FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, Management s Discussion & Analysis

Transcription

1 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 Management s Discussion & Analysis Suite Dunsmuir Street, Vancouver, BC, V6C 3K4 Tel: (604) Fax: (604)

2 INTRODUCTION The following ( MD&A ) is intended to supplement the condensed consolidated interim financial statements of Alterra Power Corp. (the Company ) for the three and nine months ended September 30, 2012 and the related notes thereto. This MD&A has been prepared as of November 14, 2012 and it should be read in conjunction with the unaudited condensed consolidated interim financial statements of the Company for the three and nine months ended September 30, 2012 prepared in accordance with International Accounting Standards ( IAS ) 34, Interim Financial Reporting, and with the audited consolidated financial statements of the Company for the six months ended December 31, 2011, which have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. All figures are expressed in United States ( US ) dollars except where otherwise indicated. References 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 THIRD QUARTER For the three months ended September 30, 2012, the Company s operating assets performed at a combined 102% of budgeted generation, as follows: Facility Type Budget () Generation (*) Generation attributable to the company () % of Budget Reykjanes Geothermal 176, , , % Svartsengi Geothermal 105, ,476 76, % Soda Lake Geothermal 15,405 12,308 12,308 80% Toba Montrose Run of river hydro 381, , , % Dokie 1 Wind 71,909 66,834 34,085 93% TOTAL 749, , , % refers to mega-watt hours. Toba Montrose achieved a new daily production record in July of 5,504, and generated in excess of 5,000 on five days during the quarter. The Company signed a contract with Iceland Drilling Ltd. (Jardbðranir hf) to have two wells drilled at its Reykjanes reservoir in Iceland as well as one work-over of an existing well. The primary purpose of the wells is to maintain existing production at Reykjanes and some spare capacity for the Rekyjanes expansion phase. Drilling is expected to commence in November and be completed by spring of Subsequent to September 30, 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 5 Peruvian concessions. 1. OVERVIEW Summary The Company s mission is to be a leading global renewable power company by increasing its production of renewable power through the advancement of its existing operating plants and projects, discovering and developing new renewable power resources and acquiring renewable power plants and projects. The Company s current portfolio of operating assets is as follows: ALTERRA POWER CORP. 3

4 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 84, , ,000 Electricity generation year to date % included in consolidated financial statements 560, ,288 46, , % 100% 100% 40% under equity income 234,301 51% under equity income The Company also owns a number of development and exploration assets as more thoroughly described below. 2. PROJECT UPDATES AND OUTLOOK Operating Plants 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 of electricity annually, while the Svartsengi plant has 72 MW of generation capacity and is budgeted to generate 460,000 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 During the third quarter of 2012, the Company signed a contract with Iceland Drilling Ltd. (Jardbðranir hf) to have two wells drilled at its Reykjanes reservoir in Iceland as well as one work-over of an existing well. The primary purpose of the wells is to maintain existing production at Reykjanes and some spare capacity for the Reykjanes expansion phase. Drilling is expected to commence in November and be completed by spring of All obligations of HS Orka are non-recourse to the Company. 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. ALTERRA POWER CORP. 4

5 The Soda Lake facility sells its entire net electrical output to NV Energy, Inc. under two 30 year PPAs that terminate in 2019 and 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 facility improvements. In March 2012, the Company received $2.1 million. Toba Montrose hydroelectric facility, British Columbia, Canada (40% interest) The Company holds a 40% economic interest and 51% voting interest in the Toba Montrose General Partnership ( TMGP ) which owns and operates the Toba Montrose run of river hydroelectric 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. 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 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. 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. All obligations of TMGP are non-recourse to the Company. The Company s historic investment in TMGP may not be recoverable in the event of default. Dokie 1 wind farm, British Columbia, Canada (51% interest) The Company holds a 51% interest in Dokie General Partnership ( 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, and is expected to generate a combined long term average of 330,000 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. ALTERRA POWER CORP. 5

6 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 Company s historical investment in DGP may not be recoverable in the event of default. Expansion and Development Projects 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 ( ABW Solar ) by First Solar, Inc. First Solar, Inc. began construction of ABW Solar in May 2012, with completion of construction expected before the end of 2012 for three farms and early 2013 for the remaining two farms. 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 s historical investment in ABW Solar General Partnership may not be recoverable in the event of default. The Company together with GE EFS and First Solar Inc. are currently in negotiations with lenders for the required debt financing. 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 run of river hydroelectric project ( Upper Toba project ) that includes two run of river power plants in close proximity to the Toba Montrose hydroelectric facility, with a combined expected annual average generation of up to 345,000 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 second quarter of Other project advancements included drilling and seismic testing for the powerhouse and intake locations. 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 ALTERRA POWER CORP. 6

7 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 a Resource Development Agreement ( RDA ) with the Klahoose First Nation, and now has in place agreements 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 to sell the expansion s output to Norðurál, and obtaining project financing which are currently expected to 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. 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 source 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 a 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) and are completing data collection for a wind resource assessment of the Dokie 2 wind farm. The Dokie 2 wind farm holds a BC Provincial Environmental Assessment Certificate; amendments to the certificate may be required depending on the results of the resource assessment. 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 a MOU with the Saulteau First Nations for this expansion phase. ALTERRA POWER CORP. 7

8 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, belonging to 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 as part of the studies for the Krýsuvík geothermal area. These studies included detailed geological mapping, geophysical surveys and 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 continued to advance the project, with commencement of a pre-feasibility report and environmental assessment. The Company has not planned for any material expenditure on these properties at this time. USA The Company has invested in a number of early stage properties in Nevada. The Company has not planned for any material expenditure on these properties at this time. Chile In Chile, the Company has drilled three slim diameter holes on the Maule and Pellado concessions, which together form the Mariposa geothermal system. Based on exploration results to date, the Company s independent consultants have calculated an inferred resource estimated to produce 320 MW annually. The three holes established temperatures up to 200 C in the cap rock just above the inferred reservoir. 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 development of the Mariposa project. Under this agreement, EDC will have up to six months to carry out its 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 Mariposa. Subsequent project equity contributions and all economic sharing would be on a pro rata basis between the partners. ALTERRA POWER CORP. 8

9 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 of significant size, 50 km northwest of the town of Candarave. The concessions include 77,400 hectares of land with favorable geochemistry along a multi-kilometer zone with near-boiling hot springs. A transmission line lies 45 km to the northwest and there are several roads cutting through the area. The Company was also awarded further concessions in 2011, just to the south of the Crucero trend concessions. These include Tutupaca Norte, Atarani and Suche covering 59,900 hectares, and are part of the area of the active volcanoes of 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 was reduced to the most favourable section covering 6,900 hectares. 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. It has also been engaged in extensive community consultations in its holdings. Several community permits are now in hand and plans for further geophysical exploration are underway. 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 to carry out its due diligence on the five 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 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. 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 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 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, numerous thermal springs. ALTERRA POWER CORP. 9

10 Field work for a detailed exploration program has been completed 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 at the end of 2012 and work on conceptual models of the concessions is underway. British Columbia, Canada Other hydroelectric exploration projects The Company has rights to 41 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 17 run of river projects into three interconnected groups with an estimated potential annual generation of 2.9 million. 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 the two First Nations. In June 2012, the Company signed a RDA with the Sliammon First Nation for the project. The Company has rights to other run of river hydroelectric power projects with a combined potential average annual generation of approximately 2.3 million of electricity. The Company continues to collect hydrological data, conduct engineering work and perform other required studies on these projects. 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. 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 expected to be completed by the end of the year. 3. SUMMARY OF QUARTERLY RESULTS Seasonality has an impact on our quarterly operating results. Generally, Soda Lake production levels are lower in the summer months due to higher 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 hydroelectric facility s production levels are higher in the summer months due to spring freshet and glacier melt, and the Dokie 1 wind farm production levels are higher in the winter months. ALTERRA POWER CORP. 10

11 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 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. 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. September 30, June 30, March 31, December 31, Three months ended: Revenue $ 13,326 $ 14,242 $ 16,388 $ 17,651 Gross profit 2,189 3,127 4,682 3,769 Income (expense) 15,853 (14,413) (14,890) (10,832) Income tax recovery (expense) (3,373) 1, Net income (loss) attributable to owners of the Company 9,825 (7,746) (8,298) (6,031) Earnings (loss) per share attributable to owners of the Company (basic and diluted) 0.02 (0.02) (0.02) (0.01) September 30, June 30, March 31, December 31, Three months ended: Revenue $ 17,009 $ 17,582 $ 18,901 $ 18,521 Gross profit 4,856 4,785 5,525 5,595 Income (expenses) (20,357) (31,717) 12,279 (13,016) Income tax recovery (expense) 4,084 3,358 (5,867) (1,156) Net income (loss) attributable to owners of the Company (7,782) (21,142) 11,667 (8,482) Earnings (loss) per share attributable to owners of the Company (basic and diluted) (0.02) (0.05) 0.04 (0.03) 4. RESULTS OF OPERATIONS The financial results for the three and nine months ended September 30, 2012 include the full consolidation of the results of HS Orka and the Soda Lake operations. The results from the Toba Montrose hydroelectric facility and the Dokie 1 wind farm are both accounted for using the equity method of accounting. The financial results for the current nine month period is not fully comparable to the nine months ended September 30, 2011 as the comparative period only include the results of the Toba Montrose hydroelectric facility and the Dokie 1 wind farm from May 13, 2011, the date of their acquisition. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 The Company recorded net income of $14.7 million for the three months ended September 30, 2012, (the current quarter ) compared to a net loss of $11.4 million for the three months ended September 30, 2011 (the comparative quarter ), an increase of $26.1 million. This increase in net income was primarily caused by changes in the fair value of bonds payable and embedded derivatives as well as other non-cash items. Net income attributable to the owners of the Company for the current quarter was $9.8 million (net income of $0.02 per common share), compared to a net loss of $7.8 million for the comparative quarter (net loss of $0.02 per common share). Selected Changes in Non-Cash Items Fluctuations against the comparative quarter in the following non-cash items contributed to the increased income: ALTERRA POWER CORP. 11

12 A positive change in the fair value of bonds payable and derivatives of $29.5 million (current quarter: $7.9 million gain; comparative quarter: $21.6 million loss) recorded in other gains and losses. A positive change in foreign exchange of $7.4 million (current quarter: $2.9 million gain; comparative quarter: $4.5 million loss). A negative change in income tax of $7.5 million (current quarter: $3.4 million income tax expense; comparative quarter: $4.1 million income tax recovery). Revenue Revenue, all from geothermal operations, in the current quarter was $13.3 million, or $3.7 million lower than the comparative quarter. The breakdown in revenue was as follows: HS Orka operations (Reykjanes and Svartsengi) - $12.5 million (comparative quarter: $15.8 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 was primarily due to two aluminum price linked power sales contracts as aluminum prices were lower in the current quarter together with unfavorable foreign exchange. Soda Lake - $0.8 million (comparative quarter: $1.2 million). The decrease is due to lower production in the current quarter as Soda Lake experienced hotter than expected ambient temperatures as well as extended downtime on the generator rebuild. 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 results from equity-accounted investees ( equity income ). The proportionate share of revenue from the two facilities included in equity income for the current quarter was as follows: Toba Montrose hydro facility - $16.2 million (representing the Company s 40% share) (comparative quarter: $17.3 million). The decrease was primarily due to higher than budgeted water flow in the comparative quarter. Dokie 1 wind farm - $3.9 million (representing the Company s 51% share) (comparative quarter: $5.7 million). The decrease was due to lower winds during the period. Cost of sales Cost of sales for the current quarter totalled $11.1 million, compared to $12.2 million in the comparative quarter, a decrease of $1.1 million. Cost of production in the current quarter included: HS Orka - $8.8 million (comparative quarter: $11.4 million). The decrease was due to foreign exchange and lower production costs than the comparative quarter. The decrease in production costs was due to fewer power purchases and lower transmission costs. Soda Lake - $2.3 million (comparative quarter: $0.8 million). The increase was due to increased repairs and maintenance on the pumps than in the comparative quarter. ALTERRA POWER CORP. 12

13 The proportionate share of production costs 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 quarter as follows: Toba Montrose hydro facility - $3.0 million (representing the Company s 40% share) (comparative quarter: $3.3 million). Dokie 1 wind farm $2.4 million (representing the Company s 51% share) (comparative quarter: $3.3 million). Gross profit Gross profit from operations was $2.2 million for the current quarter, compared to $4.9 million for the comparative quarter, a decrease of $2.7 million. This was due to lower revenue, partially offset by lower cost of sales as explained above. Income (expenses) Total other income (expenses) for the current quarter resulted in a net income of $15.9 million, compared to a net expense of $20.4 million for the comparative quarter, a net positive change of $36.3 million. This net positive change is due to a number of factors as described below: General and administrative expenses were lower than the comparative quarter at $2.8 million compared to $4.2 million, a decrease of $1.4 million. This decrease is largely due to efficiencies gained from the merger with Plutonic Power Corp. ( Plutonic ), no legal fees related to the Norðurál arbitration in the current quarter and professional fees incurred in 2011 for the IFRS conversion. Finance costs incurred in the current quarter were $2.2 million, compared to $2.9 million for the comparative quarter. The decrease is due to foreign exchange movements. Other gains and losses for the current quarter totaled a net gain of $10.0 million, compared to a net loss of $26.1 million for the comparative quarter. Highlights of other gains and losses in the current and comparative quarters include: A $7.6 million non-cash loss resulting from the change in the fair value of the long term bonds payable in the current quarter (comparative quarter: $2.7 million gain), a net negative change of $10.3 million. As partial consideration for its acquisition of shares of HS Orka, the Company has long term bond liabilities with a fair value of $119.7 million as at September 30, 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 $15.5 million non-cash gain resulting from the change in the fair value of derivatives in the current quarter (comparative quarter: $24.3 million non-cash loss), a net positive change of $39.8 million which is due to the increase in aluminum forward prices. 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. ALTERRA POWER CORP. 13

14 Due to favorable movements in exchange rates in the current quarter, a $2.9 million gain on foreign exchange was recorded in the current quarter, compared to a loss of $4.5 million loss for the comparative quarter, a net positive change of $7.4 million. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 The Company recorded a net loss of $4.8 million for the nine months ended September 30, 2012 ( current period ) compared to a net loss of $23.1 million for the nine months ended September 30, 2011 (the comparative period ), a decrease in net loss of $18.3 million. This decrease in net loss was caused largely by a significant positive fluctuation in non-cash changes in the fair value of embedded derivatives and foreign exchange, partially offset by negative fluctuations in other non-cash items. Net loss attributable to the owners of the Company for the current period was $6.2 million (loss of $0.01 per common share), compared to a net loss of $17.3 million for the comparative period (loss of $0.04 per common share). Selected Changes in Non-Cash Items Fluctuations against the comparative period in the following non-cash items contributed to the decrease in net loss: A positive change in the fair value of bonds payable and derivatives of $10.6 million (current period: $4.9 million loss; comparative period: $15.5 million loss). A positive change in foreign exchange of $11.9 million (current period: $2.5 million gain; comparative period: $9.4 million loss). A reduction in development costs written off and other expenses of $2.2 million (current period: $1.8 million loss; comparative period: $4.0 million loss). A negative change in income tax of 3.0 million (current period: $1.4 million income tax expense; comparative quarter: $1.6 million income tax recovery). Revenue Revenue, all from geothermal operations, in the current period was $44.0 million, or $9.5 million lower than the comparative period. The breakdown in revenue is as follows: HS Orka operations (Reykjanes and Svartsengi) - $41.0 million (comparative period: $49.9 million), which included $1.3 million recorded for amortization of below-market contracts (comparative period: $2.0 million). The decrease in revenue from the comparative period was primarily due to aluminum price linked power sales contracts as aluminum prices were lower in the current period, together with unfavorable foreign exchange. Soda Lake - $3.0 million (comparative period: $3.6 million). The decrease was due to higher ambient temperatures and extended downtime on a generator rebuild. Additionally, the comparative period included an extra production well for three months which was not in service during the current period. ALTERRA POWER CORP. 14

15 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 - $24.4 million (representing the Company s 40% share) (comparative period: $23.8 million for the period from May 13 to September 30, 2011). This facility was offline from the beginning of the current year to early April for penstock warranty work during its seasonally lowest generation months. Dokie 1 wind farm - $13.0 million (representing the Company s 51% share) (comparative period: $7.2 million for the period from May 13 to September 30, 2011). Cost of sales Cost of sales for the current period totalled $34.0 million, compared to $38.3 million in the comparative period, a decrease of $4.3 million. Cost of production in the current period included: HS Orka - $28.6 million (comparative period: $34.5 million). The decrease from the comparative period was due primarily to foreign exchange and lower production costs resulting from fewer power purchases and decreased transmission costs. Soda Lake - $5.4 million (comparative period: $3.8 million). The increase was due to increased repairs and maintenance on the pumps from the comparative period. The proportionate share of production costs 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 - $7.9 million (representing the Company s 40% share) (comparative period: $4.7 million for the period from May 13 to September 30, 2011). Dokie 1 wind farm $7.1 million (representing the Company s 51% share) (comparative period: $5.0 million for the period from May 13 to September 30, 2011). Gross profit Gross profit from operations was $10.0 million for the current period, compared to $15.2 million for the comparative period, a decrease of $5.2 million. This was primarily due to lower revenue, partially offset by lower costs of sales, each as explained above. Income (expenses) Total other income (expenses) for the current period resulted in a net expense of $13.5 million, compared to a net expense of $39.8 million for the comparative period. The positive change in other income (expense) is largely due to changes in the embedded derivative and fair value of long term bonds, lower general and administrative costs and finance costs offset by lower equity income as described below. General and administrative expenses were lower than the comparative period at $10.6 million compared to $16.0 million. This decrease is largely due to efficiencies from the merger with Plutonic, transaction fees incurred in the comparative period from the Plutonic acquisition, no significant legal ALTERRA POWER CORP. 15

16 fees related to the Norðurál arbitration in the current period as well as professional fees incurred in 2011 for the Company s IFRS conversion. The Company s share of equity income for the current period was $7.1 million, compared to an equity income of $15.5 million for the comparative period which only included the Company s share of TMGP equity income and Dokie 1 equity loss from May 13, 2011 to September 30, Equity income for the current period includes the Company s 40% share of TMGP income of $5.0 million, a reduction of $9.9 million against the comparative period as the Toba Montrose facility was offline during the first quarter due to the outage described above (during the first quarter a loss of $7.4 million was recorded), the Company s 51% share of Dokie 1 income of $0.6 million (comparative period: loss of $1.0 million). Financing costs incurred in the current period were $7.3 million, compared to $10.4 million for the comparative period. The decrease is due to positive fluctuations in interest charges designated in foreign currencies as well as repayment of an outstanding C$22.0 million loan in July 2011 which was accruing interest at 8% per annum in the comparative period. Other gains and losses for the current period totaled a net loss of $4.1 million, compared to a net loss of $28.9 million for the comparative period. Highlights of other gains and losses in the current period and comparative period include: A $7.7 million non-cash loss resulting from the change in the fair value of the long term bonds payable in the current period (comparative period: $5.7 million loss), a negative change of $2.0 million. A $2.8 million non-cash gain resulting from the change in the fair value of derivatives for the current period (comparative period: $9.7 million non-cash loss) resulting from an increase in aluminum forward prices. Due to favorable movements in exchange rates in the period, a $2.6 million gain on foreign exchange was incurred for the current period, compared to a loss of $9.4 million for the comparative period. A write off of $1.8 million in development costs in the current period, compared to a write off of $4.0 million in development costs in the comparative period, a decrease of $2.2 million. 5. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2012, the Company had consolidated cash and cash equivalents of $42.3 million (December 31, 2011: $22.2 million), an increase of $20.1 million from December 31, The increase in consolidated cash and cash equivalents was due primarily to cash flows generated from operations for the period as well as the receipt of $37.5 million by HS Orka from the issuance of treasury shares to Jarðvarmi slhf ( Jarðvarmi ), and a $2.1 million grant received by Soda Lake from the US Department of the Treasury, both in March This was partially offset by investment of $4.5 million in short term investments, investment of $6.9 million in plant and equipment, principal loan repayment of $12.3 million and development costs of $7.7 million in the current period. 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 ALTERRA POWER CORP. 16

17 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 September 30, 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. The Company also had short term investments of $4.5 million (December 31, 2011: $nil). Excluding HS Orka and the cash held at the equity-accounted investees, the Company had cash of $2.7 million at September 30, 2012 (December 31, 2011: $16.1 million). 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 September 30, 2012 was $28.8 million compared to $4.6 million at December 31, The increase was due primarily to the cash received from the issuance of treasury shares to Jarðvarmi and the US Department of the Treasury grant as discussed above. Excluding HS Orka, the Company had working capital deficiency of $0.9 million at September 30, 2012 (December 31, 2011: positive working capital of $13.2 million). 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 represented 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 where the proceeds will substantially fund the remaining equity requirements for the 80 MW of planned expansions which would increase the Reykjanes geothermal plant capacity from 100 MW to 180 MW. The Company has available, if needed, a revolving line of credit of C$20.0 million provided by its Chairman which expires on January 1, During the nine months ended September 30, 2012, the Company drew C$1.0 million on the line of credit and a further C$3.75 million subsequently to fund its operations at the parent company level. Further draws on this line of credit will be necessary in the foreseeable future, partially offset by the receipt of it share of distributions from operating assets. The Company is currently exploring a number of options on how to fund its future cash requirements, including any needed project equity for construction of the Upper Toba run of river hydroelectric project which is planned for Consolidated long-term debt consists of: a) $119.7 million of the present value of the bonds assumed by Magma Energy Sweden A.B. ( Magma Energy Sweden ) for the acquisition of HS Orka that mature in 2016; b) $144.4 million, representing 100% of HS Orka s debt which has annual principal repayments and the major part matures between 2016 and 2023 and; c) $1.0 million drawn on the line of credit under the aforementioned working capital facility. The Company s proportionate share of TMGP s long term-debt is $190.0 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 $93.1 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 equity investments. The HS Orka, Magma Energy Sweden, TMGP and DGP loans are non-recourse to the Company other than the ALTERRA POWER CORP. 17

18 Company s historic investment in these entities, which may not be recovered in the event of default. All entities are expected to generate sufficient cash flow to service and repay their existing long-term loans, except for Magma Energy Sweden which is a holding Company that generates no cash flow of its own. 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 controls and procedures. Based on the results of that evaluation, the Company s Chief Executive Officer and Chief Financial Officer have concluded that, as at September 30, 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 current nine month period that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. 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. 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 decisionmaking 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 ALTERRA POWER CORP. 18