Alter NRG Corp. One Man s Trash Is Another s Fuel. July 15, Disclosure statements located on pages of this report

Transcription

1 MacMurray D. Whale, Ph.D., P.Eng., (416) July 15, 2014 INDUSTRIAL TECHNOLOGY Alter NRG Corp. One Man s Trash Is Another s Fuel Recommendation: Buy(S) Target Price: $5.60 Company Statistics: Stock Symbol: NRG-TSX Price: $2.59 Share Outstanding: Basic: 28.2 MM Fully Diluted: 29.4 MM Management & Board*: 0.4 MM Market Cap: $90.1 MM Market Float*: $74.8 MM Enterprise Value: $78.0 MM Net Debt: $(12.1) MM Average Daily Trading Volume: 57,550 High Low (52-Week): $ $1.30 *Excludes ownership of strategic investor Company Description: Alter NRG supplies equipment and engineering services to developers of wasteto-energy applications, based on plasma gasification technology acquired from Westinghouse. These systems can be configured to use a variety of feedstock and provide a variety of energy outputs including liquid fuels such as ethanol and diesel, electrical power, and syngas. Disclosure statements located on pages of this report Unless otherwise denoted, all figures shown in C$ Alter NRG offers equipment and services for the conversion of various waste streams, including municipal solid waste into an energy-rich syngas, suitable for use in electricity generation or as a feedstock for liquid fuels. High and rising disposal costs for waste and high power prices are shifting interest from incineration to gasification as a key alternative to landfill, which is more efficient and has lower emissions. Alter NRG owns the Westinghouse Plasma Corporation s (WPC) gasification technology that has been in development for more than two decades and is operational at several sites. Highlights: Commercially proven waste-to-energy gasification technology providing high energy syngas stream with low emissions. Air Products (APD-NYSE), a global industrial gas supplier, is commissioning a 1,000 tpd facility in the UK, the world s largest facility using plasma gasification. MSW disposal costs are rising in most cities globally, with increasing restrictions on land use and related methane emissions. Total market for gasifiers in excess of $50 BB, with near-term addressable opportunities exceeding $13 BB. EBITDA loss has stabilized under $10 MM on the low gross margin of the lead order from Air Products. We expect strong revenue, EBITDA and EPS growth as demand rises. Initiating Coverage With Buy(S) Recommendation And $5.60 Target. Fiscal YE Dec A 2014E 2015E 2016E Revenue (000s) $14,400 $35,000 $67,100 $107,000 EBITDA (000s) $(9,200) $(1,300) $8,800 $19,600 Net Income (000s) $(10,000) $(3,800) $4,400 $12,100 EPS, Diluted (Adjusted) $(0.11) $(0.05) $0.15 $0.41 EV / EBITDA NMF NMF 6.9x 3.1x P / E NMF NMF 17.1x 6.3x

2 Executive Summary Alter NRG is the leading technology provider of equipment and engineering services for commercial waste-to-energy systems that utilize plasma gasification. Although other technology developers have pursued plasma as the key gasification pathway, none have successfully commercialized their process or related equipment. Alter NRG aims to advance its plasma gasification technology to replace incineration as the preferred and best available conversion technology for the thermal treatment of municipal solid waste (MSW). The company was formed in 2006 and became publicly traded in 2007, under the ticker NRG. There are currently 28.2 MM shares outstanding with less than 2% held by Management and the Board. Ervington Investments Limited, whose ultimate beneficial owner is Roman Abramovich, (and two other related strategic investors) owns 4.6 MM shares (16.5%), from a strategic investment made in Industry-leading Plasma Technology Alter NRG owns the plasma technology pioneered by Westinghouse, which benefits from more than 20 years of technology development. While Alter NRG continues to sell plasma torches for numerous industrial applications from metals recycling to blast furnace operations in a power range of 80-2,400 kw, the company has commercialized a range of gasification chambers that permit the conversion of solid waste into a gaseous fuel stream that can be used as a fuel for producing power or as a feedstock for liquid fuels. Unlike other gasification technologies, the high temperatures and long residence time of Alter NRG s gasification process completely destroy tars, volatile organic compounds (VOCs) and hazardous air pollutants (HAPs). All inorganics are converted into an inert solid, suitable for aggregate. A broad range of feedstock with a wide variability in energy content can be utilized, and a wide scalability is achievable. With three operating facilities and two being commissioned, Alter NRG s products and technology have a proven commercial track record. Alter NRG s plasma technology uses a single chamber, with the torches providing the high temperatures to assist in the gasification, whereas other competing systems typically use the torches as polishing systems. Commercially, these other systems have not found commercial success in waste-to-energy applications as parasitic power losses and process control have not met forecast ranges. Third-Party Verification And Solid Partners Having equipment in operation at multiple sites for more than a decade, Alter NRG s Westinghouse plasma technology has received endorsement from a number of qualified industry experts, following in-depth technical reviews, including R.W. Beck and Golder Associates among others. Alter NRG has gathered a set of experienced world-class engineering firms that can provide requisite performance obligations on projects. This is not only required by lenders in order to provide project debt, but is also important for the providers of project equity. These partners include: Foster Wheeler AG, Technip Group, Uhde GmbH, Linde Group, and Hatch Ltd. 2

3 Tees Valley Project Could Be A Tipping Point Although Alter NRG s gasifiers in operation today date back to commissioning in 2002 in Japan, it was granting of permits in 2011 and the subsequent decision by Air Products to proceed to construction on the Tees Valley 1 MSW-to-electricity project the represents the real tipping point for Alter NRG s technology adoption. Each phase of this project requires a 1,000 tpd gasifier, Alter NRG s largest such chamber will be the world s largest gasifier when fully operational in early Commissioning is underway on the first phase, TV1, of this project located in northern UK. The contract for the supply and delivery of the second gasifier for TV2 has been completed. Air Products will invest nearly $1 BB in the full facility, with approximately $43 MM being realized by Alter NRG for the engineering, fabrication and delivery of the two gasifiers. With an internationally known and respected owner/operator in Air Products, we expect that the successful commissioning and subsequent operation of Tees Valley will act as a major catalyst for other waste-to-energy projects in both the UK and globally. MSW Disposal Is A Growing Issue Worldwide Globally, more than 3.5 MMt of waste are produced daily. In the US and Canada alone, more than 200 MMt are produced annually. Most of this (more than 80%) is disposed of in landfills, the default method of handling solid waste because of its relatively easy implementation and low cost historically. Despite this relative ease of disposal, however, there are a number of problems that are raising costs of disposal. Waste generation levels are expected to rise by nearly 70% in the next 10 years, according to the World Bank. Furthermore, emissions of methane from landfills are growing, adding to greenhouse gas emissions. Available land near large urban centers is both diminishing in availability and rising in cost as pressure from other development uses rises. As landfills move further out from urban centers, shipping costs and operation of transfer stations are adding to total disposal costs. Tipping fees, which are charged by landfill owners to receive waste, are rising. On the eastern seaboard of the US, such fees exceed $120/t. In the UK, landfill taxes have driven disposal costs to more than $100/t. Some regions of Japan have disposal costs in excess of $150/t. These compare to costs of $30-50/t a decade ago in some of these areas. As a result, incineration has increasingly been sought as an alternative to landfills. However, because of the relatively low temperatures achieved by this technology, harmful emissions have impacted adoption and are subject to strict regulation and control. Large Addressable Market Total End Market Potential Is Massive: In the US, the 200 MMt of MSW produced annually would require the adoption of 550 of Alter NRG s largest gasifiers, representing $13.8 BB in revenue for the company. Given the higher population and lower per capita rates of MSW generation, we estimate the global potential is for 3,000 such units, representing $50-60 BB of total revenue. Addressable Market Of Key Urban Centers Remains Large: Obviously, the true addressable market is more limited as it must take into consideration population density, MSW disposal costs, local power and energy prices, as well as political and social barriers to adoption. Taking these issues into consideration, we believe the addressable market to be nearly 200 large gasifiers in North America, 115 in Europe, 155 in the developed urban areas in Asia and a further 200 gasifiers in the emerging markets in China, India, Brazil and Mexico. This represents a total opportunity of $13-16 BB for the gasifier portion of the capex. 3

4 UK Market In Early Adoption Phase: In the UK, where tipping fees exceed $100/t and the availability of Renewable Obligation Certificates (ROC) can add more than $100/MWh to the contractual power price of approximately $80/MWh, project returns are very favorable, exceeding 20% using 50% debt at 7%, and a 20% contingency on capex. Such conditions, along with the availability of entering into long-term contracts for MSW supply, power delivery and ROC off-take, make the UK an attractive initial market for the adoption of Alter NRG s technology. Fuel Replacement Market: Alter NRG also supplies equipment to other applications, including the fuel replacement market where LNG in turbines, and fuel for boilers, can be partially offset by gas from the conversion of MSW. We estimate this opportunity to be on the order of 90 large gasifiers based on GE s fleet of gas turbines alone. Vitrification Market: In the incinerator vitrification market, Alter NRG offers a turnkey solution to process the ash from standard MSW incinerators, producing aggregates as well as a syngas that supplements the incinerator power cycle. We estimate this market to be up to $20 BB based on the 2,000 incinerators in operation worldwide today. Financial Results Improved After Air Products Contract Alter NRG s financial results have improved following the signing of the agreement with Air Products for the supply of a gasifier for the Tees Valley project in late Revenue more than doubled in 2012 to $13.7 MM from $6.7 MM in This order further increased revenues to $14.4 MM in With the TV2 project getting the green light in late 2013, Alter NRG reported revenue of $6.2 MM in Q1/14, nearly half of the full year 2013 results. Gross margin declined to low teens on the shift from licensing and service revenue to delivery of the gasifiers. However, operating expenses have stabilized close to $1.5 MM a quarter. As a result, the loss on an EBITDA basis has been under $10 MM in both 2012 and Expect Steady Growth As TV1 Comes On Line Clearly, the Tees Valley project is a major catalyst for Alter NRG s business model. We believe many of the potential customers with whom Alter NRG is working are keenly awaiting the performance of Air Products facility to green light their own projects. As a result, we believe demand will materialize following commissioning. For our forecast, we expect a steady stream of opportunities to drive the outlook. For 2014, Alter NRG is delivering on two large contracts: Tees Valley 2 project for Air Products and gasifier for GES in Bijie, China. We expect a third large project to be signed by Q3, with one quarter of the four-to-six quarter period of high revenues associated with the gasifier work to be realized on the third project in Q4. For 2014, therefore, we expect revenue of $35 MM. Assuming gross margins rise from mid-teens to 30% by Q4, at the low end of Management s target, EBITDA would be $1.2 MM in Q4, but still remain negative for the full year. We estimate on this delivery schedule for three projects that EPS would be nil in Q4/14 and a loss of $0.05 per share for the full year For 2015, we expect the final revenues for TV2 and GES to be realized. In addition, we expect that one new large project ($25+ MM total revenue) per quarter and one smaller ($10+ MM total revenue) to begin in the middle of the year. Under this scenario of five additional projects, we estimate revenue to reach $67.3 MM, at the low end of Management s targeted revenue for With gross margins at 30%, and opex below $10 MM, we estimate EBITDA of $8.8 MM and EPS of $0.15 at a 30% tax rate. Note that with $46 MM in net operating losses, Management expects cash taxes to be offset for some time, making our estimates conservative. 4

5 In 2016, we expect that three large and one small additional project will be added to the five that carry over from 2015, approximately one per quarter in terms of timing. This would provide $107 MM in revenue, $19.6 MM in EBITDA and $0.41 of EPS. Experienced Management For early stage growth companies, we believe it is vital to the investment thesis that Management has the appropriate experience and vision to realize the potential for the business. In particular, Alter NRG is led by Walter Howard who has spent much of his 30-year career in the electric and water utility industries. He has held CEO, COO, CFO and SVP positions at General Electric, US Generating (an affiliate of Pacific Gas & Electric and Bechtel), Noble Environmental Power, GE Capital and J. Makowski Co. (partly owned by Duke Power). Investment Risks Alter NRG s technology has benefitted from a long development period dating back more than 20 years and more than $140 MM invested. However, it is the decision by Air Products to proceed on Tees Valley 1 and 2 to have driven a concentration of interest from other customers. We believe the high power prices and high tipping fees in the UK support further development, in particular with the availability of ROCs. As a result, the regulatory/incentive environment is a key driver. While positive, such drivers in our experience are also a major risk factor. In the UK, Air Products will likely wait until Tees Valley operations are well understood before progressing on a third and/or fourth project. In other jurisdictions, such as the US, some customers may choose to wait for clear incentive programs before proceeding with development, despite acceptable tipping fees and power prices for an economic project. We believe the second major investment risk is execution rather than competition. To date, gross margins are well below the 30%+ expectation forecast by Management. On the positive side, operating expenses have stabilized, suggesting Management has a tight control over such costs. On the competition side, our long involvement with other plasma gasification technologies suggests that the competition from these closest competitors is well behind both technically and financially. Other investment risks include financing risks associated with the large project capital expenses and foreign exchange. Initiating Coverage With $5.60 Target And Buy(S) Recommendation For the purpose of valuation, we have included companies from three related industries: waste management, environmental service companies, and environmental technology developers. We believe the stock should trade in line with these groups. These stocks trade on a 2015 basis at an 8.8x multiple of EV/EBITDA. While none of these comparable groups is a perfect match, Alter NRG shares some similarities to each, suggesting a multiple near the average. However, NRG today is primarily a technology developer, providing engineered systems with unique technology for a growing industry, which is today at the very beginning of its revenue ramp. As a result, its business model and growth trajectory, although not its technology, share much in common with the pre-commercial, high growth companies. These companies trade in excess of 30x EV/EBITDA and have 2015 EBITDA below $10 MM, in line with NRG. As shown in the table below, we are initiating coverage on Alter NRG with a target of $5.60. This is based on a multiple of 9.5x our 2016 estimate of $20 MM in EBITDA to arrive at a value of $7.00, discounted at 25% to account for 2016 being one year beyond our current valuation year. As orders are announced, we expect the discount to lessen as the order book rises, suggesting upside to $7.00 on our current estimates of With upside in excess of 100%, we are initiating coverage on the company with a Buy(S) recommendation, reflecting the difficulty in estimating the timing of large lumpy orders. 5

6 Figure 1 NRG Valuation Summary EBITDA EV/EBITDA Target Est. ($MM) multiple Value with 25% discount $20 9.5x $7.06 $5.60 Source: Cormark Securities Inc. With such large market potential, we expect that interest from engineering firms and other development and service-oriented suppliers to the waste segment will be keen on acquiring Alter NRG s technology, should the Tees Valley project meet its promise and the order book build. As a result, we believe there is a strong possibility that Alter NRG will be acquired for its leadership position in a growing segment. We expect the value to a strategic acquirer of Alter NRG s technology and experience to be substantially higher than the value implied by our $5.60 target. Figure 2 Price Chart Source: BigCharts.com (July 14, 2014) 6

7 Technology And Products At the heart of Alter NRG s waste-to-energy technology is the Westinghouse Plasma Corporation s (WPC) plasma gasification technology that was acquired from Westinghouse in 2007, following the divestment of the division to Management in the mid-1990s. By creating extremely intense heating of the waste in an environment deprived of oxygen, the WPC system breaks down waste into simple compounds and elements, forming a synthesis (or producer) gas that can be further refined into a finished liquid fuel or used to create electric power. Inorganic portions of the feedstock are reduced to a nontoxic solid slag, which is used in the construction industry as aggregate or is landfilled. Alter NRG s technology has been in operation at numerous sites worldwide, dating back to initial pilot facilities in the 1980s sized at 48 t per day (tpd). Its largest facility, the Tees Valley project being built by Air Products in the UK, has a 950 tpd capacity and is currently undergoing commissioning. Gasification And Plasma Technology Overview Gasification Improves On Combustion Of Fuels: Plasma arc technology is one of several alternative means of processing combustible materials through gasification to produce usable energy. By restricting the amount of oxygen, gasification produces a gaseous stream rich in carbon monoxide and hydrogen, which can then be used to produce electricity by means of a generator driven by a gas turbine or reciprocating engine. Alternatively, the gas can be simply burned in a boiler to produce steam. Gasification differs notably from incineration (commonly referred to as burning), which is a combustion process producing water and carbon monoxide and in practice other compounds such as VOCs and HAPs. Gasification is generally more efficient in extracting the usable energy in the fuel because of higher temperatures achieved in the processing of the feedstock than is typically attained through combustion. Gasification Systems Require Scale To Be Economic: Gasification is not a new technique, as it has been used since the 1800s to produce gas for lighting and heating, and in the 1900s for the creation of liquid fuels from coal and biomass. There are a handful of different gasifier technologies involving fixed and fluidized beds and numerous variations on processes around them, but nearly all run on some form of fossil fuel, though any organic material has a potential application. Furthermore, gasification systems of these types require substantial capex and are expensive to operate and maintain and therefore all require large industrial scale operations to provide an economic return. As a result, these non-plasma gasification technologies are less well suited for smaller sized systems (necessary to match the typical size of MSW collection and disposal operations). Although temperatures are high in such systems, they are still lower than in plasma gasification systems and are too low to completely destroy some compounds, resulting in the release of hazardous furans and dioxins, requiring further expensive gas cleaning technology. Plasma Arc Processing Provides Extremely High Temperatures: Plasma arc technology is similar to gasification in which a stream of hydrogen and carbon monoxide is produced from the fuel; however, the extremely high temperatures of the arc, in excess of 5,000ºC in the arc s plume, result in complete atomization of the compounds in the fuel into their basic chemical elements, eliminating emissions concerns. The high temperatures also allow the rapid destruction of compounds that would remain relatively unchanged in combustion. 7

8 Plasma Created And Controlled With A Torch: The plasma itself is created by connecting a relatively high voltage and high current electricity supply to two electrodes, separated by a gap across which jumps an electrical arc. By then blowing an inert gas (such as air) through this arc, a plume of ionized gas (a plasma) is created, which has an extremely high temperature. The plasma torch is the device that contains the electrodes and introduces the gas to the arc. By placing the plasma torch within a chamber and introducing a fuel (or waste in this case) while controlling the oxygen, a plasma arc gasifier can produce a synthesis gas that, like that from other gasifiers, can be refined and used to create electricity in a genset, or processed into a liquid fuel. The main challenge to using plasma technology in a waste-to-energy application is to engineer a complete process that exploits the high temperature of the plasma torch to produce a high quality syngas, while minimizing the electricity used to power the plasma torch. Plasma Torches Figure 3 Before digging more deeply into NRG s products, it is worthwhile taking a step back to understand a little about plasmas and plasma torch technology. Plasmas Currently Have Commercial Applications: Although the application of plasma technology to converting MSW is relatively new, plasmas themselves are well understood and used commercially in a number of applications. Under extremely high temperatures, the molecules in a gas become ionized giving off electrons and forming a mass of positive and negative particles that are unbound. The resulting state is referred to as a plasma, which shares common characteristics of gases, but also responds to magnetic and electric fields much like a metal. Such states exist within stars, in the gases in neon signs, and their unique properties have been harnessed for industrial processes such as plasma spraying in microelectronic processing, welding and fluorescent lighting. Through its WPC subsidiary, Alter NRG has developed a robust torch system that utilizes an internal electric arc to produce a plasma by pushing air through the arc itself. These systems produce plasmas with temperatures approaching 5,000ºC, making them applicable for a number of industrial applications. Plasma Torches Source: Alter NRG Corp. NRG s Torches Have Proven Track Record: Alter NRG s has sold torches for 34 different industrial applications, including metals recycling, catalyst reforming, heating in blast furnaces, and cleaning of industrial gases. The company s torches have a high reliability with over 500,000 hours in commercial operation, have a wide power input range from 80 kw to 2,400 kw, offer rapid power adjustment, precise temperature control, long electrode life, and a simple design with no moving parts, producing a selfstabilized and non-transferred arc. 8

9 Alter NRG supplies the complete torch system, including, a DC power supply, control systems for power, gas and water sub-systems, the process gas system and the water cooling equipment. The company s experience dates back to sales of torches to Dow Chemical in 1971, carrying all the way through to sales in 2013 to Beijing Huanyu Guanchuan Plasma Technology Ltd, a China-based industrial company active in the steel and iron industry. Gasification Technology Figure 4 While Alter NRG sells torches for a number of applications, the company has focused its own development efforts on the key enabling technologies for applying plasma torches to the gasification of municipal solid waste, as well as other feedstocks such as waste biomass and recycled materials. The core of its technology is the development of a gasification chamber, featuring its torches as the primary gasification and control tool. The processing of the municipal solid waste begins inside the gasification chamber, where the very high temperatures provide by the plasma torches and lack of oxygen cause the feedstock to gasify, breaking down into elements such as hydrogen and simple compounds such as carbon monoxide, methane and water. The Gasification Chamber Source: Alter NRG Corp. As shown in the figure above, the plasma torches act to maintain the extremely high temperatures and are controlled depending on the energy and moisture content of the MSW. Waste and air or oxygen are added in the middle of the chamber and the produced gases rise to fill the area above the solid materials being gasified. In such an arrangement, the torches act as a kind of thermostat chiefly maintaining the plasma conditions at the bottom of the vessel. The residence time of the gas in the top part of the chamber is controlled to ensure the feedstock is adequately processed into synthesis gas of the desired composition. This arrangement of a single chamber with torches used for temperature control is commonly referred to as Plasma Assisted Gasification, distinguishing itself from Plasma Polishing systems, which typically have two chambers, where plasma torches in 9

10 a second chamber are used to crack the partially dissociated gas from the first chamber into its basic components. Such polishing systems typically have a higher parasitic power requirement, as the torches, though potentially lower rated power than NRG s, operate at higher utilization rates, increasing the average power requirements. The inorganic materials such as metal, glass and concrete melt under the high temperature conditions and collect at the bottom of the chamber where they are removed as a molten slag, which solidifies into a non-toxic vitrified slag. The syngas that is produced from the gasifier typically contains particulates, and other undesirable compounds such as mercury, sulfur and chlorine, which are removed using well-established commercially available equipment. This cleanup process produces a syngas that is suitable for conversion into liquid fuels and/or electricity and heat. As we discuss further regarding the Tees Valley project, it is the syngas clean-up, handling and cooling elements of such systems that have attracted the partnership of Air Products. Figure 5 Plasma Gasification Flow Chart Source: Alter NRG Corp. Plasma Versus Other Gasification Techniques As we have mentioned, gasification technologies have been used commercially in a number of different applications, dating back to the late 1800s. Coal and peat powered gasification systems to produce town gas used in lighting, heating and cooking. In WWII, gasification was used to produce liquid fuels because of a shortage of petroleum. Such systems are typically arranged as fixed or fluidized beds, or as entrained flow gasifiers. Plasma gasification has a number of distinct advantages over other types of gasification, most of which arise from the much higher temperatures that are reached by using a plasma. Non-plasma gasification systems typically operate between 800ºC and 900ºC, while NRG s Westinghouse s plasma torch technology operates over 3,000ºC. This produces a syngas at 1,000ºC (quenched to 850 ºC) and a molten slag leaving the gasifier at 1,650ºC. There are a number of resulting advantages: 10

11 Complete destruction of tars, VOCs and HAPs. Tars in syngas from non-plasma gasifiers cannot be effectively removed, limiting the possible uses of the syngas in heating applications. Such compounds do not permit conditioning of the syngas for higher value downstream options such as gas turbines, reciprocating engines or conversion to liquid fuels. Conversion of inorganics into an inert solid, suitable as an aggregate. This reduces the cost of waste disposal and offers a secondary revenue stream in some markets. A broader range of feedstocks with less stringent pre-processing that can also be combined to form a mixed feedstock stream. Broad set of end product opportunities arising from a clear syngas, including power production, liquid fuels, replacement of NG and fertilizer compounds. A higher upper limit to the overall plant conversion efficiency. Wide range of scalability. Long Track Record Backed By Operating Facilities Westinghouse began developing its plasma technology more than 30 years ago, and spent more than $100 MM. Initially, in collaboration with NASA, Westinghouse developed equipment for use in its Apollo space program to simulate re-entry conditions for its space vehicles. Commercial applications were developed in the 1980s, focusing on the use of plasmas to reclaim scrap metal, hazardous wastes and landfill material contaminated with PCBs from electrical equipment, such as transformers and capacitors. Figure 6 Commercial Installations And Demonstration Facilities Operating Facilities Facility Mihama-Mikata EcoValley Maharashtra Enviro Power Ltd. (MEPL) Tees Valley Renewable Energy Facility New Facilities Sunshine Kaidi Energy Park Location Mihama, Japan Utashinai, Japan Pune, India Tees Valley, UK Wuhan Hubei, China Owner Hitachi and municipality SMSIL Air Products Wuhan Kaidi Capacity, tpd x 1, Feedstock MSW + sewage sludge MSW Various hazardous wastes sorted MSW Mixed wood residue COD (TV1) Q Output heat (boiler) power (boiler) power (boiler) Source: Alter NRG Corp. power (combined cycle) ethanol (catalytic) Applications for the treatment of MSW began in the mid-1990s in partnership with Hitachi Metals. Westinghouse Plasma Corporation conducted a number of tests at its Plasma Centre in Madison, PA, using a variety of feedstocks. This work led to the design and installation of a 24 tpd MSW gasification plant in Yoshii, Japan, and the award of a process certification from the Japanese Waste Research Foundation in Currently, there are three facilities operating commercially using the WPC technology. The Mihama-Mikata (20 tpd MSW and 4 tpd sewage sludge) and Utashinai (220 tpd sorted MSW) plants both in Japan, began operation in 2002 and 2003 and continue to 11

12 operate today. All the slag from the Mihama-Mikata is used as aggregate for concrete. The EcoValley facility has two gasifier trains each with 110 tpd capacity. The plant has recently been shut down owing to the loss of its feedstock contract, but the operation ran for 13 years and consistently met its emissions requirements. Modifications as a result of the experience from operation of these systems in Japan were incorporated into the next-generation gasifier that was commissioned in 2009 by SMSIL in Pune, India. This facility treats hazardous wastes from 40 different industries. SMSIL, India s largest civil engineering and infrastructure development company, is a partner of Alter NRG, offering the WPC system to the Indian market. As a result, SMSIL makes the plant available for customers to enable pilot and optimization tests. Important Demonstration Facilities Nearing Operation Apart from Alter NRG s own 48 tpd demonstration facility located at the Westinghouse Plasma Center in Madison, PA, there are several other facilities that although are of commercial scale, function also as demonstration facilities by their operators. Wuhan Kaidi Showcases Waste To Liquids: The gasifier at Wuhan Kaidi s 100 tpd facility in Wuhan, Hubei, China, was commissioned in early 2013, following construction at the technology park started in December The facility processes biomass and is expected to function as a biomass to liquid fuels conversion plant. Wuhan is working with Rentech (RTK-Nasdaq) for the syngas to liquid fuels conversion technology. Assets purchased by Wuhan are being transported to China, where they will be installed in connection with Alter NRG s gasifier to complete the full conversion chain. Incinerator Vitrification Facility In Shanghai: In February, GTS Energy completed the construction and is the late stage phase of commissioning of a hazardous waste destruction facility in Shanghai, China. The co-located facility (at Shanghai Environmental s waste incinerator) processes the hazardous ash from the incinerator into an environmentally benign slag. Syngas from the gasifier is used in the incinerator providing increased energy production. GTS Energy and Alter NRG have signed a joint development and marketing agreement, which provides for worldwide selling and marketing rights for the sale of turnkey waste to energy destruction units. Third-Party Verification Owing to a long and successful development experience, along with three facilities that continue to operate, the Westinghouse plasma technology has received endorsement by a number of qualified industry experts, following in-depth technical reviews: R.W. Beck (a subsidiary of SAIC), technical consultants serving public and private infrastructure organizations. Reviewed WPC for power plant retrofits and MSW applications. Found no major technical challenges, or major design issues. ENSR, a division of AECOM, a global provider of environmental and energy development services. Engineer s review verifies the emissions levels from 750 tpd MSW combined cycle waste-to-energy facility using plasma is below emissions limits for North America. AMEC provides scientific environmental, engineering and project management support in 30 countries. It completed process flow diagrams and capex estimates for three different facility configurations. Golder Associates provides civil/geotechnical and environmental consulting services worldwide. Confirmed existing plants operate below their regulated emissions limits in Japan and North America. 12

13 Shimadzu Techno Research, an analytical research service provider in the health, environment and product and material testing markets, conducted tests on slag from the Mihama Mikata facility, showing vitrified slag composition is considered inert and does not contaminate soil or drinking water. Customer List Continues To Strengthen With a growing number of systems under construction, Alter NRG receives an increasing number of inbound enquiries. As expected, many of these do not convert into viable project or sales of equipment. However, since Air Products has moved ahead with the development of the Tees Valley Renewable Energy facility, the quality of the prospects has improved. We expect this momentum to continue, particularly following the completion of commissioning of Tees Valley 1 later in To date, Alter NRG has a number of noteworthy customers/partners that are active to further the WPC deployments: Air Products currently has two municipal wastes to energy facilities under construction in Tees Valley, England. Wuhan Kaidi, a high-tech investment company specializing in the field of green energy, is currently building a biomass to power and ethanol demonstration facility in Wuhan, Hubei, China, utilizing WPC technology. It has identified 100 biomass-toenergy sites. SMS, a subsidiary of SMSIL, has built two facilities and is advancing three additional hazardous waste-to-syngas and electricity plants located in India. Waste2Tricity, a structured solutions provider to the waste to energy sector, has paid for a country license for WPC in Thailand, and has an MOU with AFC fuel cell technology for the UK. A 97,000 tpy project in Bilsthorpe, UK, was announced in December, with COD in

14 Facilities In Construction And Commissioning On the Q1/14 conference call, Management highlighted that Alter NRG s customers have five facilities in commissioning, construction or advanced development. This is the highest level of development activity in the company s history. The flagship projects, the two 1,000 tpd units at the Tees Valley project, are not only the largest units ever made by Alter NRG, their successful commissioning will also act as a key catalyst for other customers waiting to green light their own projects. Tees Valley Renewable Energy Facility Figure 7 The Tees Valley Renewable Energy facility is located on industrial land, adjacent to the North Tees Chemical Complex near Billingham in northern England. The facility will provide base load and reliable renewable energy, generated form municipal solid waste, resulting in the diversion of 700,000 t of non-recyclable waste from landfills each year. This will not only be the first of its kind combined cycle waste to power facility in the UK, but the largest in the world. Air Products, the developer of the project, received the necessary planning approvals for the first phase, TV1, in August 2011, followed by the environmental permit in April This allowed construction to commence in June Commissioning of various components and sub-systems is currently underway, and the declaration of commercial operations is expected in early Tees Valley Renewable Energy Facility: Site Source: Alter NRG Corp. Air Products moved ahead on the development of a second phase as part of the Tees Valley complex. Planning approval was received from the community council in June 2013 and in April 2014, the environmental permitting was granted. Construction work has since begun on the second phase. The project is being constructed under an engineering, construction and procurement contract from Foster Wheeler and will be owned and operated by Air Products upon completion. The total investment in the project is expected to be $1 BB over both facilities. 14

15 Figure 8 Tees Valley Renewable Energy Facility: Gasifier Source: Alter NRG Corp. Each phase consists of a 1,000 tpd plasma gasification system supplied by Alter NRG that will provide fuel for a 49 MW combined cycle power plant. Under the agreement for TV1 struck in late 2011, Alter NRG provided a G65 gasifier (its 1,000 tpd product) as well as related engineering and project management services for a fixed price of $22 MM. The supply agreement for TV2, made final in December 2013, was for an identical unit for a fixed price of US$21 MM, including the gasifier, controls and instrumentation as well as engineering services. We toured the Tees Valley facility in June 2014, as part of Alter NRG s open house event. The project is currently in the process of being commissioned. Although delays have resulted from events that often impact such large and complex construction projects, such as labour stoppages, the project is expected to be operational in early Air Products is clearly very committed to both this project as well as TV2. The project is very impressive, occupying a large site in an expansive heavy industry region of northern UK. Greenworld Energy Solutions Corp. Bijie City Green Environmental Energy Ltd. is in the process of developing a 600 tpd facility that is expected to produce 15 MW of electricity using municipal solid waste from the City of Bijie, China. A supply agreement was signed in February to provide a WPC solution for US$15 MM. Project development has been underway for the past four years and though it has obtained provincial approval, it is awaiting the People s Republic of China final approvals. These are expected to be received by mid Alter NRG is planning to begin fabrication of the equipment in Q2/14 and COD of the facility is anticipated in mid The developer has indicated that it intends to double the capacity of the facility with a second gasifier following the start-up of this first facility. The unique attribute of this project is that the slag is processed into a foamed glass that can be used for insulation applications. Owing to the high level of inorganic material and high moisture content, the economics of these plants are skewed to creating a value-added product from the slag, rather than receiving high tipping fees or producing a lot of power from the gasifier. The developer has indicated another eight projects in the region are viable candidates to use this technology. 15

16 Competitive Technologies Reduce, Reuse, Recycle. As is made abundantly clear to most children in primary school throughout the world, the preferred approach to handle municipal solid waste is through programs to encourage the reduction, reuse and recycling of waste. Although such activities reduce the total amount of waste, there still is a substantial amount that is routinely routed to disposal in landfills, the cheapest and most widely used waste management option. Landfills Remain The Default Option Essentially all waste-to-energy business models include the consideration of the local or region market dynamics associated with the landfilling of waste, as this provides a base level of revenue for a facility that would take the waste from a waste hauler. As we have discussed elsewhere in this report, environmental regulations, available land and social considerations all impact the cost of landfill as an option for MSW. In some regions, landfill costs are extremely low, less than $20/t, but as we have discussed can rise to $200/t where landfill taxes are imposed. Incinerators And Other Related Options Incineration is the most common platform for waste-to-energy facilities. Modern incinerators burn the MSW, reducing the volume of the original waste by 95%, while producing a substantial amount of fly ash that must be recycled. Critics of incineration point to the history of harmful emissions such as fine particulates, heavy metals, dioxins, as well as the destruction of valuable resources that could be recycled or otherwise utilized. While solutions for some of these complications add cost and reduce performance, incineration is largely a known technology that can be deployed with relatively little execution risk. Combined with facilities to produce power from a steam turbine, electrical efficiencies are quite low in the 15-30% range, but can be made to rise to 80% with cogeneration opportunities to use the thermal energy for process or district heating. Incinerators have been in operation for many years. The first in the US was built in 1885 on Governors Island, New York. The most successful commercially available unit was built in Saugus, MA, in 1975 by Wheelabrator Technologies and is still in operation. A notable public company with significant incineration exposure is Covanta (CVA- NYSE), which runs 46 waste facilities, 18 transfer stations and 4 landfills for ash disposal. CVA processes 20 MM tpy of MSW, with a generating base in excess of 1,500 MW, making it a world leader in generating energy from waste. Interestingly, a typical incineration plant for CVA in the tpd size provides MW of power, compared with the TV1 facility providing net 37 MW (more than 50 MW gross) from 950 tpd, considerably more efficient in extracting power from the MSW. If CVA used the WPC technology, this level of MSW processing would support more than 1,950 MW of generating capacity. CVA s latest development project in Durham Region, Ontario, is expected to produce 17.5 MW from a 383 tpd furnace, costing the municipality $260 MM. Using multiple units to equate to the 950 tpd TV1 project suggests 43 MW of power capacity only marginally higher than TV1 s net output of 36 MW) at a cost of $780 MM, 150% more costly. Other thermal-related conversion technologies include: Co-combustion: In a co-combustion application, MSW is introduced alongside 16

17 another fuel such as coal or a biomass. The fuel makes the control of the combustion process easier, allowing variations in the energy content of the MSW, which typically arise. Residual derived fuel: In such applications, MSW is shredded and dehydrated to form a fuel-like material consisting of plastics and biodegradable waste that typically has a higher energy content than untreated MSW. Gasification Technology Apart from conventional combustion systems where MSW is burned, there are other gasification approaches where solid waste is heated to very high temperatures in an oxygen-deficient environment within a reactor vessel. Under such conditions, the MSW dissociates into shorter-chained hydrocarbons, carbon monoxide and hydrogen. This syngas can then be further processed into other fuels or subsequently burned to produce heat to drive a boiler/steam turbine power system. Conventional gasification: Oxygen (and sometimes steam) is carefully controlled within the processing chamber to produce a synthesis gas. Pyrolysis: These systems exclude oxygen from the reactor chamber, which often results in the creation of pyrolysis oils, a solid char co-product and other gases. The liquids can be further processed into higher quality motor fuels, chemicals, and adhesives. Other Plasma Technology There are several other gasification technology developers that are in direct competition with Alter NRG, but none have reached the same level of commercial success. Plasco Energy Group (private), an Ottawa-based developer, has a patented plasma process that uses plasma torches in a refining chamber to polish crude syngas exiting a conversion chamber, fueled with MSW and process heat. Following a partnership with the City of Ottawa in 2006, Plasco raised more than $270 MM of capital, investing it in the 100 tpd Trail Road facility that was commissioned in In late 2012, Plasco announced its intention of building a 400+ tpd system in Ottawa based on the Trail Road facility, following the signing of MSW agreements with the city. In 2013, changes were made to senior Management, and commercial progress is unclear. Pyrogenesis Canada Inc. (PYR-V), based in Montreal, designs and manufactures plasma torches and waste destruction systems. PYR has supplied systems to the US Navy for use on its Ford-class aircraft carriers to handle solid waste on board the ship. Other systems have been sold for other marine use on cruise ships. Although development on a waste-to-energy system for the US Air Force was taken to a 10 tpd pilot demonstration phase in 2010, the Air Force ended work on the program, and PYR bought back the equipment. Pyrogenesis has most recently been focusing its efforts on waste destruction applications, and other industrial uses for its torches. InEnTec LLC, an Oregon-based developer of plasma gasification systems, announced a project with Waste Management (WM- NYSE) in 2010 to develop a waste-to-energy facility at the Columbia Ridge landfill in Arlington, Oregon. Advanced Plasma Power Ltd, a UK waste-to-energy facility developer, received planning permission for a project in Tyseley, Birmingham. This allows APP to continue toward the design of a 6 MW demonstration system that, if chosen, is expected to be operational in APP has developed a proprietary waste-to-energy process it calls Gasplasma to produce a syngas. The process uses plasma arc systems supplied by Tetronics. 17

18 Tetronics International, a private UK-based supplier of plasma arc systems for materials processing and waste treatment, has five decades on developments, 109 patents granted or pending, and installations at 80 facilities worldwide. In 2007, Tetronics established a plasma-powered waste demonstration facility in Swindon, UK. Bio-chemical Conversion The use of bio-chemical processes aims to convert the energy in the waste to an energyrich fuel that can be utilized in power or as transportation fuels. Such approach typically suffers from poor scalability, high sensitivity to variations in the waste stream, low yields, high capital costs. 18

19 Regulations & Incentives In looking back to the early deployments of the WPC technology in the 1980s and 1990s, it could be argued that Alter NRG s waste-to-energy solutions have been in development for several decades and commercially available for several years. Surprisingly then, the first 1,000 tpd facility is only being commissioned this year. On the technical side, there have been a number of advancements that have taken time to implement soundly, but regulation has also played a role in boosting the economics, and ultimately the willingness to move forward on deployments. A closer examination of the Tees Valley project provides some insight into the importance of regulations for early adoption. UK Renewable Energy Certificates The Tees Valley Renewable Energy facility is expected to generate approximately 40% of revenue from tipping fees to take the waste, 25% from the sale of power, and 35% from the sale of Renewable Obligation Certificates (ROCs). Examining these revenue streams provides insight into the impact of regulation and incentives on project economics. Air Products has a 20-year contract with the waste provider, Impetus, to take waste for a fixed fee. Given the $130 MM of annual revenue and 1,000 tpd capacity, the tipping fee of $150/t can be estimated. This compares with tipping fees in the UK, which range from $120/t to $200/t, according to WRAP, a UK-government-funded organization implemented to encourage recycling initiatives. We note that tipping fees in metropolitan regions in North America fall in the $80-120/t range. In terms of the power component of the revenue, 25% of the revenue amounts to a fixed price of $80/MWh, compared with UK energy prices expect to fall in the range of $80-90/MWh in the next several years. This suggests that the contracts for the power offtake are also in line with market prices. It is the third revenue stream that comes from the sale of Renewable Obligation Certificates or ROCs that provides a key boost to the project returns. In order to encourage investment in renewable energy, the UK has implemented a program that requires providers of power to source a specified amount from renewable sources. The Office of Gas and Electricity markets (Ofgem) overseas the program, by providing power generators with a number of ROCs that the generator can then sell to energy providers. The power providers then submit the ROCs to the regulator in order to satisfy the renewable obligation for renewable energy in a given year. The generator in effect receives a premium for its power provided it continues to operate in a renewable fashion, but the volatility of the value of the ROC makes the premium the generator will receive subject to price uncertainty. For Tees Valley, Air Products will be assigned two ROCs per MWh of power produced, and a contract has been signed to sell these ROCs at a fixed price, with an escalator over a 20-year period. The buyer is an unspecified global bank, which plans to sell the ROCs to the power providers active in the power market and subject to the renewable energy program. Considering that 35% of the revenue is expected from ROC sales, the 50 MW capacity for TV1 implies that the contractual price for each ROC is approximately $58. Alternatively, the $46 MM from ROC sales amounts to $116/MWh of a premium, suggesting the effective power price is quite expensive for consumers at more than 19

20 $200/MWh. To put this in context, the UK s Electricity Market Reform program provides a variable top-up between the market price and a fixed strike price. These strike prices range from $290/MWh for offshore wind and $180/MWh for onshore wind and hydro, down to $100/MWh from landfill gas and sewage gas. As a result, while a price in excess of $200/MWh is high relative to market prices, it is in line with the high end of the range for renewable power. As analysts covering Air Products suggest the IRR for the Tees Valley project is close to 9%, making it marginally financeable, we note that the role of the ROC program, which provides more than a third of the revenue, is essential for the economic viability of the project. European Union The European Union is the world s largest market for waste recycling equipment and waste-to-energy facilities, with approximately 520 plants in operation in Europe by the middle of Steady growth of such activities and facility investment over the past decade followed the passing of the Landfill Directive in 1999, which led to the closure of many older landfills that could not reach a regulated higher standard for landfills. Reducing the amount of biodegradable waste within MSW was also subject to a time schedule, which further drove up costs to treat and bury waste. As various sub-regions within the EU implemented individual schemes to meet their obligations, the industry went through several boom-bust cycles. We view, therefore, the general regulatory environment in Europe to be positively biased toward waste-to-energy in general and for Alter NRG s products specifically, but not individual country and region characteristics will dominate the adoption rate. Below we summarize the latest situation regarding compliance to this directive. The UK has introduced a landfill tax to increase disposal costs, which has led to high tipping fees, and with the use of ROC program as described above, waste-to-power investment is expected to increase. In Germany, a complete ban on landfilling MSW that has not been treated has been enacted. Regions in southern Europe, including France, Spain, Italy and Greece, have not yet complied with the directive, continuing to landfill MSW, and little adoption of waste-toenergy technology has taken hold. Until increased pressure for further EU legislation is enacted, the time line for adoption in these regions is limited in the near term. By contrast, in Eastern Europe, activities involving waste treatment are accelerating throughout the region, including the larger markets in Poland and the Czech Republic. However, in general, tipping fees remain low, and new legislation is needed to restrict landfilling and encourage the development of waste-to-energy facilities. United States Issues related to management of municipal solid waste are complex and highly dependent on the local individual community conditions. At the federal level, the US Environmental Protection Agency (EPA) is primarily focused on the issue of methane emissions as related to the country s greenhouse gas emissions. The EPA has programs to encourage reduction, recycling and composting as the most environmentally sound alternatives, but treats landfilling and incineration equally in its hierarchy of acceptable options. Federal programs are mostly voluntary outside landfill regulation and have helped primarily to implement landfill gas to energy projects, which exceed 530 installations. The Resource Conservation and Recovery Act is primarily focused on landfill design, operation and Management criteria. The Clean Air Act establishes emissions guidelines for landfills. Waste-to-energy projects may be eligible for certain financing programs such as renewable energy bonds and tax-rebate programs. 20

21 State and local governments have typically been focused on reduction initiatives, and the study of landfill practices and methane emissions. Some states do include wasteto-energy projects as a renewable source of energy, allowing these projects to count for a utility s compliance to the state s Renewable Portfolio Standard. Some states also offer tax breaks or per kwh incentives for producing power from waste. While these regulations continue to press for better control of emissions from landfills, they do not act to raise disposal costs to the point where plasma gasification is broadly economic. Furthermore, unlike the UK, there are no federal incentive programs that increase power prices from such operations sufficiently to drive adoption without consideration of the particular local power prices and waste disposal situation. 21

22 Market Potential Owing to the high temperatures produced by plasma torches, there are a number of applications for Alter NRG s WPC technology across the broad waste treatment market. These span activities that are primarily destructive in nature (processing biomedical waste, hazardous materials, chemicals, fly ash, treatment of sewages and other sludges) to applications aimed to convert the waste streams into saleable energy-related products (electricity, thermal energy, liquid fuels). Alter NRG is focused on value-added applications for its technology, which are mostly focused on the conversion of the waste into saleable products rather than destructive treatment. Before addressing specific projects being pursued by partners and customers, we provide an overview of the market potential for plasma technology. Municipal Solid Waste Presents A Massive Opportunity In North American Alone Figure 9 MSW is the largest target market for the application of waste-to-energy and waste destruction systems. A growing portion of MSW is now recycled; however, the large majority of MSW is still disposed of using incineration and landfill. Together, the US and Canada dispose of approximately 200 MMt of MSW each year. Of this, it is estimated that 83% is sent to landfill, while 17% is disposed using waste-to-energy technologies, dominated by incineration. Given industry standard pricing for tipping fees at landfills and incineration facilities, we estimate that MSW represents a potential market of $10-12 BB in tipping fees per annum, in Canada and the US alone. In terms of an overall addressable market for plasma systems, therefore, the opportunity is indeed very large. The 200 MMt per year equates to approximately 550,000 t of MSW per day, which would require at least 550 of NRG s G65 (1,000 tpd) gasifier systems, if operating at full out capacity utilization. Using the metrics for the Tees Valley facility, systems to process this amount of MSW would represent total capital investment of $275 BB, of which the gasifier portion would total $13.8 BB assuming $25 MM of equipment and engineering costs per facility. If we consider just the existing amount of MSW that is not currently disposed in a landfill, the opportunity exceeds $2.3 BB. US MSW Market Potential Source: US EPA, World Bank, Cormark Securities Inc. 22

23 Emerging Markets Offer High Growth And Large Markets Figure 10 In terms of devising a rough estimate of the global potential, consider that developed economies typically produce half a tonne of MSW per person per year, while emerging economies typically produce much less ( kg for south and west Asia; for Latin American and the Caribbean). For further information, see for instance reports available from the International Bank for Reconstruction and Development, the World Bank, among others. Obviously, as emerging economies experience a rise in the standards of living, the availability of MSW grows substantially. However, the sheer size of the opportunity is staggering. Given these per capita rates of MSW and current population, we estimate the production of MSW in Asia, and in South and Central America (plus Europe) is approximately 900 MM tpy, or five times that of North America. This equates to an opportunity of 1,100 G65 gasifiers in the two largest markets in Asia, 710 in Europe and another 600 in Central and South America. This implies a total market of $50-60 BB for Alter NRG s gasifier technology and related services. Gasifier Market Potential In Outside Of North America MSW per capita MM Population, MMs rate, kg/year tonnes per year G65 (1,000 tpd) gasifiers China & India 150 2, ,077 Europe Americas Source: US EPA, World Bank, Cormark Securities Inc. Addressable Waste To Energy Market Smaller But Still Large Of course, the true addressable market for waste-to-energy opportunities is substantially lower than the total MSW availability. First, MSW is routinely subjected to sorting to reduce the amount of recyclable material that is sent to landfill. Furthermore, many regions of North America do not have sufficiently high tipping fees and power prices to make such investment financeable or economic. In addition, some regions do not have enough waste with the appropriate energy content in a sufficient concentration of population along with power or liquid fuels demand to make such a system technically viable. And lastly, political and social barriers will undoubtedly hinder permitting in some regions despite the most promising economics and best project development efforts. (We note that Alter NRG s technology can also process industrial, commercial and institutional (IC&I) waste, which we have not expressly considered in this analysis. Most estimates suggested that including this source of waste would double the addressable markets over the MSW sources alone.) We can make some reasonable assumptions to pare down the total market into a more realistic addressable market, which still presents a sizable opportunity for Alter NRG. In North America, for instance, the 36 urban agglomerations that have sufficient population (greater than 1 MM) and density (more than 2,200 people per square mile) per capita rates, have a total population of 142 MM. At typical MSW rates, this would require nearly 195 of Alter NRG s G65 gasifiers, representing a market potential of $4 BB for the gasifiers. 23

24 Figure 11 Gasifier Market Potential Of Major Urban Centres Cities with Population Over 1 MM Aggregate Annual MSW Population, production, MM MMs tonnes G65 (1,000 tpd) gasifiers US & Canada Japan & So. Korea UK Western Europe (ex.-uk) Cities with Population Over 3.75 MM Aggregate Annual MSW Population, production, MM MMs tonnes G65 (1,000 tpd) gasifiers Asia China India Americas Brazil Mexico Source: Cormark Securities Inc. Demographia World Urban Areas In other Western developed economies, potential markets are equally large: there are 30 large urbanized regions in the UK and Western Europe with sufficient population and density, that in aggregate would require more than 115 gasifiers, for a total market of $3.8 BB. In Japan and South Korea, there are 16 such urban regions with a total population of 113 MM, which would require 155 gasifiers at their rates of MSW production, representing $3.3 BB in total revenue to Alter NRG. In the emerging markets, population per region would need to be more than 3.75 MM because of the lower MSW production rates. There are 68 urban centers that meet this requirement, 19 in China and 9 in India alone, which together would require 145 gasifiers for a total market potential of $3.1 BB. In Latin America, Mexico and Brazil together have five urban areas with sufficient population and density, which would require 33 gasifiers in aggregate, amounting to $700 MM of revenue for gasifier sales to Alter NRG. Tipping Fees And Power Prices Favorable In Most Of These Markets Alter NRG has provided analyses of the economics of its facilities, indicating that the G65 1,000 tpd unit has net operating income for tipping fees above $60/t. (See table below.) Most major population centers noted above also have high tipping fees. Many in the Latin American region, as well as South Africa and Eastern Europe, have tipping fees in the $30-50/t range, suggesting at first glance that these markets would not be fast adopters of the NRG technology. Even neglecting these potential markets, we estimate the near-term opportunities in Western Europe and the top three urban regions in North America, Japan and South Korea, result in an addressable market of 300 units, worth $6.3 BB for the gasifiers. The other major consideration, power prices, drives the IRR of a typical waste-to-power project, and in some cases even with low-tipping fees, provides sufficient return for projects to be financed. In Brazil, where power prices can exceed $110/MWh, tipping fees as low as $50 are sufficient to provide an IRR of 13% making such project financeable. In the Caribbean, where power prices are even higher, tipping fees of $30/t are all that is needed to provide an adequate return. 24

25 Figure 12 Project Returns In Key Regions Region/City Tipping Fee, $/t Power Price, $/kwh IRR Americas New York % California % Caribbean % Brazil % Europe UK 120 to to 90 18% to 21% Poland % Asia Japan % Australia % Source: Cormark Securities Inc., Alter NRG Considering the tipping fees, power prices as well as available MSW, we estimate the global addressable market is approximately $14 BB. Should a transition of these opportunities take a decade to accomplish, this represents an annual market potential of $1.4 BB, and success on 10% of these (i.e. a 10% market share) for Alter NRG would amount to $140 MM in revenue, representing the sale of 6-7 G65 gasifiers annually in line with Management s 2016 target. Fuel Replacement Market Apart from applications of waste-to-power, Alter NRG is also pursuing sales in the waste-to-syngas market, where the syngas is used as a full or partial replacement fuel. Such applications include replacement of LNG, substitution of fuel in existing boilers, the replacement of natural gas in gas turbines, as well as inside-the-fence applications for process heat. Using its G65 1,000 tpd gasifier, Alter NRG has estimated that a project pre-tax ROE in excess of 13% can be realized for tipping fees starting at $40/t and LNG prices at $10/GJ. (This assumes $172 MM installed capex with a 20% contingency, 85% availability and MSW with $13.2 MJ/kg.) As shown in the table above, such landed LNG prices exist in Europe, where tipping fees are well above this range. In Asia and parts of Latin America, where LNG prices are in the $13-17 range, tipping fees need only be above $20/t. For the fuel oil market, a similar analysis has indicated that there is an opportunity to replace fuel oil in regions where there is little available natural gas and import of fuel oil dominates that energy mix. In such regions, which typically have lower tipping fees, ROE s in excess of 13% can be realized for oil prices above $80 a barrel and tipping fees higher than $20/t. Last year, the power division of General Electric (GE-NYSE) presented an overview of its experience with low calorific (low energy) content fuels in its gas turbine product line. Such applications include the use of fuels such as blast furnace gas, landfill gas, sour gas, and biomass gasification. Currently, GE has more than 4.5 GW of installed base operating on low BTU fuels, dating back to installations since General Electric is promoting the fueling of its turbines on such low BTU fuels to drive adoption rates higher. Considering that each 1,000 tpd gasifier could power a 50 MW unit, this 4.5 GW installed base represents a market potential of 90 G65 gasifiers, with no consideration given to future sales. This market analysis only involves gas turbines sold by GE for low energy-content fuels. GE has a worldwide installed base of nearly 7,000 gas turbines, 25

26 accounting for just under 50% market share with Siemens, Alstom and Pratt & Wittney the other major supplier in the large MW format. General Electric has certified syngas produced from Alter NRG s WPC technology as replacement fuel for all gas turbines in its production range. Activities with GE have accelerating and currently, Alter NRG has been invited to present as part of GE s mainstream business development presentations and with pitches to customers. Incinerator Vitrification In February 2014, GTS Energy completed commissioning of a 30 tpd facility in Shanghai, China, that processes the fly ash from an existing waste incinerator. The facility is integrated with the incinerator, receiving the fly ash and other hazardous feedstock, which is processed to produce a syngas stream. The syngas is used in the boiler of the incinerator to increase electrical output, while the solids from the fly ash are vitrified into an inert slag used in construction aggregate. The current installed fleet of incinerators exceeds 3,000 units worldwide, all of which produce fly ash and other hazardous materials. Virtually all of them could benefit from the technology to reduce disposal costs and boost performance of the heat recovery portion of the incinerator. Co-processing other wastes such as medical or industrial waste can also improve revenue opportunities for the operator of the facilities, as such wastes can cost up to US$300/t to treat. GTS Energy invested $12 MM in the 30 tpd demonstration facility in Shanghai, which functions as a demonstration unit. To date, more than 20 potential customers have toured the facility. Alter NRG foresees these turnkey projects, with a $10-20 MM capex, as easily financeable on its customers balance sheet without the use of project financing. As a result, the barrier to the pace of adoption is the permitting cycle. In most jurisdictions, however, this is much simpler than the process for a greenfield waste-to-power project such as Tees Valley. Where incinerators are in operation, only a modification to permitting, which can typically take days is required. Project execution, from engineering, fabrication, shipment and installation, would typically conclude within one year. Based on 2,000 incinerators in operation to date, this represents a potential of $10-20 BB, assuming $5-10 MM of revenue to Alter NRG per facility. GTS Energy will exclusively use the WPC technology for its systems and will manufacture the waste destruction unit, and provide performance warranties and guarantees. Alter NRG receives an irrevocable royalty-free license to the turnkey waste destruction units which include the WPC system and the GTS Energy balance of plant. 26

27 Business Model With the WPC technology having been proven through successful pilots, demos and most recently operating facilities, Alter NRG has fostered a set of strategic relationships that we expect will play key roles in accelerating the adoption and deployment of WPC systems. Clearly, the development of such waste-to-energy facilities requires a number of important skills from the permitting and financing phase of development to the engineering, procurement and construction tasks, requiring the integration with existing equipment such as turbines, gensets, waste handling and power infrastructure. In our experience, for a technology developer such as Alter NRG with a focus on key enabling technology, such non-core activities, if not handled by experienced partners, will make or break a successful project. In most cases, without these partners, the projects just would not happen no matter how compelling the potential economics. As a result, we look for technology companies whose end markets already have an ecosystem of related equipment and service providers to smooth the deployment of the new technology. The outsourcing of these risks to engaged and experienced partners is a key element to Alter NRG s business model, while forming the basis of its growth strategy. Engineering And Construction Relationships A critical element for the adoption of new technology in an industrial setting is the involvement of experienced world-class engineering firms that can provide requisite performance obligations on projects. This is not only required by lenders in order to provide project debt, but is also important for the providers of project equity. Alter NRG provides a fabricated plasma gasification system, while the balance of the plant engineering is completed by an engineering partner. Foster Wheeler AG, a global engineering conglomerate based in Reading UK, is the EPC contractor on the Tees Valley project, positioning the company as the leading construction partner for Alter NRG s gasifier technology. At the open house in June, representatives discussed three other projects with which they are involved. Technip Group is a world leader in engineering, technologies and project management for the oil and gas industry Uhde GmbH is one of the world s leading engineering companies in the design and construction of chemical, refining and other industrial plants Linde Group, which has extensive experience in the field of syngas production, considered a world leading industrial gas and engineering company providing a broad range of services including Engineering, Procurement and Construction Management (EPCM) to the energy industry, among others KNM, a process equipment manufacturer and a publicly traded company in Malaysia, is a global turnkey solutions provider for the oil, gas, petrochemicals and renewable energy industries. It core business is providing process equipment manufacturing Hatch Ltd. is the world leader in high temperature furnace design and gasification engineering support. Hatch has worked with Alter NRG to optimize the best-in-class plasma reactor design resulting in additional patents for alter NRG 27

28 Technology Sales Figure 13 Alter NRG s primary source of revenue is through the sale of equipment. However, the delivery of this equipment such as torches and gasifiers is made in the context of a project development cycle. As a result, the revenue received comes in the form of licenses and engineering in the initial 3-12 months, and culminates in the fabrication, delivery and commissioning of equipment, in the final months of the development cycle. There is also an annual revenue stream related to items such as plasma torches replacement parts, which could amount to approximately $1 MM per year per gasifier. In the figure below, the timeframe and relative size of each of these components for a typical project development cycle is elaborated. In certain regions, Alter NRG will sell geographic licenses, which provides regional distribution for the WPC technology, with Alter NRG participating as a service and equipment provider. Sales Cycle And Revenue Opportunities Source: Alter NRG Inc. Developers/Sales Partners Relationships In core markets, such as North American and Europe, Alter NRG conducts its own marketing and business development activities. However, for non-core, or otherwise challenging regions, Alter NRG has implemented a licensing/royalty strategy. Below we provide a description of the key relationships: India And Middle East: Alter NRG is working with SMS Envocare Ltd., a division of SMS Infrastructure, central India s largest civil engineering and infrastructure development company on opportunities in India. While SMS owns the Maharashtra 72 tpd plasma facility (MEPL) in Pune, India, SMS is also the exclusive representative for WPC technology in India. Since 2009, SMS has provided Alter NRG access to the MEPL facility to conduct R&D trials for testing programs for potential customers. SMS is developing and marketing hazardous waste treatment facilities between 30 t/day and 100 t/day. SMS is expected to provide turnkey hazardous waste facilities to the market using the Westinghouse Plasma Solution and has approximately 140 people in their gasification division. Asia: At the end of 2013, Alter NRG provided a country license for Thailand to Waste2Tricity Ltd. (W2T), a structured solutions provider to the energy-from-waste sector. W2T was involved with the early development of the Tees Valley facility and is also pursuing other opportunities both in the UK and internationally. W2T has a Bangkok office, through which it is working with local partners to locate and secure project sites and waste streams for future projects. 28

29 In the UK, W2T has also acquired the deployments rights for waste-to-energy applications of AFC Energy fuel cells. A 97,000 tpy project aiming to generate 16.6 MW in Bilsthorpe Industrial Park, Nottinghamshire, UK, was announced in December. Caribbean: In March, Cahill Energy signed an agreement with the Government of Barbados to build a waste-to-energy facility in Barbados. The plant is expected to require the investment of US$240 MM and is to be located in Vaucluse, in the parish of St. Thomas, in Barbados. The project aims to process 650 tpd of MSW, converting it to power, which would amount to 25% of the island s power needs. Alter NRG is working with the developer as the project moves through the development cycle. Project Investment A third revenue stream that Management is pursuing involves recurring revenue from the direct investment in operating facilities. As part of the agreements to supply equipment or in the granting of exclusivity zones for partners, Alter NRG has the option to invest in the projects themselves. Currently, Management has not exercised such options, not does the balance sheet provide much flexibility as of today. However, Management is examining several opportunities to retain a carried interest, or to participate with project funding for an economic interest. In addition, Management expects to receive royalties on operating projects. 29

30 Financial Results Alter NRG s financial results have improved following the signing of the agreement with Air Products for the supply of a gasifier for the Tees Valley project in late Revenue more than doubled in 2012 to $13.7 MM from $6.7 MM in This order, worth $22 MM, was the major contributor to revenue in 2012 and will contribute a further $14.4 MM in With the TV2 project getting the greenlight in late 2013, there is solid support for revenues to rise further as other projects being pursued by partners and customers reach the stage of equipment supply. In Q1/14, Alter NRG reported revenue of $6.2 MM, nearly half of the full-year 2013 results. On a quarterly basis, we expect revenues to remain volatile, as sales are susceptible to timing related to project development. Figure 14 Annual Revenue 16,000 14,000 12,000 Revenue (000s) 10,000 8,000 6,000 4,000 2, Source: Company Reports Gross margins declined in 2012 and 2013, reflecting the delivery on the TV1 project. In earlier periods, when revenue was predominantly from the sale of licenses as well as engineering or other testing contracts, Alter NRG posted gross margin in the 40-60% range. In 2012 and through 2013, however, much of the revenue came from delivering on the TV1 project. Typical quarters in the 2012 and 2013 time frame saw gross margins in the mid-teens to low 20% range, except for a high margin quarter when change order requests were received. In Q1/14, gross margin improved sequentially to 12% from 6% in Q4/13, but remains below expectations. Additional costs related to work on changes for the TV1 project were realized, but they are being negotiated with both customers and sub-contractors to be reduced. Management believes with the first large gasifier now delivered, margins on future projects are expected to increase as all associated costs associated with the equipment, its design, fabrication, installation and commissioning are fully identified. 30

31 Figure 15 Gross Margin 70% 60% Gross Margin (%) 50% 40% 30% 20% 10% 0% Source: Company Reports Management has done a good job in reducing G&A expenses, which have dropped from a peak of nearly $14 MM in 2009 to a quarterly run rate of $1.5 MM in Q1/14. This has been particularly aided by the delivery on the gasifier contract for TV1 as more personnel are included in COGS and offset by revenue. Figure 16 General & Administrative 16,000 14,000 12,000 SG&A, '000s 10,000 8,000 6,000 4,000 2, Source: Company Reports 31

32 EBITDA Loss Improving Figure 17 Prior to the Air Products gasifier sale, Alter NRG was posting annual EBITDA losses in the $18-21 MM range, putting significant strain on the balance sheet which had cash of $51 MM at the end of With more licensing agreements and the TV1 supply agreement, Alter NRG has cut its loss before interest, tax and depreciation to under $10 MM annually. Loss Before ITDA 25,000 Loss Before ITDA (000s) 20,000 15,000 10,000 5, Source: Company Reports Cash at the end of Q1/14 stood at nearly $12 MM, reflecting in part a $5 MM equity raise in February. Working capital amounted to $11.7 MM. There is no debt on the balance sheet, although $5.2 MM of deferred revenue, $1.4 MM in warranty provision and $15.1 MM in deferred income tax are held as liabilities. 32

33 Financial Outlook The financial statements, which constitute our model and inform our target for Alter NRG, are included at the end of this report. Below we provide a discussion of our modeling assumptions and the highlights of our expectations through We have not included any equity issues in this time frame, as our analysis suggests that Alter NRG will not need to raise additional capital to fund working capital through this substantial revenue growth period. However, should Alter NRG choose to exercise options to invest in some of the projects for which it is supplying gasifiers, then the company will need to raise additional funds. We have not included the value of such opportunities in our analysis nor dilution from required equity raises to participate. NRG s Estimated Revenues Figure 18 In its marketing presentation, Alter NRG provides a forecast of estimated revenues over the next four years. As shown in the figure below, Management expects to begin delivering services and equipment on two to three projects, bringing $30-60 MM in revenue. By 2017, Management foresees 10+ projects on an annual basis, with approximately $200 MM in revenue. This ramp would bring cash flow from approximately breakeven in 2014 to more than $50 MM in Management s Estimated Project And Revenue Forecast # of projects 2 to 3 3 to 5 7 to Revenue ($MM) 30 to to to Cash Flow ($MM) 5 to to to Source: Company Reports Forecasting breakeven EPS by Q4/14 For 2014, Alter NRG is delivering on two large contracts: the $21 MM Tees Valley 2 project for Air Products and the $15 MM gasifier for GES in Bijie, China. Given that revenue in Q1 was $6.2 MM and we estimate approximately $24 MM of these two projects will be realized in the balance of 2014, revenue for the full year should reach the bottom end of Management s guidance range of $30-60 MM. We expect a third large project to be signed by Q3, with one quarter of the 4-to-6 quarter period of high revenues associated with the gasifier work to be realized on the third project in Q4. For 2014, therefore, we expect revenue of $35 MM. Assuming gross margins rise from mid-teens to 30% by Q4, at the low end of Management s target, EBITDA would be $1.2 MM in Q4, but still remain negative for the full year. We estimate on this delivery schedule for three projects that EPS would be nil in Q4/14 and a loss of $0.05 per share for the full year Expecting EBITDA Ramp Through 2015 For 2015, we expect the final revenues for TV2 and GES to be realized. In addition, we expect that one new large project ($25+ MM total revenue) per quarter and one smaller ($10+ MM total revenue) to begin in the middle of the year. Under this scenario of five additional projects, we estimate revenue to reach the low end of Management s targeted revenue for

34 We estimate this gradual ramp in projects to bring revenue to $67.3 MM. With margins stable at 30% and SG&A at the $9 MM level, we anticipate EBITDA of $8.8 MM EPS for 2015 would reach $0.15, using a 30% tax rate. Estimating $100 MM In Revenue For 2016 In 2016, we expect that three large and one small additional project will be added to the five that carry over from 2015, approximately one per quarter in terms of timing. This assumption will bring revenue to $107 MM. With margins continuing at 30%, the low end of Management s range and SG&A at the $9 MM level, we anticipate EBITDA of $19.6 MM, more than doubling from EPS for 2016 would reach $0.41, using a 30% tax rate. Please see the model at the end of this report for more details. 34

35 Valuation For the purpose of valuation, we are using both a multiple of earnings and a multiple of EBITDA. As NRG s closest competitors (such as Pyrogenesis (PYR-V)) in the waste-toenergy business are not as well advanced commercially, using the multiples of a narrow group for valuation must be taken cautiously. As a result, we have included companies from three related industries: waste management, environmental service companies, and environmental technology developers. We believe the stock should trade in line with these groups. As shown in the accompanying figure, these stocks trade on a 2015 basis at 16.2x EV/EBITDA and 22.6x PE. Ignoring Ballard Power (BLD-TSX) and Hydrogenics (HYG-TSX), which have extremely high multiples owing to expectations of reaching EBITDA breakeven within months, the average EV/EBITDA multiple is 8.8x. Initiating Coverage With $5.60 Target And Buy(S) Recommendation Figure 19 None of these comparable groups is a perfect match, but Alter NRG shares some similarities to each. Like the more mature waste management companies, Alter NRG may gain operational exposure through the exercise of its options to invest directly in the projects using its gasifiers. This would argue for an EV/EBITDA multiple close to 10x. However, today Alter NRG is essentially a service and equipment provider, which tends to trade at lower multiples at the 7.6x EV/EBITDA level. Alter NRG is a technology developer, providing engineered systems with unique technology for a growing industry, which is today at the very beginning of its revenue ramp. As a result, its business model and growth trajectory, although not its technology, share much in common with Ballard and Hydrogenics. These companies trade at 30x EV/EBITDA and higher, and both have 2015 EBITDA below $10 MM, in line with NRG. As the order book builds, we expect the multiple for NRG to be higher than average from 2015 and 2016 as sales ramp toward a 10-project annual run rate, supporting $100 MM in annual revenue. As shown in the table below, we are initiating coverage on Alter NRG with a target of $5.60. This is based on a multiple of 9.5x our 2016 estimate of $20 MM in EBITDA resulting in a value of $7.00, discounted at 25% to account for 2016 being one year beyond our current valuation year. As orders are announced, we expect the discount to lessen as the order book rises, suggesting upside to $7.00 on our current estimates of With upside in excess of 100%, we are initiating coverage on the company with a Buy(S) recommendation, reflecting the difficulty in estimate the timing of large lumpy orders. Valuation Summary EBITDA EV/EBITDA Target Est. ($MM) multiple Value with 25% discount $20 9.5x $7.06 $5.60 Source: Cormark Securities Inc. 35

36 Figure 20 Comparable Company Valuations Rep. Share Shares Market Total Ent. EV/EBITDA P/E Ticker Curr. Price Out. Cap, $ MM Debt, $ MM Cash, $ MM Value, $ MM 2013A 2014E 2015E 2013A 2014E 2015E Waste Management Progressive Waste Solutions Ltd. TSX:BIN USD ,085 1, , x 7.6x 7.1x 22.0x 21.3x 18.4x Covanta Holding Corp. NYSE:CVA USD $ ,892 2, , x 9.9x 9.2x NMF 49.6x 34.7x Stericycle, Inc. NasdaqGS:SRCL USD $ ,815 1, , x 15.8x 14.0x 32.0x 28.1x 25.0x Waste Management, Inc. NYSE:WM USD $ ,142 10, , x 8.7x 8.2x 20.3x 18.8x 17.4x Environmental Services Clean Harbors, Inc. NYSE:CLH USD $ ,928 1, , x 9.0x 7.9x 31.1x 33.7x 24.8x Newalta Corporation TSX:NAL CAD $ , , x 8.6x 7.2x 24.8x 18.9x 15.2x Nuverra Enviro. Solutions NYSE:NES USD $ , x 9.3x 7.5x NMF NMF NMF Environmental Technologies BioteQ Enviro. Techn. TSX:BQE CAD $ NMF NMF Ballard Power Systems Inc. TSX:BLD USD $ NMF NMF 54.5x NMF NMF -- Hydrogenics Corporation NASDAQ:HYGS USD $ NMF NMF 29.8x NMF NMF NMF PyroGenesis Canada Inc. TSXV:PYR CAD $ NMF NMF Average 11.0x 9.9x 8.8x 26.0x 28.4x 22.6x Median 10.4x 9.0x 7.4x 24.8x 24.7x 21.6x Max 10.4x 9.0x 7.9x 24.8x 24.7x 21.6x Min 10.4x 9.0x 7.9x 24.8x 24.7x 21.6x Alter NRG Corp. TSX:NRG CAD $ NMF NMF 6.9x NMF NMF 17.1x Source: Cormark Securities Inc., Bloomberg 36

37 Management And Board Profiles Walter Q. Howard Chief Executive Officer Director Mr. Walter Howard has spent much of his 30-year career in the electric and water utility industries, having worked in business development, project finance, and operations. He has held CEO, COO, CFO, and SVP positions at General Electric, US Generating (an affiliate of Pacific Gas & Electric and Bechtel), Noble Environmental Power, GE Capital and J. Makowski Co. Inc (partly owned by Duke Power). Mr. Howard holds a Master s degree in Engineering from Cornell University and an MBA from Harvard University. Danny Hay Chief Financial Officer Mr. Danny Hay is a Chartered Accountant, with previous experience as a CFO at public oil and gas companies. In 2007, he led the IPO process for Alter NRG. In addition to his role as CFO, Mr. Hay leads the company s investor relations initiatives as well as corporate finance. He holds a Bachelor of Commerce degree from the University of Calgary. Richard Fish President Mr. Richard Fish became Chief Operating Officer of Alter NRG after having joined the company in 2009 as Chief Marketing and Sales Officer. His guidance brought the Plasma group to positive operating results for the first time in company history. Mr. Fish was appointed President in late Mr. Fish has held senior executive positions in private equity and industrial manufacturing firms, from start-ups to companies generating billions of dollars of revenue. At Workhorse Custom Chassis (a portfolio of The Carlyle Group), Mr. Fish led global sales, strategic partnerships and acquisitions. At Universal Trailer Corp (a portfolio of Dubin Clark and Company), he led worldwide sales and strategy efforts. Prior to joining Alter NRG, Mr. Fish held the position of Portfolio CEO and Operating Partner with Monomoy Capital Partners, a private equity fund. He holds a Bachelor of Arts from the University of Virginia. Kent Hicks Chief Technology Officer Mr. Hicks brings experience in constructing, commissioning, and operating energy projects including significant experience in gasification. Most recently, he was the Vice President, Downstream Operations, for Synenco Energy and General Manager in Petro Canada s Fort Hills oilsands project. Mr. Hicks served as the Commissioning and Startup Manager during the early phases of the OPTI/Nexen Long Lake project, the first gasification project in the Alberta oilsands. Mr. Hicks is a Professional Engineer with a Bachelor of Science in Chemical Engineering from the University of Missouri-Rolla. Kevin M. Bolin Chairman of the Board After having joined the board in 2009, Mr. Bolin assumed the Executive Chairman position in September 2011 in order to lead the company through a strategic direction change until March He served on the Board of Directors of EnerTech Environmental, Inc., a private renewable energy company that converts biomass, primarily municipal sewage sludge into clean fuel. Nancy M. Laird Lead Director Ms. Laird was appointed to the Alter NRG Board of Directors in April 2006 and chairs the Compensation, Governance and Nominating Committee. She was appointed Lead Director in September 2011 to help navigate the company through strategic direction changes. Ms. Laird has 25 years of experience, including Senior Vice President, Marketing and Midstream for PanCanadian Energy (predecessor to Encana Corporation). She is currently a board member for Keyera Corp. and Synodon Inc. and serves on various private company boards. Ms. Laird holds a Bachelor of Arts degree (Honours) 37

38 from the University of Western Ontario and earned her MBA from the Schulich School of Business at York University in Toronto. Mark A. Montemurro Director Mr. Montemurro is one of the founders, formally establishing Alter NRG in From 2006 to the end of 2011, he held the position of CEO of Alter NRG. Mr. Montemurro has more than 24 years oil and gas experience, focusing primarily on the application of new technologies and the commercial development of conventional and thermal heavy oil. Prior to Alter NRG, he was the Vice President, Thermal Operations, with Deer Creek Energy from 2002 to September 2005, when the company was purchased by Total. He holds a Bachelor of Science degree in Chemical Engineering from the University of Calgary. Eugene A Tenenbaum Director Mr. Tenenbaum was appointed to the Alter NRG board in January He serves as Managing Director of MHC (Services) Ltd. And has also served as Head of Corporate Finance of OAO Sibneft from 1998 to Mr. Tenenbaum was the Director of Corporate Finance at Salomon Brothers from 1994 to Prior to that, he spent five years in corporate finance with KPMG in Toronto, Moscow and London. He has been Non-Executive Director of AFC Energy PLC since January He is a Chartered Accountant and holds a Bachelor s Degree in Commerce and Finance from the University of Toronto and a degree in Economics from the University of Toronto. Paul N. Heagren Director Mr. Heagren has served on the board since January He is a Senior Vice President and Finance Director of MHC (Services) Ltd. Mr. Heagren has 26 years of finance experience in practice and industry, having spent 9 years as UK and European finance director for a large change management consultancy based in Richmond, UK, and also worked for Philips before joining MHC. Mr. Heagren has been Non-Executive Director of Waste2Tricity Limited, is a Chartered Accountant and holds a Bachelor s Degree in Economics and Accounting from Bristol University. Wayne Sim Director Mr. Sim was appointed to the board in January 2014, bringing experience in sales and marketing, and strategic planning through his background with technology companies that have experienced significant growth. Currently, he is the president and CEO at 3esi Ltd where he manages the global operations of that early growth organization. Formerly, Mr. Sim has held key executive positions, including being the Sr. VP Worldwide Sales at Aspen Technology and a co-founder, director and CEO of Hyprotech. He graduated from the University of Calgary with a B. Sc. in Chemical Engineering in

39 Investment Risks We offer below the risks that we see are the most relevant for investment in Alter NRG. As NRG is a growth story, those most relevant are risks associated with revenue growth, including regulatory risk and execution. Regulatory Risk As we have detailed in this report, regulation and related incentive programs play an important role in aiding the adoption of this technology. In the UK, the restrictions on landfill use and availability of Renewable Energy Certificates improve the economics of the Tees Valley projects. Not only are tipping fees higher as a result, but the effective power prices are also above typical market rates. These conditions allow Air Products to enter into arrangements to firm pricing for the plant s output and fees for taking waste over a long period, which in turn aids financing of the projects. Certainly, as we have shown, there are other regions of the world where tipping fees and power prices appear attractive. However, we believe at this early stage of development, regulatory conditions and incentive programs will continue to act as both sticks and carrots for developers. As a result, the threat to changes in these rules and programs will continue to remain a risk for some time. Execution We believe there are many more potential projects under discussion than our forecast of orders and shipments assumes. Should our projections for growth materialize, Alter NRG will experience significant operational pressure. As each system requires a degree of customization, the demand for engineering-related expertise will grow. Fortunately, Alter NRG has mitigated some of the potential risk, by focusing on three standard gasifier sizes. There is a risk, however, that a rapid increase in sales may require a related increase in engineering headcount that will erode margins. Strains on the supply chain may also have a negative effect on COGS and delivery timelines that could result in a miss to our outlook. These challenges, arguably, are good issues to have since they indicate a robust activity level. Given the Management and Board expertise, we believe the company has the ability to face these challenges as they arise. Competition Alter NRG currently has a lead over other plasma gasification technology developers. The company also has a long track record of successful pilot trials and units in commercial operation. However, there are other providers of plasma gasifiers, and there are also other non-plasma gasification technologies that are having some success in more mainstream applications such as in co-firing and residue fuels applications. As a result, we expect competition to be stiff, particularly after the Tees Valley project comes on line, and a viable model for large scale MSW-to-energy applications is verified. Financing Risk The projects that impact Alter NRG financials to the greatest degree are predominantly the large ones near 1,000 tpd. While the gasifier portion may be $25 MM or more, the total project costs for the developer approach $500 MM. As a result, developers of such plants will either need a large balance sheet or would need to seek external project financing. The available and cost of such financing, though not a direct risk for Alter NRG, will affect the economics of the projects and therefore introduce an important risk to the adoption curve, by Alter NRG s customers. 39

40 Foreign Exchange Currently, the company s operations are chiefly in Canada, with operating costs largely denominated in Canadian dollars. However, because tipping fees, power prices and regulatory pressures on MSW disposal are most favorable outside Canada, much of Alter NRG s revenue will be denominated in foreign currencies. To date, Management has not hedged any currency exposure, providing risk should the Canadian dollar appreciate against the US dollar or any other currency in which Alter NRG receives revenue in the future. We expect some of this to be reduced as Alter NRG continues to source some materials and fabrication in lower costs jurisdictions. 40

41 Figure 21 Financial Models Alter NRG Corp. Income Statement Fiscal YE Dec. 31 (C$000s) 2012A 2013A Q1A Q2E 2014E Q3E Q4E 2014E 2015E 2016E Sales $13,700 $14,436 $6,188 $6,000 $10,550 $12,300 $35,038 $67,050 $107,217 Cost of Sales 12,033 11,469 5,452 4,920 7,385 8,610 26,367 46,935 75,052 Gross Profit 1,667 2, ,080 3,165 3,690 8,671 20,115 32,165 Expenses Selling Expenses $1,750 $2,761 $946 $780 $739 $800 $3,264 $3,353 $3,753 Administrative Expenses 6,606 6,555 1,472 1,500 1,583 1,230 5,785 6,169 6,969 Stock Based Compensation ,798 1,798 1,798 Depreciation 2,351 2, ,616 2,342 2,249 Total Operating Expenses 11,172 12,535 3,532 3,385 3,434 3,113 13,464 13,661 14,769 Income from Ops (9,505) (9,567) (2,796) (2,305) (269) 577 (4,793) 6,454 17,396 Financing Costs Interest Expense / (Income) (14) (77) (13) (13) Other Income (298) (49) Share of Loss from Associate 419 1, FX Gain 251 (921) (662) (662) - - Loss on Reval. of Assets for Sale 1,403 1,100 (211) (211) - - Total Other 1,794 1,979 (880) (880) Income Before Income Tax (11,299) (11,546) (1,916) (2,305) (269) 577 (3,913) 6,351 17,296 Current Income Tax (588) (611) (164) (49) (59) 144 (128) 1,905 5,189 Net loss From Discontinued Ops Net Income $(11,107) $(10,935) $(1,752) $(2,256) $(210) $433 $(3,785) $4,445 $12,107 Exchange Gain on Foreign Op. 408 (921) (515) Ear. Attrib. to Equity Holders (11,515) (10,014) (1,237) (2,256) (210) 433 (3,785) 4,445 12,107 Weighted Average Shares Basic Fully Diluted EPS (Basic) GAAP $(0.17) $(0.11) $(0.02) $(0.02) $(0.01) $0.02 $(0.06) $0.16 $0.43 EPS (Diluted) GAAP $(0.17) $(0.11) $(0.02) $(0.02) $(0.01) $0.01 $(0.05) $0.15 $0.41 EPS (Basic) adjusted $(0.17) $(0.11) $(0.02) $(0.02) $(0.01) $0.02 $(0.06) $0.16 $0.43 EPS (Diluted) adjusted $(0.17) $(0.11) $(0.02) $(0.02) $(0.01) $0.01 $(0.05) $0.15 $0.41 Year-over-Year Growth Revenue 104.1% 5.4% 41.7% 38.1% 317.4% 284.5% 142.7% 91.4% 59.9% COGS 350.1% (4.7%) (68.4%) 17.4% (0.3%) 1.4% 129.9% 78.0% 59.9% Gross Profit (58.7%) 78.1% (70.6%) 5.1% (85.9%) (120.3%) 192.2% 132.0% 59.9% Net Income 52.5% 98.4% (84.2%) 28.2% (95.3%) (120.8%) 34.6% (117.4%) 272.4% EPS (Diluted), GAAP 50.6% 63.4% (90.6%) 9.2% (83.3%) (173.8%) 51.2% (286.7%) 272.4% EPS (Diluted), Adj 50.6% 63.4% (90.6%) 9.2% (83.3%) (173.8%) 50.8% (277.8%) 272.4% Cost Analysis Cost Of Sales 87.8% 79.4% 88.1% 82.0% 70.0% 70.0% 75.3% 70.0% 70.0% Selling 12.8% 19.1% 15.3% 13.0% 7.0% 6.5% 9.3% 5.0% 3.5% G&A 48.2% 45.4% 23.8% 25.0% 15.0% 10.0% 16.5% 9.2% 6.5% Effective Tax Rate 5.2% 5.3% 8.5% 2.1% 22.0% 25.0% 3.3% 30.0% 30.0% Margin Analysis Gross Profit 12.2% 20.6% 11.9% 18.0% 30.0% 30.0% 24.7% 30.0% 30.0% Operating Income -69.4% -66.3% -45.2% -38.4% -2.6% 4.7% -13.7% 9.6% 16.2% EBITDA -68.1% -63.8% -20.3% -27.5% 3.7% 9.8% -3.7% 13.1% 18.3% Net Income -81.1% -75.7% -28.3% -37.6% -2.0% 3.5% -10.8% 6.6% 11.3% Sources: Cormark Securities Inc. Estimates, Company Reports 41

42 Figure 22 Alter NRG Corp. Balance Sheet Fiscal YE Dec. 31 (C$000s) 2012A 2013A Q1A Q2E 2014E Q3E Q4E 2014E 2015E 2016E Cash & Equivalents $7,023 $7,629 $11,977 $8,445 $8,042 $10,328 $10,328 $9,968 $13,160 Restricted Cash Accounts Receivable 959 1,895 6,678 4,454 4,908 7,106 7,106 12,899 21,673 Inventory ,324 1,433 2,072 2,072 4,120 6,922 Contract Work In Progress Prepaid Expenses Assets Held For Sale - 1,300 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Total Current Assets 9,361 12,943 22,234 17,185 17,344 22,468 22,468 29,947 44,716 PP&E 3,662 3,453 3,495 3,340 3,176 3,042 3,042 2,900 2,851 Intangible Assets 39,963 40,548 41,457 41,457 41,457 41,457 41,457-41,457 Other Assets 4, Total Long-term Assets 48,206 44,001 44,952 44,797 44,633 44,500 44,500 44,358 44,308 Total Assets $57,567 $56,944 $67,186 $61,982 $61,977 $66,967 $66,967 $74,305 $89,024 Deferred Revenue $2,453 $523 $5,163 $5,163 $5,163 $5,163 $5,163 $5,163 $5,163 Accounts Payable 6,032 4,740 5,212 1,814 1,570 5,678 5,678 6,772 7,586 CP LTD Total Current Liabilities 8,485 5,262 10,491 7,093 6,848 10,956 10,956 12,050 12,864 LTD Warranty provision 612 1,144 1,411 1,411 1,411 1,411 1,411 1,411 1,411 Deferred Tax Liabilities 14,336 14,693 15,107 15,107 15,107 15,107 15,107 15,107 15,107 Total LT Liabilities 14,948 15,837 16,776 16,776 16,776 16,776 16,776 16,776 16,776 Total Liabilities $23,433 $21,099 $27,267 $23,868 $23,624 $27,732 $27,732 $28,826 $29,640 Shareholders' Capital $129,204 $140,312 $145,335 $145,785 $146,234 $146,684 $146,684 $148,482 $150,280 Reserves 7,650 9,186 9,990 9,990 9,990 9,990 9,990 9,990 9,990 Contributed Surplus Deficit/Retained Earnings (103,046) (113,980) (115,733) (117,989) (118,199) (117,766) (117,766) (113,321) (101,213) Shareholders' Equity 34,136 35,845 39,920 38,113 38,353 39,235 39,235 45,479 59,384 Total Liabilities & Share. Equity $57,569 $56,944 $67,186 $61,982 $61,977 $66,967 $66,967 $74,305 $89,024 Sources: Cormark Securities Inc. Estimates, Company Reports 42

43 Figure 23 Alter NRG Corp. Cash Flow Statement Fiscal YE Dec. 31 (C$000s) 2012A 2013A Q1A Q2E 2014E Q3E Q4E 2014E 2015E 2016E Operations Net Income $(11,299) $(11,546) $(1,916) $(2,256) $(210) $433 $(3,949) $4,445 $12,107 Share Of Loss From Associate 419 1, Depreciation 2,351 2, ,616 2,342 2,249 Loss On Disposal Of Assets 11 (275) Stock-Based Compensation/Payme ,673 1,798 1,798 Warranty Provision Impairments/Writedowns 1,403 1, Other, FX 2 (799) (710) (710) - - Cash From Ops Before WC $(6,108) $(5,764) $(1,371) $(1,151) $903 $1,516 $(103) $8,585 $16,155 Changes In A/R $- $- $- $2,223 $(454) $(2,198) $(428) $(5,793) $(8,774) Changes In Inventories (707) (108) (640) (1,455) (2,047) (2,802) Changes In A/P (3,398) (244) 4, , Changes In Def. Revenue 7,208 (5,078) Change In Non-cash WC 7,208 (5,078) 851 (1,882) (806) 1,270 (567) (6,746) (10,763) Discont'd ops/ Income Taxes Paid (700) Cash from Operations $400 $(10,842) $(520) $(3,032) $97 $2,786 $(669) $1,840 $5,392 Investing Investments $14 $77 $- $- $- $- $- $- Purchase Of Property & Equip. (17) (88) (12) (500) (500) (500) (1,512) (2,200) (2,200) Purchase Of Intangibles (392) (381) (15) (15) - - Restricted Cash (31) Other Proceeds From Equip. Sales Cash From Investing $1,191 $458 $(58) $(500) $(500) $(500) $(1,527) $(2,200) $(2,200) Financing Common Share Issuance $2,533 $11,100 $5,000 $- $- $- $5,000 $- $- Share Issuance Costs (411) (101) (13) (13) - - Other (46) Cash From Financing $2,076 $11,054 $4,987 $- $- $- $4,987 $- $- F/X Effect On Cash (24) (65) (60) (60) - - Net Increase In Cash $3,643 $606 $4,348 $(3,532) $(403) $2,286 $2,730 $(360) $3,192 Cash & Equivalents, Start 3,380 7,023 7,629 11,977 8,445 8,042 7,629 10,359 9,999 Cash & Equivalents, End $7,023 $7,629 $11,977 $8,445 $8,042 $10,328 $10,359 $9,999 $13,191 Sources: Cormark Securities Inc. Estimates, Company Reports 43

44 Recommendation Terminology Cormark s recommendation terminology is as follows: Top Pick our best investment ideas, the greatest potential value appreciation Buy expected to outperform its peer group Market Perform expected to perform with its peer group Reduce expected to underperform its peer group Our ratings may be followed by "(S)" which denotes that the investment is speculative and has a higher degree of risk associated with it. Additionally, our target prices are based on a 12-month investment horizon. Disclosure Statements and Dissemination Policies A full list of our disclosure statements as well as our research dissemination policies and procedures can be found on our web-site at: Analyst Certification I, MacMurray D. Whale, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. 44

45 Figure 24 Alter NRG Corp. Disclosure Chart Source: Cormark Securities Inc. 45

46 TORONTO Royal Bank Plaza South Tower 200 Bay Street, Suite 2800, PO Box 63 Toronto ON M5J 2J2 Tel: (416) Fax: (416) Toll Free: (800) CALGARY Stock Exchange Tower 300-5th Avenue SW, Suite 1800 Calgary AB T2P 3C4 Tel: (403) Fax: (403) Toll Free: (800) For Canadian Residents: This report has been approved by Cormark Securities Inc. ( CSI ), member IIROC and CIPF, which takes responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of CSI. For US Residents: Cormark Securities (USA) Limited ( CUSA ), member FINRA and SIPC, accepts responsibility for this report and its dissemination in the United States. This report is intended for distribution in the United States only to certain institutional investors. US clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of CUSA. Every province in Canada, state in the US, and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, some of the securities discussed in this report may not be available to every interested investor. Accordingly, this report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited. The information and any statistical data contained herein have been obtained from sources believed to be reliable as of the date of publication, but the accuracy or completeness of the information is not guaranteed, nor in providing it does CSI or CUSA assume any responsibility or liability. All opinions expressed and data provided herein are subject to change without notice. The inventories of CSI or CUSA, its affiliated companies and the holdings of their respective directors, officers and companies with which they are associated may have a long or short position or deal as principal in the securities discussed herein. A CSI or CUSA company may have acted as underwriter or initial purchaser or placement agent for a private placement of any of the securities of any company mentioned in this report, may from time to time solicit from or perform financial advisory, or other services for such company. The securities mentioned in this report may not be suitable for all types of investors; their prices, value and/or the income they produce may fluctuate and/or be adversely affected by exchange rates. No part of any report may be reproduced in any manner without prior written permission of CSI or CUSA A full list of our disclosure statements as well as our research dissemination policies and procedures can be found on our web-site at: