INVESTING IN ALTERNATIVE ENERGY

5th Annual Economic & Financial Development ConferenceThe Road to Recovery: Caribbean’s Economic Development

& Pension FundsJuly 14 – 16. 2010The Biltmore Hotel

Miami, FloridaModerator:  Ronald Simmons, Chair Investment Committee

Panellists:   Randy Bauslaugh, Blake Cassels & Graydon, LLP

                   Jay Womack, FIS Group Inc

                    Farrell Crane, Energy Opportunities Capital Management

Agenda

1. Introduction

2. Legal Issues Associated with Alternative Energy Investments by Pension Funds

3. Energy Investments Generally

4. Alternative Energy Investments

5. Conclusions

6. Q&A

Introduction:Asset

Allocation Mix

Fixed Income

Public Equities

Alternative Assets

Resources

Traditional Asset

Classes

Energy

Infrastructure

Introduction

• In a pensions context, alternative investments are anything other than publicly traded stocks and bonds, including:

» private equity» infrastructure» resources» real estate» derivatives» commodities» hedge funds

Introduction

• Risks commonly associated with alternative investments: • liquidity risk• operational risk• counter-party risk• reputation risk• outsourcing risk

• Barriers to pension funds investing in alternative investments:• attitudes• knowledge and expertise• illiquid and long-term

– divestment difficulties– valuation difficulties

• less transparency than publicly traded stocks and bonds• limited access to performance data• law lags the commercial environment

Legal Issues:The Legal Framework

• Tax Legislation– foreign investment issues

• Pension Legislation– mostly prudent portfolio

• with some qualitative or quantitative limits• legal for life

– standard of care• use of experts = expert?

• Common-law– pension documents

• trust deed• investment policy• investment management contract

– fiduciary standards• prudent person vs. prudent expert• SRI or ESG Considerations ?

• Business Law– limitation of liability

• corporations• limited partnerships

Legal Issues: Alternative Investment Structures

Note: Diagram for illustrative purposes and not intended to be exhaustive. (Slide courtesy of Caledon Investments)

Institutional investor

FoF Asset Managers

Funds

Companies & Assets

1. Fund of Funds (FoFs)

Institutional investor

Funds

Companies & Assets

** Co-investment with Fund partners or other plans

**

2. Funds (& Co-investments)

Institutional investor

Companies & Assets

3. Directs – Lead/co-lead

Legal Issues:Alternative Energy -- SRI / ESG

1. Best Financial Interest of Plan Members– direct financial interest Cowan v. Scargill

• not for collateral or speculative benefit• not pre-determined social values

2. Distinguish value from values– Ethical screen vs. Risk mitigation and enhanced returns– Document rationale

3. Consider Governance Culture– Unionized Members

• P3 and infrastructure projects• in-house expertise and remuneration

Legal Issues:Alternative Energy -- SRI / ESG

• …integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions

– A legal framework for the integration of environmental, social and governance issues into institutional investment, Freshfields Bruckhaus Deringer, UNEP Finance Initiative, October 2005 (the “Freshfields Report”) http://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf

Legal Issues:Alternative Energy -- SRI / ESG

• “so long as ESG considerations are assessed within the context of a prudent investment plan, ESG factors can (and where they implicate value, risk and return, arguably should) constitute part of the asset management process” – Arnold & Porter

• “it does not appear that U.S. law forbids integrating ESG considerations into an asset manager’s decision making process, so long as the focus is always on the value inuring to the beneficiaries and not on achieving unrelated objectives – even if positive collateral benefits result” -- Freshfields

Legal Issues:Alternative Energy -- SRI / ESG

• Imbed ESG or SRI language in:– trust deeds or similar constating plan documentation– investment policy statements– investment management contracts– notices and information provided to plan members

Legal Issues: Consider Governance Culture

• Quote from Nova Scotia Federation Labour:•

“The NSFL proposes that the Pension Review Panel directly address the corrosive effects of privatization and P3s on pension plan coverage in Nova Scotia. Further, it is important that the Pension Review Panel call for the clarification of statutory and common trust law as it applies to pension investment in order that decisions by pension fund trustees to expressly avoid investments in P3s and other forms of privatization that threaten unionized, public sector employment (and the pension coverage that such employment generally provides) are clearly permitted.Further, the NSFL proposes that language be added to the PBA, making it legitimate for pension trustees to consider social, ethical and environmental principles.”

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSENERGY – INEXORABLY LINKED TO THE ECONOMY AND THE PREDICATE TO ECONOMIC GROWTH

Energy Demand Growth Vs. Global GDP Growth (1970-2008)

13

Chart NotesGlobal % GDP estimates (IMF

April 2009 and October 2009):

Apr ‘09 Oct ‘092007 + 5.2% +5.2%2008 + 3.2% +3.2%2009 - 1.3% -1.1%2010 + 1.9% +3.1%2011 + 4.3% +4.2%2012 + 4.8% +4.4%

Solid recovery projected, driven in large part by Non-OECD economies.

Source: BP Statistical Review, IMF, EOCM.

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSTHE RISE OF NON-OECD ECONOMIES – INSATIABLE ENERGY DEMAND

14Source: IMF.

Percent of Global GDP: U.S., China and India

Chart Notes

Year ChinaIndia

1980 2.0%2.2%

1990 3.6%2.8%

2000 7.2%3.6%

2010E 12.7%5.1%

For 2014, the IMF estimates the percentages as follows:

U.S. ChinaIndia

18.3% 15.4%5.7%

CHINA THEN CHINA NOW

INDIA THEN INDIA NOW

WORLD POPULATION(relative)

Out of every 100 persons added to the population in the coming decade, 97 will live in developing countries." Hania Zlotnik, 2005

Source: www.worldmapper.com

ALTERNATIVE EN

ERGY FU

NDAM

ENTALS

THE ERA OF CHEAP, EASY TO ACCESS ENERGY IS OVER

1950s 2000s

18

Alberta Tar Sands ProductionAlberta Tar Sands Production Sakhalin ISakhalin I

“The fact that we're willing to move four tons of earth for a single barrel really shows that the world is running out of easy oil.”

- National Geographic, March 2009

“My father rode a camel, I drive a car, my son flies an airplane, his son will ride a camel.”

- Middle East saying

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSGROWING SUPPLY CHALLENGES FOR TRADITIONAL ENERGY

The Supply Impact of Decline Rates (Depletion)

19Source: International Energy Agency.

~ 2 new Saudi Arabias

"I'd put my money on the sun and solar energy… I hope we don't have to wait until oil and coal run out before we tackle that."

- Thomas Edison, to Henry Ford and Harvey Firestone, 1931

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSALTERNATIVE ENERGY DEMAND GROWTH DRIVERS The IEA is projecting long-term energy growth of 1.5% per annum through 2030, with a noticeable uplift

in energy consumption just beyond 2010 as the pace of expansion increases to 2.5% per annum through 2015.

The primary regions for energy demand growth are the developing Asian and Middle East countries. Notwithstanding that fossil fuels remain and are expected to remain the dominant source of primary

energy worldwide, a combination of supply challenges and environmental concerns are expected to result in decreased share of total energy sources, with the offset being renewable alternative energy sources.

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Drivers of Alternative Energy Demand Growth

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSPOWER GENERATION – A KEY AND GLOBAL FORCE DRIVING ALTERNATIVES According to the IEA, global power generation needs through 2030 equate to an additional 4,800 GW (five

times the amount currently installed in the U.S.). Over 80% of this growth comes from developing economies, with the single largest increase coming from China.

Coal, natural gas, hydro and nuclear are and are expected to remain the primary energy sources for power generation, with coal’s share expected to expand from 42% to 44%. Natural gas share is expected to remain flat at 21%.

Renewables and biomass are expected to expand rapidly and increase share over this period, rising from over 2% to almost 9% in 2030.

21

Recap of the Primary Energy Sources for Power Generation

Source: International Energy Agency

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSTHE THREE “E’S” – EMISSIONS, ENERGY SECURITY, AND ECONOMIC DEVELOPMENT Given that the growth in fossil fuel consumption will be predominantly in developing nations where

emissions controls are less adequate, CO2 emissions are expected to rise at 1.5% per annum through 2030, all of which comes from developing countries.

There is a real and growing risk of supply disruptions to oil and natural gas supplies due to future incremental production coming from politically unstable regions and from concentrated areas.

Spiking energy prices increases a country’s share of GDP spent on energy. In the OECD, spending onoil and gas reached 2.3% of GDP in 2008, approaching levels last seen during the second oil shock of 1979. For emerging economies, the impact was more severe. Spending on oil and gas reached 6.9% of GDP in India and 3.0% of GDP in China.

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Socio-Political Drivers of Alternative Energy Demand Growth

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSWIND– ROBUST GROWTH PROJECTED From 2005 through 2008, wind turbine installations rose at a meteoric clip of 35% per annum.

Notwithstanding the stunted growth in wind turbine installations during 2009, a function of the global economic slowdown, worldwide installations are still expected to rise meaningfully beyond 2010 at pace in excess of 20% per annum.

In 2008, the U.S. had the greatest number of wind installations at 9,500 Mega Watts followed by Europe at 9,200 Mega Watts. Both regions are expected to witness a doubling of this level by 2013.

23

Source: BMT Consult

Historical and Projected Wind Installations (Mega Watts)

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSSOLAR – ROBUST GROWTH PROJECTED AS WELL

Solar installations have similarly increased at a rapid clip. Despite the dip in 2009, which was associated with the global financial crisis, expectations call for resumption of installations at a pace approximating 25% per annum.

24

Source: BMT Consult

Historical and Projected Solar Installations (Giga Watts)

ALTERNATIVE EN

ERGY FU

ND

AMEN

TALSOTHER ALTERNATIVE ENERGY SECTORS

While Wind and Solar get the bulk of attention, there are a number of other sectors within Alternative Energy that have promising growth prospects:

Power Generation Nuclear Geothermal Clean Coal Demand Response Energy Storage

Transportation Solutions Biofuels (Cellulosic Ethanol, Algae) Natural Gas Electric/Battery Technology

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Q & A

• Moderator: Ronald Simmons, Chair Investment Committee

• Panelists: Randy Bauslaugh, Blake, Cassels & Graydon, LLP

• Jay Womack, FIS Group• Farrell Crane, Energy

Opportunities Capital Management

Q & A

Moderator:  Ronald Simmons, Chair Investment Committee

Panellists:   Randy Bauslaugh, Blake Cassels & Graydon, LLP

                   Jay Womack, FIS Group Inc

                    Farrell Crane, Energy Opportunities Capital Management