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Global Utility White Paper
CONFIDENTIAL

• Latam Utilities

Latin America will be a trading market for the next year or two. These markets, with the exception of Chile, are subject to significant government intervention, which follows long cycles; Brazil is early in the interventionist cycle (e.g., Brazilian President Dilma Rousseff's recent politicization of electricity tariffs), while other countries such as Argentina are closer to the end.

Below is a partial list of structural changes driving long/short opportunities in Latin America:

Electron's structural changes: Latin America

• Brazil's tariff intervention and consequent derating of sector
• Argentina's increasingly urgent need for system investment and tariff increases
• Shale gas development in Argentina and its impact on power prices and regional markets

4. Global Structural Changes Driving Alpha Opportunity

In addition to region-specific structural changes, there are structural changes that have a global impact on the utility sector.

• Power Prices are Skewed to the Upside

The cost of natural gas and coal sets the marginal power price in many power markets around the globe. The rapid rise in US shale production that began in 2007 caused domestic gas prices to decline much more rapidly than other fuels and put downward pressure on power prices both in the US and globally. For US gas-fired generator Calpine, lower fuel costs offset lower power prices and the company emerged a relative winner. Virtually all other US generators employ a mix of assets fired by costlier fuels and suffered a tremendous margin squeeze, with – in the most extreme example – coal-fired generator Dynegy declaring bankruptcy in 2012. We believe the downward trend in US natural gas prices has flattened for reasons noted below, and upward optionality remains, which will affect power prices not only in the US but also Europe and Asia given cross-border commodity linkages.

In Europe, in an example of the regional, non-correlated character of the global utility sector, a quite different dynamic has taken shape, with coal-generated power margins remaining attractive relative to natural gas-fired generation margins. Coal prices in Europe have declined as a result of cheaper US and Colombian coal imports (because of US shale gas) and the knock-on effect of softening Asian coal prices. Carbon costs (i.e. EU ETS) embedded in power prices also have declined, from €16/tonne 2 years ago to €5/tonne today, largely as a result of the European recession. With European natural gas prices at 3x US prices (unlike in the US, natural gas prices in Europe are linked by convention to oil), European utilities have been minimizing natural gas generation and maximizing coal generation. So, unlike the situation in the US, coal generators such as Drax in the UK have enjoyed better margins on higher power output (see below) as gas plants sit underutilized.

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Electron Capital Partners, LLC
For exclusive of Jeffrey Epstein
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