Opinion

General Electric and BC's Private Power Gold Rush

When cash-poor Finavera needed backers for its Peace River wind farms, who stepped up? First, an aging Irish tycoon cut his sweet deal, then giant GE gained the 'lions share' of profits.

By Will McMartin 11 May 2010 | TheTyee.ca

Tyee contributing editor Will McMartin is a veteran political advisor and analyst.

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GE is world's fourth largest corporation.

Are you passionate about B.C. politics? If so, you might be able to use the following skill-testing question to amaze your friends, confound your enemies and be a hit at cocktail parties.

Here it is: what do a New York hedge fund run by a couple of ex-Goldman Sachs managers, a 95-year old Irish business tycoon who made his initial fortune in movie theatres, and an international conglomerate ranked in the latest Fortune 500 ratings as the fourth-biggest company in the world, have in common?

The surprising answer: Finavera Renewables Inc., the tiny company that on March 11 won an astounding four, much-valued electricity purchasing agreements (EPAs) from British Columbia's biggest Crown corporation, BC Hydro and Power Authority.

It's true, and perhaps not so surprising in the world of independent power production where, in B.C. at any rate, such are the vast profits waiting to be made -- courtesy of BC Hydro ratepayers -- that even the smallest, financially-destitute companies have access to phenomenal amounts of capital.

Finavera's rags to riches story

Tyee readers learned a few weeks ago that Finavera Renewables Inc., a Vancouver company with no revenues and few assets -- save some interesting connections to Accenture, the global out-sourcing giant -- was selected by BC Hydro to build four electricity-generating wind farms in northeastern B.C.

The project will cost an estimated $800 million to complete, but Finavera executives believe their wind farms will produce annual revenues (from BC Hydro) of at least $100 million over the life of the four 25-year contracts recently signed with the publicly-owned utility.

To repeat: once their company expends $800 million in capital costs, Finavera executives expect at least $2.5 billion in revenues over the following two-and-a-half decades. The profit potential, to put it mildly, is enormous.

At the present time, however, Finavera Renewables is anything but enormous.

Consider the company's most-recent financial statements, for fiscal 2009, released on Friday, April 30, along with the management's discussion and analysis (MD&A), a standard document for publicly-traded companies.

The financial statements confirm The Tyee's observation several weeks ago that Finavera's ongoing expenses and a dearth of revenues meant the company was "operating on fumes" not long before it won the four Hydro EPAs.

In fact, as the company's most-recent balance sheet shows, Finavera's entire cash balance at the beginning of 2010 was a mere $6,695.

Moreover, the company’s total assets at year-end were valued at just $536,302. For sake of comparison, consider that the average price of a house in the Greater Vancouver area in April was $662,741.

That asset valuation was down sharply from the $1.9 million recorded in 2008, and a stunning drop from $5.5 million in 2007. Simply, Finavera appears to have been forced to sell assets -- notably an undeveloped wind-power project in Alberta -- merely to stay alive, hoping against hope that it could obtain at least one long-term EPA from BC Hydro.

Lean times

Further examination of the company's financial statements shows that year-end assets included property, computers and office equipment valued at $176,574, pre-paid expenses of $56,329, receivables of $47,756, and -- strangest of all -- an IOU from an employee totaling $81,510.

(Notes to the financial statements suggest that a tax assessment was levied against an individual who was both an officer and director, and the company advanced the monies necessary for the executive to meet his tax obligation. It further appears that at year-end, the company was still negotiating a repayment schedule.)

On the other side of the ledger, accounts payable and accrued liabilities came to more than $4.6 million. In total, Finavera's liabilities added up to more than $6.0 million.

Interestingly, among Finavera's creditors were members of the company's board of directors. At year-end, as much as $360,565 was owed "to related parties... in respect of expenses incurred in current and prior periods." The outstanding amounts, moreover, "comprise fees to directors and officers, former directors, and companies with current or former directors in common."

Simply, it appears that in a bid to conserve cash, Finavera might have been withholding payments to its directors for their attendance at board meetings and other functions. And on top of that, the company has borrowed monies, $40,563, from a related party. It's an unsecured loan, repayable upon demand.

In search of more credit

As well as delaying payments to creditors, Finavera has been forced to drastically slash its operating expenditures. Payroll and benefits -- the company currently employs 10 full-time people at its Vancouver office, five staff who work part-time, and another full-time worker overseas -- were chopped nearly in half, from $1.4 million in 2008, to $874,000 last year.

Office and administration expenditures fell from $833,000 to $538,000 over the same period, outlays for marketing and advertising dropped from $256,000 to $43,000, and professional fees declined from $741,000 to $489,000.

Over all, Finavera was able to cut its year-over-year operating expenses by $3.5 million (from $7.5 million to just over $4.0 million). As a result, the company's fiscal year losses fell from $9.1 million in 2008, to $3.3 million in 2009.

Finding new capital has been a difficult and on-going challenge. The latest financial statements make clear that there was "no operating credit facility" on which the company could draw funds.

To raise cash, therefore, Finavera has had to ask existing shareholders to boost their investments and extend loans.

As the most-recent MD&A states: "In the longer term, the Company's ability to continue its operations, develop its projects, and realize assets at their carrying values remains dependent upon its creditors, and obtaining sufficient financing through debt and equity offerings, until it can generate revenues to cover operating costs."

A cash infusion

Then, in the last two months or so, both just before and after it obtained those four BC Hydro EPAs, Finavera raised nearly $4 million from current shareholders.

In February and March, $142,420 was generated through the sale of just over 2.8 million share-warrant units at five cents apiece. A few weeks later, another 10 million shares were sold at six cents each and fetched a total of $600,000.

The former sale appears to have gone to Anchorage Capital Master Offshore Ltd., a New York-based hedge fund founded in 2003 by Kevin Ulrich and Anthony Davis, a pair of alumni from Wall Street's largest investment bank and brokerage, Goldman Sachs.

With about $7 billion currently under management, Anchorage has been associated with Finavera's principals for much of the past decade, going back at least to when many of them toiled at Tournigan Gold, a penny-stock company listed on the Toronto Venture Exchange. (Hein Poulus, the Stikeman Elliott lawyer who chairs Finavera, also sits on that company's -- now known as Tournigan Energy -- board of directors.)

Anchorage Capital currently owns more than 25 million Finavera shares, or about 9 per cent of the total.

The Irish connection

The latter share sale was taken up by Kevin Anderson, a 95-year old Irish business magnate who has become a significant Finavera shareholder in recent years.

An accountant by training, Anderson acquired and developed movie cinemas across Ireland and Britain, which, along with his son, Tom, he parlayed into a business conglomerate with holdings in oil and gas, real estate, hotels, pubs, and much more -- including a Christmas tree company.

Along with adding 10 million Finavera shares to his portfolio, Anderson also agreed to lend the company $1.8 million -- at a whopping 12 per cent annual interest. (Yes, there's a reason he's a multi-millionaire.)

Lastly, Finavera realized just over $1.3 million when a number of shareholders exercised warrants that allowed them to purchase new shares from the company treasury at 10 cents apiece.

Not surprisingly, the continual sale of stock from the company treasury has resulted in considerable dilution over the last few years. At the beginning of 2007, Finavera had 92 million shares outstanding, but by the beginning of 2010 that number had skyrocketed to nearly 246 million. Recent sales put that latter figure to 270 million shares or so.

Over the last 10 weeks or so, the total amount of capital raised by Finavera was in excess of $3.8 million.

Enter General Electric

Still, on the face of it, Finavera remains a long way from the $800 million or so needed to construct the four wind farms in B.C.'s Peace River country. This is where the world's fourth-largest conglomerate -- General Electric Company (GE) -- enters the picture.

General Electric has five operating divisions, one of which (GE Energy Infrastructure -- with revenues of $42.3 billion in 2009), among other things, manufactures and installs wind-turbines, and another (GE Capital Finance -- revenues of $50.6 billion last year) that, among other things, provides financing to companies seeking to buy wind turnbines.

(The arrangement is not dissimilar to that at General Motors, which manufactures automobilies, and has a financing arm, GMAC, to provide credit to people wishing to buy a GM car.)

According to GE, the company to date has installed 13,500 wind and 3,600 hydro turbines around the world, with capacity in excess of 160,000 megawatts.

Eighteen months ago, in November 2008, General Electric and Finavera Renewables signed a memorandum of understanding whereby GE Energy Financial Services obtained the exclusive right to provide 100 per cent financing for Finavera's four wind projects through equity investments and debt arranging.

GE's growing profile in BC

General Electric has become a significant presence in BC Hydro's quest to obtain clean energy. The conglomerate is a partner with Plutonic Power Corporation in the massive -- and controversial -- run-of-river project in the Upper Toba Valley.

And last year, GE and Plutonic teamed up to take over the failed Dokie 1 Wind Project, also located in the Peace region. That initiative similarly has been controversial, as the GE/Plutonic duo obtained from BC Hydro a contracted price higher than was allowed under the original EPA. That second EPA was approved -- but kept secret -- by the B.C. Utilities Commission.

General Electric also took a high-profile role at the 2010 Winter Olympics, notably in contributing $700,000 towards a $2 million upgrade of the Robson Square ice rink, which for the duration of the festivities was renamed GE Plaza.

And together, Plutonic and GE have made significant donations to Gordon Campbell's BC Liberals. Since 2005, their combined total is $150,351.

'The lion's share' to GE

Finavera executives are quite prepared to concede that General Electric will acquire nearly all of the profits from their four Peace River windfarms.

In a remarkable interview with The Sunday Tribune of Ireland in January, Jason Bak, company CEO said that he expected GE to get "the lion's share of the proceeds" from the project.

Finavera shareholders, he added, "will get a significant portion based on the risk we took. We take all the risk, do all the grunt work, and they [GE] come in and sign the cheque."

So, it's a win-win situation for everybody. General Electric gets to sell a sizeable number of their wind turbines and earn a steady stream of interest and principal payments, along with significant profits, over the next several decades. Finavera shareholders -- company executives, New York's Anchorage Capital hedge fund, and Kevin Anderson, the Irish movie theatre magnate -- will be handsomely rewarded for their patience.

As for BC Hydro ratepayers: well, that's not so clear.  [Tyee]

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