Publicly, the first sign of trouble came in early July, when EarthFirst announced it was increasing its capital cost estimate for Dokie 1, British Columbia's first wind farm, from C$325 million to C$360 million. The eight Vestas 3 MW turbines making up the first phase are to go up near Chetwynd in the Peace Region of north-eastern British Columbia (BC) before the end of the year.
About C$22 million of the C$35 million increase was due to higher than expected local tendering costs. "Natural gas exploration suddenly took off in that region over about a six month period, and what that does is start to affect some of your local contractor costs. We were right in the phase of bidding those contracts and awarding those contracts as that shift in the local economy occurred," says EarthFirst CEO Linda Chambers. "That is definitely part of it. Another aspect is that the independent engineer, who is tied to the lending bank, wanted there to be more contingency built in." That added another C$13 million to the project budget.
As if C$35 million in extra capital cost was not enough to be contending with, EarthFirst also learned that projected revenues from sales of wind power were not going to be as high as budgeted: the estimate of the project's potential energy production was being lowered by the company responsible for making it, Britain's Garrad Hassan, a recognised expert in the field.
What EarthFirst found itself caught up in was a general revision by Garrad Hassan of expected energy yield across a number of projects in North America. The action came when the firm decided to change the wind energy estimation methodology it applies to North American projects after it found a consistent pattern of overestimation of wind resource compared to actual operating results. "What they did was anything they were involved in they adjusted the resource downward, anywhere from two to five percent. They adjusted our project 2.3% downwards," says Chambers. Lower production estimates means lower projected revenues, which translates into borrowings falling short of what is required.
In total, says Chambers, the company found itself with a C$50 million gap to fill. "There was a pretty strong reaction on the share price," she says. EarthFirst is traded on the Toronto Stock Exchange and saw its stock price plunge from more than C$2 a share earlier this year to a 52-week low of C$0.22 on August 20. The stock rallied somewhat after the company called in consultants on August 21 to examine "strategic alternatives" for keeping the project on track and has been trading in the C$0.30-C$0.40 range.
Chambers believes there were a number of factors contributing to the reaction of investors. "One is when you are a relatively new entity and this is your first project and you have a misstep like a cost overrun, there are probably some issues out there in the market in terms of confidence in the company," she says.
"But it is compounded by the fact that right now credit markets and lending markets are very tight and they just don't have any tolerance for projects that don't come in on time and on budget in terms of then going out and looking at project financing."
Because it is the company's first project, adds Chambers, EarthFirst does not have a portfolio of operating assets to help cushion the impact. "Everything in one project becomes more visible because it is the only project you have under construction." The first phase of Dokie 1 is on schedule to come on line by the end of the year. The second phase, made up of 40 turbines, is slated for 2009.
Chambers says she is confident the company can deliver on the project, which won a 20-year power purchase agreement with BC Hydro in 2006. EarthFirst is continuing to pursue project financing. The board decided to hire outside advisors to determine whether there are other options, such as selling an equity position in the project or forming a strategic partnership, it should also be considering. "All those things will be looked at and considered. But at this stage it would be very premature to speculate on where it might land," she says.
The driving factor in the board's decision, Chambers says, is figuring out how to return the value back to shareholders. "There is a lot of embedded value in EarthFirst. The view we would hold here is that the share price doesn't reflect the value of the strong pipeline of projects." EarthFirst, with the ambition of becoming one of the country's leading wind developers, went public last December, raising C$140 million in the largest renewable energy initial public offering ever in Canada. (Windpower Monthly, May 2008).
The company has two fully permitted wind power projects with a combined capacity of 190 MW, also in the Peace region, that it plans to bid into BC Hydro's current call for clean energy. It has a purchase contract with Nova Scotia Power for a 45 MW project in that province and has announced plans to build a 30 MW project in Ontario next year that has be awarded three C$0.11/kWh standard offer contracts under a special program for projects of 10 MW and less. Its total pipeline adds up to about 2500 MW in five provinces.