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					                 Growing Pains
        Consolidation in a Maturing Sector

                            David Jones
                          Chief Executive
                  Allianz Specialised Investments




10 October 2006
Growing Pains
Consolidation in a maturing sector


  Supply and demand in the value chain

  Component shortages and consolidation

  Turbine market hardening

  Project availability

  Capital availability

  Conclusion




                                          1
Supply and Demand in the Value Chain
Component shortages constraining market growth




                         Macro drivers (regulation, economics)




                                        Capital




                                       Projects



                                       Turbines



                                    Components




                                   The supply gap
                                                                 2
Component Shortages and Consolidation
Product mix changes and demand growth are changing the game


               Global share of MW class turbines
 Components
               –   2001 36%

               –   2005 76%

               Challenges of increasing turbine size and demand growth

               –   Component manufacturing machines require replacement

               –   Old factories too small or badly sited

               Component providers split into two tiers

               –   Those able to invest heavily in new facilities and willing to bet on market growth

               –   Those that aren’t

               As a result the component market has changed eg: gearboxes

               –   2001 Winergy and Hansen est. 55%

               –   2006 Winergy and Hansen est. 75%+




                                                                                                        3
Case study: Hansen Transmissions
Significant time lag in meeting demand growth


  Lommel - Purpose built 2,000MW wind gearbox facility

  –   €100m+ investment

  –   Decision taken to build new facility – Nov 2001

  –   Full production – Apr 2005 (3.5 years later)

  Expansion to 4,000MW+ capacity at Lommel under way

  –   Lead times on machines the critical path

  Large barriers to entry for new players

  –   Both financial and technical




                                                         4
Consolidation is happening
The largest three gearbox manufacturers have changed hands in the last 18 months




             Gamesa       Allianz          CapMan       Siemens     Suzlon
             acquired     acquired         acquired     acquired    acquired
             Echesa       Hansen           Metso        Flender     Hansen
                                           (Moventas)   (Winergy)




              2001-3        2004           2005                2006




                                                                                   5
Turbine market hardening
Price increases, harsher terms, delivery dates slipping


                   Significant hardening of contract terms
    Turbines       –   Increase in turbine prices / deposits
                   –   Shift in contractural obligations
                   –   Longer lead times
                   Delivery dates pushed back
                   –   Turbine framework agreements for 2008-9 being negotiated
                   –   “The business is growing at 18% (p.a.). We’ve sold out to the end of 2008”
                       Lorraine Bolsinger, head of GE Ecomagination division

                   Everyone seems to be sold out but….. component issues
                   –   Turbine manufacturers warning component shortages may delay turbine delivery
                       –   “Some projects had to be postponed from the second to the third quarter as the supply
                           of key components, particularly gear systems, rotor blade bearings and hubs, was not
                           carried out in line with contracts” RePower H1 results 2006
                       –   “Although some sub-suppliers have started to expand capacity, the company (Vestas)
                           said that it would take years before the demand for and the supply of sub-components
                           would meet” Enskilda Sept ‘06

                   Shortages will affect some more than others


                                                                                                                   6
Turbine market
Progressive growth


                                   Cumulative announced orders



    MW
    9,000
    8,000
    7,000
    6,000
    5,000
    4,000
    3,000
    2,000
    1,000
        0
            Jan   Feb     Mar      Apr      May    Jun   Jul    Aug      Sep        Oct        Nov        Dec

                   2002     2003         2004     2005   2006




                                                                 Source: ASI, news reports, stock exchange announcements



                                                                                                                       7
Turbine market
Expect delays !


                  12 month rolling turbine order annoucements

        14,000

        12,000

        10,000

         8,000

         6,000

         4,000

         2,000

            0
               03




               04




               05




               06
                3




                4




                5




                6
              02




               03

              03




              04
               04




               05

              05




               06
             -0
             -0




             -0




             -0
            n-




            n-




            n-




            n-
            c-




            p-

            c-




            c-
            p-




            p-

            c-




            p-
           ar
           ar




           ar




           ar
         Ju




         Ju




         Ju




         Ju
         De




         Se

         De




         Se

         De




         Se

         De




         Se
         M




         M




         M




         M
                                                    Source: ASI, news reports, stock exchange announcements

                                                                                                          8
Turbine market
Consolidation through component supply control?


  Most turbine manufactures outsource a large
                                                             Turbine manufacturer
  proportion of their gearbox requirements                                                          Gearbox ownership
                                                             by 2005 market share
  –   Typically long term contracts covering thousands of
      MWs                                                   Vestas                              -
  –   Component suppliers forced to prioritise customers                                        GE Transportation*
      due to shortages of sub components and machines       GE
                                                                                                (captive)

                                                            Enercon                             NA
  Is vertical integration of component suppliers
  emerging as strategic response to shortages?              Gamesa                              Echesa (captive)

                                                            Suzlon                              Hansen (captive)
  Will ownership of component suppliers drive
  consolidation of the turbine market?
                                                            Siemens                             Winergy (captive)

                                                            RePower                             -


                                                            Nordex                              -




                                                            * Announced but small scale production est. <20% of current requirement



                                                                                                                                      9
Project availability
Project scale and turbine suppliers are squeezing smaller developers


                  Project sizes increasing
    Projects
                   –   Especially in USA, Canada, China, Australia and offshore

                   –   Implications for turbine market as GW sized orders and farms appear

                   –   Larger turbine manufacturers focusing on larger projects

                  Developers facing

                   –   Turbine deposits years ahead of project permits

                   –   Turbine prices rendering smaller projects uneconomic

                   –   Turbines with uncertain delivery dates

                   –   Investors who have reached their return floor

                  Developers are being squeezed

                   –   Flexing of muscles by turbine manufacturers – short termism ?




                                                                                             10
Project availability
Consolidation set to continue


  Consolidation seen in the last three years likely to continue       Target        Country          Acquiror

                                                                      Zilkha          USA     Goldman Sachs
  –   Further acquisitions of developers and pipelines by utilities
                                                                      Greenlight      USA                 BP
      and financial buyers
                                                                      SeaWest          USA    AES Corporation
  –   Footprint of oil majors to increase                             CESA            Spain          Acciona
                                                                      EHN             Spain          Acciona
  Larger will focus on larger developers and larger projects          Winkra       Germany            Essent
                                                                      Navitas          USA          Gamesa
  What is Allianz doing?                                              DERSA           Spain       Gas Natural
                                                                      EnXco            USA              EDF
  –   Initially project-by-project organic growth                     DESA            Spain             EDP
                                                                      SIIF          France              EDF
      –   Francofonte (72MW) under construction in Italy

      –   Freyenstein (16MW) operational in Germany

      –   Several others advancing well

  –   Looking at framework deals with developers




                                                                                                                11
Capital availability
Debt and equity financing readily available


                   Plentiful sources of equity and debt capital
     Capital       –   Numerous private equity funds, even hedge funds
                   –   Utilities seeking to buy projects
                   Equity returns
                   –   Unlikely to fall further
                   –   Interest rates rising
                   Debt funding
                   –   Sector seen as ‘minimal risk’
                   –   Increasing use of bond financing
                   But looming issue of turbine and component quality as supplies stretched
                   –   Will turbine and component providers cut corners / use less experienced suppliers?
                   –   Already component failures
                   Will banks demand to know what is inside the nacelle?
                   –   Expect more component due diligence on the largest projects
                       –   A series fault on a GW of plant would bankrupt all but the largest component suppliers
                       –   Components are not always interchangeable or available


                                                                                                                    12
To Summarise
Its getting harder…


  Component manufacturers
     –      More consolidated than turbine manufacturing
     –      Likely to see further vertical consolidation
     –      Turbine manufacturers (component assemblers)
     –      Higher prices short term
     –      Longer delivery times
     –      Timely access to components determining medium term profitability / survival of turbine manufacturers
     –      New entrants medium term
  Projects
     –      Larger projects trending towards the GW level
     –      Impact of larger projects on turbine supply and indirectly viability of smaller onshore developments
     –      Reduced development premiums as turbine costs rise and contract terms fall
  Finance
     –      Equity returns unlikely to fall further
     –      Debt availability / price – will the market tighten?


                                              Deliverability is the key

                                                                                                                    13
Conclusion
Growing pains…


  Wind sector at a transition point

  –   Becoming a mature competitive market

  Segmented market likely to emerge

  –   Large scale global manufacturers and smaller / niche players

  –   Think power plant manufacturers or car manufacturers

  Large scale regional / global owners and smaller / niche players

  –   Think utilities or oil and gas companies

  All part of growing up into a mainstream energy source




  ……. The difficult adolescent years


                                                                     14

				
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