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A C$140 million initial public offering (IPO) and new contract with an east coast utility has put EarthFirst Canada on track to become a major player in Canadian wind, just 17 months after federal tax changes rendered what had been a ground-breaking business plan unworkable. EarthFirst's share offering, completed in December, was the largest renewable energy IPO ever in Canada, says CEO Robert Toole. A chunk of the proceeds will be used to finance the 144 MW Dokie 1 project in British Columbia, which won a power purchase contract from the province's utility in a 2006 call for tenders. It is expected to start construction this quarter.

The IPO marked a major step in the restructuring of a Canadian wind energy leader. Creststreet, a Toronto-based investment management firm and EarthFirst partner, pioneered a financing model in 2003 that became a popular way for wind projects to attract capital. Through the model it raised more than C$435 million for investment in wind power projects throughout Canada. Under the structure, companies were able to create "flow-through limited partnerships" that allowed investors to receive certain tax deductions available to renewable energy projects. But because members of those limited partnerships (LPs) typically did not trade on any secondary markets, the LPs provide liquidity to partners by selling projects to publicly traded entities called income trusts.

The whole structure started to unravel in October 2006 when the Canadian government made the surprise announcement that it planned to start taxing income trusts at the same rate as corporations beginning in 2011 (“uåX˜äŠÊ˜·³Ç, January 2007). It was a huge blow to the sector because trusts pay little or no corporate tax, instead shovelling out the bulk of earnings to investors who are taxed individually.

Forced out

At the same time the government put limits on how much existing trusts could grow between now and 2011. It was that restriction that ultimately forced Creststreet out of the wind power business. It decided to consolidate its entire project pipeline in the company formed to build Dokie 1, along with the pipeline of Earth First Energy of British Columbia, Creststreet's partner and the original developer of the project. Once the IPO for the new EarthFirst Canada was completed, Toole and the rest of Creststreet's wind power management team became full-time employees of the company.

"Once we recognised that the income fund structure was not going to be viable anymore, we put in place a plan to restructure our business," says Toole. "Once we have completed that restructuring, all of the wind power investments that Creststreet has been involved with will have been liquidated. The projects will be sold and investors will receive the proceeds of the sales of those projects. From that point forward, Creststreet will no longer be involved in the wind business and all of the future potential will be pursued through EarthFirst."

Building a lead

The company, says Toole, plans to become one of Canada's leading wind energy developers. It has a pipeline of more than 2500 MW and in March it announced it had added to that portfolio with the acquisition of the 45 MW Nuttby Mountain project in Nova Scotia from Atlantic Wind Power Corporation, the same day it was awarded a power purchase agreement from Nova Scotia Power.

"There is a lot going on here but this was a very attractive project and even though we were as busy as we were, we really felt we should take the time out do this acquisition," Toole says. "It was a nice project we could get involved with and get into construction very quickly and those are the type of projects we are looking for."

EarthFirst has started negotiations for turbine supply for Nuttby, which is expected to be in service by the end of 2009. Toole does not anticipate any problems getting turbines, pointing out the company signed supply agreements with Vestas and Enercon for other projects during the past quarter. "We are not having trouble accessing turbines. I think what we have established here is that we are going to be one of the most aggressive wind developers in Canada and the manufacturers have figured that out. Yes, the global turbine market is in tight supply, but if you've got a pipeline of the quality of EarthFirst, the turbine suppliers will pay attention to you. I think we've proven that."

The company's focus in the coming year will be on two more British Columbia projects totalling 226 MW. "They are the only two fully permitted wind projects in BC right now that can be tendered into the clean power call that we expect BC Hydro to announce any day now," he says. "So we are exceptionally well positioned."

Liquidation

Meanwhile, the liquidation of Creststreet's existing assets has started. Enmax Energy, a Calgary-based electricity retailer, announced in March that it bought the 63 MW Kettles Hill wind project in southern Alberta for C$163 million. The facility, made up of 35 Vestas 1.8 MW turbines, adds to a wind portfolio that includes the 81 MW Taber project and 50% of the 75 MW McBride Lake Wind Farm, both of which are also located in Alberta.

Enmax bought the Kettles Hill project from Creststreet Kettles Hill “uåX˜äŠÊ˜·³Ç LP after it was put up for auction last year. The original plan had been for the Creststreet Power and Income Fund (CPIF) to take over the project, says Toole. "With the change to the income fund tax regime in Canada, CPIF was no longer able to complete that transaction," he explains. "In the regulations with respect to this new distribution tax on income funds, you couldn't do acquisitions that are larger than 40% of your market capitalisation on the date of the announcement. This was substantially larger than that."

CPIF already owns two wind farms, the 30.6 MW Pubnico Point facility in Nova Scotia and the 54 MW Mount Copper project in Quebec. CPIF announced in late April that it would sell the projects to FPL Energy for C$121.6 million and wind up its operations.