2Q 2013

Renewable Energy Generation: A new fixed income alternative

Renewable energy assets are positioned to be an attrac- institutional funds will increasingly come to a similar tive asset class. Long-term cash yields from renewable conclusion. energy assets are very attractive relative to investment Many utilities do not have the financial resources to alternatives with comparable risk. Additionally, the continue to invest, or even maintain, large renewable investible universe of renewable energy assets is large portfolios on their balance sheets. The enterprise value and growing, and asset ownership is migrating from of the Europe utility industry was €900 billion at the utilities and IPPs to investors. These trends will lead end of 2007. Five years later, at the end of 2012, it was to a lower cost of capital for deployment and help spur €450 billion. Distributed renewable generation, weak further development of renewable generation. load growth, excess capacity and aging infrastructure all Installed wind and large-scale solar power generation combined to severely pressure the financial wherewithal assets in North America and Europe have grown to over of the European utility industry. The same trends are 180 gigawatts, representing over $250 billion in asset accelerating in the US, and many utility and resource value. Utilities and independent power producers (IPPs) companies are seeking to monetize portions of their are still by far the largest owners of these assets. Over renewable generation assets. We estimate that over $23 trillion of capital exists in institutionally managed 10 gigawatts of existing wind generation assets in the funds from pensions, insurers, endowments and others US will change hands in the next two to three years, as which to date have not made direct investments in many tax equity structures flip and cash begins flowing renewable energy infrastructure. We expect this will to the equity investors. change. Much is written about the potential for publicly However, few new investment pools are being formed. traded yield oriented vehicles to invest in renewable gen- One impediment has been that direct investment eration assets. Indeed, we note that the successful US in energy assets requires a dedicated, specialist listing of NRG Yieldco (NYLD) and Pattern Energy (PEGI), investment management team. The / both of which have traded well post IPO, validate investor infrastructure fund higher fee model (the infamous “2% demand. Several vehicles have emerged recently in and 20%”) destroys the economics for an investor in Europe, with both Greencoat and Bluefield Solar floating renewable generation. Low risk, contracted renewable offerings on the Stock Exchange in the first part assets lack the high return potential that can bear high of 2013. fees without destroying returns. Some funds European feed-in-tariffs (FITs) and utility power purchase in Europe have addressed this challenge by assembling agreements (PPAs) for existing renewable energy proj- in-house teams of experts and are acquiring seasoned ects are creditworthy sources of long-term, fixed revenue operating assets in target countries, such as France (with exceptions for certain Southern European countries, and the UK. Several Canadian pension funds have also which have repeatedly reduced their FITs). Compared chosen to hire specialist teams to invest alongside IPPs with utility bonds of similar duration, investments in in existing projects, although these bilateral deals can renewable energy projects with long-term PPAs offer be cumbersome to originate and negotiate. several hundred basis points of additional return. This We see the potential for another alternative – a dedicat- comes with resource, operating and liquidity risk – much ed, managed fund structure focused on a fixed income of which can be mitigated by an investor who invests asset management model rather than an expensive, in diversified portfolios of projects with proven perfor- high fee, carried-interest incentive model. A dedicated, mance. Long duration cash yielding assets secured third-party manager of this type would have a fee by contracts with strong counterparties matches well structure that more closely aligns investment costs with the liability planning of many institutional investors. with attractive net returns. This would lower the cost of While public equity market investors seeking yield have capital for assets and bring forth from Utility, IPP and PE already recognized the favorable return versus risk sellers a broader set of assets with high-quality cash characteristics of renewable generation, we believe yield for investors.

Renewable Energy Generation: A new fixed income alternative 1 Four Things We Are Watching

Downstream Solar Power Electronics Transmission System The Impending Demand for residential Efficient power conver- Asset Sales Return of Sustainable solar is growing rapidly sion remains an area of As capital constrained Infrastructure IPOs and returns are increasing. high interest for private conditions continue for Following another dismal Private investors and investors and acquirors, many utilities globally year of IPOs in the sector public markets are sup- although valuation (particularly in Europe), in 2012, the beginning of portive of the sector, as benchmarks fluctuate utilities are increasingly 2013 seems to be turning evidenced by SolarCity’s significantly. ABB’s acqui- looking to find partners for a corner in the IPO market, meteoric rise in stock sition of Power-One in partial or full ownership of underpinned by the hugely price following its IPO. We April 2013 valued the com- their transmission assets. successful SolarCity expect to see adjustments pany at a 57% premium to We expect this trend IPO. However, this is not to the current third party its stock price, with several to continue as utilities a return to the IPO boom ownership business model other buyers rumored to globally find creative ways years of 2006 – investors as (1) solar system prices be seriously considering to free up capital. The are demanding a track continue to fall, making the acquisition at similar Chinese utilities have tar- record of revenue growth. geted transmission asset outright system ownership levels. We expect many more ownership as a preferred more attainable; and (2) best in class companies to way to expand interna- the lion’s share of the cur- IPO, although caution that tionally, although political rent returns are going to investors are much more and regulatory restrictions the large financial institu- discerning than in the 2007 in many regions restrict tions that are providing the – 2009 period. funding for the leases. ownership to partners from the same region.

Equity Market Context After underperforming the broader market over the past several years, sustainable infrastructure equities have seen resurgence this year, especially in 2Q

Sustainable Infrastructure vs Broad Equity Market LTM Performance by Subsector

Pollution Control 53% 130% Water 24% Biofuels / Bioproducts 9% 125% Demand Side Management 123% 10% Advanced Lighting 54% 120% Environmental Services 13% Solar Equipment / Systems 37% 115% Transportation 173% 110% Advanced Materials 110% 10% Renewable Power Generation 15%

105% Energy Storage 14% Fuel Cells / Clean Technologies 48% 100% Solar - Midstream 135% Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Wind 72% Solar - Upstream 34% GCA Sustainable Infrastructure Index MSCI The World Index Solar - Downstream 252% S&P 500 17% 0 25 50 75 100 125 150

The performance of Elon Musk’s companies (Solar City and Tesla) drove the strong outperformance in the downstream solar and transportation sectors

Renewable Energy Generation: A new fixed income alternative 2 M&A Market 1H 2013 M&A activity has tracked slightly below the previous year, although a larger number of transactions indicates that average deal size continues to decline

YTD M&A Activity

By Target Geography By Target Subsector Source: Bloomberg New Energy Finance, Cleantech Group, CapitalIQ Group, Cleantech Finance, Energy New Bloomberg Source: Central and Central and Power Power South America 2% South America 2% Electronics 5% Electronics 5% Wastewater and Wastewater and Water 5% WaterOthe 5%r Other APAC APAC 14% 14% 23% 23%

IPP IPPWaste Waste North North Transaction Volume ($mm) 11% 11%Services Services America America 26% 26% 32% 32% $23,509

EMEA EMEA # of Transactions Smart Grid Smart Grid 43% 43% 79 18% 18% Wind Wind Transactions > $250mm 21% 21%

22

21% 21%

Wind Wind

18% 18% 43% 43%

Smart Grid Smart Grid EMEA EMEA

32% 32%

26% 26%

America America

Services Services

11%

11% North North

Waste Waste IPP IPP

23% %

YTD Top M&A 23Deals Announced

APAC APAC 14% 14%

Water 5% Water 5%

Other Other

Wastewater and

Date Target Acquiror TransactionWastewater and Sector

South America 2%

South America 2% Electronics 5%

Announced Value Electronics 5%

Central and Central and

Power 4/18/13 ista International GmbH CVC Capital Partners Ltd $4,046 Smart GridPower Renewable Power N/A TrustPower Limited Washington Securities Pty Ltd $2,087 Producer 4/18/13 Befesa Medio Ambiente Triton $1,405 Waste Services

6/17/13 AVR-Afvalverwerking B.V. Cheung Kong $1,258 Waste Services

1/7/13 EnergySolutions Energy Capital Partners $1,178 Waste Services 4/22/13 Power-One ABB $1,000 Power Electronics 1/2/13 Zipcar Avis Budget Group $647 Advanced Transportation Greengate Power Corporation, 300 4/8/13 Megawatt Blackspring Ridge Wind Enbridge Inc.; EDF EN Canada Inc. $588 Wind Project China Resources Power Holdings 5/10/13 Wind Farm Group $552 Wind Co. Ltd. 4/15/13 Caraustar Industries, Inc. H.I.G. Capital, LLC $519 Waste Services

Source: Bloomberg New Energy Finance, Cleantech Group, CapitalIQ

GCA served as a Financial Advisor to Charterhouse on the €3.1 billion sale of ista to CVC Capital Partners

Renewable Energy Generation: A new fixed income alternative 3 Financing Landscape IPO volumes in 1H 2013 have already exceeded the annual total for 2012, setting a back drop for the first increase in annual volume since 2010

YTD IPOs

Pricing Issuer Sector Exchange Deal Market Offer Price Aftermarket Date Value Cap ($/share) (%) June-28 05/10/13 Mighty River Power Geothermal New Zealand $1,439 $2,400 $2.10 (11.2%)

04/24/13 Alupar Investimento SA Wind Sao Paulo $405 $4,175 $9.13 8.1%

03/27/13 Greencoat UK Wind PLC Wind London $394 $419 $1.52 6.3%

04/22/13 BIOSEV SA Biomass & Waste Sao Paulo $347 $1,188 $7.43 (15.4%)

Hannon Armstrong Sustainable General Financial & 04/18/13 NYSE $177 $196 $12.50 (5.0%) Infrastructure Capital Inc. Legal Services

01/30/13 Energy Absolute PCL Biofuels Thailand $103 $811 $0.18 22.7%

03/13/13 Silver Spring Networks Inc. Smart Grid NYSE $93 $1,161 $17.00 46.7%

06/10/13 BioAmber Inc. Biofuels NYSE $80 $125 $10.00 -32.00%

Average $380 $1,310 2.5%

Source: Bloomberg New Energy Finance, Cleantech Group, CapitalIQ

By Target Subsector The private capital markets have been challenged due to a lack of exit options; if the IPO market continues Lighting to improve, investors’ risk appetite is 20% IPP likely to increase 14%

Other Transaction Volume ($mm) Solar 29% 14% $23,509 # of Transactions Wind 79

12%

6% Transactions > $250mm

6% Agri

s Fuel Cell 22 Fuel Cells 6% Agri

6% 12%

Wind

14%

%

Source: 29Bloomberg New Energy Finance, Cleantech Group, CapitalIQ Solar

Other

14%

IPP

20% Lighting

Renewable Energy Generation: A new fixed income alternative 4 YTD Top Private Placements

Date Target Acquiror Transaction Sector Announced Value 6/17/13 Sanan Optoelectronics Co Fujian San'an Group Co., Ltd. $539 Lighting Renewable Power 6/7/13 Aela Energia Actis Capital LLP $290 Producer Total Energies Nouvelles Activités 5/29/13 SunPower Corporation $200 Solar USA

5/1/13 Intrexon Corporation Third Security $150 Agricultural

Goldman Sachs Group, Merchant 6/5/13 ReNew Power Pvt. Ltd. $135 Wind Banking Division 5/13/13 Bloom Energy Corp Credit Suisse AG $130 Fuel Cells China Water Investment Co., Ltd.; Qianjiang Water Resources 5/27/13 Zhejiang Water Resources & Electric $122 Wastewater and Water Development Co Investment Group Co., Ltd. Manufacturing / Industrial 5/30/13 Xiangtan Electric Manufacturing Hunan Hi- $112 / EPC FE Clean Energy Group Inc ; International Finance Corp ; Asian Development Bank ; Proparco; 4/29/13 NSL Renewable Power Pvt Ltd Deutsche Investitions Und; $90 Wind Entwicklungsgesellschaft mbH ; Asia Clean Energy Pte Ltd ; GS Power Co Ltd 4/3/13 Gaelectric Developments Ltd Proventus AB $84 Wind 4/30/13 Clean Energy Renewable Fuels Babson Capital $30 Advanced Transportation

Source: Bloomberg New Energy Finance, Cleantech Group, CapitalIQ

GCA served as Exclusive Placement Agent to Clean Energy Renewable Fuels on its $30 million mezzanine debt financing by Babson Capital

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Media Contact

Caitlin Stevens T 212.946.3365 [email protected] Zürich New York San Strategic partnership Francisco with CITIC Securities Beijing

Strategic partnership with Sangyo Sosei Advisory Inc. Tokyo

Strategic partnership with CITIC Securities Beijing

RenewableStrategic Energy partnership Generation: A new fixed income alternative 5 with Sangyo Sosei Advisory Inc. Tokyo