THREE MONTHS ENDED MARCH 31, Management s Discussion & Analysis

Transcription

1 THREE MONTHS ENDED MARCH 31, 2012 Management s Discussion & Analysis Suite Dunsmuir Street, Vancouver, BC, V6C 3K4 Tel: (604) Fax: (604)

2 INTRODUCTION The following Management s Discussion and Analysis ( MD&A ) is intended to supplement the condensed consolidated interim financial statements of Alterra Power Corp. (the Company, formerly Magma Energy Corp.) for the three month period ended March 31, 2012 ( current quarter ) and the related notes thereto, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. This MD&A has been prepared as of May 14, 2012 and it should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the current quarter prepared in accordance with IAS 34, Interim Financial Reporting, and with the audited consolidated financial statements of the Company for the six month period ended December 31, The Company s comparative period ending March 31, 2011 ( comparative quarter ) has been restated and presented in accordance with IFRS in this MD&A. All figures are expressed in United States ( US ) dollars except where otherwise indicated. Reference to C$ are to Canadian dollars. Additional information and disclosure relating to the Company can be found on the Company s website at and on the SEDAR website at Information contained in or otherwise accessible through our website does not form part of the MD&A and is not incorporated into the MD&A by reference. The Company was incorporated on January 22, 2008, pursuant to the Business Corporations Act (British Columbia) and effectively commenced operations in February The Company operates renewable power generating plants in Canada, the US and Iceland and is actively exploring and developing additional renewable power projects in North America, South America, continental Europe and Iceland. The Company s head office is located in Vancouver, British Columbia ( BC ), Canada, it is a reporting issuer in all the provinces of Canada except the Province of Quebec, and its common shares trade on the Toronto Stock Exchange under the symbol AXY. FORWARD-LOOKING STATEMENTS Certain statements contained in this MD&A constitute forward-looking statements. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as seek, anticipate, plan, continue, estimate, designed, expect, may, will, project, predict, potential, targeting, intend, could, might, should, believe and similar expressions. These statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements. Based on currently available information, the Company believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that those expectations will prove to be correct. The forward-looking statements in this MD&A are expressly qualified by this statement, and readers are advised not to place undue reliance on the forward-looking statements. ALTERRA POWER CORP. 2

3 HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2012 The Company s operating assets performed at 99% of budgeted generation, as follows: Generation (*) Generation attributable to the company () Budget () % of budget Facility Type Reykjanes Geothermal 206, , ,953 99% Svartsengi Geothermal 115,863 83, , % Soda Lake Geothermal 18,668 18,668 20,235 92% Toba Montrose Run of river hydro ,011 0% Dokie Wind 101,086 51,554 90, % TOTAL 442, , ,845 99% * refers to mega-watt hours HS Orka received ISK 4.7 billion ($37.5 million) from the issuance of shares. A group of Icelandic pension funds ( Jarðvarmi ), which previously held a 25.0% interest in HS Orka, exercised an option to increase their stake to 33.4% by purchasing shares of HS Orka from treasury, diluting the Company s interest in HS Orka from 75.0% to 66.6%. The US Department of the Treasury awarded and paid a grant of $2.1 million to the Company s Soda Lake division under the American Recovery and Reinvestment Act of The operating partnership for the Dokie 1 wind farm exercised a one-time right in its Power Purchase Agreement ( PPA ) to increase its firm energy allotment by 10%, commencing in May 2012, which is expected to result in a 1.2% average increase to annual net revenue. The Dokie 1 wind farm formally achieved Final Completion in its engineering, procurement and construction agreement between Dokie General Partnership ( DGP ) and the project's primary contractor. All of the projects comprising the ABW solar project received their Renewable Energy Approval (REA) permits and First Solar, Inc. is expected to begin construction of the ABW solar project shortly, with completion of construction before the end of Subsequent to the three month period ended March 31, 2012: The Toba Montrose hydro facility came back on line in April 2012 with completion of its scheduled warranty and maintenance work which was planned for a period when flows are seasonally at their lowest. In April 2012, Toba Montrose General Partnership ( TMGP ) and Upper Toba General Partnership, signed an agreement with BC Hydro allowing the Upper Toba Project to interconnect to BC Hydro s Saltery Bay substation. 1. OVERVIEW Summary The Company s mission is to be a leading global renewable power company by increasing its production of electricity through the advancement of its existing operating plants and projects, discovering and developing new renewable power resources and acquiring renewable power plants and projects. ALTERRA POWER CORP. 3

4 The Company s current portfolio of operating assets is as follows: Reykjanes Iceland Svartsengi Iceland Soda Lake Nevada, US Toba Montrose BC, Canada Dokie BC, Canada Type of generation Geothermal Geothermal Geothermal Run of river Wind hydro Capacity 100 MW 72 MW 15 MW 235 MW 144 MW Forecast annual electricity generation 798, ,000 84, , ,000 Electricity generation current quarter % included in consolidated financial statements 206, ,863 18,668 0 * 101, % 100% 100% 40% under equity income 51% under equity income * The Toba Montrose hydro facility was offline during the current quarter due to scheduled warranty and maintenance work. The Toba Montrose hydro facility resumed generating electricity on April 8, 2012 and generated 21,648 during the month of April 2012, or 132% of the revised budget for the partial month. The Company owns a number of development and exploration assets as more thoroughly described below. 2. PROJECT UPDATES AND OUTLOOK Operating Plants Reykjanes and Svartsengi operations, Iceland The Company, through its Icelandic subsidiary HS Orka, produces and sells electricity from two operating geothermal plants (Reykjanes and Svartsengi) located in the Reykjanes peninsula of Iceland. Both plants are connected to the Icelandic transmission grid with a 132 kilovolt ( kv ) transmission line. The Reykjanes plant has 100 MW of generation capacity and is budgeted to generate 798,000 of electricity annually, while the Svartsengi plant has 72 MW of generation capacity and is budgeted to generate 460,000 of electricity and has the capacity to generate 150 MW of thermal hot water for district heating annually. HS Orka sells to a number of commercial and retail customers including power sold under two long term PPAs: one with Landsvirkjun, an energy company owned by the Icelandic state, that terminates at the end of 2019 and one with Norðurál Grundartangi ehf (together with its affiliates, Norðurál ), an operator of aluminum smelters in Iceland, which terminates in June All obligations of HS Orka are non-recourse to the Company. Soda Lake operations, Nevada, USA The Company s 100% owned Soda Lake plant consists of two binary geothermal power production facilities currently operating at a maximum of 15 MW gross capacity. ALTERRA POWER CORP. 4

5 The Soda Lake plant sells its entire net electricity output to NV Energy, Inc. under two 30 year PPA s that terminate in In 2010, the Company completed an initial expansion program (the Phase 1 expansion ) at a total cost of approximately $21.7 million. Net output from the facility to date has increased from approximately 60,000 to 73,000 of electricity on an annual basis as a result of the Phase 1 expansion program. In addition, certain follow-on optimizations related to the Phase 1 expansion have not yet been fully implemented, but are expected to ultimately result in up to 2 MW of incremental net production capacity over The Company successfully applied for a grant under Section 1603 of the American Recovery and Reinvestment Act of 2009, US Department of the Treasury, with respect to certain Phase 1 expansion improvements. In March 2012, the Company received $2.1 million, representing 10% of eligible projects costs incurred. Toba Montrose hydro facility, British Columbia, Canada The Company holds a 40% economic interest and 51% voting interest in TMGP which owns the Toba Montrose hydro facility. The remaining 60% economic interest in TMGP is held by an affiliate of GE Energy Financial Services ( GE EFS ). After 35 years of operations, the Company s economic interest in TMGP will increase from 40% to 51% for no additional consideration. In May 2010, TMGP commenced selling electricity to BC Hydro under a 35 year PPA. The Toba Montrose hydro facility is expected to generate 727,000 of electricity annually. Additionally, the Toba Montrose hydro facility is EcoLogo certified and has commenced receiving funding under the Government of Canada s ecoenergy for Renewable Power program (the ecoenergy program ) of up to C$72.7 million during its first ten years of operations, based on C$10 per. The Company s annual production from the Toba Montrose hydro facility is projected to vary seasonally in the following proportions: January March 4% April June 32% July September 52% October December 12% TMGP operates the Toba Montrose hydro facility in cooperation with First Nations: the Klahoose, Sliammon and Sechelt First Nations. All obligations of TMGP are non-recourse to the Company. Dokie 1 wind farm, British Columbia, Canada The Company holds a 51% interest in DGP which owns the Dokie 1 wind farm in northern British Columbia. The remaining 49% interest in DGP is held by GE EFS. The Dokie 1 wind farm consists of 48 Vestas V-90 wind turbines that are expected to generate a combined 330,000 of electricity annually. In February 2011, DGP commenced selling electricity to BC Hydro under a 25 year PPA. Additionally, the Dokie 1 wind farm is EcoLogo certified and has commenced receiving funding under the ecoenergy program of up to C$33.3 million during its first ten years of operations, based on C$10 per. ALTERRA POWER CORP. 5

6 The Company s annual production from the Dokie 1 wind farm is projected to vary seasonally in the following proportions: January March 28% April June 20% July September 22% October December 30% DGP operates the Dokie 1 wind farm in cooperation with its First Nations partners: the Halfway River, West Moberly and Saulteau First Nations and the McLeod Lake Indian Band. All obligations of DGP are non-recourse to the Company. Expansion and Development Projects Reykjanes Geothermal Expansion Project The Company plans to expand the Reykjanes plant s output from 100 MW to 180 MW in two phases, subject to satisfactory resolution of issues with Norðurál, and obtaining project financing. Commencement of drilling activities for the 50 MW expansion ( Reykjanes 3 ) is planned for 2012 for which a 50 MW Fuji turbine generator has already been purchased. An additional 30 MW expansion ( Reykjanes 4 ) is scheduled to commence following the Reykjanes 3 expansion, and will require no additional drilling as the source will utilize the low pressure steam generated from current operations. HS Orka received a permit to proceed with the expansion of the Reykjanes plant from the National Energy Authority of Iceland. The permit allows the Company to install and place into service the new, currently-owned 50 MW turbine, as well as a 30 MW low pressure turbine. In 2007, HS Orka entered into a conditional PPA with Norðurál to sell power from Reykjanes 3 and 4 expansions to a planned Norðurál aluminum smelter in Helguvík, Iceland. This PPA contained a number of conditions, which were not fulfilled by the time set out in the PPA. Accordingly, HS Orka held the view that the PPA had lapsed in accordance with its terms. Norðurál, however, disputed this interpretation and maintained that the PPA had been met. Norðurál initiated, in July 2010, arbitration proceedings according to the agreement to determine the validity of the PPA. The arbitrators gave their final ruling on December 16, The results of the arbitration were mixed, with each party succeeding on certain aspects of their claims. The Company is currently working with Norðurál to seek a satisfactory resolution to all issues arising out of the award. Dokie 2 wind farm expansion project, British Columbia, Canada The Company holds a 51% interest in a currently planned expansion of the Dokie 1 wind farm (the Dokie 2 wind farm ) with a current projected capacity of up to 156 MW. GE EFS holds the remaining 49% interest. The Company and GE EFS currently have three meteorological towers at the site and are completing data collection for a wind resource assessment of the Dokie 2 wind farm for later in The Dokie 2 wind farm holds a BC Provincial Environmental Assessment Certificate, although amendments to the certificate may be required depending on the results of the resource assessment. The Company has Memoranda of Understanding ( MOUs ) for the expansion project with the Halfway River and West Moberly First Nations and the McLeod Lake Indian Band. The Company will be negotiating an MOU with the Saulteau First Nation. ALTERRA POWER CORP. 6

7 Upper Toba run of river hydro project, British Columbia, Canada In 2010, the Company and GE EFS signed a 40 year PPA with BC Hydro for the Upper Toba run of river hydro project ( Upper Toba project ) that includes two run of river projects in close proximity to the Toba Montrose hydro facility, with a combined expected annual average generation of 345,000 of electricity. The Company holds a BC Provincial Environmental Assessment Certificate for the Upper Toba project. The Company and GE EFS are currently in negotiations on a partnership agreement to further optimize and construct this project, with a goal to complete all required steps and commence construction by early The Company has the right to use the excess and unused capacity of the TMGP transmission line for the Upper Toba project, subject to a priority use agreement with TMGP. The TMGP transmission line was built to interconnect the Toba Montrose hydro facility to the BC Hydro substation at Saltery Bay. In April 2012 Toba Montrose General Partnership and Upper Toba General Partnership, signed an agreement with BC Hydro allowing the Upper Toba project to interconnect to BC Hydro s Saltery Bay substation. The Company has Impact Benefit Agreements ( IBAs ) with the Sliammon and Sechelt First Nations for the Upper Toba project, and is in final negotiations on an IBA with the Klahoose First Nation. ABW solar project, Ontario, Canada In January 2011, the Company and GE EFS agreed to acquire, subject to several significant contractual conditions, a 50 MW portfolio of five photovoltaic solar facilities to be built in Ontario ( ABW Solar ) and permitted under Ontario s REA process by First Solar, Inc. In March 2012, First Solar, Inc. received the final required REA permits and is expected to begin construction of ABW Solar in May 2012, with completion of construction before the end of Completion of the acquisition of ABW Solar by the Company and GE EFS will occur once it is built, provided that the contractual conditions have been met. The Company and GE EFS formed the ABW Solar General Partnership to acquire and hold ABW Solar. The Company will need to make an equity contribution of approximately $6.0 million to purchase a 10% interest in ABW Solar. The Company will serve as the managing partner. ABW Solar will sell all electricity generated to the Ontario Power Authority under 20 year PPAs under Ontario's Renewable Energy Standard Offer Program. Exploration and Other Development Projects Iceland The Company s development and exploration properties in Iceland include the Eldvörp, Krýsuvík and Trölladyngja geothermal properties, and the Bulandsvirkjun hydroelectric property. The Eldvörp high-temperature geothermal field is located in the western part of the Reykjanes peninsula, approximately 5 kilometers ( km ) southwest from Svartsengi and approximately 11 km northeast from the Reykjanes geothermal field. The Krýsuvík high-temperature geothermal field covers approximately 80 square km, and is also located in the Reykjanes peninsula and belongs to the Krýsuvík volcanic centre and associated fissure swarm. ALTERRA POWER CORP. 7

8 The Trölladyngja geothermal field is a sub-field in the northern part of the Krýsuvík geothermal area. Several research and exploration studies have been conducted in the Trölladyngja field since the 1960s as part of the studies for the Krýsuvík geothermal area. These studies included detailed geological mapping, geophysical surveys and drilling of two exploration wells in 1971 and 1972 to depths of 0.8km and 0.9km respectively. Two additional exploration wells were drilled in 2001 and 2006 to depths of 2.3 km each. The Trölladyngja geothermal field is currently under review by the government of Iceland on its eligibility for future commercial development. The Bulandsvirkjun hydroelectric property, owned 50% by HS Orka, is an early-stage development property on the Skaftá river. The Company has not planned for any material expenditure on these properties in USA The Company has invested in a number of early stage properties in Nevada and Utah, the most advanced of which are McCoy and Desert Queen. The Company has not planned for any material expenditure on these properties in Chile In Chile, the Company drilled three slim diameter holes on the Maule and Pellado concessions, which together form the Mariposa geothermal reservoir. Based on exploration results to date, the Company s independent consultants have calculated an inferred resource estimated to produce 320 MW over 30 years. The three holes have established temperatures of the order of 200 C in the cap rock just above the inferred reservoir. The next phase is expected to include drilling large-diameter rotary holes to confirm rock permeability, to perform flow tests, to establish production parameters and to sample geothermal fluids to finalize steam plant designs. The Company is in active negotiations with a potential industry partner to further fund the exploration and development costs. The Los Cristales property is a 68,000 hectare concession located in the Maule region, 400 km south of Santiago and 50 km southeast of the Pehuenche hydro power plant which is served by a 220 kv transmission line. The concession has good access via a paved road and other secondary roads. The Tres Puntas property is a 90,000 hectare concession located in the Atacama Region, 800 km north of Santiago, 70 km east of the city of El Salvador and served by a 110 kv transmission line. Peru In April 2011, the Company was awarded the Crucero and Loriscota geothermal concessions, which lie in southern Peru s region of volcanoes and prospective geothermal systems of significant size, 50 km northwest of the town of Candarave. The concessions include 37,400 hectares of land with favorable geochemistry along a 7 km long area of silica sinter and near boiling hot springs that follow extensional faults believed to be related to a strike-slip pull-apart basin. A transmission line lies 45 km to the northwest and there are several roads cutting through the area. The Company is currently working with the local communities and landowners in preparation for further exploration in In 2011, the Company was awarded a number of concessions in the Yucamane trend. The Pasto and the Panejo concessions, which cover 40,000 hectares, adjacent to the Crucero concession are part of the Crucero trend that follows the northwest tending structures identified in the Crucero area. The Company was also awarded the Sara Sara concession which is further to the north covering 20,000 ALTERRA POWER CORP. 8

9 hectares, and includes the northernmost volcano in the trend, as well as the Tutupaca Norte, Atarani and Suche concessions, which cover 59,900 hectares, and are part of the area covering the active volcanoes of the Yucamane trend. The Company is actively reviewing a number of options for the exploration phase of these properties including utilizing an industry partner to fund the exploration and development costs. Italy The Company was awarded the Mensano and Roccastrada geothermal leases in March These concessions are located near the historic Larderello geothermal field that has been in production for nearly 100 years. The Company is actively reviewing a number of options for the exploration phase of these properties, including utilizing an industry partner to fund the exploration and development costs. The Roccastrada concession covers 27,190 hectares, and is characterized by the presence of high heat flow and hot springs that are the expression of a hydrothermal circulation system that appears to be similar to that of Monte Amiata located to the east. The Mensano concession covers 21,265 hectares, and is located about 20 km northeast of the town of Larderello. The area is characterized by the presence of a large heat flow anomaly, numerous thermal springs and hydrothermal alteration areas. A detailed exploration program is underway at Mensano and Roccastrada to confirm the presence of high enthalpy resources. The program includes geological, geophysical and geochemical prospecting suitable to define the best location and targets for the exploration wells to be drilled in later phases of exploration. Results of geophysical surveys are expected in the second half of British Columbia, Canada Bute Inlet Project The Company has rights to 17 run of river hydro power projects in the Bute Inlet (the Bute Inlet Project ). In 2008, the Company had submitted its Bute Inlet Project proposal to the BC Environmental Assessment Office, the Canadian Environmental Assessment Agency and the Major Projects Management Office. The proposal organized the 17 projects into three interconnected groups with an estimated potential annual generation of 2.9 million. The Company and GE EFS jointly submitted the Bute Inlet Project into a BC Hydro call for power; however in March 2010, the Company and GE EFS announced that negotiations with BC Hydro for a PPA on the Bute Inlet Project would not move ahead at that time in order to allow for further data collection, studies, due diligence and market assessment. The Company has signed IBAs with the Homalco and Sechelt First Nations to advance the hydro power opportunities of the Bute Inlet Project within the traditional territories of the two First Nations. The Company is also currently in negotiations with the Sliammon First Nation to conclude an IBA for the project. Other Hydro Exploration Projects The Company has rights to 18 other run of river hydro power projects in British Columbia, primarily in the southwestern region with a combined potential average annual generation of approximately 2.3 ALTERRA POWER CORP. 9

10 million of electricity. The Company continues to collect hydrological data, conduct engineering work and perform other required studies on these projects. The Company also has a Crown Land Tenure, an accepted water license application and holds an investigative use permit for a 1,000 MW pumped storage project in southwestern BC. Geothermal In July 2011, the Company was awarded two geothermal exploration concessions in the Upper Lillooet area of British Columbia covering 4,942 hectares. The area is a known geothermal resource area and hosts hot springs and other geothermal manifestations including volcanic activity. The Company plans to commence exploration of the two concessions during RESULTS OF OPERATIONS The financial results for the three month period ended March 31, 2012 include the full consolidation of the results of HS Orka and the Soda Lake operations. The results of the Toba Montrose hydro facility and the Dokie 1 wind farm are both accounted for using the equity method of accounting. The financial results for the current quarter are not fully comparable to the comparative quarter as the first quarter of 2011 does not include the results of the Toba Montrose hydro facility and the Dokie 1 wind farm. The Company recorded a net loss of $9.8 million in the current quarter compared to net income of $11.9 million for the comparative quarter. A number of significant non-cash items contributed to this net decrease, including: A non-cash change in the fair value of bonds and derivatives of $20.7 million from the comparative quarter related to changes in the future price of aluminum Equity loss of $5.4 million, including a $7.4 million equity loss from the Toba Montrose hydro facility due to the facility being offline for planned warranty and maintenance work Negative non-cash foreign exchange loss of $2.1 million A decrease of $0.8 million in gross profit from lower revenues offset by lower operating costs Non cash income tax recovery of $6.2 million The owners share of the Company s net loss for the current quarter was $8.3 million (loss of $0.02 per common share), compared to net income of $11.7 million for the comparative quarter (income of $0.04 per common share). The change resulted from a number of significant non-cash items as explained above. Revenues Revenue totaled $16.4 million for the current quarter (compared to $18.9 million in the comparative quarter) and included: HS Orka operations (Reykjanes and Svartsengi) - $15.2 million (comparative quarter: $17.5 million), which included $0.4 million recorded for amortization of below-market contracts (comparative quarter: $0.7 million). The decrease in revenue from the comparative quarter is primarily due to lower aluminum prices in the current quarter. ALTERRA POWER CORP. 10

11 Soda Lake - $1.2 million (comparative quarter: $1.4 million) due to higher ambient temperatures resulting in lower production in the quarter. The Company s ownership of TMGP and DGP is accounted for using the equity method of accounting, i.e. the revenue and costs associated with the Toba Montrose hydro facility and the Dokie 1 wind farm are netted and disclosed as the Company s share of profit of equity-accounted investees ( equity income ). The proportionate share of revenue from the two facilities included in equity income for the current quarter is as follows: Toba Montrose hydro facility - nil (representing the Company s 40% share) (comparative quarter: nil) as the facilities were offline during the quarter for scheduled warranty work and maintenance. Dokie 1 wind farm - $6.0 million (representing the Company s 51% share) (comparative quarter: nil). Cost of sales Cost of sales for the current quarter totalled $11.7 million, compared to $13.4 million in the comparative quarter. Cost of production in the current quarter included: HS Orka - $10.2 million (comparative quarter: $11.6 million) due to lower maintenance costs and purchases of power. Soda Lake - $1.5 million (comparative quarter: $1.8 million) due to lower maintenance costs. The proportionate share of production costs from the Toba Montrose hydro facility and the Dokie 1 wind farm included in equity income for the current quarter are as follows: Toba Montrose hydro facility - $2.4 million (representing the Company s 40% share) (comparative quarter: nil). Dokie 1 wind farm $2.2 million (representing the Company s 51% share) (comparative quarter: nil). Gross profit Gross profit from operations was $4.7 million for the current quarter, compared to $5.5 million for the comparative quarter, a decrease of $0.8 million. This was due to lower revenues resulting from lower aluminum prices in Iceland, partially offset by the lower cost of sales, also in Iceland. Income (expenses) Total other income (expenses) for the current quarter resulted in a net expense of $14.9 million, compared to a net other income of $12.3 million for the comparative quarter. The variance in other income (expense) is largely due to the change in the embedded derivative as described below. General and administrative expenses were consistent with the comparative quarter at $4.0 million compared to $4.3 million. Amortization of non-operating assets, depletion and accretion were $0.1 million for the current quarter, compared to $0.6 million for the comparative quarter. The Company s share of equity loss for the current quarter was $5.4 million, compared to nil for the comparative quarter. Equity loss for the current quarter included the Company s 40% share of TMGP ALTERRA POWER CORP. 11

12 that incurred a loss of $7.4 million (comparative quarter: nil) due to the outage described above, the Company s 51% share of DGP that generated income of $2.0 million (comparative quarter: nil). Financing costs incurred for the current quarter were $2.7 million, compared to $3.1 million for the comparative quarter. Other gains and losses for the current quarter totaled a net loss of $3.0 million, compared to a net gain of $19.7 million for the comparative quarter. Highlights of other gains and losses in the current quarter and comparative quarter include: A $2.5 million non-cash loss resulting from the change in the fair value of the long term bonds payable for the current quarter (comparative quarter: $7.6 million loss). As partial consideration for its acquisition of shares of HS Orka, the Company has long term bond liabilities with a fair value of $111.6 million as at March 31, The bonds contain certain embedded derivatives related to the price of aluminum and have therefore been accounted for as hybrid instruments designated as at fair value through profit or loss and are recorded at fair value at each reporting date with the change in the fair value recorded in the statement of operations. A $1.6 million non-cash gain resulting from the change in the fair value of derivatives for the current quarter (comparative quarter: $27.5 million non-cash gain). HS Orka has two PPAs under which the sales price of the power sold is based on the market price of aluminum. The indexing of the sales price to the price of aluminum gives rise to an embedded derivative which is fair valued at each reporting date. Due to an increase in aluminum forward prices in the comparative quarter, the Company recorded a non-cash gain of $27.5 million relating to the change in the fair value of this embedded derivative. Due to unfavorable movements in exchange rates in the period, a $2.1 million loss on foreign exchange was incurred for the current quarter, compared to a loss of $0.1 million for the comparative quarter. 4. SUMMARY OF QUARTERLY RESULTS Seasonality has an impact on our quarterly operating results. Soda Lake production levels are lower in the summer months due to hotter ambient temperatures in Nevada, and HS Orka supplies a lower demand for electricity and heating in the summer months in Iceland. Most prominently, the Toba Montrose hydro facility s production levels are higher in the summer months due to spring freshet and glacier melt, and Dokie 1 wind farm production levels are higher in the winter months, in BC. In addition, the Company has a number of derivatives which can fluctuate significantly from quarter to quarter. These fluctuations are non-cash in nature. The following table summarizes information regarding the Company s operations on a quarterly basis for the last eight quarters expressed in thousands of US dollars, except for per share amounts. Financial information is reported under IFRS for all quarters, with the exception of the quarter ended June 30, 2010, which was prior to the Company s IFRS transition date of July 1, The quarters ended March 31, 2011, December 31, 2010 and September 30, 2010 have been adjusted to reflect the final purchase price adjustments on the acquisition of control of HS Orka. ALTERRA POWER CORP. 12

13 March 31, December 31, September 30, June 30, Three months ended: IFRS IFRS IFRS IFRS Revenue $ 16,388 $ 17,651 $ 17,009 $ 17,534 Gross profit 4,682 3,769 4,856 5,180 Other income (expense) (14,890) (10,832) (20,357) (31,905) Income tax recovery (expense) ,084 3,298 Net income (loss) attributable to owners of the Company (8,298) (6,031) (7,782) (20,995) Earnings (loss) per share attributable to owners of the Company (basic and diluted) (0.02) (0.01) (0.02) (0.07) March 31, December 31, September 30, June 30, Three months ended: IFRS IFRS IFRS CGAAP Revenue $ 18,901 $ 18,569 $ 8,325 $ 1,347 Gross profit 5,525 5,200 1, Other income (expenses) 12,278 (12,828) 7,015 (8,750) Income tax recovery (expense) (5,868) (1,095) (2,870) (412) Net income (loss) attributable to owners of the Company 11,665 (8,629) 6,468 (8,674) Earnings (loss) per share attributable to owners of the Company (basic and diluted) 0.04 (0.03) 0.02 (0.04) 5. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2012, the Company had consolidated cash and cash equivalents of $52.6 million (December 31, 2011: $22.2 million), an increase of $30.4 million from December 31, The increase in consolidated cash and cash equivalents was due primarily to the receipt of $37.5 million by HS Orka from the issuance of treasury shares to Jarðvarmi, and a $2.1 million grant received by Soda Lake from the US Department of the Treasury. This was partially offset by investment of $3.7 million in short term investments, investment of $3.1 million in plant and equipment, principal loan repayment of $3.9 million and development costs of $2.0 million. Cash and cash equivalents consist of cash and term deposits that are redeemable prior to maturity on demand and without economic penalty to the Company. The Company s exposure to credit risk on its cash and term deposits is limited by maintaining the majority of its cash and term deposits with major banks that have high-credit ratings. Other than in Iceland, where cash is being held in preparation for the 80 MW expansion at Reykjanes, a minimal amount of cash is held by banks in the countries where the Company s subsidiaries operate to fund their operating needs. At March 31, 2012, the Company had restricted cash of $4.5 million (December 31, 2011: $4.5 million), dedicated to loan payments in accordance with a collateral agreement with HS Orka s lenders. Working capital is defined as current assets minus current liabilities. Working capital calculations or changes are not measures of financial performance, nor do they have standardized meanings under IFRS. Readers are cautioned that this calculation may differ among companies and analysts and therefore may not be directly comparable. The Company s consolidated working capital at March 31, 2012 was $39.3 million compared to $4.6 million at December 31, The increase was due primarily to the cash received from Jarðvarmi and the US Department of the Treasury grant as discussed above. As stated above, in March 2012, Jarðvarmi invested ISK 4.7 billion ($37.5 million) in HS Orka through the purchase of 878,205,943 treasury shares at a price of ISK 5.35 per share. This price represents a 15.6% increase over the original price paid by Jarðvarmi of ISK 4.63 per share for their initial 25% stake. These funds are currently being held by HS Orka for the remaining equity requirements for the 80 MW of ALTERRA POWER CORP. 13

14 planned expansions which will increase the Reykjanes geothermal plant capacity from 100 MW to 180 MW. The Company has available, if needed, its existing and currently unused revolving line of credit of C$20 million. If in 2012 the Company elects to fund, without a partner, all of its currently planned activities in 2012 at the Upper Toba project, the Dokie 2 wind farm, and the Chile, Peru and Italy geothermal development projects, it may access a portion of the line of credit to do so. Currently the Company is involved in active partnership discussions on each of those development projects. Consolidated long-term debt consists of; a) $111.6 million of bonds assumed by Magma Energy Sweden A.B. ( Magma Energy Sweden ) for the acquisition of HS Orka that mature in 2016 and; b) $153.4 million of HS Orka s debt which has annual principal repayments and matures primarily between 2016 and The Company s proportionate share of TMGP s long term-debt is $183.9 million (representing the Company s 40% share) which has annual principal repayments until 2045, and the Company s proportionate share of DGP s long-term debt is $85.9 million (representing the Company s 51% share) that has annual principal repayments until TMGP and DGP long term debt are not recorded by the Company as these two investments are recorded as an equity investment. The HS Orka, Magma Energy Sweden, TMGP and DGP loans are non-recourse to the Company other than the Company s initial investment and these entities are expected to generate or receive sufficient cash flow to service and repay their existing long-term loans. 6. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements. 7. MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES The Company's management is responsible for establishing and maintaining adequate internal controls over financial reporting and disclosure controls and procedures. Any system of internal controls over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company s disclosure policy and procedures. Based on the results of that evaluation, the Company s Chief Executive Officer and Chief Financial Officer have concluded that, as at March 31, 2012, the Company s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports it files is recorded, processed, summarized and reported within the appropriate time periods and forms. 8. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in the Company s internal controls over financial reporting during the three month period that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting, with the exception of the adoption of IFRS. Future changes to internal controls over financial reporting may be deemed to constitute a material modification (either individually or when considered collectively) and therefore any material changes to internal controls over financial reporting will be disclosed as they occur. ALTERRA POWER CORP. 14

15 Limitations of Controls and Procedures The Company s management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. 9. DISCLOSURE OF OUTSTANDING SHARE DATA At May 14, 2012, the Company had the following common shares, stock options and warrants outstanding: Common shares 465,699,499 Stock options (vested and unvested) 13,737,394 Warrants nil Fully diluted common shares outstanding 479,436,893 ALTERRA POWER CORP. 15