Management s Discussion & Analysis For the Year Ended December 31, 2012

Transcription

1 Management s Discussion & Analysis For the Year Ended December 31, 2012 Suite Dunsmuir Street, Vancouver, BC, V6C 3K4 Tel: (604) Fax: (604)

2 TABLE OF CONTENTS INTRODUCTION... 3 CORE BUSINESS AND STRATEGY... 3 HIGHLIGHTS AND UPDATES FOR THE YEAR ENDED DECEMBER 31, OPERATIONS REVIEW... 7 EXPANSION AND DEVELOPMENT PROJECTS INFORMATION, UPDATES AND OUTLOOK EARLY STAGE DEVELOPMENT AND EXPLORATION PROJECTS INFORMATION, UPDATES AND OUTLOOK SELECTED ANNUAL INFORMATION REVIEW OF RESULTS FOR THE YEAR ENDED DECEMBER 31, SUMMARY OF QUARTERLY RESULTS QUARTERLY FINANCIAL REVIEW FOR THE THREE MONTHS ENDED DECEMBER 31, LIQUIDITY AND CAPITAL RESOURCES TRANSACTIONS WITH RELATED PARTIES OFF-BALANCE SHEET ARRANGEMENTS OTHER RISKS AND UNCERTAINTIES CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES FUTURE ACCOUNTING STANDARDS MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DISCLOSURE OF OUTSTANDING SHARE DATA ALTERNATIVE PERFORMANCE MEASURES ALTERRA POWER CORP. Twelve Month Report

3 March 27, 2013 INTRODUCTION The following ( MD&A ) is intended to help the reader understand the significant factors that have affected Alterra Power Corp. s and its subsidiaries (the Company ) performance and such factors that may affect its future performance. The MD&A should be read in conjunction with the Company s audited consolidated financial statements for the year ended December 31, 2012 and the related notes thereto. All figures are expressed in U.S. dollars except where otherwise indicated. Reference to C$ are to Canadian dollars. The Company reports its consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The Company s significant accounting policies are set out in Note 3 of the audited consolidated financial statements. This MD&A refers to various non-generally Accepted Accounting Principles ( GAAP ) measures, such as net interest, by which the Company means the effective portion of results that the Company would have reported if each of HS Orka hf (75% for 2 months of the year and 66.6% for the remaining 10 months), the Toba Montrose General Partnership (40%), the Dokie General Partnership (51%), and the Soda Lake facility (100%) had been reported in accordance with Alterra s actual share ownership for the twelve months ended December 31, This measure is used by the Company to better manage and evaluate performance at each of the Company s operating facilities and to further assist the Company s shareholders in understanding the Company s holding, but does not have standardized meaning. To facilitate a better understanding of these measures as calculated by the Company, reconciliations have been provided where applicable. Except for historical information contained in this MD&A, the following disclosures are forwardlooking statements within the meaning of applicable Canadian provincial securities laws relating to the Company and its operations. Please refer to the cautionary note regarding the risks associated with forward-looking statements at the back of this MD&A and the Risk Factors in the Annual Information Form on file with the Canadian provincial securities regulatory authorities. 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. CORE BUSINESS AND STRATEGY The Company is engaged in the operation, development, exploration and acquisition of renewable power projects. The Company operates six power plants totalling 566 mega-watts ( MW ) of capacity, with operations in Canada, Iceland and the United States. As at December 31, 2012, the Company s operating facilities consisted of a 66.6% net interest in two geothermal power plants in Iceland (Svartsengi and Reykjanes owned and operated through HS Orka hf), a 100% interest in one geothermal power plant in Nevada ( Soda Lake ), a 40% net interest in two run of river hydro power plants in British Columbia ( Toba Montrose, owned and operated through the Toba Montrose General Partnership) and a 51% net interest in a wind farm in British Columbia ( Dokie 1, owned and operated through the Dokie General Partnership). ALTERRA POWER CORP. Twelve Month Report

4 The Company s current portfolio of operating facilities is summarized as follows: Reykjanes Iceland Svartsengi Iceland Soda Lake Nevada, US Toba Montrose BC, Canada Dokie 1 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 MWh 460,000 MWh 84,000 MWh 727,000 MWh 330,000 MWh % included in consolidated financial statements 100% 100% 100% 40% under equity income 51% under equity income In addition to the operating facilities, the Company has assets under construction in Iceland with respect to a planned expansion at the Reykjanes facility, three advanced-stage exploration geothermal properties in Iceland (the Eldvörp, Krýsuvík and Trölladyngja properties), several advanced-stage exploration geothermal properties in Nevada (including the McCoy and Desert Queen properties), two advanced-stage development run of river projects and an advanced-stage development wind project in British Columbia (the Upper Toba Valley project and the Dokie 2 wind expansion project) and the Mariposa advanced-stage development geothermal property interest in Chile. The Company s exploration and development pipeline also includes a number of early-stage properties in British Columbia, the United States, Italy, Chile, Iceland and Peru. The Company was incorporated on January 22, 2008, pursuant to the Business Corporations Act (British Columbia) and effectively commenced operations in February 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. The Company s mission is to be a leading global renewable power company through continued excellence in production and safety as a premier operator/manager, successful origination and development of new utility-scale projects, and opportunistic acquisitions of other renewable power projects and development assets. To execute this strategy, the Company has assembled a core team of professionals with a depth of exploration, construction, operating, and financial knowledge that allows the Company to confidently advance early stage projects through construction into operation. The Company has a proven ability to develop and deliver large assets at greenfield locations, on-time and on-budget. In addition to maximizing value for its shareholders the core values of the Company include being responsible for the environment in which the Company operates, contributing to the long-term development of host communities and ensuring that employees can work in a safe and secure manner. The Company is committed to maintaining positive relations with employees, the local communities and the government agencies, all of whom are viewed as partners. ALTERRA POWER CORP. Twelve Month Report

5 HIGHLIGHTS AND UPDATES FOR THE YEAR ENDED DECEMBER 31, 2012 Operations For the year ended December 31, 2012, the Company s operating assets performed at a combined 94% of forecast generation (98% of budget), as follows (the performance of each facility is discussed below under the section Operations Review ): Generation MWh (a) Facility Forecast (b) 2012 Budget (c) 2012 Actual Net interest % of Forecast % of Budget Reykjanes 798, , , ,167 95% 99% Svartsengi 460, , , , % 110% Soda Lake 84,000 78,000 64,421 64,421 77% 83% Toba Montrose 727, , , ,564 91% 95% Dokie 1 330, , , ,667 90% 90% TOTAL 2,399,000 2,300,960 2,250,804 1,316,004 94% 98% (a) (b) (c) - MWh refers to mega-watt hours. - Long-term forecast annual generation - Budgeted annual generation, which reduces long-term forecast annual generation for planned maintenance outages In February 2012, HS Orka hf ( HS Orka ) received ISK 4.7 billion ($37.5 million) from the issuance of HS Orka shares from treasury. A group of Icelandic pension funds ( Jarðvarmi ), which previously held a 25.0% interest in HS Orka, exercised an option to increase its stake to 33.4% by purchasing new shares of HS Orka, adjusting the Company s interest in HS Orka from 75.0% to 66.6%. Subsequent to this the Company received an unsolicited offer from an Icelandic consortium to purchase the Company s remaining 66.6% interest in HS Orka. The Company continues to discuss the sale of HS Orka with prospective purchasers. During the third quarter, the Company (through HS Orka) signed a contract with Iceland Drilling Ltd. to have two new wells drilled at its Reykjanes reservoir in Iceland as well as one work-over of an existing well. Drilling commenced in November 2012 and one well was completed at the Reykjanes field in January 2013, and initial indications for the completed production well are positive. Drilling for the remaining well is expected to be completed by the spring of The expected cost for the drilling program is $9 million, which will be paid from cash reserves at HS Orka. The new capacity expected to result from the drilling will be used for the planned 80 MW expansion and as reserve capacity for the existing 100 MW plant. On December 31, 2012 the Toba Montrose General Partnership ( TMGP ) declared equity distributions of C$7.0 million to the partners, of which the Company s portion was C$2.8 million. The cash was received by the Company subsequent to the year-end. In the twelve months ended December 31, 2012 the Dokie General Partnership ( DGP ) completed funding of a C$8.9 million required loan reserve and also paid or declared equity distributions of C$4.0 million to the partners, of which the Company s portion was C$2.0 million. All outstanding distributions were received subsequent to the year-end. In December 2012, the Company and Fiera Axium Infrastructure ( Fiera Axium ) became partners at Toba Montrose and Dokie 1, when a consortium of Canadian investors led by Fiera ALTERRA POWER CORP. Twelve Month Report

6 Axium purchased GE Energy Financial Services' ( GE EFS ) partnership interests, and now owns a 60% interest in Toba Montrose and a 49% interest in Dokie 1. The Company s ownership interests in these facilities are unchanged at 40% and 51% respectively and the Company continues to be the operator of both facilities. A major rockslide occurred at Toba Montrose in December 2012 affecting the Montrose penstock. Repairs are expected to be completed by the summer of Repairs and business interruption costs are fully insured (subject to policy deductibles). Project Development, Expansion and Exploration The Company expects to acquire a 10% interest in a 50 MW portfolio of five photovoltaic solar farms ( ABW Solar ) being built in Ontario by First Solar Inc. subject to fulfillment of certain conditions precedent. Construction of ABW Solar began in 2012 following receipt of certain key permits and continued throughout the year. In April 2012, an agreement was signed with BC Hydro and Power Authority ( BC Hydro ) allowing the Upper Toba run of river hydroelectric project ( Upper Toba Project ) to interconnect to the BC Hydro Saltery Bay substation. The Company subsequently signed an agreement with a contractor to carry out design work for the Upper Toba project. The Company is currently focused on design and preparation for the initial 62 MW portion of the project (the Jimmie Creek project). In May 2012, the Company signed a Resource Development Agreement ( RDA ) with the Klahoose First Nation for the Upper Toba project, establishing the framework under which the Company and the Klahoose First Nation will work together to advance the project. The Company now has agreements in place with all First Nations affected by the project. The Company entered into an agreement in May 2012 to acquire a portfolio of early stage wind development assets in coastal BC with potential generation capacity in excess of 1,000 MW. The Sliammon First Nation and the Company signed an RDA in June 2012 that will facilitate the development of the transmission infrastructure for the Bute Inlet run of river hydroelectric project. In October of 2012, the Company entered into an agreement with Energy Development Corporation ( EDC ), a Philippines-based global leader in the geothermal power industry, for the continued development of the Mariposa geothermal project in Chile and five of the Company s Peruvian geothermal concessions. If advanced into a formal joint venture, EDC will be entitled to earn a 70% interest by funding the next $58.3 million in project expenditures at Mariposa and $8.0 million in project expenditures on the Peruvian concessions. Throughout the fourth quarter of 2012 and into 2013 the Company and EDC have been actively documenting the next-phase agreement toward full partnership, while EDC continues to conduct its due diligence in parallel. The Company expects final arrangements to be completed within the first half of ALTERRA POWER CORP. Twelve Month Report

7 Financial The Company reported steady gross earnings of 24% of revenues for the twelve months ended December 31, 2012, marginally down from the six months ended December 31, 2011 (25% gross earnings). The Company s 2012 net interest in revenue and project EBITDA was $87.2 million and $46.8 million respectively. While these results are not directly comparable to the six months ended December 31, 2011, pro forma financial information for the twelve months ended December 31, 2011 is shown in the Operations Review below, for comparative purposes. For the twelve months ended December 31, 2012, the Company generated positive cash flow from operations of $12.1 million and ended the year with positive working capital of $29.3 million. In March 2012, 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 OPERATIONS REVIEW Reykjanes and Svartsengi geothermal facilities, Iceland (66.6% interest) 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. The Reykjanes plant has 100 MW of generation capacity and is budgeted to generate 798,000 MWh of electricity annually, while the Svartsengi plant has 72 MW of generation capacity and is budgeted to generate 460,000 MWh of electricity as well as 150 thermal MW of hot water for district heating. HS Orka sells power to a number of commercial and retail customers including power sold under two long term power purchase agreements ( 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. The remaining portion of the Company s investment in HS Orka may not be fully recoverable if there were an incurred event of default. The Company has commenced drilling of two new wells at its Reykjanes reservoir in Iceland as well as one work-over of an existing well. The primary purpose of the wells is to be used for the planned 80 MW expansion and as reserve capacity for the existing 100 MW plant. Drilling commenced on these wells in November 2012 and one well was completed in early 2013 and the remaining well is expected to be completed by spring of The operating results of the Reykjanes and Svartsengi facilities are shown below and reflect the Company s actual ownership interest during the period, specifically 75% interest from January 1 to February 29, 2012 and 66.6% interest for the remainder of 2012 (six months ended December 31, % interest) in the facilities: ALTERRA POWER CORP. Twelve Month Report

8 Actual ($000 except where specified) Twelve months ended December 31, 2012 Six months ended December 31, 2011 Generation (MWh) 835, ,090 Revenue 38,560 24,190 EBITDA (a) 16,440 7,339 a EBITDA is a non-gaap measure. Please refer to the section Alternative Performance Measures for the definition of EBITDA applied in this calculation Overall, the combined performance of the Reykjanes and Svartsengi facilities was 98% of forecast generation for the twelve months ended December 31, Due to both the change in the Company s year-end and the change in ownership of HS Orka in 2012, the results are not directly comparable. Pro forma information is shown below which reflects what the results would have been had Alterra consolidated 66.6% of HS Orka for the twelve month period ended December 31, 2012 and 2011: Pro forma ($000 except where specified) Twelve months ended December 31, 2012 (b) Twelve months ended December 31, 2011 (b) Generation (MWh) 817, ,292 Revenue 38,367 44,516 EBITDA (a) 15,214 15,369 a EBITDA is a non-gaap measure. Please refer to the section Alternative Performance Measures for the definition of EBITDA applied in this calculation. b This information is based on annual reporting from HS Orka, it includes purchase price adjustments for below market contracts, and has been translated at the average rate of exchange for the twelve month period. Here and elsewhere all pro forma information has not been audited or reviewed by the Company s auditors and is provided for additional comparative information only. Generation and revenue decreased against the prior year, primarily due to the expiration of a 35 MW contract in October 2011 which resulted in a scaling back of production, coupled with a 7.8% weakening of the ISK against the US Dollar, and a decline in aluminum prices that were on average 15.2% lower in 2012 than in In 2012 approximately 34% of HS Orka's revenue was indexed to the price of aluminum (2011: 44%). New sales contracts have been entered into in 2013 which will require an increase in generation going forwards. EBITDA increased by 6.7% in ISK primarily due to a reduction of non-recurring expenses in 2012 related to the Nordural contract arbitration. In US dollars EBITDA decreased by 1.0% due to weakening of the Icelandic Krona. Soda Lake geothermal facility, Nevada, USA (100% interest) The Company s Soda Lake facility consists of two binary geothermal power production plants currently operating at a maximum of 15 MW gross capacity. The Soda Lake facility sells its entire net electrical output to NV Energy, Inc. under two 30 year PPAs that terminate in 2017 and The operating results of the Soda Lake facility are shown below and reflect the Company s 100% interest in the facility: ALTERRA POWER CORP. Twelve Month Report

9 ($000 except where specified) Actual Pro forma Twelve months ended December 31, 2012 Six months ended December 31, 2011 Twelve months ended December 31, 2011 (b) Generation (MWh) 64,421 33,664 71,970 Revenue 4,406 2,405 5,163 EBITDA (a) (614) a EBITDA is a non-gaap measure. Please refer to the section Alternative Performance Measures for the definition of EBITDA applied in this calculation. b - This financial information has been prepared from the financial results of Soda Lake. Generation and revenue in 2012 were down against the pro forma comparative period due to additional downtime for maintenance activities in the power plant plus delays in bringing two geothermal wells online. One of the wells was placed into production during the fourth quarter of 2012 and generation capacity is expected to increase by 0.5 MW in EBITDA is lower than the pro forma comparative period, due in part to lower revenues, increased maintenance expense in 2012, as well as additional costs associated with the removal of a pump from one production well and the installation of the two new pumps at the end of the year. During 2012 the Company received a $2.1 million grant under Section 1603 of the American Recovery and Reinvestment Act of 2009, US Department of the Treasury, with respect to certain facility improvements. Toba Montrose hydroelectric facility, British Columbia, Canada (40% interest) The Company holds a 40% economic interest and 51% voting interest in TMGP which owns and operates the Toba Montrose run of river hydroelectric facility. The remaining 60% economic interest in TMGP is held by Fiera Axium. After 35 years of operations, the Company s economic interest in TMGP will increase from 40% to 51% for no additional consideration. TMGP sells electricity to BC Hydro under a PPA that expires in May The Toba Montrose hydroelectric facility is expected to generate a long term average of 727,000 MWh of electricity annually. The Toba Montrose hydroelectric facility is EcoLogo certified and receives 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, at a rate of C$10 per MWh. The Toba Montrose hydroelectric facility s annual long term generation 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 hydroelectric facility in cooperation with the Klahoose, Sliammon and Sechelt First Nations. ALTERRA POWER CORP. Twelve Month Report

10 All obligations of TMGP are non-recourse to the Company. The remaining portion of the Company s investment in TMGP may not be fully recoverable if there were an incurred event of default. The operating results of the Toba Montrose facility is shown below and reflect the Company s 40% interest in the facility: ($000 except where specified) Actual Pro forma Twelve months ended December 31, 2012 Six months ended December 31, 2011 Twelve months ended December 31, 2011 (b) Generation (MWh) 264, , ,095 Revenue 27,238 18,562 25,830 EBITDA (a) 20,463 14,244 19,011 a EBITDA is a non-gaap measure. Please refer to the section Alternative Performance Measures for the definition of EBITDA applied in this calculation. b This information has been prepared from the twelve months results of Toba Montrose adjusted to include purchase price adjustments and an assumed purchase of Toba Montrose by the Company on January 1, Revenue and generation at the Toba Montrose facility for the twelve month period ended December 31, 2012 is higher than the pro forma comparative period. The increase is due in to an uplift in the firm energy price in the current year against the comparative period pro forma and a 4% increase in flows in In July 2012 the Toba Montrose achieved a new daily production record of 5,504 MWh. EBITDA was higher than the comparative period pro forma due to an increase in revenue related to the increased water flow mentioned above offset in part by increased maintenance costs in 2012 in addition to higher water rental charges due to the increased flows in the period. On December 12, 2012 a naturally occurring rockslide damaged a 300 meter section of the five kilometer penstock (which supplies water from the intake to the power generating plant) at the Montrose facility. Replacement pipe for the 300 meter damaged section has been ordered, and preparations for the repair have begun. The Company expects the facility to return to full operations in the summer of The repairs are to be carried out during the first half of 2013 when water flows and power generation are lower. The project's insurers have confirmed that the incident is covered by property and business interruption insurance, and total insurance deductibles related to the rockslide are expected to be less than $1.0 million for the Toba Montrose project (of which the Company s interest is 40%). Dokie 1 wind farm, British Columbia, Canada (51% interest) 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 Fiera Axium. The Dokie 1 wind farm consists of 48 Vestas V-90 wind turbines, and is expected to generate a combined long term average of 330,000 MWh of electricity annually. DGP sells electricity to BC Hydro under a PPA that expires in February The Dokie 1 wind farm is EcoLogo certified and receives funding under the ecoenergy program, of up to C$33.3 million during its first ten years of operations, at a rate of C$10 per MWh. ALTERRA POWER CORP. Twelve Month Report

11 The Dokie 1 wind farm s annual long term generation 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 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. The remaining portion of the Company s investment in DGP may not be fully recoverable if there were an incurred event of default. The operating results of the Dokie 1 wind farm is shown below and reflect the Company s 51% interest in the facility: ($000 except where specified) Actual Pro forma Twelve months ended December 31, 2012 Six months ended December 31, 2011 Twelve months ended December 31, 2011 (b) Generation (MWh) 151, , ,557 Revenue 17,034 11,913 16,650 EBITDA (a) 10,550 8,404 10,748 a EBITDA is a non-gaap measure. Please refer to the section Alternative Performance Measures for the definition of EBITDA applied in this calculation. b This information has been prepared from the twelve months results of Dokie 1 adjusted to include purchase price adjustments and an assumed purchase of Dokie 1 wind farm by the Company on January 1, Despite a reduction in generation in 2012 against the comparative period pro forma, due to lower winds experienced and repairs completed during the fourth quarter of 2012, the revenue generated in 2012 was 7% higher than the comparative period pro forma. A contributing factor is that in May 2012, DGP exercised a one-time right in its PPA to increase its firm energy allotment by 10% but in addition to this the 2011 pro forma revenue includes pre completion revenue which was sold to Powerex at a significantly lower price than the EPA with BC Hydro which contributed to higher overall revenues in EBITDA was marginally down against the pro forma comparative period, predominately as a result of increased revenue in the period off-set by an increase in maintenance costs. Summary Pro Forma Net interest Comparative Results and EBITDA In summary, the following pro forma results represent what the Company s net interest in the operating facilities would have been had the Company reported the results representing the Company s ownership percentage in effect as at December 31, 2012 of HS Orka (66.6%), TMGP (40%), DGP (51%), and Soda Lake (100%) for both calendar years. Pro forma information twelve months ended December 31, 2012 ALTERRA POWER CORP. Twelve Month Report

12 For the 12 months ended December 31, 2012 HS Orka (66.6%) Toba Montrose (40%) (a) Dokie 1 (51%) (a) Soda Lake (100%) (a) Total Production (MWh) 817, , ,667 64,421 1,298,111 Revenue $ 38,367 $ 27,238 $ 17,034 $ 4,406 87,045 EBITDA (b, c) 15,214 20,463 10,550 (614) 45,613 Pro forma information twelve months ended December 31, 2011 For the 12 months ended December 31, 2011 HS Orka (66.6%) Toba Montrose (40%) Dokie 1 (51%) Soda Lake (100%) Total Production (MWh) 838, , ,557 71,970 1,331,914 Revenue $ 44,516 $ 25,830 $ 16,650 $ 5,163 92,159 EBITDA (b, c) 15,369 19,011 10, ,077 (a) Actual results for the year ended December 31, (b) EBITDA is a non-gaap measure as defined above. (c) - This financial information has been prepared from the financial results of each operating facility. This information has not been audited or reviewed by Alterra s auditors and is purely provided for additional comparative information only. EXPANSION AND DEVELOPMENT PROJECTS INFORMATION, UPDATES AND OUTLOOK ABW Solar project, Ontario, Canada In January 2011, the Company and GE EFS agreed to acquire a 50 MW portfolio of five photovoltaic solar farms being built in Ontario by First Solar, Inc. First Solar, Inc. began construction of ABW Solar in May 2012 with completion of construction expected in the first half of Completion of the acquisition of ABW Solar by the Company and GE EFS will occur once ABW Solar is built, provided that certain contractual conditions have been met. The Company and GE EFS have formed the ABW Solar General Partnership to acquire and operate ABW Solar. Provided the aforementioned contractual conditions have been met, the Company will need to make a contribution of approximately $6.0 million to purchase a 10% equity interest in ABW Solar which is projected to occur upon achievement of commercial operations. The Company will serve as the administrative partner. All electricity generated by ABW will be sold to the Ontario Power Authority under 20 year PPAs. The remaining purchase price will be funded through fixed rate long term debt financing which will be non-recourse to the Company. The Company together with GE EFS and First Solar Inc. are currently in late-stage negotiations with lenders for the required debt financing and expect the project to close in the first half of Upper Toba hydroelectric project, British Columbia, Canada In 2010, the Company and GE EFS signed a 40 year PPA with BC Hydro for the Upper Toba project that includes two run of river power plants (Jimmie Creek and Upper Toba River) in close proximity to the Toba Montrose facility, with a combined expected annual average generation of up to 345,000 MWh of electricity. The Company holds a BC Provincial Environmental Assessment Certificate for the Upper Toba project. The Company entered into a development phase agreement with a contractor to perform project optimization and design work and is planning to commence construction in the summer of Other project advancements included completion of drilling and seismic testing for the powerhouse and intake locations, further hydrology work and firm energy bids on water to wire ALTERRA POWER CORP. Twelve Month Report

13 suppliers. The Company is currently focused on design and preparation for the initial 62 MW portion of the project (the Jimmie Creek project). The Company has the right to use the excess and unused capacity of TMGP s 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 hydroelectric facility to the BC Hydro substation at Saltery Bay. In April 2012, 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. The Company has Impact Benefit Agreements ( IBAs ) with the Sliammon and Sechelt First Nations for the Upper Toba project. In May 2012, the Company signed an RDA with the Klahoose First Nation, and now has agreements in place with all First Nations affected by the project. Reykjanes geothermal expansion project, Iceland The Company plans to expand the Reykjanes plant s capacity from 100 MW to 180 MW in two phases, subject to completion of modifications to an existing PPA (discussed below) to sell the expansion s output to Norðurál, and obtaining project financing, both of which may occur in The first phase would be for a 50 MW expansion ( Reykjanes 3 ) for which a 50 MW Fuji turbine generator has previously been purchased and paid for in full. The second phase would be for an additional 30 MW expansion ( Reykjanes 4 ) which would follow the Reykjanes 3 expansion, and would require no additional drilling as the unit would utilize the low pressure steam generated from existing operations. HS Orka has 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 July 2010, Norðurál initiated arbitration proceedings against HS Orka with respect to the previously mentioned conditional PPA to sell power from Reykjanes 3 and 4 expansions to a planned Norðurál aluminum smelter in Helguvík, Iceland. In December 2011, the arbitrators gave their final ruling and the results of the arbitration were mixed. The Company is currently working with Norðurál to seek a satisfactory resolution to all issues arising out of the award to allow the planned expansion of the Reykjanes plant to proceed. 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 ( Dokie 2 wind farm ) with a projected capacity of up to 156 MW. GE EFS holds the remaining 49% interest. The Company and GE EFS installed four new meteorological towers at the site in late 2011 to complement the previously installed towers (13 in total). During 2012, the Company collected and analysed wind data and furthered project optimization in terms of turbine size, layout and associated costs. The Dokie 2 wind farm holds a BC Provincial Environmental Assessment Certificate. Amendments to the certificate may be required depending on the final project layout. The Company has Memoranda of Understanding ( MOU ) for the Dokie 2 wind farm with the Halfway River and West Moberly First Nations and the McLeod Lake Indian Band. The Company plans to negotiate an MOU with the Saulteau First Nations for this expansion phase. ALTERRA POWER CORP. Twelve Month Report

14 EARLY STAGE DEVELOPMENT AND EXPLORATION PROJECTS INFORMATION, UPDATES AND OUTLOOK 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 is part of the Krýsuvík volcanic centre and associated fissure swarm. 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. These studies included detailed geological mapping, geophysical surveys and the drilling of four exploration wells. The Trölladyngja geothermal field is currently under review by the government of Iceland for 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 commenced a pre-feasibility report and environmental assessment in The Company has not planned any material expenditure on these properties at this time. USA The Company s advanced-stage properties in the USA are McCoy and Desert Queen and the Company has also invested in a number of other early stage properties in Nevada. The Company does not plan any material expenditure on these properties in Chile In Chile, the Company has drilled three slim diameter holes on the Mariposa geothermal system which consists of the Maule and Pellado concessions. Based on exploration results to date, the Company s independent consultants have calculated an inferred resource of 320 MW available over 30 years. The next phase of activity is expected to include drilling large-diameter rotary holes to confirm rock permeability, reservoir chemistry, fluid chemistry and other resource parameters in order to finalize plant design. In October 2012, the Company entered into an agreement with EDC for the further development of the Mariposa project on a joint basis. Under this agreement, EDC will have up to six months, subject to extension under certain circumstances, to carry out due diligence on the Mariposa project to make a decision to enter into a formal joint venture with the Company. Under the terms of the proposed joint venture, EDC will be entitled to earn a 70% interest by funding $58.3 million in project expenditures at ALTERRA POWER CORP. Twelve Month Report

15 Mariposa. Subsequent project equity contributions and all economic sharing would be on a pro rata basis between the partners. Throughout the fourth quarter of 2012 and into 2013 the Company and EDC have been actively documenting the next-phase agreement toward full partnership, while EDC continues to conduct its due diligence in parallel. The Company expects any final arrangements to be completed within the first half of The Company holds a 100% interest in two other properties in Chile, the Los Cristales property and the Tres Puntas property, which are not part of the EDC agreement. The Los Cristales property is a 68,000 hectare concession located in the Maule region, 400 km south of the City 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 close to a 110 kv transmission line. Peru In 2011, the Company was awarded the Crucero, Loriscota, Panejo and Pasto geothermal concessions, which lie in southern Peru s region of volcanoes and prospective geothermal systems. The concessions include 77,400 hectares of land with favorable geochemistry and near-boiling hot springs. A transmission line lies 45 km to the northwest and there are several roads in the area. The Company was awarded further concessions in 2011 including Tutupaca Norte, Atarani and Suche. These concessions cover 59,900 hectares, and are part of another area of active volcanoes in the Yucamani trend. The Company was also awarded the Sara Sara concession, further to the north which includes the northernmost volcano in the trend. Based on 2012 field work, the Sara Sara concession area has been reduced to the most favourable section covering 6,900 hectares. All concessions awarded have been awarded exploration concessions. During the first half of 2012 the Company carried out exploration activities in the Sara Sara concession area and has been working on synthesizing geochemical data from several other concessions. Additional geological and geochemical work was carried out in September of 2012 on the southern concessions. The Company has also been engaged in extensive community consultations in its holdings resulting in several community permits. In October 2012, the Company entered into an agreement with EDC for the development of five of the Company's Peruvian geothermal concessions. Under this agreement, EDC will have up to six months, subject to extension under certain circumstances, to carry out its due diligence on the projects to make a decision to advance them into a formal joint venture. Under the terms of the proposed joint venture, EDC will be entitled to earn a 70% interest by funding $8.0 million in project expenditures on the five Peruvian concessions. Subsequent project equity contributions and all economic sharing would be on a pro rata basis between the partners. Throughout the fourth quarter of 2012 and into 2013 the Company and EDC have been actively documenting the next-phase agreement toward full partnership, while EDC continues to conduct its ALTERRA POWER CORP. Twelve Month Report

16 due diligence in parallel. The Company expects any final arrangements to be completed within the first half of The Company continues to explore and hold in good standing the other concessions it holds in Peru and may consider partnering on these concessions to further advance exploration. Italy The Company was awarded the Mensano and Roccastrada geothermal leases in March These concessions are located near the historic Larderello geothermal field in Tuscany that has generated electricity for nearly 100 years. The Company is actively reviewing a number of options for the exploration phase of these properties, including a potential joint venture with an industry partner to fund further exploration and development costs. The Roccastrada concession covers 27,190 hectares, and is characterized by the presence of high heat flow and hot springs. 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 and numerous thermal springs. Field work has been completed at Mensano and Roccastrada to confirm the presence of high enthalpy resources. The field work included geological, geophysical and geochemical prospecting suitable to define the best location and targets for exploration wells to be drilled in later phases of exploration. Review of these geophysical surveys and development of conceptual models of the concessions is in progress. British Columbia, Canada Other hydroelectric development projects The Company has rights to 37 run of river hydroelectric power projects in British Columbia, primarily in the southwestern region of the province. 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 16 run of river projects into three interconnected groups with an estimated potential annual generation of 2.8 million MWh. The Company subsequently decided to place this application on hold to allow for further analysis and data collection. 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 these First Nations. In June 2012, the Company also signed a RDA for the project with the Sliammon First Nation. The Company has rights to other run of river hydroelectric power projects with a combined potential average annual generation of approximately 2.2 million MWh of electricity. The Company continues to collect hydrological data, conduct engineering work and perform other required studies on these projects. ALTERRA POWER CORP. Twelve Month Report

17 The Company also holds a Crown Land Tenure, an accepted water license application and an investigative use permit for the Fir Point 1,000 MW pumped storage development project. 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 undertook data compilation and synthesis in the first half of 2012 and a modest field program in August Analysis of the results is nearing completion. SELECTED ANNUAL INFORMATION The Company s key financial results as summarized below have been prepared in accordance with IFRS. ($000s, except per share amounts) Selected Financial Information Year Ended Six Months Ended Year Ended December 31, December 31, June 30, Total revenues $ 61,112 $ 34,660 $ 63,329 Loss for the period attributable to the owners of the Company (19,849) (13,813) (11,491) Loss per share attributable to the owners of the Company - basic and diluted (0.04) (0.03) (0.04) Total assets 712, , ,713 Total current liabilities 38,557 37,391 51,753 Total long-term liabilities 309, , ,922 Total equity 364, , ,038 REVIEW OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2012 The year ended December 31, 2012 ( current period ) results are for a full twelve month period, whereas the comparative period results shown are for only the six month period ended December 31, 2011 ( comparative period ) as the Company changed their fiscal year end in 2011 resulting in a short fiscal year. Due to this change in year-end and the effect of seasonality, the financial results for the current period and the six month comparative period are not directly comparable. The Company recorded a net loss attributable to the owners of the Company for the current period of $19.9 million (loss of $0.04 per common share), compared to a net loss of $13.8 million for the comparative period (loss of $0.03 per common share), the movement is predominantly due to movements in other gains and losses explained further below. Gross Profit from Operations Gross profit from operations was $14.5 million for the current period, compared to $8.6 million for the comparative period. The gross profit from operations is comprised of geothermal operations only and includes 100% of the results from HS Orka and Soda Lake. ALTERRA POWER CORP. Twelve Month Report

18 Revenue Revenue in the current period was $61.1 million and $34.7 million in the comparative period. The breakdown in revenue was as follows: HS Orka operations (Reykjanes and Svartsengi) 100% consolidated - $56.7 million (comparative period: $32.3 million), which included $1.7 million recorded for amortization of below-market contracts (comparative period: $1.2 million). Soda Lake - $4.4 million (comparative period: $2.4 million). The Company s ownership of TMGP and DGP is accounted for using the equity method of accounting, whereby the revenue and costs associated with the Toba Montrose hydroelectric facility and the Dokie 1 wind farm are not included in consolidated revenue but are instead included in the Company s share of profit of equity-accounted investees. The proportionate share of revenue from the two facilities included in equity income for the current period was as follows: Toba Montrose hydro facility - $27.2 million (representing the Company s 40% share) (comparative period: $18.6 million). Dokie 1 wind farm - $17.0 million (representing the Company s 51% share) (comparative period: $11.9 million). Cost of sales Cost of sales for the current period totalled $46.6 million, compared to $26.0 million in the comparative period. Cost of production in the current period included: HS Orka - $39.2 million (comparative period: $23.3 million). Soda Lake - $7.4 million (comparative period: $2.7 million). The proportionate share of production costs (including depreciation and amortization) from the Toba Montrose hydro facility and the Dokie 1 wind farm are not included in consolidated cost of sales but are instead included in equity income for the current period as follows: Toba Montrose hydro facility - $12.0 million (representing the Company s 40% share) (comparative period: $6.1 million). Dokie 1 wind farm $10.6 million (representing the Company s 51% share) (comparative period: $5.1 million). Income (expenses) Total other income (expenses) for the current period resulted in a net expense of $34.4 million, compared to a net expense of $31.2 million for the comparative period. General and administrative expenses were $14.9 million compared to $9.8 million in the comparative period. The decrease against the comparative period (after taking into account the different periods presented due to the change in year-end) is due to efficiencies from the merger with Plutonic Power Corporation, in addition to a reduction in legal and professional costs in the current period as the comparative period included legal fees related to the Norðurál arbitration as well as professional fees ALTERRA POWER CORP. Twelve Month Report

19 incurred in conjunction with the Company s conversion to IFRS. These costs were not repeated in The Company s share of equity income for the current period was $3.3 million, compared to equity income of $7.8 million for the comparative period. Equity income for the current period includes the Company s 40% share of TMGP income of $2.0 million (comparative period: $6.4 million), the Company s 51% share of Dokie 1 loss of $0.1 million (comparative period: income of $3.0 million), and the Company s net interest in Blue Lagoon income of $1.4 million (comparative period: loss of $1.6 million). The variability in the Company s share of equity income is largely due to the change in yearend and seasonality. Financing costs incurred in the current period were $9.8 million, compared to $5.3 million for the comparative period. The decrease against the comparative period (after taking into account the different periods presented due to the change in year-end) is due to a reduction in indexation on Icelandic loans and foreign exchange. Financing income earned in the current period was $2.8 million, compared to $1.3 million for the comparative period. The increase against the comparative period is primarily due to interest income on cash proceeds from the share issuance by HS Orka in the current period. Other gains and losses for the current period totaled a net loss of $15.1 million, compared to a net loss of $23.9 million for the comparative period. Highlights of other gains and losses in the current period and comparative period include: A $9.3 million non-cash loss resulting from the change in the fair value of the long term bonds payable in the current period (comparative period: $2.4 million gain). As partial consideration for its acquisition of shares of HS Orka, the Company has long term bond liabilities with a fair value of $121.1 million as at December 31, The bonds contain certain embedded derivatives related to the price of aluminum and have therefore been recorded at fair value at each reporting date with the change in the fair value recorded in the statement of operations. A $2.8 million non-cash loss resulting from the change in the fair value of derivatives for the current period (comparative period: $24.5 million non-cash loss). 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 is an embedded derivative and has therefore been recorded at fair value at each reporting date with the change in the fair value recorded in the statement of operations. A $1.3 million loss on foreign exchange was incurred for the current period, compared to a loss of $1.8 million for the comparative period. A $1.8 million write off in development costs in the current period, compared to a write off of $0.01 million in the comparative period. SUMMARY OF QUARTERLY RESULTS As mentioned previously, seasonality has an impact on our quarterly operating results. In addition, the Company has a number of non-cash derivatives which can fluctuate significantly from quarter to quarter. The following table summarizes information regarding the Company s operations on a ALTERRA POWER CORP. Twelve Month Report