Micro-Analysis Cuba Energy Sector

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the economy grows the countries tend to impose foreign exchange controls, this will expose foreign companies to an increased exchange risk.

2. Worst Case:

A total collapse of the Cuban political system as the power vacuum left after the Castro brothers hold on power creates a power struggle necessitating a military, or worse a foreign military, intervention. The result of this period of intense political conflict produces a vitriolic anti-American regime, which holds America responsible for the collapse of the Cuban political system. Under these conditions, the Cuban economy stagnates, American companies are forced to vacate the country and demand for American solar panels is essentially wiped out. In addition, American public opinion probably precipitated by some geopolitical event, moves strongly against Cuba and U.S. relations there. Crippling sanctions return, and American companies return to no prospect in the Cuban market.

Strategy: With severe sanctions from the regime in Cuba and intense pressure from US, First Solar will be forced to exit Cuban market.

3. Most-likely Scenario:

The most likely-scenario is that the status-quo will continue in the short-run, but in the long-run the process of normalization will continue and lead to a more economic and geo-political reforms. The US will reduce the trade sanctions and a better relationship between both countries will prosper, Cuba will remain to be a state-owned economy with most projects being owned and operated by the government. The risks that will remain pervasive are approval and construction risk, financing risk, and contractual and operating risk.

Strategy: Energy projects are long-term investments which are built to operate over 20 years and here is significant risk associated with developing energy projects in a communist country such as Cuba but the best case and worst case scenario outlined below describe the key risks in more detail. Ultimately, if Cuba remains an authoritative regime First Solar would participate as the project developer, and solar panel equipment provider. This project would be owned and operated by the Cuban government which reduces the risk of expropriation, approval and construction.

Advantages:

Labor Cost: Since the role of First Solar will be restricted it will not be exposed to the high labor cost in Cuba due to government intervention.

Alignment of Interest: The society & government will still benefit from the availability of an efficient distributed energy system and an advanced proprietary thin-film solar panel technology developed by First Solar. The government will own the project so it will be in its benefit to expedite the approval and permitting process. Also, the construction risk will also be greatly mitigated because First Solar will be operating as the Engineering, Procurement and Construction Management (EPCM) contractor for this project and so we are able to control this risk.

Pricing Flexibility: Company will not be exposed to this risk as the company will be supplying the solar panels and technical expertise for which it will be paid as per the previously agreed contracts.

Less Uncertainty: In this type of authoritative regime, policy uncertainty and adherence to contact could be low. First Solar will need to negotiate a third-party arbitration country.

Low Financial and Operational Risk: Financing risk is the risk of obtaining necessary financing under favorable terms including securing a major lender but this risk is low since we will be providing financing as well. Operational risk is low since the Cuban government will serve as the owner and operator of the project and will handle power off-take.

Risks:

• Government may put capital controls in place.

• Government may default on the contract, or unilaterally cancel the