30% Increase In The Cost Of New Power Plant Construction Emphasizes Positive Correlation Between IPPs And GDP Growth

• On 3:15 pm EDT, Tuesday October 27, 2009

67 WALL STREET, New York - October 27, 2009 - The Wall Street Transcript has recently published its Third Quarter Alternative Energy/Clean Energy/Power Generation/Utilities Report offering a timely review of the sector to serious investors and industry executives. This 98 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Long Term Perspective on Alternative Energy Industry -- Leading Indicators for Alternative Energy Components Companies -- Mergers and Acquisitions in the Alternative Energy Industry -- Break Even Business Fundamentals for Carbon Free Energy Providers -- Development of Carbon Free Energy Production Infrastructure -- NAT GAS Act -- New Players in the Alternative Energy Industry -- Solar Power Cell Manufacturers Market Strategy -- Demand Response for Raw Materials for Solar Cell Production -- Alternative Energy Investment Opportunities -- Multiple Stock Winners in Carbon Free Production Industry -- Government Funding of Alternative Energy Power Providers -- Chinese Solar Energy Companies -- Alternative Energy Hedge Fund Investors -- Commodity Cycles -- Determinants of Market Valuations in the Alternative Energy Production Industry -- Carbon Emissions Statistics -- Energy Efficiency Statistics -- Innovations in Solar and Wind Power Generation -- Business Economics for Methane Based Power Generation -- Electric Vehicles Projections and Statistics-- Cap and Trade Projections and Statistics -- Development of Battery Technology -- Regulatory Environment Developments for Solar, Wind, and Alternative Energy -- Hybrid Vehicles Development and Sales Projections

Companies include: Tanfield (TAN.L); Smith Electric Vehicles U.S.; Valence (VLNC); Spire (SPIR); Newport (NEWP); MYR Group (MYRG); Primoris (PRIM); Tetra Tech (TTEK); EnerNOC (ENOC); Comverge (COMV); EnergyConnect (ECNG.OB); Calgon Carbon (CCC); and Ener1 (HEV); Westport Innovations (WPRT); Clean Energy Fuels (CLNE); Fuel Systems Solutions (FSYS); FuelCell Energy (FCEL); FEI Company (FEIC); Veeco (VECO); AT&T (ATT); Landi Renzo (LR.MI); Teleflex (TFX); Royal Dutch Shell (RDS.A); Wal-Mart (WMT); Pepsico (PEP); FuelMaker; Chevrolet; GM; Honda (HMC); Itron (ITRI); Siemens (SI); American Superconductor (AMSC); GE (GE); and ABB (ABB);

In the following brief excerpt from just one of the in depth interviews in the 98 page report, an equity analyst discusses the outlook for the sector and for investors.

Angie Storozynski is the head of US utilities equity research at Macquarie Capital (USA). Her team currently covers 27 electric utilities, water utilities and power generation companies. She previously covered the US utilities sector at HSBC Capital (USA). Prior to that, she worked at ING Barings in the corporate finance department covering European electric utilities and telecoms. She began her career at PricewaterhouseCoopers and specialized in due diligence of electric utilities and telecoms.

TWST: What are the highlights from a business perspective so far here?

Ms. Storozynski: The Midwest economy and thus power demand are particularly weak, which together with low coal and natural gas prices has depressed power prices in the region. Margins of independent power producers (IPP) with power plants in the Midwest are feeling the pressure. The impact is partly offset by power and natural gas hedges, though the timing and the effectiveness of these hedges is key. Dynegy (DYN), with a large portfolio of coal-fired power plants in Illinois, is experiencing a sharp compression of margins despite a high level of hedges. The weak margins of coal-fired merchant power plants are not limited to the Midwest, however. As natural prices have fallen below US$3/MMBtu, we are observing a coal-to-gas switching, and thus a temporary displacement of mid-merit coal-fired plants with gas-fired units. IPPs such as RRI Energy (RRI), with coal plants in Pennsylvania and Ohio, are seeing dismal earnings due to pressure from weaker production volumes and pricing. RRI has little to no short-term power hedges to offset the impact.The impact on near-term earnings of other IPPs, such as NRG Energy (NRG), Calpine (CPN) or Mirant (MIR) is negligible because their power output is highly hedged at natural gas prices above US$7/MMBtu on average.

TWST: So it really depends upon business decisions that were made on the fuel side rather than conditions in the economy?

Ms. Storozynski: Power prices are more sensitive to natural gas/coal prices than to the power supply-demand balance, reflected through market heat rates. Given that most of IPPs are highly leveraged, they cannot afford to stay open, because in commodity price environments like the current one, they would not have been able to service their debt. And so they tend to sell a portion of their future power output forward under long-term power contracts, or they try to fix power prices for their projected production using financial instruments. This strategy caps potential earnings of IPPs if commodity/power prices rebound, but during the times like now, give IPPs a safety net. Some of the IPPs are more skillful, or lucky, than others in timing their hedges, which in turn impacts their near term earnings. Investors tend to appreciate the hedges in the down commodity cycles, but then again oppose them when commodities are rising. The problem is it is rather hard to anticipate when the cycle swings.

TWST: So it's positioning. If we go back a year or two ago, this was kind of a hot space and everybody was announcing plans to build lots of plants. What happened to all of those? Are they still on the boards or if they kind of disappeared in this thin air at this juncture?

Ms. Storozynski: Power companies make decisions about new builds for power plants based on two criteria. One is something called reserve margins, which is simply the how much of spare capacity over projected power demand you have. The GDP growth or decline and changes in electric power demand are correlated, and so during the recession we tend to observe a pullback in the electricity consumption. This leads to higher reserve margins, delaying any new power capacity needs. Secondly the decision depends on longer-term views on power prices. An economic recession has an even sharper negative effect on commodity prices, including power prices. Market expectations of future power prices also come down, which is reflected in lower regional power curves. When you project future cash flows from a potential power plant, you simply cannot justify the investment with today's forward power curves. Even ahead of this recession, given a spike in the cost of new build for power plants, power prices (which were about 30% above the current levels) were insufficient to justify those projects. There are some exceptions and these are new power plants being built with long-term contracts for their future output or renewable power plants, but pretty much all other projects have been suspended or delayed at best.

Note: Opinions and recommendations are as of 09/10/09

ANGIE STOROZYNSKI Macquarie Group 125 W. 55th St. New York, NY 10019

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