There have been some pretty dramatic changes to energy markets over the past couple of years that may have caught some of us by surprise. As the world’s economy fell into recession, a relatively small drop in demand caused oil and natural gas prices to fall considerably. This recession is unique in its cause. The collapse of one narrow segment of the credit market, that being home mortgages, cascaded in ever widening circles, damaging an otherwise healthy energy industry.

I have often said the natural gas industry is one that cannot tolerate good times. It seems that whenever natural gas prices rise, the industry over responds and brings far more supply to market than is needed, causing prices to fall. Layoffs and losses in the supporting service businesses follow, badly undermining the industries ability to recover. This time seems different. Many companies have attempted to maintain their talent pools and sensible long term projects are going forward, particularly involving unconventional gas. We see lower prices growing existing markets (gas fired power generation), reviving old ones (fertilizers, chemicals and metals) and stimulating demand in new segments (natural gas vehicles). The positive proactive roles the industry is playing will shorten the downturn and position us for resumed growth. We seem to be better able to understand and, in turn, live with commodity price volatility. In that regard, many producers have done effective jobs of hedging their production and have stabilized their cash flow.

Like a growing number of financial experts, I am seeing positive signs. That said, energy demand is not immune to reduced industrial and commercial activity and demand recovery lags the overall economy, especially industrial output. So while natural gas enjoys some advantages as a power generation fuel, we still need customers buying that power. It appears that 2009 may have been only the fourth time in the last four decades in which power consumption actually declined. The Energy Information Administration (EIA) forecasts an increase of 1.2% in 2010 as opposed to a decline of 1.4% last year.

Finally, here are some of the things we are doing at EMS to weather the storm and prepare for better times:

• We implemented a new TEAM structure that is already paying dividends in faster response times and greater flexibility while maintaining quality control. With TEAM, a form of matrix management structure, we are better able to deploy skills while keeping people focused and productive.
  
  
  
• We are actively pursuing gas fuel supply opportunities for combustion turbine power generation. This is a segment of the energy industries that has a strong and growing affinity for the natural gas business. There are many services we offer that are valued by power generators.
  
  
  
• We are taking advantage of a slower market to update and improve our internal standards, procedures and practices, resulting in more efficient project execution.
  
  
  
• We provide Project Financing services for projects requiring funding. We also introduce our projects to financial interests seeking ways to deploy capital in direct investment vehicles.

We hope you find these thoughts helpful and invite you to respond and offer your own thoughts and comments. Your business is important to us, and we look forward to serving you over the months and years to come.

T. Dale Honn, P.E., P.L.S.
CEO & Chairman of the Board