Weekly Stock Monitor: 8 October 2008

Ethical Markets SRI/ESG News

Electric Utilities
EDF Seeks UK Nuclear Sites With Bid for British Energy

Electricite de France (EdF) has re-bid for British Energy (BE) with an all cash price of GBP 12.4 billion (USD 22.1 billion). For EdF the main driver of the deal is access to BE’s sites for new reactor construction, which already have the necessary permits and transmission access. In this article we look at the carbon implications of this deal for BE, EdF, and Centrica.

BE and EDF hope the new price will bring the deal to closure by Q408 or Q109. Upon completion of this transaction, Centrica is expected to purchase 25% of BE from EDF at the above price.

EdF plans to build four of its next-generation EPR reactors in the UK, with the first expected to be online by 2017 (see WSM ‘British Energy Up For Grabs’ – 15 April 2008).

The acquisition will slightly improve EdF’s carbon profile while also improving its market position in the UK, where 14% of its 2007 revenue was generated. However, it could have a potentially negative impact on the company’s health and safety ratings (see WSM ‘More Nuclear Troubles for British Energy Sends Share Price Tumbling’ – 9 November 2007), although it should be noted that EdF currently has a strong safety record and the change of ownership could improve the performance of the acquired plants. And related to this, five of BE’s currently operating reactors, or 5.8 GW of capacity, will be decommissioned before 2020, including the two most troublesome, Hartlepool and Heysham 1, that are due to close in 2014.

BE is the owner and operator of eight nuclear power stations (9,551 MW of capacity) and one coal plant (1,960 MW) in the UK. Upon closing of the offer, EdF will have 66 nuclear reactors, total power production of 669 TWh and installed capacity of 135.4 GW. Installed capacity by fuel type will break down as 53.5% nuclear, 24.5% gas, 17% hydro, 4% coal, 1% wind and other renewables. In the UK, EDF Energy currently has a capacity mix of 80% coal, 20% combined cycle gas turbines (CCGT), which is going to shift to 58% nuclear, 36% coal, and 6% CCGT, with the addition of BE. EdF will become the largest generator and supplier of electricity in the UK as a result of the acquisition.

Centrica has signed a memorandum of understanding with EdF to purchase 25% of the newly created holding company, upon closing of the acquisition, giving it access to 25% of the company’s power output. This will potentially have a greater impact on Centrica’s rating and carbon profile going forward, relative to EdF; the addition of almost 500 MW of coal capacity is negative, however this is largely offset by the current and future carbon-free nuclear capacity added to the company’s power portfolio. The acquisition also increases the company’s exposure to nuclear operating risks, such as health and safety, and hazardous waste storage. For Centrica, this will increase its generating capacity to approximately 7.6 GW. Current capacity is 96% gas-fired and 4% wind, but this will shift post-acquisition to 59% gas, 32% nuclear, 6% coal, and 2% wind..

EdF is currently rated AA, BE is rated BB, and Centrica is rated AAA.

Oil & Gas Refining
Valero Energy Ordered to Pay USD 1.2 million in Fines

Delaware environmental regulators have handed Valero subsidiary Premcor a USD 1.2 million penalty for noncompliance at its Delaware refinery’s propane storage facility. Valero Energy Corporation (rated BBB) acquired Premcor in 2005. The order regards undisclosed ongoing fugitive air emissions at Premcor’s Delaware refinery.

Premcor’s Frozen Earth Storage (FES), a low-pressure underground propane storage facility with a half-million barrel capacity has been leaking propane and propylene for decades since its construction in 1966.

This development is unsurprising to us as we have assessed the company’s environmental strategies, performance, and risk to be below average for the refining and marketing sector. Our assessment in 2005 pointed out the environmental liabilities and litigations risk associated with Premcor and its refineries. Innovest recommends strong oversight on company’s environmental and safety risk commitment and implementation, especially in a volatile energy prices environmental and strong margin pressure on the refining business.

The conciliation order handed to Premcor cites a number of violations, including:

· Failure to report propane and propylene emissions defined as air pollutants under Delaware law; omission from federal Toxic Release Inventory (TRI) and state inventory reports

· Inadequate permitting, and failure to quantify and report fugitive emissions

· Failure of mechanical integrity under Premcor’s risk management program

The facility is estimate to leak 200 to 350 tons of propane annually. The order requires Premcor to reduce by 25% the propane stored at the facility in order to lower the pressure and reduce leakage. Valero will be required to provide alternative storage capacity and cease adding inventory to the FES no later than May 1, 2010 and the FES facility must be emptied by December 1 of that year. Failing to comply will entail a USD 114,000 per month fine. Valero has not provided estimates on the cost of replacing the FES.

Metals and Mining
Boosting Platinum Output: Implats targets Mvela and Northam

Impala Platinum intends to increase production and reduce potential instability by consolidating the assets of two South African platinum competitors and by limiting mining operations in Zimbabwe.

Impala Platinum (Implats) (rated A), the world’s second largest platinum producer, has formally announced its intentions to buy assets of two of its competitors Northam Platinum (Northam) and Mvelaphanda Resources (Mvela) for USD 2.5 billion. If Implats does acquire Mvela and Northam, the combined group’s platinum reserves would surpass world leader Anglo Platinum.

Through black economic empowerment (BEE) initiatives, Northam acquired the Booysendal platinum project from Anglo Platinum. Mvela has a 63% interest in Northam. Northam has intentions to develop Booysendal as early as 2010, making it ideal for Implats. The Booysendal project is a shallow asset that may be operational faster and produce more than Implats’ Leeuwkop project. Implats has struggled to get 160,000 platinum ounces a year from its Leeuwkop project due to unreliable power supply and other increasing operational costs. Input costs have doubled to USD 735 million since its acquisition in 2007. Booysendal has estimated reserves of 103 million platinum ounces and with the potential to produce 480 000 ounces per year.

Although Booysendal may face energy resource issues as well, it is a shallow project requiring less power supply. Booysendal will be mining at shallow depths for about 30 years; theoretically requiring less refrigeration than deeper mines and less power in general. In addition, the Booysendal development is expected to have advanced practices and technologies incorporated into its infrastructure.

This move by South Africa’s Implats is intended to help the company distance itself from deep, expensive mining projects while diversifying away from its dependence on Zimbabwe. Zimbabwe, a politically unstable African country has the world’s second largest platinum reserves.

If Implats is successful in its bid, the investment risk associated with Northam will drop greatly as junior miners are often straddled down by limited financing for expansion projects. Northam and Mvela would both benefit from Implats’ mining experience as well as financial backing. Besides owning a refinery, Implats would also gain from Northam’s energy initiatives, such as coal-fired generation and renewable power, such as wind energy.

The integration of Implats, Mvela and Northam has the potential to create a fully integrated South African platinum producer. This prospective group will have the ability to manage a diverse asset portfolio with potential for new growth opportunities with associated job creation and enhanced labor relations, social and environmental development.

Xstrata has abandoned plans to bid for Lonmin, stating that the instability in global financial markets as a deterrent.