Industry Opportunities [Abridged]

September 3, 2009 Josh Lutton Managing Partner Woodlawn Associates

[email protected] +1 (847) 403-1099

Woodlawn Associates Confidential Business Consulting Executive summary

• and Gamesa, two vertically integrated turbine suppliers, have high gross margins but low returns on invested capital (“ROIC”) – Payoff from vertical integration may be too low to support additional capital base required

• industry leader in operating margin and ROIC despite modest gross margins – As market share leader, may get operating leverage from its scale

• U.S. operators put major turbine manufacturers in four groups – Blue chip, respected second tier, potential competitors, and reputation-challenged

• To improve performance, turbine manufacturers should: 1. Place significant R&D on key areas of customer interest (gearbox, grid compatibility, serviceability) 2. Explore new business opportunities such as NOCs, remote monitoring 3. Mount campaign to build reputation for reliability and transparency – Develop preferred tax-equity, project finance, and equity partners (reputation-challenged vendors only) 4. Design manufacturing process to minimize working capital and fixed asset needs 5. Create strategic supply chain optimization program

• Woodlawn Associates has significant experience in these areas – Contact Josh Lutton at [email protected] or +1 (847) 403-1099

Woodlawn Associates Confidential 2 Business Consulting About Woodlawn Associates

• Management consulting firm focusing on high tech, telecommunications, and industrial clients – Most recent work in cable TV, mobile phones, wind energy, and private equity

• Help clients with strategy, M&A, process optimization, channel design, and supply chain management

• Offices in Chicago, New York, and San Francisco – Extensive experience in China, Japan, Europe, and the United States

• Partial team experience: – Chief Quality Officer, Fortune 100 – Chief Supply Chain Officer, Fortune 100 – Master Black Belt, GE Wind Energy (China)

For more information:

www.woodlawnassociates.com +1 (847) 403-1099 [email protected]

Woodlawn Associates Confidential Business Consulting Ten companies supply more than 90% of the worldwide turbine market; Vestas is global leader, GE largest in U.S.

Wind Turbine Market Share • U.S.-based turbine manufacturers include GE, (MW) Clipper Windpower – DeWind and Nordic Windpower also based in U.S., 100 REpower Other Acciona but have very little market share 90 REpower Mitsubishi • , Vestas, Gamesa, , Siemens, Acciona Clipper 80 Acciona, and REpower based in Europe Sinovel Gamesa – Enercon does not participate in U.S. market Siemens 70 Suzlon – Vestas, Gamesa, Nordex. Siemens, and Acciona Suzlon have or are building U.S. R&D or manufacturing 60 Siemens facilities Percent Enercon – Gamesa and Acciona have both wind farm 50 Vestas development and turbine manufacturing operations Gamesa • Ensures a market for turbines but alienates some 40 possible customers

30 GE • Suzlon is an Indian company supplying GE globally 20 – Acquired >90% of REpower but due to German law does not have operating control 10 Vestas • Sinovel and Goldwind are Chinese companies 0 focused mostly on that market Global (2008) U.S. (2008)

Source: BTM Consult World Market Update 2008 (March 2009), U.S. Dept. of Energy Annual Report on Installation…2007 (June 2008), AWEA Project Database Woodlawn Associates Confidential 4 Business Consulting Firms have taken very different stances on the appropriate amount of vertical integration

Source: Emerging Energy Research, company reports, Woodlawn Associates analysis Notes: * uses gearless design Woodlawn Associates Confidential 5 Business Consulting Suzlon and Gamesa, two of the more vertically integrated turbine suppliers, have the highest gross margins

The financial data in this section refer Gross Margin % primarily to publicly-traded, pure-play turbine manufacturers, for which such 45% (1Q07-2Q09) data is readily available.

40% • Given their vertical integration, Gamesa and Suzlon should (and 35% do) achieve best-in-class gross margins 30% Suzlon Industry share leader Vestas Gamesa* • reaches only about 20% 25% • Industry gross margins have been Nordex slipping since 4Q08 20% REpower Vestas – Negotiating power shifted to buyers as market softened 15%

10%

5%

0% 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09

Source: Reuters, company reports Notes: * Gamesa data generally available every six months. Chart includes some interpolated data points Woodlawn Associates Confidential 6 Business Consulting Suzlon & Gamesa have low ROIC despite high GM%. Returns from vertical integration may be too low to support additional capital base required

Return on Invested Capital • Return on Invested Capital defined 35% (1Q07-2Q09) as 12-month operating earnings (less taxes) over the average capital invested in the firm 30% – Invested capital is shareholders’ equity + long term debt + interest- bearing portion of short term liabilities + dividends payable Vestas 25% – Equivalent to operating working capital + fixed assets

20% • Gamesa and Suzlon lagging. REpower Actions to consider: Nordex – De-integrate to reduce fixed asset 15% and working capital requirements – Manage working capital better – Reduce opex 10% – Increase scale – Improve gross margins (focus on costs) Gamesa* 5% • Other firms may also want to Suzlon consider these moves 0% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09

Source: Reuters, company reports, Woodlawn Associates analysis Notes: * Gamesa data generally available every six months. Chart includes some interpolated data points Woodlawn Associates Confidential 7 Business Consulting Wind farm operators say the most important criteria in turbine vendor selection are reliability-related

Most Important Criteria in Vendor Selection (# of mentions)

0 1 2 3 4 5 • Priorities have changed since sellers’ market ended Financeability “… A couple of years ago the priority was just access to turbines…” Highest availability / reliability Similar Head of Wind Development issues “… We are able to be more selective now than…in Vendor will be survivor the past, when we would take what was available…” Low risk of non-performance VP, Strategy & BD “… We’re seeing really, really interesting price Price reductions and getting more and more T’s & C’s amenable to us…” VP, Operations & Maintenance Size / wind rating Most important criteria are related to Other contract terms • predictability, reliability, and availability Other technical factors “… Financeability is most important and wraps a lot of the other items into it…” VP, Strategy & BD Relationship “… The first thing we look at in choosing a turbine supplier is what the expected Net Capacity Delivery schedule Factor will be, which depends on the overall reliability…” Vendor financing MD, Operations

Source: Woodlawn Associates interviews. n=8. Except as noted, all interviewees were with the top 20 wind farm operators in the U.S. Woodlawn Associates Confidential 8 Business Consulting The most desired turbine improvements also relate to reliability—especially of the gearbox

Most Desired Turbine Improvements (# of mentions) • The gearbox generates the most interest in improvement 0 1 2 3 4 5 6 “… I would like turbines to be able to catch gearbox problems earlier. It can cost $300-400k to replace a Gearbox gearbox… Field Service Manager, Maintenance Provider Reliability / availability “… We would love to see the elimination of gearboxes. It can cost $400,000 or more to replace the gearbox…” VP of Strategy & BD Serviceability / ergonomics “… We continue to have gearbox problems…” Managing Director, Operations Blades “… Various vendors have struggled with gearbox Price reliability…” Managing Director

Performance • Serviceability / ergonomics also important Training “… Making the machines more service-friendly would help…” VP, Strategy & BD Pitch system reliability “… Turbine manufacturers only meet the minimum required safety standards to be installed. We would like to see Cooling them go many steps beyond that…we have techs get into their early 40s and they can’t work anymore, but Shaft grounding that is just when they know the most…” VP, Operations & Maintenance Grid compliance

Source: Woodlawn Associates Interviews. n=9. Except as noted, all interviewees were with the top 20 wind farm operators in the U.S. Woodlawn Associates Confidential 9 Business Consulting Comments of 20 largest U.S. wind farm operators put major turbine manufacturers in four main groups

Examples Top 20 U.S. Wind Farm Operator Comments

• GE “… Blue chip. Easily financeable…” Blue Chip • Vestas “… Reliable, solid, proven product…” • Siemens “… Been around a long time. Considered reliable. Trustworthy and credible…” “… Probably the best turbine available in the U.S.…” “… Run and run and run…”

• REpower “… Interesting offer. High quality, conservative design. Proven in other markets…” Respected Second Tier • Nordex “… Interesting machine. Wouldn’t be scared to go with them…” • Mitsubishi “… Very good technology. Up and comer…”

??? • Acciona “… Pretty good turbine. Solid, large company…” Possible Competitors • Gamesa “… Who are they, a developer or turbine supplier? At what point would my supply be compromised so they could deliver to their own projects?” “… The only reason I would buy is they make an offer I can’t refuse. I would advise them to get out of the business of farms…”

• Suzlon “… I would disqualify Clipper and Suzlon, as both have had to do mass overhauls Reputation- • Clipper that have left turbines off-line for days or weeks as they figured out how to make Challenged them work…” “… Impression is not the most reliable or highest quality turbine…” “… Blemished. Good company, but blade problems have hurt them. Hard to get anyone excited about financing them…” “… Terrible product, based on what I hear…”

Source: Woodlawn Associates interviews Woodlawn Associates Confidential 10 Business Consulting To improve ROIC, turbine manufacturers should consider focused programs to improve profitability…

ROIC

Operating Working Fixed Income Capital Assets

Revenue

Volume Price New Products COGS Opex

• Price in dollars • Move mix to • Explore NOCs, • Negotiate with • Benchmark • Make more use higher margin remote suppliers for SG&A, R&D of performance products operations, etc. better prices versus guarantees • Raising prices • Focus R&D on • Create cost competitors and broader industry • Address not realistic in areas of highest reduction reliability issues current buyers’ customer targets for each • Hiring queue (PR and market interest subsystem through CEO engineering) • Fill, rent, or sell • Selective budget excess capacity cuts • Localize supply chain for U.S. and China Woodlawn Associates Confidential 11 Business Consulting …reduce working capital…

ROIC

Operating Working Fixed Income Capital Assets

Inventory Cycle Time Throughput Suppliers Others

• Build to orders, • Reduce CT of • Increase • Outsource • Reduce demand not inventory slowest step in capacity of subsystems that variability production bottleneck steps don’t through better • Enforce differentiate forecasting or mathematically • Reduce wait innovative optimal times between • Prefer suppliers customer inventory policy steps of with contracts production – Faster delivery times • Effect virtual (including – Less variable pooling of transportation) delivery times inventory – Extended payment terms • Parallelize • Get annual vs. production • Lengthen order volume process payment terms purchase discounts and reduce volume / order Woodlawn Associates Confidential 12 Business Consulting …and reduce capital tied up in fixed assets

ROIC

Operating Working Fixed Income Capital Assets

Optimal level Lease vs. Intangible Utilization of integration Own Assets

• Divest or avoid • Fill, rent, or sell • Consider • Where goodwill non- excess capacity leasing facilities impairment is in differentiating and equipment question, take component • Delay write down supply investments in operations new plants • Stop – Towers capitalizing – Gearboxes development – Generators – Castings expense • Note: these may increase taxable income

Notes: Also consider government financing to fund asset acquisitions instead of traditional investor capital Woodlawn Associates Confidential 13 Business Consulting Vendors may want to consider a focused program to build their reputations for reliability

1. Get on the speaking circuit. Describe problems, company response, positive outcome

2. Encourage customers to do same

3. Go on a road show to major tax-equity, project finance, and equity providers

4. Develop preferred finance partners (reputation-challenged vendors only) – Partners would agree to offer competitive terms to developers – Vendor may offer incentives such as warrants

5. Publish availability data for entire fleet on web site – Create employee bonuses for high availability – Develop reputation for transparency

6. Offer generous performance guarantees in some cases – Focus on areas near other customers and with similar wind regimes and environmental characteristics

7. Place significant R&D on key areas of customer interest – Gearbox – Grid compatibility and fault-ride through – Ergonomics and serviceability. World-class service manuals and training curriculum – Reduce technology risk with accelerated life testing and carefully phased rollout of new technology

Woodlawn Associates Confidential 14 Business Consulting Woodlawn Associates’ principal has assisted many companies in new market analysis and executed startup operating plans

Typical Steps in New Market Analysis Example Market Analysis and Execution Plan

[Redacted] is an attractive opportunity, but it is subject to high business risks, a low service profile, and acquisition targets are • Work with management to generate a list of more scarce than expected possible opportunities

Market Attractiveness to Assessment Assessment – Interview suppliers and customers for additional ideas Characteristics Client

Market size $450M • Very limited service proposition Attractiveness of ? 80-90% of rentals only require delivery service Market growth 8-14% service model ? Some security / painting services but none differentiating • Attractive underlying economics indicating a • Rate the attractiveness of each possible new two-year payback period • Client already has many of the requirements to Profitability • Competitor A EBITDA ~40% Ability to leverage help it compete in this market • Comments and market indications • Units are similar to client’s in size, material support market profitability current assets and and transportability market resources • Dealer network and term-leasing procedures • Top three players share ~30% of the market, support business otherwise regionally and locally fragmented • Strong demand currently stabilizes competitive • Construction segment would have some overlap – Size, growth, profitability, capital requirements environment; increasing number of with Client construction customers, likely Competitive intensity players / units could increase intensity Fit with current common call point • Competitor A has somewhat differentiated offer, customer base • Limited synergies with other customer segments; but otherwise characterized as a commodity although they may rent, they would not be not a – Competitive intensity, barriers to entry market primary user

• Somewhat seasonal • Many, many small companies. Number of Availability of targets Business and market • Currently supply-constrained, with increasing medium-sized companies is somewhat limited product costs risks • Customers driven by availability and price • Volatile short-term prices

• Examine the fit of each market with the client’s • Low barriers to entry encourage many smaller players to enter market Barriers to entry • However, national customers (e.g., homebuilders, retail) typically secure contracts with national existing assets, capabilities, and business model providers

Woodlawn Associates Confidential 18 Business Consulting • Identify companies already offering these services We have a detailed plan for 2008 – Include possible acquisition candidates

Timing Category 2007 4Q 2008 Q1 2008 Q2 2008 Q3 2008 Q4

1 • Common regional • Begin FD with • List risks Optimize distributor certain sub-accounts channel incentives based on partners retail performance metrics

– Key assumptions 2 3 • Conduct retail • Finish staffing regional • Continue field sales • Continued retail sales census across retail HQ sales ops force expansion force expansion markets • Expand regional retail funded by clawing – Market risks • Begin staffing sales force back distributor margins (FD) Improve field regional HQ sales sales force ops • Begin ramp on • Complete ramp of and marketing training organization effectiveness professional sales and product training • Standardize retail data • Roll out mini-RCM in • Begin ramp on collection schedule, • Build pro-forma financials definitions, process, Gradual improvements in data collection and analysis Country A, B, C, and expanded retail process and systems within manual framework D sales team and analysis

4 • Start increasing media • Media to X% of • Media to X% of • Media approx. flat Increase spending modestly. revenue in retail revenue in retail with Q3, but Fund by BTL markets markets – need to declining to around media • Create project startup plan efficiencies and higher gain high-tier share X% of revenue in spending A&P budget retail markets

5 6 – What needs to happen, month-by-month or quarter-by- • Upgrade product • Example: lock down 2008 portfolio and Partner better marketing talent sales plan with • Stand-alone GTM prod. quarter w/ Operators Customer A, B, and C and Improve mgt team Product • New leadership in biz ops Effectiveness and carrier sales

Woodlawn Associates Confidential 52 Business Consulting Woodlawn Associates Confidential 15 Business Consulting A strategic supply chain optimization program would improve both cost of goods and capital efficiency

Set Cost & Qualify and Divide Make vs. Integrate & Performance Negotiate w/ Problem Buy Decisions Finalize Targets Vendors

• Divide turbine into • Set cost targets for • Indentify possible • Determine subsystems • Ensure all subsystem standard subsystems current or future suppliers that should be interface assumptions • Make one person product and each • Rate on criteria such outsourced are consistent responsible for both subsystem as (historical and/or • Consider: • Validate overall expected cost and performance • Also set minimum expected): – Potential for system performance in of each subsystem performance and – Price differentiation light of subsystem (usually in R&D or quality metrics – Quality – Vendor pricing, quality, decisions manufacturing) – Technical performance and tech. performance – Fixed asset & working • Audit selected vendors – Capacity as appropriate – Delivery time / flexibility capital requirements – Shipping cost / time – Minimum efficient scale • Iterate as necessary – Payment terms – Number of possible – Discount structure suppliers – Keeping design but outsourcing mfg

Divide turbine into subsystems and determine cost and The one step of a strategic supply chain optimization program performance targets would be to examine the optimal level of vertical integration

• Could be for new turbine or Cost Target Breakdown cost-reduction program on existing design Blades Gearbox Generator Castings Tower Controls Fixed Asset Low High Moderate High Moderate Very Low • Important to have cost targets Req’t by subsystem / manager Working Turbine Size (MW) 2.1 High High High High High Very Low Expected Price (000 $) 3,000 • Experienced supply chain Capital Req’t GM Target 35% negotiation experience helpful Potential for Example in getting best terms from High Moderate Low Low Low Very High Allowable COGS (000 $) 1,950 differentiation suppliers Difficultly of Subsystem Breakdown: integration with Outputs: Cost • Need to consider quality, Moderate Moderate Moderate Low Low Very High Target payment terms, cycle time, other (000 $) Manager Possible 3rd Party Suppliers shipping time and cost, and subsystems discount structure in addition Industry Tower 439 Smith DMI, Trinity, Towertech to price Rotor / Blades 439 Johnson LM Glasfiber capacity No Maybe No No No No Gearbox 244 Nagata Winergy, Hansen bottleneck Generator 244 Liu ABB, Siemens Importance of 195 Ramirez WSL, Mitsui Controls 195 Schneberger Foxcon, Flextronics process know- High Moderate Moderate High Low Low Other 195 Knight how # and quality of Total 1,950 potential Low Moderate High High High High suppliers Keep design, Conclusion Insource Outsource Outsource Outsource Outsource outsource mfg

Woodlawn Associates Woodlawn Associates Confidential 21 Business Consulting Confidential 16 Business Consulting Woodlawn Associates Confidential 16 Business Consulting