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					                                                  Innovest
                                             STRATEGIC VALUE ADVISORS
                                              New York . Toronto . London . Paris . San Francisco




Uncovering Hidden Value Potential -
Electric Power Companies & The
Climate Change Challenge


National Renewable Energy Laboratory, 2006



www.innovestgroup.com                                                                         1
Agenda


I.   Innovest
II. Why Should We Care? Emerging Indicators of Competitive
     Advantage - Key Drivers

III. Implications for Investors
IV. Innovest Rating Model-
V. Findings – The Electric Power Sector
VI. Climate Change – A Key Emerging and Financially-Relevant
     Value Driver

VII. Conclusion- Q&A
                                                             2
Innovest Background


•   Innovest is an international equity research firm focusing
    on non-traditional drivers of investment risk and return

•   Specializes in analyzing companies’ performance on
    intangible values with a focus on their impact on share
    price performance and the bottom line

•   Founded in 1995 and has grown to over 50 professionals
•   International presence with offices in San Francisco, New
    York, London, Paris, Toronto and Melbourne

• Strategic investors include State Street Global Alliance
    and ABP, the largest European pension fund

                                                              3
What We Do


•   Research coverage: reports on 2200 companies
    globally, 60+ sectors: North America, Europe, Asia-
    Pacific, global emerging markets

• Best-in-class rating: from AAA (top) to CCC (Bottom)
    within each industry sector

•   Innovest’s perspective: AAA companies are those which
    supply the goods and services which we demand, with
    the lowest environmental impact relative to their peers
    and in a socially equitable manner

•   Over $1 billion currently invested based on Innovest’s
    research platform (e.g. State Street Global Advisors,
    T.Rowe Price, Crédit Agricole AM (IDeAM) and ABP)
                                                             4
Why Should We Care? Indicators of
competitive advantage are changing…


 An increasing number of academic and business
studies show a positive correlation between
environmental and stock market performance


Correlation exists because environmental
performance is an excellent proxy for superior
management quality


  Management quality is a leading determinate of stock
 market performance


                                                     5
Why Should We Care? Indicators of
competitive advantage are changing…


 Environmental issues represent one of the most
complex challenges facing management


 High level of technical, market and regulatory
uncertainty


Many complex issues, stakeholders and non-
financial measures to address

Success in this high complexity area implies ability
to excel in other business areas, and thereby earn
superior returns
                                                        6
What We Do

   “…The bulk of the value (60%) of any company is
  determined by its long-run or sustainable returns,
  the next 20% by secular or cyclical change
  observed in the coming 12 months; and the
  remainder by longer term growth or other issues.”
              Goldman Sachs, February 24, 2004


    Innovest’s Intangible Value Assessment Model
     is designed to derive information on that 60%




                                                       7
 The “Iceberg” balance sheet


  Financial Capital 30%



                                         Four Key Intangible Value Drivers


  Intangible Capital 60-70%
  Sustainable    Eco-Value            Human Capital             Stakeholder Capital
  Governance     • Quality of         • Recruitment retention   • Regulators &
• Strategy         environmental        strategies                Policymakers
• Capability/      management         • Employee motivation     • Local communities
  Adaptability   • Environmental      • Labor relations         • NGOs
• Traditional      risks &            • Innovation capacity     • Customer
  governance       Eco-efficiency     • Knowledge                 relationships
  practices      • Strategic profit     Development &           • Alliance partners
                   opportunities        Dissemination           • Supply chain
                                      • Health & Safety         • Social benefits of
                                      • Progressive               products &
                                        workplace practices       services      8
The Findings–Analysis of Stock Performance Based
on Environmental Ratings (May 1997 – Nov. 2005)

                    250%
                                                           Difference
                                                           Above Avg EV21 Rating - Electric Power Companies - N. America
                                                           Below Avg EV21 Rating - Electric Power Companies - N. America
                    200%



                    150%
                                                                                                                                                        TOP HALF
     Total Return




                                                                                                                                                                                            SPREAD


                    100%

                                     Top Half Outperforms by 76%

                    50%



                     0%

                                                                                 BOTTOM HALF
                    -50%
                                       Nov1997



                                                             Nov1998



                                                                                  Nov1999



                                                                                                      Nov2000



                                                                                                                          Nov2001



                                                                                                                                              Nov2002



                                                                                                                                                                   Nov2003



                                                                                                                                                                                       Nov2004



                                                                                                                                                                                                           Nov2005
                           May1997



                                                 May1998



                                                                       May1999



                                                                                            May2000



                                                                                                                May2001



                                                                                                                                    May2002



                                                                                                                                                         May2003



                                                                                                                                                                             May2004



                                                                                                                                                                                                 May2005
                                                                                                                                                                                                                     9
Superior Environmental Management –
Benefits


    Reduce regulatory risk and litigation exposure

  Improve operations (reduced energy and materials costs)
    Improve relations with regulators and other stakeholders
    Enhance ability to attract, retain and motivate workforce
    Increase competitive position
    Enhance market access in difficult countries and regions
    Lower cost of capital and insurance


 i.e. Sustainable competitive advantage


                                                                 10
    Partial Client List
    Financial Institutions                 •   Hermes
•     ABN-AMRO Bank                        •   HSBC Asset Management
•     ABP Investments                      •   IBK Capital Corp.
•     Aeltus Investment Management (ING)   •   Insight Investment
•     Baillie Gifford                      •   John A. Levin & Co.
•     Bank Sarasin                         •   Legg Mason Funds Management
•     Bank Julius Bear                     •   Lombard Odier & Cie
•     BNP Paribas                          •   Mellon Capital Management
•     BP Investments Management            •   Mellon Equity
•     Brown Brothers Harriman              •   Morley Fund Management
•     CalPERS                              •   Neuberger Berman
•     Cazenove Fund Management             •   Rockefeller & Co.
•     Collins Stewart (CI) Ltd             •   Schroders Investment Management
•     Contra Costa County Employees’       •   Société Générale AM
      Retirement Association               •   SNS Asset Management
•     Daiwa Securities                     •   Swiss RE Asset Management
•     Dreyfus Investment Advisors          •   State Street Global Advisors
•     Friends, Ivory & Sime                •   Threadneedle Asset Management
•     Frontier Capital Management          •   T. Rowe Price
•     Glenmede Trust                       •   UBS Investment Bank
•     Henderson Global Investors           •   Wellington Management
•     IDeAM (Crédit Agricole AM)           •   World Bank
                                                                         11
 Eco Value 21® Environmental Research

Multi-factor EcoValue’21 algorithms integrate over 60 key data points, including:

              Past                                Present                        Future

          RISKS                               MGT                         STRAT. PROFIT
         FACTORS                             QUALITY                      OPPORTUNITIES


      • Historical Liabilities          • Policy & Strategy               • Ability to profit from
                                        • Governance Capability           environmentally driven
      • Operating Risks (Toxic
                                                                          industry and market
      Emissions, Haz. Waste             • Environmental Mgt               trends
      Disposal, Waste Disch.)
      • Product Risk Liabilities
                                    +   Systems                       +   • Sustainability of
                                        • Env. Auditing, Accounting       earnings
      • Market & Regulatory Risks       and reporting
                                                                          • Eco-compatibility of
      • Health and Safety               • Value Chain Mgt                 product portfolio and
                                                                          R&D initiatives
      •Climate Change                   • Stakeholder Capital

      • Social “License to Op.”


                                                   =
                                        EcoValue’21                                                12
Intangible Value Assessment
Social Research

                          Sustainable
                          Governance                                         Emerging Markets
                      Strategic Scanning Capability                          Economic Development
                        Agility/Adaptability                                     Human Rights
                      Performance indicators/                                 Oppressive Regimes
                       monitoring/reporting
                    International “best practice”




                                                         IVA           ™



                                                                                                    Human Capital
            Stakeholder
                                                                                            Recruitment/retention strategies
               Capital                                                                           Employee Motivation
            Labour relations                                                                     Innovation Capacity
      Regulators and Policymakers                                                            Knowledge Development &
      Local communities & NGOs                                                                      Dissemination
        Customer relationships                                                                     Health & Safety
                                                        Products &
             Supply Chain                                                                       Progressive workplace
                                                         Services
         Partnerships/alliances                                                                        practices
                                                      Intellectual Capital
                                                        Product Safety


                                                                                                                               13
Innovest Rating Model



  Analyst assesses company
  against 100+ factors by                                 Model computes all scores          A rating from AAA – CCC
  assigning a score of 0 – 10                             to generate a normalized           is assigned to company
  (10 = best in class)                                    figure for the company             based on total




 Example: Pharmaceutical Sector
                                                                Rat ing M at rix
                                                              Score      Rat ing      Rank
            Novo Nordisk                                       1412        AAA          1
       Brist ol-M yers Squibb                                  1168         AA          2
              Pf izer Inc.                                     982            A         8
        Abbot t Laborat ories                                  748         BBB         12
     Wat son Pharmaceut icals Inc                               514          BB        15
         Forest Laborat ories                                   100        CCC         18

                                                                                                                14
                      Note: Figures in table above are indicative and not actual.
Portfolio Construction: Integrating the Innovest Signal
                          Standard & Poors 500
                                Universe

                            Financial Screens
                  • Valuation measures: P/E, Price/Free Cash Flow
               • Momentum Factors: Earnings growth & consistency
                            • Historical Returns: ROE etc




                                 Sector Views

                             (   150 Companies)

                         Intangible Value Overlay
                                     • EcoValue
                                  • Human Capital                   Innovest
                             • Corporate Governance
                               • Stakeholder Capital


                            Portfolio Risk Control/
                                 Optimization

                    Sustainability-Enhanced Portfolio
                                                                         15
                             (60-80 Companies)
Portfolio Construction: Integrating the Innovest Signal

     The Risk/Return Continuum


                                                       Long/Short Hedge Funds, eg.
      HIGH                                                     Green Cay

                                               Private Equity Funds, e.g. Carbon,
                                                     Renewables, Forestry

                                     The me Funds, e.g. T. Rowe Price “Clean
                                                 Future Fund”
   Return
                                                               Credit
                               Active Plus Equities, e.g. ABP, IDeAM
                                          Lyonnais/ABF
                                     (Crédit Agricole AM)

                       Enhanced Index Equities, e.g. SSgA, ING
                                   Investments,

             Enhanced Fixed Income

                                                                          HIGH
                                 Risk
                                                                                     16
Across a Number of Investment
Styles. . .
                      PRELIMINARY RESULTS                                                                                Innovest Strategic Value Advisors, Inc.
                      Real Time Simulation of Innovest Ratings
                      Applied to Actual Portfolios of a U.S. Pension Fund
                      For the Year 2002
             2.00
                      Three Simulations per Portfolio
                      1) at 50 basis point tracking error
                      2) at 100 basis point tracking error
                      3) at 200 basis point tracking error
             1.50     where the benchmark is the actual portfolio and the
                      test portfolios are set to maximize the Innovest rating
                      subject to the tracking error constraint (tilt)


             1.00




             0.50




             0.00




             -0.50
                      US Large Cap        US Large Cap        Int'l Large Cap   US Mid/Small Cap   US "Diversity"   US Large Cap                           Innovest/ING
                                                                                                                                         Average
                         Growth              Value                 (EAFE)             Core             Index            Core                                  Aeltus
 1Q - 4Q Tilt = 50        -0.04                0.23                0.08               0.51             -0.01            0.45               0.20
 1Q - 4Q Tilt = 100        0.15                0.48                0.39               0.92             -0.04            0.65               0.43
 1Q - 4Q Tilt = 200        0.76                1.07                0.47               1.58             -0.40            1.45               0.82                1.30




                                                                                                                                                                      17
The Green Planet Fund (IDEAM)




                                18
Focus: US Electric Power Sector and The Climate
              Change Challenge




                                                  19
 Key Drivers

• Tightening global, regional, and domestic regulatory pressures

• Accounting-based numbers are telling less and less of the story

• Tougher requirements for disclosure of “non-financial” risks for both
   companies and institutional investors (e.g. Sarbanes-Oxley, SEC)

• Increasing market pressures -e.g. shareholder activism, institutional
   investors’ awareness on hidden environmental liabilities, public
   scrutiny

• Changing consumer demographics: Greater sensitivity to
   social/environmental issues in tandem with greater availability of
   information on corporate performance

• Broadening interpretation of fiduciary responsibility to include social,
                                                                        20
   environmental and governance issues
   Electricity Industry - Key Drivers

                          Growing pressures to
                          incorporate negative     Limited ability
                            externalities into     of companies
                           market prices from      to recover
                                                   operating and
                               regulators,         compliance
                            shareholders and       costs through
                               customers           regulated
                                                   rates
Evolving industry model
                                                       The burden of
Restructuring towards        Increasing                environmental
more competition             Pressures                  expenditures
                                                        continues to
Some states move                                          shift from
beyond federal rules                                    customers to
                                                          investors
                                                    Need to
                            Need to improve       differentiate
                             efficiency rates,   their products
                            retain customers      (commodity)
                                and attract       and diversify
                                 investors          revenue
                                                    streams21
Downside Issues – Risk Metrics


          • Air Emissions Regulations: SO2, NOX, Hg and
             increasingly CO2

          • Other Operating Risks associated with coal
     $$      mining, water and waste management

          • Resource Usage & Efficiency

          • Site Remediation Liabilities

          • Nuclear Management (long-term waste disposal,
             pot. radiation releases, decommissioning, public
             acceptance and security concerns)

          • Other Sustainability Risk/Climate Change
                                                            22
Climate Change- Physical Impacts




    Projected changes in climates worldwide will affect the
   frequency and severity of extreme natural events with the
   potential of causing physical damage to power assets




   Unpredictable weather patterns will impact the availability of
  water for power plant cooling and cause unpredictable
  variabilities in power consumption




                                                                23
Climate Change- Financial Impacts



    Investors have been filing shareholder resolutions
   demanding disclosure of the climate change risks and
   opportunities with 20-30 percent of shareholders support


   The potential influence of institutional investors over corporate
  boards and management is substantial controlling 60 percent of
  the shares in the 1,000 largest US companies


   Signatories to the 2006 CDP, which has combined assets under
  management of $31 trillion, have demanded the chairmen of the
  500 largest quoted companies in the world to mandate corporate
  disclosure of the risks posed by climate change
                                                                24
Potential Carbon Caps- The Electric Power
Industry




•   Legislation to cap CO2 emissions is inevitable

• Question of “when and what form”, rather than “if”?

•   What will be the impact on the Utility sector?

•   Debate has moved from policy to technology - Global
    focus is on technology solutions


                                                     25
 Exposure to Carbon Regulations
 Some States Are Moving Beyond Federal Standards

                        Seattle,  WA: Long-term goal of zero
                         net GHG emissions from Seattle City                                       NY: 3 pollutant
                        Light, which has purchased reductions                                      bill passed, GHG
    OR: CO2                    from OR Climate Trust                                                   task force
 standard for new
                                                                                                       established
  power plants -                                                WI   developing GHG registry
 17% below most
  efficient natural
     gas plant;
reductions can be
 purchased from                                                                                 MA:  Law requiring 10%
 Oregon Climate                                                                                 cuts in CO2 emissions
Trust or generated                                                                               from existing power
  from approved                                                                                  plants; sources may
       projects                                                                                 purchase external CO2
                                                                                                        offsets
     Portland,
     OR: 20%                                                                                     NJ:    Statewide
    below 1988                                                                                     GHG emissions
        CO2                                                                                      reduction target of
   emissions by                                                                                   3.5% below 1990
       2010                                                                                        levels by 2005;
                                                                                                      voluntary
                                                                                                generation of GHG
              CA:   GHG climate                                                                credits and banking
              action registry being                                                             in NJ credit registry
                   developed


                         TX   developing GHG registry                                                           26
Downside Issues – Potential Carbon Caps

 • Electric power plants account for 40 percent of U.S. CO2
   emissions

 • The industry is likely to become a prime target under
   future GHG emissions regulations

 • Current, proposed or impending CO2 caps will require
   substantial investments -50% of the 1000 US coal plants
   are older than 30 years and will be replaced in next 20 yrs

 • Even more so in a deregulated marketplace, in which cost
   recovery is uncertain

 • Delayed climate change response may result in higher cost
   response actions including impairment of generating
   assets or early retirement
                                                                 27
Carbon Caps- Implications for Investors


• Major C02 emitters may face higher debt charges
    from air quality conscious lenders

•   Insurance premiums may be imposed on companies
    unprepared to take carbon risk management steps

•   Credit risk ratings may become impaired due to
    exposure to weather changes and future
    regulations
•   Ability to negotiate rates with regulators may be
    impaired
•   Access to capital markets may be limited as
    institutional investors increasingly consider
    carbon profiles as part of their fiduciary obligation 28
Carbon Caps- Innovest Analytical Approach

  Financial impacts are highly differentiated across
  companies, creating potential winners and losers:

   • Prevailing power market dynamics and competitive environment in
     operating states


   • Pace of carbon regulations in operating states

   • Ownership of generating assets and geographic diversification

   • Fuel mix of generating assets

                                                                 29
Carbon Caps- Innovest Analytical Approach

   Financial impacts are highly differentiated across
   companies, creating potential winners and losers:

   • Flexibility to diversify the existing generation portfolio away from
     carbon- intense fuels

   • Ability of passing on costs to consumers, and access to less-
     carbon-intensive technologies

   • Strength of the corporate carbon governance, management
     systems and mitigation strategies

   • Positioning to pursue and profit from emerging business
     opportunities in new less carbon-intense technologies
                                                                       30
Leading Carbon Management Practices

 Develop GHG hedging strategy as critical component of risk
  management to anticipate mandatory GHG emission caps

 Set quantitative GHG reductions targets and monitoring

 Follow third party GHG inventory and reporting protocols
 Monetize external impact of fossil fuel generation
 Incorporate risks in asset and investment planning decisions
  (better capital allocation)
 Engage in carbonless business or products

 Allocate formal management and board responsibility

 Conduct sensitivity analysis and emissions trading simulations


                                                               31
Industry Carbon Mitigation Practices

  Reduce GHG emissions through internal energy efficiency

  Avoid GHG emissions by increasing operation of low carbon
   emitting generation

  Offset GHG emissions through emission trading, i.e., offset
 purchases

  Switch towards less CO2-intensive fuel

 Engage in renewable power

  Participate in efforts to sequester carbon

  Pursue “clean” coal technologies


                                                             32
Benefits of Investments in Green Power
and Distributed Power Generation
  Allow companies to gain expertise and strategic
  positioning in a niche market
     Lower exposure to fluctuating fossil fuel prices

     Protect companies from grid disruptions (on-site projects)

  Reduce operating costs due to avoided potential
  carbon related charges

   Align with potential national security energy goals to
  reduce fossil fuel dependency
  Create additional assets from tradable certificates
  generated during project
  Enhance access to capital- About 66% of total investment in
  energy generation were in clean technology (Cleantech Venture)
  Target   of fast-growing clean technology funds
                                                                   33
Carbon Is A New Asset Class

The EU’s Emissions Trading Scheme started in Jan 2005-Price of
CO2 is €26.5 per ton (March 2006) from €7 in April 2004
The value of the EU carbon emissions trading market is about
€58.3 billion per year (US$ 73.4 bn) based on March 2006 prices
Further standardization is expected to increase liquidity
Price drivers include policy events, fuel/other commodity prices,
CDM/JI supply, and weather
Japan, Canada and New Zealand as well as some US states have
considered similar trading schemes
The US Chicago Climate Exchange provides for a voluntary spot
market platform.
Financial institutions increasingly engage in carbon trading-
Bloomberg expands coverage
                                                                  34
Benefits of Carbon Management Leadership-
CONCLUSION

 Risk         Identifies potential hidden risk and profit
 Control      opportunity factors


 Strategic    Source of differentiation and competitive
 Pos.         advantage


 Reputation   Enhances reputation with internal (employees)
              and external stakeholders (regulators, suppliers,
              consumers)


              Better access to capital markets as a growing
 Funding      number investors consider companies’ individual
              carbon risk exposure and management
              capabilities as part of their fiduciary obligation

                                                                   35
For Further information



      Carla Tabossi
      Senior Research Analyst
      Innovest Strategic Value Advisors


      675 Third Avenue, Suite 400
      New York, NY 10017
      Phone: 212-421-2000 x211
      Fax: 212-421-9663
      ctabossi@innovestgroup.com



                                www.innovestgroup.com


                                                        36

				
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