Primary Energy Recycling PRI.UN W
September 18, 2007 - 5:02pm EST by
2007 2008
Price: 6.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 200 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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All numbers are in USD unless otherwise stated.
Primary Energy Recycling Corporation (“PERC”) (TSX: PRI.UN) is a British Columbia based corporation that captures and recycles waste energy from industrial processes and converts it into reliable and economical electricity and thermal energy for its customers’ use.  As such, PERC provides a “green” solution to supplying its mostly steel mill customers with low-cost energy.   PERC indirectly owns controlling interests in four recycled energy projects and a 50% interest in a pulverized coal facility (Harbor Coal).  The projects have a combined electrical generating capacity of 283 megawatts and a combined steam generating capacity of 1,851 Mlbs/hour.  PERC’s four wholly-owned projects provide a very stable bond-like cash flow stream, have limited commodity price exposure and are situated on-site at some of the lowest cost steel facilities in the world.  The traded securities are stapled units comprised of 1/3 bonds and 2/3 bond-like equity.
PERC pays out its cash flow like a Canadian unit trust.  Despite its similarities, PERC is not structured as an income trust, but rather as an enhanced income security (“EIS”).  This structure is described below.  The company hit a road bump due to the simultaneous unforeseen shutdown at one of its assets (North Lake) and a poor result from its only inherently volatile asset, Harbor Coal.  As a consequence the company was forced to reduce its distributions. 
We believe that there is nothing fundamentally different with PERC as a result of the recent negative news about the temporary shutdown of North Lake and the volatile result at Harbor Coal.  Since its IPO in 2005 and until the recent cut in distributions, the security historically paid out CD$1.10 and traded between CD$10.00 and $11.00.  Furthermore, conversations with industry experts have suggested these assets would probably trade in the private market for 8-9% cap rates unleveraged or approximately CD$8.50 to CD$10.00 on the current depressed distribution level.  Today, the security trades at CD$6.50 and pays out in monthly distributions an annualized CD$0.80 for a 12.3% yield.  With zero contribution from the volatile Harbor Coal asset, the company would have historically supported a distribution within the range of CD$0.60 to CD$0.80.  At the low end of this range, which would represent the realistic worst case scenario, an investor should earn a cash yield of 9.2% (CD$0.60 distribution over a CD$6.50 stock price), implying the EIS is at worst fairly valued.  In the upside scenario (ignoring growth), a return to normal profitability from Harbor Coal (including a possible renegotiation of the agreement with Mittal) would allow the company to distribute CD$1.00+.  Capitalizing this CD$1.00 at 9% would yield a security price of CD$11.11 for a capital gain of 71% plus a cash yield of 15.4% on the investor’s purchase price.  As such, we think we have limited downside with a very good probability of a significant upside. 
We believe there might also be an opportunity for PERC to deploy capital towards the development of further assets with its existing customers, particularly Mittal, and perhaps more broadly.  We have not contemplated this “growth” opportunity in our valuation; however, it could represent an area of significant upside should the company reach terms with Mittal on such an expansion.  Management has highlighted this opportunity on recent conference calls and hired an individual with an M&A background to effect a master agreement with Mittal.  We have been told the ROIC for these projects is quite high (in the 15-25% range un-levered) so this could be a very nice development if the company could find project financing.
Although it is also not a direct part of our thesis, it is worth pointing out that EPCOR Power L.P., a Canadian public company that holds a 17% economic interest in the Projects through its ownership of Primary Energy Recycling Holdings LLC (“PERH”), could make an accretive bid for PERC.  In the height of the credit market collapse in mid-August, EPCOR was able to refinance an outstanding bridge loan (which it had used to finance its purchase of the economic stake in PERH as well as other similar assets) into long-term bank financing at sub-6% rates.  If EPCOR purchased PERC at an 8% or 9% yield using 6% money (and thereby taking the upside from normalized Harbor Coal and the ability to expand the platform for free), it could make for a very interesting deal for EPCOR shareholders.  EPCOR has made public statements regarding its interest in potentially buying more PERC at some point in the future.
This write-up will be relatively heavy on corporate structure as the operations and financials are fairly straightforward and the structure is both important and somewhat complicated.
IPO and Corporate Structure
On August 24, 2005, PERC completed an initial public offering through the issuance of 28.5 million EISs at a price of CD$10.00 per EIS, each representing one common share of PERC and CD$2.50 principal amount of 11.75% subordinated notes (“Subordinated Notes”). In addition, the company issued CD$18.5 million separate Subordinated Notes (not forming part of EISs) (“Separate Subordinated Notes”) with the same terms as the EIS Subordinated Notes. On September 27, 2005, the underwriters of the IPO exercised their over-allotment option to purchase 2.5 million additional EISs.
The Company used the proceeds of the IPO, and the proceeds of the over-allotment, to acquire an ownership interest in PERH. On completion of the IPO and closing of the over-allotment, PERC owned 85.8% of the preferred interests and 83.0% of the common interests in PERH, through its ownership of all of the issued and outstanding Class A preferred membership interests and all of the issued and outstanding Class A common membership interests of PERH. Primary Energy Ventures LLC (the “Manager” or “Ventures”), indirectly holds the remaining 14.2% of the preferred interests and 17.0% of the common interests in PERH, through its ownership of all of the issued and outstanding Class B preferred membership interests and all of the issued and outstanding Class B common membership interests in PERH.  Each Class B common interest is entitled to receive pro rata distributions as and when declared by the board of managers after payment in full of Class A preferred return and Class B preferred return.
A diagram demonstrating the ownership structure of the underlying assets can be found on page 3 of the Annual Information Form dated March 8, 2007.  Note that what we refer to as PERH is labeled “Primary Energy (Delaware)” in the diagram.
PERC is a corporation established under the laws of Ontario on June 10, 2005 and continued under the laws of British Columbia on August 5, 2005.  As stated above, PERC owns 85.8% of the preferred interests and 83.0% of the common interests in PERH, through its ownership of all of the issued and outstanding Class A preferred membership interests and all of the issued and outstanding Class A common membership interests of PERH.  
Ventures is a limited liability company established under the laws of Delaware on December 9, 2004. Ventures indirectly holds, through Ventures Holdco, the remaining 14.2% of the preferred interests and 17.0% of the common interests in PERH, through its ownership of all of the issued and outstanding Class B preferred membership interests and all of the issued and outstanding Class B common membership interests in PERH.
The Manager was formed by Thomas Casten (former Chair and CEO of the Manager) and private equity firm American Securities Capital Partners to acquire and redevelop electric generation assets.  The Manager is engaged to provide management and administrative services to the Company and its subsidiaries pursuant to the terms of the Management Agreement for which it earns a fixed fee that adjusts annually based on inflation factors. The Manager is also entitled to an incentive fee under the Management Agreement. The incentive fee is designed to align the financial interests of the Manager with those of the Company. The incentive fee for each year will equal 25% of the product of (a) the excess of the Company’s Distributable Cash per Common Share over its Target Distributable Cash (as defined) and (b) the weighted average number of EISs, Common Shares not represented by EISs and Class B Common Interests outstanding for such fiscal year. The Management Agreement has an initial 20-year term which commenced August 24, 2005.
PERH is a limited liability company formed under the laws of Delaware on May 23, 2005.  PERH owns 100% of Primary Operations, which in turn owns, through its subsidiaries, the Projects. Primary Operations is a limited liability company formed under the laws of Delaware on June 26, 2003.
The Projects
The company has four generation projects (North Lake, Cokenergy, Ironside and Portside) as well as a pulverized coal facility (Harbor Coal). A brief description of the projects is below. Some data was most recently provided via the 2005 IPO document which references 2004 data.
Project Name
Nameplate Electrical Capacity (1)
Steam Capacity
Primary Fuel
S&P Rating
% Ownership
Revenue Contract Expiration
North Lake…………
East Chicago, IN
75 MW
Blast Furnace Gas from Host
Mittal Steel USA Inc.
East Chicago, IN
95 MW
896 mlbs/hr
Waste Heat from Host
Mittal Steel USA Inc.
East Chicago, IN
50 MW
460 mlbs/hr
Blast Furnace Gas from Host
Mittal Steel USA Inc.
Portage, IN
63 MW
495 mlbs/hr
Natural Gas
United States Steel Corporation
Harbor Coal………..
East Chicago, IN
Mittal Steel USA Inc.
(1) Nameplate Capacity may differ from reported capacities in previously filed documents. Nameplate capacity is the amount of electrical power
     delivered by a generator, turbine or system as rated by the manufacturer.
Operations and Maintenance
Capacity Payment
Self Managed
Variable Energy Service Fee
North Lake……………..
Variable Energy Service Fee
Subcontracted to host
Harbor Coal…………….
Shared Savings
Subcontracted to host by partnership
Capacity Payment
Host responsibility except casualty insurance
Variable Energy Service Fee
Capacity Payment
Self Managed
Variable Energy Service Fee
North Lake
The North Lake Project consists of a 75 megawatt steam turbine generator located within an industrial cogeneration facility at its host, Mittal’s Ispat Inland facility in East Chicago, Indiana. In 2004, the North Lake Project generated 555,422 megawatt hours of electricity and had an availability rate of 98.9%.
The North Lake steam turbine generator receives steam that is produced by Mittal boilers with off gas from blast furnace #7. North Lake’s turbine-generator then converts this steam to electricity for Mittal’s operations. North Lake’s services are provided to Mittal pursuant to a long-term agreement under which North Lake is paid a fee for converting the steam to electricity.
Until first quarter 2007, the historical availability of the North Lake Project has been very high. The average availability over the five years from 2000 to 2004 inclusive was 94.3%. North Lake performed a major overhaul on its turbine during the $100 million reline of blast furnace No. 7 in the fall of 2003. On April 19, 2007 an unplanned turbine outage at the North Lake facility occurred.  The unit was returned to service on May 25, 2007.  This resulted in $1.77 million of costs. 
PERC is responsible for performing major maintenance of the Project.  Mittal operators monitor the operation of the North Lake steam turbine.
The Cokenergy Project consists of sixteen heat recovery steam generators (HRSGs), one 95 megawatt GE extraction/condensing steam turbine generator, a cooling tower, flue gas treatment system and ancillary equipment located adjacent to four coke batteries owned and operated by the Indiana Harbor Coke Company. Both Cokenergy and the coke batteries are within Mittal’s Ispat Inland Indiana Harbor Works in East Chicago, Indiana. In 2004, the Cokenergy Project generated 503,179 megawatt hours of electricity, 7,843,973 Mlbs of steam and had an availability rate of 98.9%. Five year average availability was 98.5%.
Cokenergy’s HRSGs receive all of the hot exhaust from 268 coking ovens and produce steam that powers Cokenergy’s extraction steam turbine generator, producing electricity and process steam for Mittal. Cokenergy has an electric generating capacity of 95 megawatts and provides a substantial portion of the electric and process steam needs of Mittal’s facility.
The Cokenergy Project is entirely driven by the capture of waste heat from coking operations, and its conversion to useful electric and thermal energy with no supplementary firing. PERC operates the Cokenergy facility. Cokenergy had a major overhaul in 2006.
The Ironside Project consists of a boiler and 50 megawatt steam turbine generator located at its host, Mittal’s East Chicago, Indiana steel plant. The plant was commissioned in late 2003 and has had normal startup adjustments through late 2004. In 2004, the Ironside Project generated 179,856 megawatt hours of electricity and had an availability rate of 89.9%.
The Ironside boiler produces steam by burning blast furnace gas rejected from the integrated steel mill. Ironside’s condensing steam turbine generator then converts a portion of this steam to electricity and provides it to Mittal’s operations. The Ironside facility is interconnected with other boilers and steam turbines on site to assure reliability of its host’s power and thermal system. Mittal is responsible for all operations and maintenance of the Ironside Project, provides all water and other utilities and services required by the Ironside Project and is responsible for all of its own backup power requirements.
Pursuant to a lease agreement between Ironside and Mittal dated September 29, 2003 (the ‘‘Ironside Lease’’), Mittal has an option to purchase the Ironside Project at a purchase price equal to the greater of a price calculated under a formula prescribed in the Ironside Lease or fair market value (the ‘‘Purchase Option’’). The Purchase Option may be exercised by Mittal (i) during the first five years of the term of the Ironside Lease, once per year on the anniversary of the lease commencement date upon 30 days prior notice by Mittal; and (ii) following the first five years of the term of the Ironside Lease, at any time upon 30 days prior notice by Mittal.
The Portside Project is a 63 megawatt natural gas fired combined-cycle generating facility located at U.S. Steel’s Midwest Finishing Mill in Portage, Indiana. Pursuant to a ground lease U.S. Steel leased the land located in Portage, Indiana to Portside for the purposes of supplying electricity and thermal energy from the natural gas supplied to the facility by U.S. Steel. Portside produces steam, hot softened water and electricity for delivery to U.S. Steel, pursuant to a long-term tolling agreement. Portside’s plant includes a 44 megawatt GE gas turbine-generator, a once-through heat recovery steam generator and a 19 megawatt back pressure and extraction steam turbine generator set. Two auxiliary boilers provide steam during periods of peak usage or when the gas turbine is not in use. The facility’s steam capacity is 495 Mlbs/hour of steam. Approximately 400,000 tons of carbon dioxide are eliminated each year from this project. In addition, nitrogen oxide and sulfur dioxide emissions have been reduced by thousands of tons compared to more traditional methods of energy supply.
Portside provides 100% of the thermal energy and most of the electricity its host requires. The natural gas and propane fuel required by Portside for its energy production is supplied at no cost by U.S. Steel. Portside must convert the fuel to electricity and useful thermal energy at a heat rate that is at or below agreed levels. U.S. Steel is responsible for supplying or purchasing all of its own backup power in the event the Project is not operating or is dispatched at reduced levels.
In 2004, Portside’s gas turbine’s annual availability factor was 99.93%. The forced outage rate for the gas turbine in 2004 was only 0.18%. The availability of the gas turbine over the previous five years was 96.9% and the forced outage rate over the same period was 0.6%. A planned turbine outage at Portside occurred during the second quarter of 2007 and cost approximately $0.9 million.
PERC is responsible for all operations and maintenance of the Portside project.
Harbor Coal
The Harbor Coal Project is a coal pulverization facility that provides pulverized coal for injection into all three of Mittal’s Ispat Inland blast furnaces in East Chicago, Indiana. The facility has pulverizing capacity of 110 tons per hour of dried, pulverized coal for blast furnaces.  Pursuant to a long-term ground lease and related documentation, Mittal’s Ispat Inland indirectly leases a parcel of land at the Indiana Harbor Works Plant to PCI Associates. The Harbor Coal Project consists of coal pulverization equipment, pneumatic conveyors to Ispat Inland’s blast furnace No. 7, three specialized trucks to deliver coal to other blast furnaces, two silos designed to store pulverized coal and two silos for raw coal storage. The facility has been in operation since 1993.
Harbor Coal is wholly owned by PERC which in turn owns a 50% interest in PCI Associates. PCI Associates is an Indiana general partnership formed between Harbor Coal and III/PCI Inc., which is 100% beneficially owned by Mittal.. The PCI Associates partnership agreement lists certain actions requiring approval of both partners, default rights and capital contribution rights. The partnership terminates on (i) an election by Harbor Coal to terminate, (ii) the bankruptcy of either partner, (iii) an event of default and the other party elects to terminate, or (iv) the 30th anniversary of the commercial operation date, if the partnership does not renew or repurchase the lease on its expiration. A management committee comprised of two individuals from each partner is provided for in the partnership agreement, which must approve certain decisions unanimously.
The facility pulverizes coal and dries the coal with reject heat from the blast furnace operations. The blast furnace is able to inject pulverized coal to replace more expensive coke, natural gas and oil in making hot metal. Harbor Coal is paid for its services by Mittal based on reductions in specific injectant usage realized by Mittal. Mittal provides operations and maintenance services to Harbor Coal and operates the facility.
Other Business Issues
Stability of Earnings
Given their low cost status, these facilities would be very unlikely to sit idle even in a severe steel market downturn; as long as they are running PERC makes its return.  PERC provides energy to its customers at a substantially lower cost than any alternative source (including the grid) and is therefore very likely to continue earning more or less exactly what it has earned in the past.  For each asset the company has a long-term contract with the host. 
In 2006, the company earned more than 41% of its revenue from fixed payments that are independent of production volumes (compared to 40% in 2005). Revenue that is dependent on production volume benefits from “First Dispatch Rights,” meaning that the host is contractually obligated to use all of the energy produced by the Projects before purchasing electricity from another source.
Renewal of Contracts
An apparent risk is that the host companies will not renew the contracts at attractive terms upon their expiration (the earliest of which is 2011, and the bulk of which are 2013).  We believe the Projects are critical to the operation of their hosts and provide significant benefits including supplying cost efficient, reliable energy streams required for their operations. To replace any of the Projects would require the hosts to make significant capital investments for the purchase or construction of replacement sources of energy, as well as to acquire the engineering and operational expertise necessary to construct and operate the Projects. Since the Projects primarily utilize waste energy from their hosts at zero cost, they produce energy at a cost well below the marginal cost of energy from other sources and as such generate significant savings for their hosts.  Furthermore, the on-site generation provides for additional saving by reducing energy lost in transmission. 
We believe that all of the Projects create substantial value for the host companies. These benefits include (i) the difference between the low and fixed rates the hosts pay for electricity from the Projects and the much higher costs of acquiring that power from the local utility, (ii) the avoided boiler fuel that would have been required by the hosts to generate steam supplied by the Projects, (iii) avoided capital and operating costs to install and operate thermal generating equipment and (iv) other ancillary benefits.  As a result we do not believe non-renewal of the contracts represents a material risk.
Commodity Exposure
PERC has limited exposure to fluctuations in fuel prices. Three of the Projects obtain their primary fuel from their hosts’ waste thermal energy streams; accordingly, there is no significant fuel price risk associated with this fuel source. The Portside Project converts natural gas purchased by its host into electricity and thermal energy. As such, Portside has no exposure to the cost of natural gas as the host bears the risk.  Harbor Coal does have exposure to changes in natural gas prices relative to changes in coal prices.  Harbor Coal’s exposures are discussed below in more detail.
Blast Furnace #7
Blast furnace #7 plays a large role in the Projects and is a critical asset to Mittal.  Mittal relined the furnace in the fall of 2003 at a cost to Mittal of $100 million.  Historically relining would happen every 6-7 years.  However, due to improved technology, the furnace now needs to be relined only every 20-25 years. This means that the next reline will be in 2023-2028.  The reline was very helpful both to Mittal and to PERC; PERC management believes the benefits from the reline will only improve over time and represents an area of potential upside to cash flow generation.
Corporate Events and Agreements
Sale of Ventures (the Manager)
On November 1, 2006, EPCOR acquired the Manager from American Securities Capital. As a result of the acquisition, all the employees of the Manager were transferred to EPCOR Operations (U.S.) Inc., a wholly owned subsidiary of EPCOR Utilities Inc. and an affiliate of EPCOR Power. EPCOR Operations now provides all management and administrative services to the Manager which continues to act as Manager under the Management Agreement.
In connection with the acquisition of the Manager by EPCOR Power on November 1, 2006, the Company, EPCOR Power, EPCOR Operations, the Manager and Thomas Casten entered into an allocation agreement, which allocates among the parties rights to new and certain existing development and acquisition opportunities, where such opportunities have been or will be developed or identified by any of the Manager, EPCOR Operations or Casten.
Allocation Agreement
As EPCOR is also in the business of developing and owning electric generation assets, the main purpose of the allocation agreement is to clearly delineate any conflicts of interest.  The result is that the Manager (or EPCOR) only needs to present PERC with a very specific set of assets for acquisition.  Projects presented to PERC must be one of the following: a combined heat and power project, an industrial recycled energy project, an enhancement to an existing project or a development opportunity that existed at the time of the purchase.  Anything outside of these, EPCOR may pursue for its own interests.  Even with the potential conflicts of interest, we believe the existing Manager might be able to utilize this vehicle to develop additional assets. 
In addition, Casten has been granted a right to develop opportunities that the Manager has passed on.  If Casten concludes any of these deals within a one year period from the time of the purchase of the Manager, then PERC will have a right of first offer if Casten desires to sell the asset. 
Tax Structure
Unlike typical Canadian income trust structures, PERC is a corporation and not a flow-through entity.  As such, we do not believe it falls under the current legislation proposing to tax unit trusts beginning in 2011. All of the US entities are LLCs which pass through the earnings to the holder.  This holder (PERC) is then leveraged utilizing the debt which is currently owned by the equity holders.  However, the debt can be separated and traded independent of the equity.   Furthermore, the company has over $10 million of NOLs because of the accelerated depreciation and the deductibility of intangible assets. 
Financial Analysis
The nature of PERC’s contracts contributes to the stability of its cash flows.  As mentioned, in 2006 the company earned more than 41% of its revenue from fixed payments that are independent of production volumes (compared to 40% in 2005). Revenue at the Recycled Energy Projects is dependent on production volume benefits from First Dispatch Rights, meaning that the host is contractually obligated to use all of the energy produced by the Projects before purchasing electricity from another source. This revenue is also based on long-term contracted prices for electricity and thermal energy.
Harbor Coal Economics
At the Harbor Coal Project, revenue is based on the savings for the blast furnace from using pulverized coal instead of more expensive fuels such as coke and natural gas.  Harbor Coal is therefore a much more volatile asset than the other Projects.  Harbor Coal revenues are paid based on cost savings from replacing metallurgical coke, natural gas, and heating oil with steamed coal.  Metallurgical coal (which is more expensive than “steamed” coal) is burned in a coke oven which produces a 30% loss in weight.  Therefore the price of the metallurgical coke is the price of the metallurgical coal divided by 70% plus conversion costs.  This is a very expensive input.  Harbor Coal is paid based on three different factors:
§        The efficiency of the furnace, i.e. the more steel Mittal makes for a given usage of energy, the more “savings” Harbor Coal generates
§        The volume of steel that is produced during any given time.  Largely based on furnace # 7, but also affected by 5 and 6 – two smaller blast furnaces at the same location
§        The relative prices of metallurgical coke, “steamed” coal, natural gas and heating oil
The revenue is book based on “assumed” savings.  This is then adjusted from the measurement of huge piles of both metallurgical coal and steamed coal. 
During the fourth quarter of 2006, the company reduced revenue by $3.2 million.  This was the effect of an annual consumption adjustment recorded at year end based on physical inventory counts completed by Harbor Coal’s joint venture host.  Again on April 25th, PERC disclosed that it had been informed by Mittal Steel of the results of its physical measurement of the inventories of coke and coal of Harbor Coal’s site host, and the resulting inventory adjustment resulted in a material reduction of Harbor Coal revenues for the first quarter of 2007.  In the second quarter of 2007, Harbor Coal revenue declined $3.1 million.  This decrease is primarily associated with the final reconciliation of the previously recorded reserve for negative inventory adjustments, which totaled $3.0 million, as well as reduced revenue based on volume of $1.9 million. This was partially offset by increased revenue based on pricing of $1.0 million, attributed to the spread between the cost of coal supplied and the prices of the fuels replaced by the coal, as well as efficiency adjustments of $0.8 million.
Due to the confidential nature of the contract between Mittal and Harbor Coal, the exact details are difficult to ascertain.  However, our conversations with individuals familiar with the company provided the following details:
§         Drivers are usage of pulverized coal and commodity prices of met coke, natural gas and heating oil
§         Inventory adjustments are very difficult to predict and can swing fairly wildly in either direction (it is tough to measure piles of coal)
§         Operations are strong and counterparty is not the problem (there is 3rd party verification with a right to dispute)
§         Harbor Coal should always at least break even with small fixed costs, and if Mittal is using the coal at all it should be generating savings
§         The pulverization process eats up some of the spread
§         The savings are different for each blast furnace (5,6,7) but the vast majority of the economics are based on furnace #7
As a result of the volatility of Harbor Coal, we isolated its impact and looked at the cash flow impact both with and without the assets.  There is virtually zero capital spending in this business.  The maintenance spending primarily flows through the income statement.  This analysis gave us the upside / downside cash generation abilities of the underlying assets.  As can be seen below, the EBITDA from the generation assets is very stable and approximates $35 million.  The 2004 numbers are pro forma from the prospectus, which didn’t include any adjustment for the costs of being a public company.  It should be noted that the 2005 EBITDA for Harbor Coal has been estimated by extrapolating data that was provided for 219 out of 365 days of the years.  This number is probably high which provides for conservative downside.  Also, the company has hedged the CAD/USD rate till September 2010. As a result, you will see the business analyzed on an “unhedged” basis as well as the distributions associated with the currency hedge.  Just for clarification, the company earns 100% USD and pays out to its EIS holders CAD.  Furthermore, the “Dividend Yield Considered Return Upside (Downside)” utilizes the “Upside (Downside) Yield” number, not the actual current payout. 


PERC Historical Cash Generation
Downside Scenario
Total Company EBITDA
Less Harbor EBITDA
EBITDA ex-Harbor
Interest Expense
EBITDA-Interest, ex-Harbor
Manager Pref
Total Subordinated Debt
Cash to Equity
EIS Holders Subordinated Interest
Company's share of Equity
Dividend Per Share
Holder Pref per Share
Total Distribution
Hedged Rate
Share Price in CAD
Downside Yield
Yield the Stock "Should" Trade At
Stock Price
Stock Depreciation Downside
Div. Yield Considered Downside
PERC Historical Cash Generation
Upside Scenario
EBITDA-Interest, with Harbor
Manager Pref
Total Subordinated Debt
Cash to Equity
Company's share of Equity
Dividend Per Share
Sub Debt Distribution
Total Distribution
Hedged Rate
Share Price
Upside Yield
Yield the Stock "Should" Trade At
Stock Price
Stock Appreciation Upside
Div. Yield Considered Upside


Management is currently in discussions with Mittal regarding the Harbor Coal agreement and it is possible that terms will be renegotiated so as to avoid confusion and the types of problems that occurred in the past few quarters.  We believe there is a reasonable likelihood that a new agreement will be reached that provides PERC with greater stability of cash flows from Harbor Coal, albeit at a somewhat lower absolute level than we have seen in the past few years.
Balance Sheet

Balance Sheet as of 6/07
(in thousands except per share; currency is $US)
Cash and equivalents
Accounts payable
Accounts receivable
Accrued liabilities
Other current liabilities
Other current assets
    Current assets
    Current liabilities
PP&E, net
Deferred taxes
Goodwill and intangibles
Other liabilities
Other assets
Non Controlling Pref/Common
    Equity and liabilities

In the below calculation we treat the EIS subordinated debt as equity for simplicity and to reflect the current market for the stapled EIS unit.  Because the equity component is legally separable from the debt component, we could mark the debt to market and calculate the yield to the true equity, which would work out to be several hundred basis points higher than the yield we are stating above (how much different would depend on how far “market” is below an 11.75% yield on this type of debt).   Note: the debt balance below does not tie to the balance above because of deferred financing fees which reduce the balance sheet amount as per the company’s reporting.  We have removed those fees from the capitalization table.

Term Loan Facility
L+ 275 bps but hedged
Separate Subordinated Notes
Total Outside Debt
Subordinated Notes EIS
Manager Preferred Notes
Total Debt Held by Equity Holders
Total Debt on Assets
Cash on Balance Sheet
Net Debt
Units Outstanding
Unit Price
Market Value of EIS
Outside Debt
Net Debt
Enterprise Value

Given the attractive price on the existing business, the reliable earnings of the core generation projects, and the possible upside from developing additional plants, we believe PERC represents an attractive and conservative investment.  We believe the downside is limited to an appropriate capitalization rate on the current earnings power of the non-Harbor Coal projects, which would equate to a unit price about equivalent to today’s.  This implies we are getting Harbor Coal, which generated between $10 and $15 million in EBITDA in each of the last 3 years, for “free.”   This free asset should have substantial value of anywhere from CD$1 to CD$4 per unit.  With limited downside, upside of over 70%, and a 12% cash yield while we wait, we think PERC should prove to be a very good investment.


- Takeout by EPCOR or other buyer
- Fixing of Harbor Coal issues or renegotiation of Harbor Coal contract
- Announcement of master agreement with Mittal for new projects
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