1www.innovestgroup.com

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

National Renewable Energy Laboratory, 2006

InnovestSTRATEGIC VALUE ADVISORS

New York . Toronto . London . Paris . San Francisco

2

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

3

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

4

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)

5

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

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

6

Environmental issues represent one of the most complex challenges facing management

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

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

High level of technical, market and regulatory uncertainty

Success in this high complexity area implies ability to excel in other business areas, and thereby earn superior returns

7

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%

8

Four Key Intangible Value Drivers

Financial Capital 30%

Sustainable Governance

• Strategy• Capability/

Adaptability• Traditional

governance practices

Stakeholder Capital• Regulators &

Policymakers• Local communities• NGOs• Customer

relationships• Alliance partners• Supply chain• Social benefits of

products & services

Human Capital• Recruitment retention

strategies• Employee motivation• Labor relations• Innovation capacity• Knowledge

Development & Dissemination

• Health & Safety• Progressive

workplace practices

Eco-Value• Quality of

environmental management

• Environmental risks & Eco-efficiency

• Strategic profit opportunities

The “Iceberg” balance sheet

Intangible Capital 60-70%

9

The Findings–Analysis of Stock Performance Based on Environmental Ratings (May 1997 – Nov. 2005)

TOP HALF

BOTTOM HALF

SPREAD

Top Half Outperforms by 76%

-50%

0%

50%

100%

150%

200%

250%

Ma

y19

97

No

v19

97

Ma

y19

98

No

v19

98

Ma

y19

99

No

v19

99

Ma

y20

00

No

v20

00

Ma

y20

01

No

v20

01

Ma

y20

02

No

v20

02

Ma

y20

03

No

v20

03

Ma

y20

04

No

v20

04

Ma

y20

05

No

v20

05

To

tal

Re

turn

DifferenceAbove Avg EV21 Rating - Electric Power Companies - N. AmericaBelow Avg EV21 Rating - Electric Power Companies - N. America

10

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

11

• ABN-AMRO Bank• ABP Investments• Aeltus Investment Management

(ING)• Baillie Gifford• Bank Sarasin• Bank Julius Bear• BNP Paribas• BP Investments Management• Brown Brothers Harriman• CalPERS• Cazenove Fund Management• Collins Stewart (CI) Ltd• Contra Costa County Employees’

Retirement Association • Daiwa Securities• Dreyfus Investment Advisors• Friends, Ivory & Sime• Frontier Capital Management• Glenmede Trust• Henderson Global Investors• IDeAM (Crédit Agricole AM)

• Hermes • HSBC Asset Management• IBK Capital Corp.• Insight Investment• John A. Levin & Co.• Legg Mason Funds

Management• Lombard Odier & Cie• Mellon Capital Management• Mellon Equity• Morley Fund Management• Neuberger Berman• Rockefeller & Co.• Schroders Investment

Management• Société Générale AM• SNS Asset Management• Swiss RE Asset Management• State Street Global Advisors• Threadneedle Asset

Management• T. Rowe Price• UBS Investment Bank• Wellington Management• World Bank

Partial Client List

Financial Institutions

12

STRAT. PROFIT OPPORTUNITIES

+

MGT QUALITY

+

Past Present Past Present Future Future

RISKS FACTORS

• Historical Liabilities

• Operating Risks (Toxic Emissions, Haz. Waste Disposal, Waste Disch.)

• Product Risk Liabilities

• Market & Regulatory Risks

• Health and Safety

•Climate Change

• Social “License to Op.”

Multi-factor EcoValue’EcoValue’2121 algorithms integrate over 60 key data points, including:

• Policy & Strategy

• Governance Capability

• Environmental Mgt Systems

• Env. Auditing, Accounting and reporting

• Value Chain Mgt

• Stakeholder Capital

• Ability to profit from environmentally driven industry and market trends

• Sustainability of earnings

• Eco-compatibility of product portfolio and R&D initiatives

EcoValue’21=

Eco Value 21® Environmental Research

13

Products &Services

Intellectual CapitalProduct Safety

Stakeholder Capital

Labour relationsRegulators and PolicymakersLocal communities & NGOs

Customer relationshipsSupply Chain

Partnerships/alliances

Human CapitalRecruitment/retention strategies

Employee MotivationInnovation Capacity

Knowledge Development &Dissemination

Health & SafetyProgressive workplace

practices

Intangible Value AssessmentSocial Research

IVA™

Sustainable Governance

Strategic Scanning CapabilityAgility/Adaptability

Performance indicators/monitoring/reporting

International “best practice”

Emerging MarketsEconomic Development

Human RightsOppressive Regimes

14

Innovest Rating Model

A rating from AAA – CCC is assigned to company based on total

Analyst assesses company against 100+ factors by assigning a score of 0 – 10(10 = best in class)

Model computes all scores to generate a normalized figure for the company

Score Rating RankNovo Nordisk 1412 AAA 1

Bristol-Myers Squibb 1168 AA 2Pfizer Inc. 982 A 8

Abbott Laboratories 748 BBB 12Watson Pharmaceuticals Inc 514 BB 15

Forest Laboratories 100 CCC 18

Rating Matrix

Example: Pharmaceutical Sector

Note: Figures in table above are indicative and not actual.

15

Standard & Poors 500 Universe

Financial Screens• Valuation measures: P/E, Price/Free Cash Flow

• Momentum Factors: Earnings growth & consistency• Historical Returns: ROE etc

Intangible Value Overlay• EcoValue

• Human Capital• Corporate Governance

• Stakeholder Capital

Sustainability-Enhanced Portfolio

Innovest

Portfolio Construction: Integrating the Innovest Signal

( 150 Companies)

Sector Views

Portfolio Risk Control/ Optimization

(60-80 Companies)

16

Enhanced Fixed Income

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

Active Plus Equities, e.g. ABP, Credit Lyonnais/ABF

Return

Risk

The Risk/Return Continuum

HIGH

HIGH

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

Theme Funds, e.g. T. Rowe Price “Clean Future Fund”

Long/Short Hedge Funds, eg. Green Cay

Enhanced Fixed Income

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

Active Plus Equities, e.g. ABP, IDeAM (Crédit Agricole AM)

Return

Risk

The Risk/Return Continuum

HIGH

HIGH

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

Theme Funds, e.g. T. Rowe Price “Clean Future Fund”

Long/Short Hedge Funds, eg. Green Cay

Portfolio Construction: Integrating the Innovest Signal

17

Across a Number of Investment Styles. . .

-0.50

0.00

0.50

1.00

1.50

2.00

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

US Large Cap Growth

US Large Cap Value

Int'l Large Cap (EAFE)

US Mid/Small Cap Core

US "Diversity" Index

US Large Cap Core

AverageInnovest/ING

Aeltus

PRELIMINARY RESULTSReal Time Simulation of Innovest RatingsApplied to Actual Portfolios of a U.S. Pension FundFor the Year 2002Three Simulations per Portfolio1) at 50 basis point tracking error2) at 100 basis point tracking error3) at 200 basis point tracking errorwhere the benchmark is the actual portfolio and thetest portfolios are set to maximize the Innovest ratingsubject to the tracking error constraint (tilt)

Innovest Strategic Value Advisors, Inc.

1.30

18

The Green Planet Fund (IDEAM)

19

Focus: US Electric Power Sector and The Climate Change Challenge

20

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, environmental and governance issues

21

Limited ability of companies to recover operating and compliance costs through regulated rates

The burden of environmental expenditures continues to

shift from customers to

investors Need to

differentiate their products (commodity) and diversify

revenue streams

Need to improve efficiency rates, retain customers

and attract investors

Increasing Pressures

Growing pressures to incorporate negative

externalities into market prices from

regulators, shareholders and

customers

Restructuring towards more competition

Some states move beyond federal rules

Evolving industry model

Electricity Industry - Key Drivers

22

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

$$

23

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

Climate Change- Physical Impacts

24

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

Climate Change- Financial Impacts

25

• 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

Potential Carbon Caps- The Electric Power Industry

26

Exposure to Carbon Regulations

Some States Are Moving Beyond Federal Standards

MA: Law requiring 10%cuts in CO2 emissionsfrom existing powerplants; sources may

purchase external CO2offsets

CA: GHG climateaction registry being

developed

NJ: StatewideGHG emissions

reduction target of3.5% below 1990levels by 2005;

voluntarygeneration of GHGcredits and bankingin NJ credit registry

TX developing GHG registry

WI developing GHG registry

Seattle, WA: Long-term goal of zeronet GHG emissions from Seattle City

Light, which has purchased reductionsfrom OR Climate Trust

Portland,OR: 20%

below 1988CO2

emissions by2010

NY: 3 pollutantbill passed, GHG

task forceestablished

OR: CO2standard for new

power plants -17% below mostefficient natural

gas plant;reductions can bepurchased fromOregon Climate

Trust or generatedfrom approved

projects

27

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

Downside Issues – Potential Carbon Caps

• 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

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

• 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

28

• 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

Carbon Caps- Implications for Investors

• 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

29

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

Carbon Caps- Innovest Analytical Approach

30

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

Carbon Caps- Innovest Analytical Approach

31

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

Leading Carbon Management Practices

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)

Allocate formal management and board responsibility

Engage in carbonless business or products

Conduct sensitivity analysis and emissions trading simulations

32

Reduce GHG emissions through internal energy efficiency

Industry Carbon Mitigation Practices

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

Pursue “clean” coal technologies

Participate in efforts to sequester carbon

33

Allow companies to gain expertise and strategic positioning in a niche market

Benefits of Investments in Green Power and Distributed Power Generation

Protect companies from grid disruptions (on-site projects)

Reduce operating costs due to avoided potential carbon related charges

Create additional assets from tradable certificates generated during project

Align with potential national security energy goals to reduce fossil fuel dependency

Lower exposure to fluctuating fossil fuel prices

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

34

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

35

Identifies potential hidden risk and profit opportunity factors

Risk Control

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

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

Reputation

Funding

Source of differentiation and competitive advantage

Strategic Pos.

Benefits of Carbon Management Leadership-CONCLUSION

36

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