Carbon Impacts What Really Matters ?

Expert in European Equities New York Zurich Milan Madrid Paris Amsterdam Frankfurt Stockholm London Research headcount Cheuvreux CLSA Calyon Securities San Francisco Taipei Manila Jakarta Singapore Kuala Lumpur Mumbai Bangkok Hong Kong Beijing Shanghai Seoul Tokyo Shenzhen 100 110 11

Front-ranking European Research 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 N°1 France ** 35 analysts 50 sales & sales traders 88% of market capitalisation N°1 Italy * 7 analysts 12 sales & sales traders 94% of market capitalisation N°3 Netherlands * 8 analysts 10 sales & sales traders 85% of market capitalisation N°3 Switzerland * 7 analysts 8 sales & sales traders 95% of market capitalisation N°1 Spain * 8 analysts 9 sales & sales traders 99% of market capitalisation N°3 Germany * 14 analysts 15 sales & sales traders 82% of market capitalisation N°4 Nordic countries * * * 12 analysts 12 sales & sales traders 75% of market capitalisation

35 analysts

50 sales & sales traders

88% of market capitalisation

7 analysts

12 sales & sales traders

94% of market capitalisation

8 analysts

10 sales & sales traders

85% of market capitalisation

7 analysts

8 sales & sales traders

95% of market capitalisation

8 analysts

9 sales & sales traders

99% of market capitalisation

14 analysts

15 sales & sales traders

82% of market capitalisation

12 analysts

12 sales & sales traders

75% of market capitalisation

Carbon: an SRI issue ?  Responsibility Analysis towards Carbon Management Cheuvreux 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 Constraints Our 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 Research Our 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 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 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 06-07 and fwd 2008 is expected Sept, 18 th : sharp drop in phase 1 carbon contracts

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

NAP 1: Over-allocations ! First true-up revealed huge over-allocation

First true-up revealed huge over-allocation

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

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

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

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

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

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 (tCO 2 /year) Non-covered Industries Government

The Kyoto Game: Market Actors Sellers Buyers

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 Co 2 Allowable quotas

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)

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

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

 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 specificities Price regulation Fuel at the margin

Marginal cost of EUA is now included in electricity prices

With market specificities

Price regulation

Fuel at the margin

Correlated Carbon and Power Prices Strong correlation on deregulated markets

Strong correlation on deregulated markets

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

 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% 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

 Carbon constraint is theoretically a threat

Highest carbon intensity: 750kgCO2/ t cement

Generous over-allocation in Phase I: +7.2%

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

 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

 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

 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