Waratah Capital Ltd.

September 17, 2015 21:00 ET

Transeastern Power Trust Desperate for Our Cash-Vote "No" Now

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Sept. 17, 2015) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF U.S. SECURITIES LAWS

Waratah Capital Ltd. wishes to advise all Mediterranean Resources Ltd. ("Mediterranean" or "MNR") shareholders that it has conducted due diligence on the proposed merger (the "Proposed Merger") with Transeastern Power Trust ("Transeastern"), and the results are disturbing. Shareholders have not been supplied with all relevant information in MNR's "Information Circular", and are therefore not in a fully informed state to evaluate and vote on the Proposed Merger. The Fairness Opinion stops short of addressing the concerns shareholders should have about such a merger.

Waratah Capital Ltd. holds a significant interest in Mediterranean. The lack of information provided by Mediterranean to its shareholders caused us significant concern and prompted us to conduct our own due diligence into the Proposed Merger. As a result, we engaged Whitelaw Twining Law Corporation and Williams & Partners LLP to assist in assessing the details of the Proposed Merger and its potential impact to Mediterranean's shareholders.

From the preliminary investigations, it was apparent that a significant amount of additional information is required in order to properly consider the merits of the Proposed Merger. This resulted in our lawyers writing a letter to Mediterranean and its Board of Directors requesting further information and documents.

We appreciate that the letter was delivered before the information circular was distributed; however, many of those concerns are not addressed in the information circular. Further, and of greater concern, is that our lawyers have received absolutely no substantive response from Mediterranean or its lawyers indicating a willingness to provide the requested information. The concerns are set out in our lawyers' letter are reproduced in summary form:

  1. Several large European multi-national corporations in energy generation and distribution, such as CEZ AS (Czech Republic), Enel SpA (Italy), GDF Suez (France), and Iberdrola (Spain) have put their investment plans in Romania on hold or have outright left projects in Romania, which is, in our view, an indicator of increased risk in Transeastern's investment in renewable energy in the Romanian market.
  2. There is a significant risk on profitability and distribution to unit holders given the Romanian government's announcement that one-third of green certificates would be withheld until March 2017 to curtail solar power demand.
  3. Transeastern's acquisition of 5 power plants within a time span of 14 months (between May 2014 and July 2015) may suggest significant integration risks and cash flow demands as these projects are either brought on-line or rationalized.
  4. As per its financial statements for the year ended December 31, 2014, Transeastern received $19,675,593 CAD from financing activities, and reported a net loss before tax of $3.1 million CAD. Transeastern has not reported any net income or record of profitability to date or a realizable return on the initial investment.
  5. Further to Item (4) above, there is insufficient information with respect to Transeastern's anticipated use of the cash that it will receive from Mediterranean.
  6. Transeastern entered into Milestone Unit Agreements with various individuals offering significant Transeastern trust units if distributions from Transeastern are maintained at a set target. This creates a risk of dilution to the other investors in Transeastern.
  7. Transeastern also entered into an Administrative Services Agreement with Transeastern Power Administrator Inc., which is in effect, owned by related-companies. This creates some concern over the viability of the trust structure issuing tax-free distributions to its unit holders.

Our lawyers requested a number of documents to assist us in our due diligence; however, the information circular does not contain many of the requested documents. Consequently, the information circular still leaves many questions unanswered.

In addition to the above list, as at or around May 29, 2015, Transeastern's capitalization consisted of 11,970,341 outstanding trust units and $11,763,000 of 7.5% convertible unsecured debentures. According to the Fairness Opinion authored by Stephen W. Semeniuk, he calculates the total number of trust units outstanding, on a fully diluted basis, will amount to approximately 42,016,744 with the completion of the Transaction. Again, there is insufficient information about how future distributions will be maintained and where the cash will be sourced to fund these increased distributions taking into account the future possible increase in trust units outstanding.

With regard to the Fairness Opinion, we are concerned that Mr. Semeniuk's opinion fails to adequately address all matters one would expect in a typical valuation, which would alleviate concerns of any detrimental impact to Mediterranean shareholders. In this respect, we have the further concerns as follows:

  1. Mr. Semeniuk indicates that Transeastern's stock is essentially illiquid, but for the various brokered deals. Therefore, there is little evidence to show that the Proposed Merger is value accretive, when compared with a straight dividend of cash from Mediterranean to its shareholders.
  2. Mr. Semeniuk does not consider other alternatives on a risk-adjusted basis. Interestingly, he mentions that the Proposed Merger refers to Mediterranean's desire to redeploy into "new business opportunity", but fails to identify whether this "new business opportunity" is accretive.

Mr. Semeniuk's mandate in preparing the Fairness Opinion is limited to assessing whether the consideration is "fair". In our view, a proper assessment of the Proposed Merger requires further due diligence on:

  1. Transeastern's ability to meet its future distributions;
  2. Transeastern's ability to finance acquisitions;
  3. possible trust dilutions;
  4. the fair market value of Transeastern's trust units; and
  5. Transeastern's business projections and business plans

For this purpose, our lawyers prepared a second letter requesting the following:

  1. Transeastern's business proposal, marketing plans, projections, forecasts, and financial analysis submitted to Mediterranean management in regards to the Transaction;
  2. all consolidated financial projections for Transeastern detailing operational cash flow for the power plants (detailing power prices, green certificates, CAPEX, operational costs etc), distributions to the trust owners and how these distributions will be funded, distribution ratios, and specific modeled acquisitions.
  3. all internal marketing plans, business proposals, projections and financial analysis completed or assembled with regards to Sprott Asset Management's investment of approximately $18 million in March of 2015;
  4. Renovatio Group's proposal, marketing plans, projections, forecasts, and financial analysis of the 2 solar power plants sold to Transeastern. This information should include, but not be limited to, cash flow history of the power plants, performance, past technical and mechanical issues, construction plans, etc.
  5. financial performance reports of each power plant owned by Transeastern since the date in commission;
  6. all power-purchase agreements currently in place for all 5 power plants or currently in negotiation, including, but not limited to, details in regards of quantity of power to be sold, number of years the contracts are for, launch/effective date of the agreements, and Transeastern's expectation of the likelihood/probability of success in negotiation of these contracts;
  7. financial analysis / modeling showing the exact usage of the $4M of Mediterranean cash Transeastern will receive on completion of the Transaction;
  8. all tax-related memos / rulings / documentation to support the tax structures that have been set-up to support the distribution strategy;
  9. Transeastern's original forecasts and business plan as at the initial public offering date;
  10. copies of all material communications with Romanian officials regarding power purchase agreements, green-certificates and the like;
  11. a list of all related party transactions that have taken place at Transeastern;
  12. details and background of all advisors used by Mediterranean to support the management's team assessment of the deal terms of the Transaction, assuming they are not experts in renewal energy in Eastern Europe;
  13. all country-specific research on purchase price agreement pricing in Romania and anticipated trends;
  14. all information received from bankers / corporate advisors in contemplation of this Transaction or prior transactions as deemed applicable; and
  15. all strategic presentations and analysis performed by Mediterranean management to support the Transaction and the significant change in strategic direction for Mediterranean.

As a result of the foregoing, it is abundantly clear to us that the shareholders of Mediterranean do not have a complete picture on the Proposed Merger and that further disclosure is required to ensure that our interests are protected. As Waratah has a significant interest in Mediterranean, we are more than willing to perform the necessary due diligence, but simply require more information and documents.

We expect that Mediterranean's Board of Directors are alive to all of these issues, since the Proposed Merger represents a significant shift in the strategic direction of Mediterranean. However, Mediterranean's inadequate disclosure to its shareholders, the limitations in the Fairness Opinion and, in particular, the lack of response to our lawyers' letters, collectively, cause us some reservation as to whether the Board of Directors is faithfully acting in the best interests of the shareholders.

Unless Mediterranean is able to provide a meaningful response in the immediate future, a thorough and detailed assessment of the Proposed Merger will not be available for the shareholders to consider. Thus, we believe that the upcoming meeting scheduled for September 25, 2015, should be adjourned until Mediterranean responds to our requests. Alternatively, if it chooses not to adjourn the meeting, then we believe that all shareholders should reject the Proposed Merger for the reasons set out above.

In addition, Transeastern's Chairman Mr Ravi Sood has recently made some conflicting statements, which have caused us great concern. In an interview on March 18 2015, (http://www.midasletter.com/2015/03/transeastern-power-trust-chairman-ravi-sood-and-ceo-colter-eadie- on-income-stream-from-hydro-elcetric-plants/), he said, "We're profitable. So we're able to fund all of our operations. All of our individual assets generate free cash flow, and we distribute a large percentage of that to our unit-holders, so it's very important for us to watch every aspect of that."

In fact, the company has not reported any net income or record of profitability to date or a realizable return on the initial investment.

In the same interview, Mr Sood said, "The first thing to understand is, we're not a developer of power assets or projects; we are an owner and operator of mature assets. So we don't want development, construction risk, we don't want to bet on what our ultimate production will be from that asset. We're making these acquisitions on the basis of trailing cash flow, and doing it on an accretive basis."

The company's web site, however, declares, "Transeastern Power Trust is an independent power producer that develops, builds, owns, and operates facilities that produce electricity from renewable energy sources. The Trust seeks to provide investors with long-term, stable income through the ownership and operation of a range of assets diversified by energy source, location, and scale."

Transeastern chooses to use EBITDA to forecast its earnings in 2016. EBITDA is arguable the most misleading way to represent earnings, and always overstates it, sometimes considerably. This is unacceptable

In light of the above conflicting statements, and the company's use of EBITDA in its forecast for 2016, we find Transeastern's credibility compromised, and for Waratah that creates more concerns about the pending merger. This merger should be halted while a proper due diligence is conducted. Waratah has already spent about $50k on this process so far, and is happy to spend more to complete the process, in order to protect ourselves and all other MNR shareholders. Being cashed up, and with no current projects, MNR is a target for opportune individuals and companies in a less favourable cash position. There is no burning urgency to merge with Transeastern. In Waratah's opinion, the Board of MNR should be changed, and the cash preserved, until we can find a more suitably qualified project which could build value for shareholders to the point where the value of their shares is at least equal to their initial investment.

If you have already voted by proxy in favour, write to the company and rescind it and vote "No"; if you have not voted please do so now and vote "No". Every shareholder should vote "No" now, otherwise this merger may go ahead.

For and on behalf of Waratah Capital Ltd.

Nicholas C. Taylor, Director

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