lookin at quotas from every angle

IIGCC – 12th October 20061

Grégory Schneider-Manoury - 33 1 45 96 79 23 - E-mail : [email protected]ès Blazy - 33 1 45 96 77 61 - E-mail : [email protected]

Marie Luchet - 33 1 45 96 78 75 - E-mail : [email protected] : 9th November 2006

Looking at quotas from every angleA broker research on climate change risk and

opportunity


►EU Allowances on the CO2 market

►EU Allowances in companies balance sheet


EU CO2 Allowances trend from October 2005 to October 2006 €

Source: Bloomberg

Crash on the CO2 market

April 06: drop of 50 %from € 31 to € 13,70

(April 05 level)


EU CO2 Allowances trend from October 2005 to October 2006 €

Source: Bloomberg

Crash on the CO2 market

April 06: drop of 50 %from € 31 to € 13,70

(April 05 level)

Why ?Publication by 6 Member States

of 2005 CO2 emissions well below allowances

OVER ALLOCATION of EUAs


Long or short in EUAs ?

► ALLOCATION / 2005 VERIFIED EMISSIONS … BY COUNTRY

Not enough ?

Spain

United Kingdom

- 5 %

- 15 %

Too many !

France FinlandDenmark Rep. Tchèque

+ 14 %+ 26 %+ 29 %+ 16 %

Etc.

TOTAL : + 67 Mtonnes


Long or short in EUAs ?

► ALLOCATION / 2005 VERIFIED EMISSIONS … BY SECTOR IN FRANCE

14,6%

45,3%

29,0%

16,8%

12,8%11,3%8,7%7,5%

0,7%0%

10%

20%

30%

40%

50%

Cement & lime

Steel

Energy production

Glass

Refineries Ceramic

Combustion plants Paper & paper pulp

Total


CO2 price depending on EUA scarcity

DEMAND

► Extreme climatic conditions lead to high use of energy

►Energy production mix

►Price trends of fossil energies

► Increasing CO2 emissions from companies

► Economic growth: + 2 % per year of CO2 emissions

=> Strong impact of political decisions and regulations on CO2 price

=> 2006/2007 EUA balance still unknown

SUPPLY

►Amount of EUAs assigned by member states to their industries: => Will 2008-2012 NAPs be less generous than phase 1 NAPs ?

►Technological improvements by companies leading to a reduction of CO2 emissions

► Emissions credits resulting from Kyoto project mechanisms (Clean Development Mechanisms & Joint Implementation)


Carbon trading markets

► Spot or Future (80% of the market) contracts Difference between spot & futures price = up to 4 €

10.10.2006EUA spot price = 12.45 €

1.8 Mtonnes traded on Powernext in sept.06

10.10.2006EUA futures price for year 2008 = 16.00 €

Source: Bloomberg


►EU Allowances on the CO2 market

►EU Allowances in companies balance sheet

10 IIGCC – 12th October 2006

CAC40 companies were generously allocated by the government: Main target

of our work►17 of them were granted by Allowances allocation (49% CAC’s Market cap)

− 10 groups met criteria : received allowances & answered the Carbone Disclosure Project 4 survey23 did not benefit of allowances, of which 16 banks & services7 benefit from allowances but were not transparent

Minibase 03/10/2006

PriceMarket cap

06 Allowances needed ?

response CDP4

response available on

CDP siteEDF 44,51 81 105 x x xLAFARGE 102,00 17 950 x x xPEUGEOT SA 43,72 10 257 x x xRENAULT 88,60 25 245 x x xSAINT 57,20 20 058 x x xST MICRO 13,43 12 199 x x xSUEZ 34,76 44 191 x x xTOTAL 50,85 123 305 x x xVEOLIA 47,18 19 243 x x xVINCI 87,20 20 700 x x x + Rodhia 2,00 2 192 yes not in survey

Our universe 9 stocks- STM & Vinci not retained- Rhodia added

STM : 1 site EU-ETS (16 sites globally), for 0.013 M tonnes CO2 allocated for Crolles-France.

Vinci : 2 site EU-ETS , for 0.164 M Tonnes, had over allocation in 2005.


► French allowances more than generous► Allocations exceeded needs by 6% for these 9 stocks

− PSA, Renault more than 40%−Total, Suez excess of 2 to 15%− Lafarge, EDF company whose needs were not met

CAC40 companies were generously allocated by the government: How big was

their allocation?

-

10

20

30

40

50

60

70

Renault PSA (1) Veolia Total

Saint Gobain

Suez Rhodia Lafarge EDF

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

EU-ETS Allowance - M Ton CO2 +excess/-shortage (% allocation)


► Balance sheet impact? If IASB recommends that allowances should be accounted at « fair value »

All groups account for the allowances … but at ZERO value! In intangible assets and counterpart as subsidies Provisions to be made in case of quota shortage at year’s end

1%2%3%4%5%6%

LafargeEDF

Rhodia Veolia Suez Total

Saint Gobain

PSARenault

% intangible /total assets 05

% intangible /total assets (with allowances, at 13€)

% intangible /total assets (with allowances, at 30€)

Earth in the balance sheetAssumptions: Thin balance sheet Impact


Earth in the balance sheetAssumptions: big potential P&L Impact

► Impact on margins if Allowances were bought Impact on Ebit margins if all allowances required were bought at 13€ or 30€ Impact on Pre tax profit impact if companies have to buy all allowances at 13€

0%

3%

6%

9%

12%

15%

PSARenault

TotalSt Gob. Veolia EDF

Lafarge SUEZ RhodiaEbit margin 2005Ebit margin with allowances purchase 13€Ebit margin with allowances purchase 30€

-19%

-16%

-13%

-10%

-7%

-4%

-1%

PSARenault

Total

Saint Gobain

SUEZ Veolia LafargeEDF

Pre tax Profit impact with "cash out" to purchase all allowances


Earth in the balance sheet Assumptions: Fair Value of the over allocationAllowances : do these free things have a price?

at 13€ Cash out

2005 , M€Fair value of over

allocation = ACompensation Executive + Supervisory Directors = B

A / B

1 Veolia 37,70 2,50 15,1 2 Total 57,20 7,28 7,9 3 Suez 10,40 5,98 1,7 4 Saint Gobain 3,90 8,32 0,5 5 PSA 1,31 4,78 0,3 6 Renault 1,64 7,02 0,2

Rhodia balanced 3,10

EDF shortage 2,91

Lafarge shortage 6,67

Total 6 112,15 35,87 3,13


Conclusion

► 1- The CO2 allowance has a financial worth for companies

► 2- The CO2 quota has and will have a clear financial value for investors

It is counterproductive that the biggest CO2 contributors get the highest amount of quotas.

THANK YOU FOR YOUR ATTENTION


► Identification of trends not yet integrated in the stock price The number before the number

The number against the number

► Identification and measurement of financial impact 2 consequences : operational performance or long run

performance

3 impacts: sales, margin, assets

► Dissociation of moral and economic issues Awareness of the moral grounds of decision

Focus on financial impact

What a broker looks for in SRI analysis


The ESN offer in SRI analysis

► An integrated methodology: Financial framing of environmental and social

issues

► 700 European companies covered

► 10 European brokers

► 8 Sustainable Investment analysts


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19 IIGCC – 12th October 2006

Questions / Answers

Agnès [email protected]

Marie [email protected]

Gregory [email protected]

lookin at quotas from every angle

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