)

Not returns to shareholders and this is against their mission

Key target / goals

Profitability

Clean and environmentally focused

Constraint:

Company is clean focused and will only choose projects that are clean and
renewable energy.

The company must maintain a maximum debt-equity ratio of 0.75:1, if


additional financing is taken from Western Canada Bank

Maximum available long-term loan is $75M

REC is a publicly traded company and has a constraint of using IFRS for its
accounting policies

30% tax rate

PPA capacity - the company can deliver what they promise

SWOT
Strength

Global reputation

International reach

Passion to stay true to the renewable source of energy, even reheated


other sources of energy

Good compensation packages & good HR practices

Many companies want to partner with REC, given its size

they do a full list of due diligence before they accept a project

REC is known as technical experts in consultant

there are several sites that they are currently investigating (not putting all
their eggs in one basket)

Good and diverse board

Management is skilled and

they receive a clean audit each year and they have no collection issues

Good cash flow

Weaknesses

Higher day sales in receivables, when the billing cycle is on a monthly


basis

Have no solar and wind expertise and projects

Departure of staff after the merger

Bonus plan is considered above average for the industry (this can be a
strength or weakness depending on AI)

Company is not paying dividends and they claim that they are in the
growth phase but their stocks are dropping thus this is bad

Opportunity

Cost of wind energy will decline by 12% over the next five years and is the
fastest growing sector of renewable energy (this would be 2.6% each year
**important for calculations**)

They are no in solar energy and have the opportunity to enter that market
which is growing by 20% over the past decade. There is significant
opportunity both domestically and export markets

Renewable energy will grow by 2.6% p.a. from 2008-2035

Pursuing joint ventures with companies (for specific projects)

It is significantly challenging to provide clean and safe energy and REC is


doing it so they have developed a niche for themselves

Long-term partnerships

large market for products and Canada holds 20% (recognized as Solar
leaders around the world)

Hydro Opportunities
o Proven installed capacity and track record in Canada
o Canada can double its capacity

o upto 15000MW potential


o smallest greenhouse gas out of all of them
o you can make the partner with equity state with the first Nations
(partnership with First nations given its limited footprint)
Geothermal

Opportunity in BC, Alberta and Yukon

Threats

If government and environmental regulations and standards change, it


might lead to incremental costs for REC to achieve the clean audit
approvals.

New cheaper and easily accessible technologies are being developed and
the energy index has already lost 5%, this means that there is a potential
for losing its attractiveness

Solar industry is dependent on government incentives and the


government can take this away

Hydro: Regulatory hurdles and permits and licenses, first nations asking
for royalty (licenses to operate)

Current Financial Analysis


REC can be appropriately classified into a utility company. Typically, utility
companies are expected to have robust cash flows due to pre-signed power
purchase agreements. In addition, the capital intensive nature of the plants and
equipment, to some extent reduces the cash balances. Utility companies are
generally expected to pay dividends due to sound cash flows. However, REC has
not paid any dividends since incorporation and does not intend to do so in
future. This probably is one of factors contributing to declining stock price.
With a current ratio of 7.81 in 2012 and debt-equity ratio of 0.57, REC is well
positioned to take on additional debt to finance long term projects. The company
can further improve its cash position by improving receivables collection, which
currently is high at close to 60 days given that billings occur on a monthly basis.
The Operating margin (EBITA/Interest) has decreased to 30.91% in 2012 from
32.46% in 2011. Given, the higher capital assets required by utility companies, it
is wise enough to consider earnings before amortization, as that delineates a
better cash flow position. The decrease in operating margin could be attributed
to an increase of 1.4% in cost of sales and a 6.28% increase in general and

administration costs. However, the lower amortization and financing expense,


have improved overall profit margin by 53 bps, ROE by 8 bps and ROA by 5 bps.
The current losses and nil dividend payouts pose significant threats to the
current stock price, thereby limiting possibility to raise additional capital through
equity. Moreover, with the bank constraint of debt/equity of 0.75 and current
debt/equity of 0.57, there exists limited scope to raise debt.

Issues & Alternatives


Minor Issues

Retention of employees: Many employees are not happy with their new
roles in the merge company. They are still working on developing a
common culture. (Cultural fit)

Compensation

SG&A expenses /Merger problems

PCRIA - Problem, Consequences, recommendation, implementation, action


plan

Geothermal Energy
Pros:

More reliable than other renewable sources

Can be used to heat and cool residential and commercial buildings

Cons:

Geothermal facilities must be located near tectonic plate boundaries


which poses risk to natural disasters

Found only in BC, Alberta and the Yukon

Considerable costs involved

Greater risks of write off

ROR
Pros:

Western Canada has numerous opportunities for ROR development

Cons:

Require substantial government approvals making it a longer process

Hydroelectric Power
Pros:

Accounts for 60% of the Canadas total electricity production

Produce no air pollutants and release smallest quantity of greenhouse gas


emissions

Cons:

Requires numerous permits and regulatory approvals

Alter the surrounding ecosystems by disrupting natural flow of water

Requires higher degree of stakeholder management as revenue sharing


and equity interests are demanded by aboriginal communities

First nations take 1-1.5% of your revenues

Wind Power
Pros:

Increased involvement by government to make this a viable long term


source

Cost to produce electricity expected to decline by 12% in next 5 years

Financial resources and commercial credibility possible due to extensive


backing by large energy firms, industrial corporations and income funds

Fastest growing sector of renewable energy in Canada

Workforce expected to increase rapidly leading to employment


opportunities.

Cons:

Solar
Pros:

Viable option with abundance of clear skies

Long term commitments to purchase clean power is increasing domestic


development of this sector

Complete control of the entire supply chain

Has enjoyed market of 20% for than a decade

Will no longer need government incentives by 2025

Speculation of Alternatives
1. New Capital Project: Solar (no expertise, or experience)
1. they are on incentives from the government
2. REC looks at political risk
Pros:
Cons:
- the breakup of revenue is 40:30:30 (Hydro:Geo:Wind), if there is a hydro
project. You are decreasing your diversification and thus putting more eggs in
one basket
- Wind

Government likes wind and they want it to grow

12% decrease in cost over the next 5 years

Risk: because of rapid growth, there is skill shortage

2. Merger/Acquisition
Pros:

Fair Price?

Already making money

Cons:

No synergy (difficult culturally)

3. Expansion
Implementation
PAGE 7 (last paragraph)
- use the 20 licenses if its a water program

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