carbon impacts – octobre 2006 carbon impacts what really matters ?

Carbon Impacts – Octobre 2006

Carbon Impacts What Really Matters ?


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TOP 5

in Continental Europe

Number of staff and rankings by stocks’ country of origin (No.1 in France = No. 1 in Europe for French equities)* Greenwich Associates, 2006 , European investors (UK + Continental Europe) - ** Institutional Investor, 2006 - *** Thomson Extel Survey, 2006 & Greenwich Associates, 2006 , European investors

Front-ranking European Research

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35 analysts 50 sales & sales traders 88% of market capitalisation

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Carbon: an SRI issue ?

Responsibility Analysis towards Carbon ManagementCheuvreux Carbon Research provides SRI Investors with a specific Carbon related approach to discriminate the Responsibility of companies towards carbon emissions management and strategy.

Risk Analysis towards Carbon ConstraintsOur analysis aims at measuring the financial impact of the carbon constraints on European companies through the implementation of the Kyoto mechanisms such as the EU-ETS. .

Sustainability ResearchOur Carbon Research enhance our capacity to identify and value European companies, typically small & mid caps that are developing carbon related technologies or that benefit from carbon credits.


Exhaustive Research on Carbon

Carbon Research

- 1 dedicated carbon analyst

- 10 Reports published in 2006

- Carbon Focus: understanding mechanisms and drivers

- Carbon Impacts: a series of 7 reports: evaluating the impact of the carbon constraints 5 regulated sectors + Chemicals + Airlines

- Carbon Flash : Balanced analysis on carbon news flow

Monitoring major events (regulations…)

Companies updates

Carbon Expertise- Monitoring emissions and NAPs

- Evaluating CDMs credits

- Political trends (lobbies, NGOs, Brussels…)

Carbon Impact On Utilities

Carbon Impact On Ciment Sector

Carbon Impact On Pulp & Paper

Carbon Impact On Steel sector

Carbon Impact on Oil & Gaz Sector

Carbon Impact on Chemicals

Carbon Focus

Carbon Impact On Utilities

Carbon Impact On Ciment Sector

Carbon Impact On Pulp & Paper

Carbon Impact On Steel sector

Carbon Impact on Oil & Gaz Sector

Carbon Impact on Chemicals

Carbon Focus


Carbon Market – Recent Events

Recent drop in carbon price raises up

uncertainties

Pilote phase (2005-07) is behind us…

Second phase prices wait a signal from the European

Commission on NAPs submitted by Member States

Decorrelation of prices fwd 06-07and fwd 2008 is expected

0

5

10

15

20

25

30

02/05/2006 22/05/2006 14/06/2006 08/07/2006 29/07/2006 22/08/2006 16/09/2006

Forward 08 Forward 06

Sept, 18th: sharp drop in phase 1 carbon contracts


NAP 1: Over-allocations !

First true-up revealed huge over-allocation

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Pola

nd

Germ

any

Fra

nce

Cze

ch R

epublic

Fin

land

Denm

ark

Lithuania

Neth

erlands

Slo

vakia

Hungary

Esto

nia

Sw

eden

Belg

ium

Latv

ia

Port

ugal

Slo

venia

Italy

Luxem

bourg

Gre

ece

Cypru

s

Malta

Austr

ia

Irela

nd

Spain

UK

Tota

l

Position 2005


Capping with regards to Fundamentals

2005: emissions around 30 Mt below the last 10 year average emissions

Standard deviation : 32 Mt

2005 surplus will not be resorbed

Caps must take into account the impact of variation of fundamentals


Lobbying Pressures

A Common Concern: Impact on electricity prices

Lobbying game: electro-intensive industries vs. electricity producers

Stakeholders’ equilibrium price: EUR 12-18/tCO2


Market Bias: Political Uncertainties

Political announcements create strong uncertainties German and Polish proposals to limit sales of surpluses: ex-

post adjustements About 50% of surpluses are in these two countries

Any political decision could bring a new deal

A bias for carbon markets that causes wait-and-see policies of many actors


NAP2: Nothing is Set

Contrasted prospects French NAP seems far too lax

… whereas U.K. holds emissions tight

A lack of transparency Submission of Spanish and Italian NAP delayed: what

shortage?

What about Central and Eastern Europe (hot air) ?

Modification of the scope (# installations), new entrants…

European Commission: judgement on submitted NAP expected in November


NAP 2 and Kyoto Targets

-144.14

0.86

1.63

3.07

4.56

7.71

9.10

10.78

10.98

12.25

13.16

18.80

22.94

93.01

97.86

16.69

-5.20

-31.79

-26.56

-5.38-12.62

-15.32

-18.71

-30.31

-200.00 -150.00 -100.00 -50.00 0.00 50.00 100.00 150.00

Poland

Hungary

Czech Republic

Lithuania

Estonia

Slovakia

Latvia

France

Sweden

Greece

Slovenia

UK

Luxembourg

Ireland

Portugal

Germany

Finland

Denmark

Belgium

Netherlands

Austria

Italy

Spain

Total

countries: off the Kyoto target

Countries already have met their Kyoto targets


Link between Kyoto and the EU ETS

ETS Covered Sectors

? TOP-DOWN APPROACH

National Kyoto target

Sector-level

Households Transport Agriculture

Activity-level

Electric Power Oil & Gas Cement Paper & Pulp

Company-level

Company A Company B Company C

BOTTOM-UP APPROACH

Steel

Member State National Assigned Allowance (tCO2/year)

Non-covered Industries

Government


The Kyoto Game: Market Actors

Sellers Buyers

-26.3

-32.7

-40.5-62.1

-93.7

-201.0

-209.9-318.8

-26.0

-25.3

-19.5-17.7

-16.1

-14.4

-13.8-12.6

-8.4

-7.8

-3.5

-0.1

-0.1-0.8

-0.9

-350 -300 -250 -200 -150 -100 -50 0

Monaco

Liechtenstein

Luxembourg

BulgariaSlovenia

Croatia

Greece

NorwayNew Zealand

Ireland

Portugal

AustriaFinland

Denmark

NetherlandsFrance

Belgium

Romania

ItalySpain

J apan

Canada

European Union 15


Kyoto: CDM markets

Only 13.3m CER emitted…

… but lots of projects in pipelines 1112 projects submitted: 1.287 b. CER

CER price is based on EUA price (fwd 08)

ETS sectors

CO2 emissions

JI/CDM around 45%

Non-ETS sectors

all other gases

National Kyoto target Allowable emissions= Sector distribution Co2

Allowable quotas


Risk vs. Responsibility Analysis

Our responsibility analysis assesses internal efforts to control ghg emissions Evolution of groups’ carbon factor (tCO2/unit

produced)

But other external parameters make risk analysis results different Country risk (Spain, Italy, U.K.) prevails: cap

stringency


Carbon Impact on Utilities

Carbon: a new market variable for electricity producers

Redefines dispatching decisions: “Clean” dark/spark spreads

Power markets now integrate the "carbon cost" in wholesale prices

Average cost-pass-through in Europe: 0.55x EUA price

Windfall profits largely compensate compliance costs


Electricity: Carbon Impact on Wholesale Prices

Marginal cost of EUA is now included in electricity prices

With market specificitieso Price regulation

o Fuel at the margin


Correlated Carbon and Power Prices

Strong correlation on deregulated markets

U.K.y = 1.5184x + 23.962

R2 = 0.9036

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

10 15 20 25 30

EUA price EUR/tCO2

GB

P/M

Wh

Forw ard price baseload contract Linear (Forw ard price baseload contract)

Germanyy = 0.5498x + 29.851

R2 = 0.6958

303234363840

4244464850

10 15 20 25 30

EUA price EUR/tCO2 E

UR

/MW

h

Forw ard price baseload contract Linear (Forw ard price baseload contract)


Utilities : Unequal Windfall Profits

Unequal carbon impact by player Depends on

the allocated emissions caps, the average carbon intensity of group installations, and the level of price regulation on the markets in

which they operate

Carbon windfall represents 0.5-3.0% of sales for most of the players Top 3: Fortum, RWE, E.On Bottom 3: Union Fenosa, Enel, EDP


Electricity Producers: Positive Financial Impact

Estimated windfall profits in 2005, as a % of EBITDA


Utilities: Responsibillty Analysis


Cement Sector: Outlook Carbon constraint is theoretically a threat

Highest carbon intensity: 750kgCO2/ t cement Generous over-allocation in Phase I: +7.2%

o Significant disparities by country

High exposure to hike in electricity prices Electricity represents 14% of costs Estimated adverse effect: -0.9% of sales Though, local markets allow cost pass-through

Overall neutral effect on margins With surplus sold at EUR12.5 per tCO2 And before rise in cement prices


Cement players: Carbon

Constraint Seven groups analysed through:

Location of production sites Control of electricity consumption Exposure to regions covered by the EU ETS

Top 3: Buzzi Unicem, Lafarge, Holcim Large over-allocations in Central Europe

Bottom 3: Italcementi, Cementos Portland, Ciments Français High exposure to stringent caps


Cement Stocks under the Carbon Constraint


Cement & Climate Change: Responsible Players


Oil &Gas : Refining Industry A Regulatory Paradox…

Low sulphur specifications boost CO2 emissions

… Justifies general over-allocation for phase I (except Spain)

Self-produced electricity: +/- 50% Hedge against cost pass-through of Utilities


Oil &Gas : Company Focus

South: the place not to be Tightest cap constraints (Italy and Spain) More CO2 intensive processes to reach sulphur specifications

Financial exposure: part of business in EU Neste Oil, Erg, Cepsa: 100% of refinery production in EU

Top 3: Neste Oil, Total, Shell

Bottom 3: ERG, Cepsa, Repsol YPF


Oil&Gas: Risk Analysis

Company exposure to stringent emission caps

carbon impacts – octobre 2006 carbon impacts what really matters ?

Documents

carbon carbon research

carbon credits

carbon price

carbon focus

carbon contractschart318

carbon constraintsour

carbon emissions management

carbon related technologies