Alternative and Renewable Energy The Choice of a New Generation
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Alternative and Renewable Energy The Choice of a New Generation

Launching Alternative & Renewable Energy Coverage

We have initiated or transferred coverage on five Canadian equities within the Alternative & Renewable Energy space: Boralex Inc.; Canadian Hydro Developers Inc.; EarthFirst Canada Inc.; Innergex Renewable Energy Inc.; and Plutonic Power Corporation. While we anticipate sector volatility to continue over the short term due to shaky equity markets in general, we expect our top stock picks, Canadian Hydro Developers and Boralex, both rated 1-Sector Outperform, to perform exceptionally well over the next 12 months, as follows:

• Canadian Hydro Developers oversold. We believe the recent sell-off of Canadian Hydro Developers presents a compelling buying opportunity. Following several permitting-related project timing setbacks and associated cost overruns, we think KHD’s current share price now reflects too much of an execution risk discount. Our DCF and NAV analyses are supportive of a $7/share price and a 50%+ ROR one year out.

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• Boralex is a bargain, in our opinion, and is one of the few renewable power development companies that offers investors healthy cash flow generation, coupled with a well-funded and achievable growth plan. Strong spot northeastern U.S. power prices coupled with easing diesel prices and our long-term bullish outlook for a tight Connecticut REC market are the basis for our positive thesis. Our DCF and NAV support a price in the $18/share area, suggesting a 20%+ one-year return. On balance, we have a positive outlook for all five of the companies that we have assumed coverage on, backed by our average one-year rate of return of 35%.

• Plutonic Power – neutral on the name (2-Sector Perform; one-year target of $9.00/share). Plutonic is currently 100% dependent on the B.C. government choosing its renewable projects over others. We assume 1,047 MW of Plutonic projects get submitted into the current BC Hydro Clean Power Call. If no more of its projects are chosen, its stock price could drop to $3 per share. If the company wins all 1,047 MW in the Call, and maintains a 40%+ economic interest in the projects, the stock could be worth close to $15.

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• Innergex – a “show me” story (3-Sector Underperform; one-year target of $9.50/share). INE recently lost its bid in the 2,000 MW Hydro-Quebec wind request for proposal (RFP), while all other companies within our coverage universe that bid into the RFP won at least two projects. Innergex is sitting on over 290 MW of PPAs, spread over nine projects, most of which it has yet to execute. Execution and construction risk is high, and two of its three current construction projects have faced timing setbacks. We think investors should focus more on the successful commissioning of its PPA-signed projects than on winning new PPAs.

• EarthFirst – highly speculative (3-Sector Underperform; one-year target of $0.40/share). Following $35 million of cost overruns at its only construction project and a $200+ million debt financing deal that expired prior to funding, EF is now uncertain whether it will remain a going concern. The company desperately needs $50 million of equity/sub debt as well as a reworked debt financing agreement to complete construction of its 144 MW Dokie I project. We see one of four scenarios playing out over the short term: (1) bankruptcy; (2) a takeout; (3) financial partner; or (4) a successful refinancing. On August 21, the company announced that it had formally initiated a review of its strategic alternatives.

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