/VANCOUVER (Reuters) - Conditions are ripe for consolidation in Canada's green energy sector as small, cash-hungry developers seek scarce capital to advance government power contracts through to project construction.
These companies make alluring targets for deeper-pocketed players seeking to expand their green-power portfolios with profitable, shovel-ready and secure projects.
"We have a surplus of power, we have a number of large contracts already awarded, and we could see fewer contracts awarded soon," National Bank Financial analyst Rupert Merer said.
"So any company that's interested in greening their portfolio, or continuing to grow, is going to have to look to acquisition," he said.
With 184 green-power projects approved in the province of Ontario and 23 in British Columbia since March, demand for debt financing is expected to far exceed still-stingy supply as the market continues to recover from the credit crunch.
"We're definitely looking at some consolidation," NCP Northland Capital Partners Inc analyst Tania Maciver said. "It's probably a necessity."
Considered individually, each project awarded under Ontario's lucrative fee-in tariff program for green energy and British Columbia's clean power call likely merits financing, Jacob Securities power and infrastructure analyst Bill Cabel said.
The problem is timing. All told, the projects represent more than 3,500 megawatts of power and most are expected to start operating between 2011 and 2013.
Capital spending will be in the C$13 billion ($12.5 billion) range, Cabel estimates, which means developers could be shopping for close to C$10 billion in debt financing over the next several years.
In recent years, however, domestic banks and insurance companies have only provided, on average, about C$600 million annually for the debt portion of renewable power developments, Cable said. In 2007, the amount rose to a high of C$2.7 billion.
Traditional lenders could "step up" and reallocate resources to match demand, and nontraditional lenders, such as European banks or mezzanine funds may fill the void, he said.
But if there is a funding shortage for the glut of projects on the horizon, developers may be forced to sell or seek partnerships with bigger, more mature companies that can self-finance or secure financing easily.
GOLD-PLATED DEAL
Small power developer Finavera Renewables Inc said the phone was "ringing off the hook" after it won 25-year contracts for four wind farms from government-owned utility BC Hydro in March. It expects to announce a partner by summer's end, news that may give a jolt to its anemic stock, which has been trading around just 8 Canadian cents a share.
Finavera is undervalued, said its chief executive, Jason Bak, because the market is overly worried about how it will secure financing.
"We have 300 megawatts of gold-plated electricity purchase agreements that are issued by a Triple-A rated utility that will yield over C$2.5 billion in revenue over the next 25 years," he said.
"I believe the market is waiting for us to have the financing partner in place before it starts giving us credit for the asset."
Many of Canada's mid-sized power developers have said they are looking for deals to acquire projects awarded to smaller companies in Ontario and British Columbia. Potential buyers include Brookfield Renewable Power Fund , Innergex Renewable Energy Inc, Northland Power Income Fund , Plutonic Power Corp and Algonquin Power and Utilities Corp.
Foreign companies are also expected to cast a keen eye on Canada, notably European operators and financiers with green-power project experience.
"I know some developers out of Spain who are looking at Canada, looking for solar projects that they can buy," Merer said.
Of the 200-plus renewable power contracts recently awarded, Merer estimates that 10 to 20 smaller projects could be picked up in the next year.
Tiny Swift Power Corp, which won a 20 MW purchase deal in March from BC Hydro, recently agreed to be acquired by Fort Chicago Energy Partners for about C$9.7 million, or 35 Canadian cents a share.
Fort Chicago, with annual revenues of more than C$600 million, will take over development of Swift's C$60 million hydroelectric project.
"To the point that you've won a contract, you've spend very little money," Cabel said. "The big money is at the time of construction."
(Editing by Peter Galloway)
