COC RBC-Feb-3-2009.pdf

INDUSTRY |COMMENT
FEBRUARY 3, 2009
Navigating Treacherous Waters: Strategic
Impetus for Next 24 Months
Dividends good, commodities bad for 2009;
reversal in 2010
2009: The year of the dividend
Among the three major sectors that we cover (IPP, natural gas and utilities),
we believe that 2009 will be the year of the utilities. Stocks with high
dividend yields are likely to flourish, as long as the high yields don't portend
of bad things. Therefore, we believe utilities in general are likely to
outperform in 2009.
Commodity-driven names in 2009 aren't likely to fair well
We do not expect commodity-driven names to do well in 2009 as we believe
that natural gas and oil prices are likely to stay anemic. In addition, we fear
that the global economic malaise will put pressure on demand for
commodities, particularly in 1H09.
2H09 should bring back demand, but not price
If economists are correct, and we see recovery start in 2H09, we are likely to
see demand for energy increase moderately, but pricing stimulus is likely to
lag.
For 2010, commodity-driven names should be bifurcated between those
that are likely to benefit from low-prices in the future and those that
won't
For stocks that have an E&P component, we don't think 2010 will be good.
Even as demand begins to recover for energy products, we believe pricing
pressures are likely to continue for natural gas well into 2010 and beyond.
However, as the economy recovers, we believe that demand for oil should
surge, dragging with it price. Therefore, while natural gas prices are expected
to continue to stay low, frac spreads should widen, benefiting mid-stream
businesses. Also, as industrial consumption returns, we believe this drives
heat rates; thus, again, while natural gas prices stay low, IPPs should benefit
from rising heat rates.
Late 2010 should see the resurgence of IPPs
At low natural gas prices, building new generation will be uneconomic. This
means that heat rates should rapidly go up. In this environment, IPPs may see
another renaissance.
Renewable energy, DSM and efficiency should blunt increasing heat
rates, but are unlikely to keep them from rising
If we assume US electricity demand grows at 1.5%/year, we would have to
build 15GW/year of new usable generation. To cover this growth, we would
have to build ~60GW/year of renewable generation, and ~7.5GW of new
gas-turbine plants as back-up. We don't think the US will come close to
reaching these proportions. In addition, transmission would have to be built to
support this rapid expansion, which would be difficult at best.
Recommended names that we think should transcend this framework are
AES, ORA and SRE.
Priced as of prior trading day's market close, EST (unless otherwise noted).
All values in USD unless otherwise noted.
RBC Capital Markets Corp.
Lasan Johong (Analyst)
[phone]; [e-mail]
Emily Christy (Associate)
[phone]; [e-mail]
Ella Vuernick (Associate)
[phone]; [e-mail]
For Required Disclosures, please see Page 15.
2
Major Assumptions for the Economy and Capital Markets
Major assumptions include the return of the economy starting in 2H09 and accelerating into 1H10
Much of our analysis depends on the timing of the economy’s revival. Therefore, if the return of the economy is delayed for 6-12
months, then our thesis should be delayed by that time period, but it should not materially change.
Access to capital markets is not as critical to our thesis, particularly for utilities
Actually, if access to the capital markets is further hindered or delayed, this should help our thesis in regards to the IPPs and
marginally hurt or remain neutral to utilities, mid-stream businesses and E&P. Difficulty accessing the capital markets means
continued restrictions on new capital projects, but those projects that have state or federal level guaranteed returns should still move
forward. For utilities, this ought to translate into relatively few projects being cancelled. However, restrictive access to capital is more
problematic for companies that rely on market dynamics and fundamentals for profit then for companies that rely on government
mandated returns.
For market-driven companies, the net effect of not having access to capital is not clear
The analysis of the situation depends much on whether a company generates free cash flow or doesn’t; whether a company needs
growth capex to increase profitability; whether the assets are depleting assets or not; and whether the basic fundamentals of the
business improves with capital or doesn’t. Obviously, if a company generates free cash flow, doesn’t own depleting assets and
fundamentals improve without access to capital, then not having access or restricted access is not an issue in the near term. This is
likely to be the case for IPPs. For E&P companies, not having access to new capital could be cumbersome in the near term, while
outright deadly in the long term as survival depends vastly on developing new projects to stave off the natural decline of the cash flow
generating assets.
Commodity Demand to Remain Weak in 2009 with Recovery in 2010
Electricity demand to continue weakness in 1H09…
Given the depth and breadth of the current economic malaise, which seems worse than a normal recession, we have no confidence that
the 1H09 electricity demand picture will improve over 2H08’s performance. For the full year 2008, we believe the country
experienced an almost 1% decrease in electricity demand. Part of the poor demand was clearly due to relatively low cooling degree
days (CDD) versus 2007 (2008 had 11% lower CDD versus 2007), but it is our thought that the largest portion of the year-over-year
decline comes from industrial demand destruction. We do not expect this picture to brighten in 1H09 as comps versus 1H08 are not
likely to be easy for the industrial sector. Therefore, we look for about (0.5%)-(1.0%) 1H09 demand decrease versus 1H08, more if
summer weather proves to be suboptimal.
…followed by an anemic recovery in 2H09
Comps versus 2H08 should be more favorable, particularly versus 4Q08 as GDP declined about 3.8% (preliminarily), but despite the
easier comps, we are not predicting a “party atmosphere.” Also, if the anticipated economic recovery is delayed, then the recovery in
electricity demand would be commensurately delayed. Nevertheless, if all goes to plan, we anticipate an increase of 0.5%-1.0% in
electricity demand for 2H09, making 2009 flat to slightly above 2008.
Good news is that historically electricity demand accelerates after a decline in year-over-year
consumption of electricity
Since 1948 or so, the US has suffered through three years of year-over-year decline in electricity consumption prior to 2008. These
were 1974, 1982 and 2001. Following each of these three years, electricity consumption accelerated above the mean by about half or
more for 2-4 years. We believe that this phenomenon has to do with industrial demand. During these major recessions, as we work
through excess inventory and retrenching of industries, the country experiences a painful period of resetting the baseline. Then, as we
enter the economic recovery phase, we believe that a build-out of inventory and meeting of pent-up demand for goods accelerates
demand for electricity.
We believe historical trends should hold for 2010
Therefore, if we do trend towards historical patterns in 2010, then we should see electricity demand accelerate in 2010. At present, we
are looking for a 2.0%-3.0% increase in electricity demand for 2010, with longer-term average estimated growth of about 1.5%-2.0%
per year. This accelerated increase in electricity demand may persist into 2011 at the same robust rate that we are forecasting for 2010,
given that the depth and pain of the current economic fall should be reflected in the rebound, but in the opposite direction, i.e., we are
firm believers in the principal that for every action, there is an equal and opposite reaction in the universe as well as in the
commodities world.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
3
Electricity, natural gas and oil prices look to remain weak in 2009
In our opinion, natural gas price weakness will remain weak in 2009 driven by the overhang from shale plays in the US and
compounded by expected record LNG imports starting in 2H09. Also, we believe that oil prices will remain weak until a global
economic recovery gets under way in earnest, despite OPEC production cuts. Given our view on natural gas prices and subsequent
translation into electricity prices, we believe IPPs will remain anemic investment vehicles in 2009, and, given our view on oil prices
and natural gas prices, mid-stream businesses should also be less than attractive. However, we think utilities should be marginal and
indirect beneficiaries of low natural gas and electricity prices.
However, we believe that oil prices will start recovering in 2010, driven by increasing global demand
The investment outcome of this thesis is that mid-stream businesses should start to see benefits of stronger frac spreads; however, no
significant consequences are likely for the utility and IPP sectors.
While natural gas prices continue to look weak in 2010 and beyond
Clearly, as drilling budgets get slashed and shale activity is radically reduced, North American natural gas production should rapidly
decline. Therefore, we believe that the approximately 6BCF/Day of shale gas exposure that we currently enjoy is likely to be headed
closer to 0BCF/Day starting in 2010. However, it is central to our thesis that LNG should more than make up for this exponential
decline in shale gas, keeping natural gas prices anemic through 2010 and beyond (please review our LNG report dated February 3,
2009, for more details).
Strategic Consequences for 2009 and 2010
Strategy for 2009: Dividend yields rule; utility sector should outperform, while the IPP and natural gas
sector are likely to underperform
We believe that investors will continue to choose safety over risk in 2009, even as signs of economic recovery blossom in 2H09. This
means that investors should choose stocks with strong dividend yields over stocks that have growth potential and exposure to
commodity risk, in our view. Therefore, we conclude that the utility sector should relatively outperform, but investors must be assured
of the safety of the dividend. Consequently, we recommend stocks that have little need for additional capital, strong balance sheets,
good free cash flow, and good regulatory relationships. We also caution that sometimes there is a reason for a very high dividend
yield. In contrast to our utility thesis, for 2009, we also believe that commodity-sensitive businesses such as the IPP companies, and
businesses with mid-stream or E&P should under-perform.
Utility stocks recommended for consideration in 2009 include: CNP, DUK and PCG
For 2010, as oil prices rise, we believe that mid-stream-oriented businesses should flourish
If, as we conjecture, oil prices reverse course and start mounting a charge and natural gas prices continue to stay low, then frac spreads
should widen, benefiting mid-stream-oriented businesses. This assumes that the correlation between oil and NGL prices remains
relatively steady or improves. At present, we have no reason to doubt that the relationship between the two commodities will change
dramatically in one direction or another.
Mid-stream-oriented businesses recommended for consideration in 2010 include: SE
For pipeline businesses, no immediate impact, but changing natural gas fundamentals portend
difficulties
Over the next year or two, we do not anticipate any major impact from weak natural gas prices and high LNG imports for pipeline
companies as they operate on a take-or-pay basis. But as LNG starts to make a larger and larger impact on natural gas fundamentals in
the US and pipeline contracts come up for renewal, we foresee some challenging times ahead. In general, pipelines that have the
ability to transport methane gas from LNG to major markets are likely to continue to do well. However, those pipes that serve high
cost basins in North America are not likely to flourish.
Beyond 2010, bifurcation of mid-stream and pipeline businesses a necessity based on all-in cost of
resources served
As LNG becomes a larger and larger part of our domestic natural gas supply equation, we believe that consequences will arise for
mid-stream businesses as well. We think businesses that are heavily exposed to shale gas plays are likely to fair poorly, while
operations that are centered on more conventional resources are likely to fair much better. The key to this analysis and the corollary
for pipeline businesses is the all-in cost basis for the resource that is serviced by the pipeline or mid-stream business. Obviously, we
believe those that serve resource plays with lower all-in costs than LNG marginal cost of about $4/MMBTU should continue to
survive and may even thrive (mostly pipelines and fee-driven mid-stream businesses); however, those serving resources that have a
higher all-in cost versus LNG may not even survive, let alone do well.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
4
Hybrid utility/IPP companies should flourish in the transitional period between 2009 and 2010
We expect companies that have utility operations as well as independent power supply segments, such as EIX and AYE, to lead the
transition away from the dividend mindset and towards the commodity exposure of IPPs. The utilities provide a level of safety in their
regulated operations, but also a window to the potential upside of heat rate expansions that we think should propel IPPs in 2H10.
Therefore, we would recommend EIX and AYE as intermediary investments in late 2009 or early 2010.
Hybrid names that are recommended for consideration in late-2009-to-mid-2010 include: AYE and EIX
Second half of 2010, likely renaissance for IPP businesses, driven by heat rate expansion
Again, if, as we surmise, natural gas prices stay low in 2010 and beyond, then IPPs should begin a renaissance starting in the second
half of 2010, initially driven by accelerating electricity demand, then compounded in the future by lack of new construction. By 2010,
we fully expect the economy to have found a solid footing again and consumption of electricity to accelerate led by strong industrial
demand. As electricity demand accelerates into 2010 and 2011, we believe heat rates should start to move up aggressively. Therefore,
despite low natural gas prices, we look for heat rate expansion to drive IPP profitability.
IPP names that are recommended for consideration in 2010 include: CPN, DYN and RRI
Recommended names that transcend the framework above: AES, ORA, and SRE
We don’t think there will be a wrong time to invest in these names, if the investment time horizon is longer than 12 months. We
believe that these three names will transcend the current economic malaise to deliver performance above market returns based on the
unique and differentiating characteristics of each investment. Following is a brief summary of our thesis on each name:
AES: The thesis behind AES is simple. The US has installed capacity of about 3.3KW per person, while the rest of the world
combined is only 0.5KW. This means that massive catching up should occur, and we believe that AES is in the perfect position to take
advantage of this global development need.
ORA: Ormat is in the unique position of being a pure play geothermal generating company that also is fully vertically integrated and
has the balance sheet to pursue its growth plans, in our view. We also believe that Ormat will be the primary beneficiary of western
US – state-mandated – renewable standards.
SRE: Not only does SRE own two LNG terminals and is a very smart counter-cyclical investor in the natural gas sector, in our view,
but its marketing and trading JV is in the enviable position of being an investment grade entity thriving amidst a paucity of
competitors. In addition, SRE has long-term utility growth projects that have state-mandated returns, and we believe the balance sheet
and operating cash flow to fund growth projects and to continue to take advantage of market weaknesses.
LNG Business Looking Good Starting 2H09 and Well into Next Decade
If our thesis on LNG proves correct, we believe that we could see some 2.0-3.0 BCF/Day on average in 2009 and growing rapidly
from then on. This means that companies with LNG exposure should do well, but this exposure has to have a spot component.
Meaning, companies that have fully contracted their capacity are not likely to benefit from the new wave of LNG hitting our shores as
they have no immediate upside. In contrast, those that do have capacity to take spot cargoes or negotiate for offloading uncommitted
cargos should do better and better with the passage of time. However, this strategy and outlook is not without risks, as not only does
LNG have to come to the US, which we believe it will, the LNG also has to go to terminals that have the spot capacity in order for the
spot strategy to benefit. In this regard, Sempra offers the best of both worlds as its contracted capacity is sufficient to give investors an
unlevered high-single-digit return, while its uncontracted capacity at Cameron LNG gives it market-based upside potential. In
somewhat of a contrasting state, Cheniere LNG provides the ultimate upside potential as its survival depends on its ability to monetize
its spot cargo capability. We are of the opinion that Cheniere will be able to do so, therefore providing investors with relatively high
upside potential commensurate with its high risk profile.
LNG names that are recommended for consideration in late 2009 into 2010 include: LNG and SRE
National Renewable Standards Won’t Be Easily Forthcoming, in Our Opinion
Despite President Obama’s push for everything renewable, we are not optimistic that a national renewable standard will be easily
forthcoming. The core issue at hand is the disparity between states that have access to ample supply of renewable generation versus
states that have a paucity of sources. For instance, the Western US provides for many wind, solar and geothermal generation
opportunities, while east of the Mississippi River is challenged to provide renewable resources to its citizens. We think that for a
national renewable standard to be implemented, either the standard will be very weak – for example, 5% – or definitional changes in
what is renewable must be allowed.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
5
Large-scale hydro and nuclear would have to be defined as renewable sources of energy
Defining large scale hydro as a renewable source of energy should not be difficult to do and would allow many south-central and
south-eastern states to fulfill part of their obligations. However, defining and designating nuclear as a renewable source of energy will
be more challenging. For one, in order for nuclear power to be defined as a renewable source of energy, the US would have to allow
reprocessing of nuclear waste-fuel into usable reactor fuel. For this to occur, an act of Congress would be necessary, as reprocessing of
nuclear fuel is prohibited by law. This would not be an easy task.
In our opinion, nuclear power qualifies as a renewable source of energy
For the waste fuel, nuclear energy is clean; it has virtually no emissions. Therefore, the matter of waste fuel is paramount. It is our
understanding that waste fuel can be reprocessed many times over for reuse in reactors, albeit with declining productivity, to virtually
eliminate the dangers of long-term storage. Nuclear fuel, once used, has a half life of some 200,000 years. However, this waste can be
reprocessed and reused to reduce the half life to some 200 years. It is our opinion that no one can guarantee the safe storage of
something for 200,000 years; however, we believe that 200 years is definitely more manageable. Therefore, given this unique
characteristic, we believe that nuclear energy can and should qualify as a renewable generation source.
Regardless, state mandates may override the need for a federal standard
We are not even sure that, given the various states that have already set up renewable standards, we would have a federal standard.
Therefore, the alternative may be a heavily diluted standard that essentially every state can achieve and override with its own
standards. Therefore, the alternative may be a weak standard such as a 5% standard or a higher standard, but over a longer period of
time.
CO2 Legislation May Be Even More Difficult, in Our Opinion
The issue and the crux of the problem with CO2 legislation is that not every state emits the same amount of CO2 per capita. Outside of
transportation, California clearly has one of the lowest, if not the lowest CO2 footprint per capita in the US, while coal heavy
generation states such as Pennsylvania, Kentucky and West Virginia are likely to have a far higher per capita foot print. This means
that a uniform standard may not be fair to all states. So, again, the disparity in implementing a fair single standard may be the barrier
to achieving this objective.
Both the Renewable Standard and CO2 Have Costs Associated with Them That Make
Implementation Difficult in 2009 or 2010
Given the economic malaise that the country is currently going through, it would be difficult for us to imagine that any federal law
regarding renewable standards or CO2 legislation will pass muster in Congress in 2010, let alone 2009. Also, even if legislation passes
in 2009 or 2010, it is unlikely to be implemented immediately. For one, to design a working national cap-and-trade market for CO2 is
an undertaking that would take months, if not years, to set up correctly. Also, if nuclear waste-fuel reprocessing is to be allowed, an
act of Congress would have to be executed, which is likely to be quite an undertaking and very time-consuming. Last but not least, the
cost of implementing either or would have to be ultimately borne by the people and this is not likely to go over well with voters.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
6
Table 1. Ratings and Risk Weightings
Previous
Rating
New
Rating Risk
AES TP TP Above Average
AYE OP SP Average
BKH SP UP Average
CPN N/A OP Above Average
CNP OP OP Average
DUK SP OP Average
DYN OP SP Above Average
EIX OP SP Average
HTM OP OP Speculative
IDA SP SP Above Average
LNG SP OP Speculative
MIR SP UP Above Average
NRG SP SP Average
NVE SP SP Average
OKE SP UP Average
ORA OP OP Above Average
PCG SP OP Average
PNM SP SP Above Average
RRI OP OP Above Average
SE OP SP Average
SRE TP TP Average
SUG UP UP Average
TE UP UP Above Average
UTL OP OP Above Average
WMB OP SP Above Average
Source: RBC Capital Markets
TP = Top Pick
OP = Outperform
SP = Sector Perform
UP = Underperform

Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
7
Table 2. CNAV and Price Target Revisions
Current
Price*
Previous
CNAV New CNAV
Previous
Target
Price
New
Target
Price
% Change
in Target
Price
% to Target
Price
AES $7.98 $56.00 $38.00 $20.00 $21.00 5%163%
AYE $33.73 $65.00 $55.00 $48.00 $38.00 -21%13%
BKH $27.17 $38.00 $34.00 $36.00 $29.00 -19%7%
CPN $7.41 N/A $36.00 N/A $12.00 N/A 62%
CNP $13.83 $25.00 $24.00 $16.00 $18.00 13%30%
DUK $15.01 $22.00 $24.00 $20.00 $22.00 10%47%
DYN $2.14 $12.00 $8.00 $8.00 $3.00 -63%40%
EIX $32.97 $69.00 $56.00 $49.00 $40.00 -18%21%
HTM $0.95 $4.00 $4.00 $3.00 $3.00 0%216%
IDA $28.70 $38.00 $38.00 $33.00 $33.00 0%15%
LNG $3.70 $13.00 $10.00 $7.00 $8.00 14%116%
MIR $16.99 $43.00 $34.00 $33.00 $21.00 -36%24%
NRG $23.21 $45.00 $36.00 $37.00 $27.00 -27%16%
NVE $10.84 $15.00 $16.00 $12.00 $13.00 8%20%
OKE $29.45 $46.00 $40.00 $40.00 $32.00 -20%9%
ORA $32.66 $74.00 $65.00 $60.00 $51.00 -15%56%
PCG $38.85 $52.00 $53.00 $44.00 $47.00 7%21%
PNM $9.87 $18.00 $17.00 $13.00 $12.00 -8%22%
RRI $5.18 $17.00 $18.00 $9.00 $9.00 0%74%
SE $14.39 $33.00 $33.00 $28.00 $19.00 -32%32%
SRE $44.80 $77.00 $69.00 $65.00 $57.00 -12%27%
SUG $13.03 $26.00 $21.00 $20.00 $15.00 -25%15%
TE $12.09 $18.00 $17.00 $17.00 $14.00 -18%16%
UTL $20.24 $30.00 $30.00 $26.00 $26.00 0%28%
WMB $13.63 $42.00 $36.00 $28.00 $18.00 -36%32%
*Closing price as of February 2, 2009.
Source: RBC Capital Markets

Table 3.Adjusted-EPS Estimates
4Q08
Previous 4Q08 New
4Q08 %
Change
FY08
Previous FY08 New
FY08 %
Change
Consensus
FY08
FY09
Previous FY09 New
FY09 %
Change
Consensus
FY09
FY10
Previous FY10 New
FY10 %
Change
Consensus
FY10
AES $0.26 $0.21 -20%$1.25 $1.20 -4%1.06 $1.19 $1.05 -12%1.12 $1.71 $1.18 -31%1.38
AYE $0.57 $0.56 -2%$2.27 $2.26 -1%2.33 $2.80 $1.91 -32%3.13 $3.05 $2.10 -31%3.64
BKH $0.57 $0.44 -23%$1.67 $1.55 -7%2.05 $2.19 $1.53 -66%2.10 $2.07 $1.74 -33%2.25
CPN N/A ($0.18)N/A N/A ($0.05)N/A 1.27 N/A $0.20 N/A 1.28 N/A $0.31 N/A 0.44
CNP $0.35 $0.35 0%$1.32 $1.32 0%1.27 $1.40 $1.40 0%1.28 $1.52 $1.53 1%1.38
DUK $0.29 $0.26 -10%$1.23 $1.21 -2%1.20 $1.41 $1.35 -4%1.25 $1.64 $1.65 1%1.37
DYN $0.02 ($0.03)-223%$0.08 $0.03 -66%0.06 $0.30 ($0.04)-112%0.07 $0.60 $0.02 -97%0.18
EIX $0.64 $0.60 -7%$3.79 $3.75 -1%3.80 $4.46 $3.55 -20%4.06 $5.41 $3.69 -32%4.62
HTM ($0.01)($0.01)0%($0.09)($0.09)0%N/A ($0.06)($0.06)0%N/A ($0.05)($0.05)0%N/A
IDA $0.24 $0.20 -16%$2.21 $2.18 -2%2.23 $2.02 $1.94 -4%2.26 $2.09 $2.01 -4%2.27
LNG ($1.55)($1.46)-6%($4.91)($4.82)-2%(4.80)($1.77)($2.09)19%(3.61)($0.67)($0.79)18%(0.67)
MIR $0.83 $0.86 4%$2.77 $2.80 1%2.45 $3.77 $3.43 -9%3.24 $4.35 $3.62 -17%2.37
NRG $0.60 $0.50 -17%$3.05 $2.95 -3%2.72 $3.07 $2.76 -10%2.49 $3.44 $2.94 -14%2.97
NVE $0.09 $0.09 3%$0.87 $0.87 0%0.93 $1.00 $1.03 3%1.00 $1.12 $1.22 9%1.21
OKE $0.75 $0.75 0%$3.10 $3.10 0%3.01 $3.05 $2.34 -23%2.91 $3.24 $2.74 -15%3.14
ORA $0.29 $0.29 0%$1.24 $1.24 0%1.14 $1.76 $1.80 2%1.48 $2.29 $2.16 -6%1.74
PCG $0.62 $0.59 -4%$2.93 $2.90 -1%2.93 $3.21 $3.16 -2%3.17 $3.37 $3.34 -1%3.37
PNM $0.06 $0.06 5%$0.17 $0.17 2%0.14 $0.95 $0.71 -25%0.60 $1.09 $0.99 -9%0.97
RRI $0.04 ($0.05)-225%$0.61 $0.52 -15%0.28 $0.38 $0.20 -48%0.33 $0.90 $0.29 -68%0.67
SE $0.37 $0.31 -16%$1.90 $1.84 -3%1.83 $1.82 $1.50 -18%1.34 $1.88 $1.61 -14%1.55
SRE $1.16 $1.10 -5%$4.19 $4.14 -1%4.00 $5.03 $4.41 -12%4.40 $5.59 $5.20 -7%4.95
SUG $0.45 $0.42 -6%$1.93 $1.90 -1%1.79 $1.74 $1.41 -19%1.74 $1.79 $1.63 -9%1.65
TE $0.17 $0.15 -11%$0.83 $0.81 -2%0.84 $1.16 $0.97 -16%1.22 $1.22 $1.15 -5%1.32
UTL $0.49 $0.48 -1%$1.61 $1.61 0%1.53 $1.73 $1.68 -3%1.71 $1.77 $1.74 -2%1.74
WMB $0.50 $0.34 -33%$2.36 $2.20 -7%2.14 $2.20 $1.26 -43%1.36 $2.53 $1.44 -43%1.81
*Consensus estimates as of February 2, 2009.
Source: RBC Capital Markets and Thomson Financial.

Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
8
Valuations and Price Target Impediments
The AES Corporation (AES)
Valuation: Our target price is $21, our CNAV is $38 and our rating is Top Pick. We believe that the stock will be pushed towards our
target price over the next 12-18 months due to a strong pipeline of growth projects, steady free cash flow, and removal of accounting
uncertainties. We believe that investors will favorably view the value proposition that AES brings in due course, given the company’s
multi-year high-growth EPS and cash flow story. Therefore, we believe that there is significant upside left to the stock. And, given our
CNAV, we think the upside potential could be well above our target price. We determine our CNAV based on a full discounted cash
flow model, while our target price is based on what we believe the stock performance will be through the next 12-18 months.
Specifically, we discount our target to our CNAV because, discount of growth profile, and investor concern for global risk and credit
market turmoil.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 6.97%. Our terminal value multiple of 14.4x is calculated at approximately 25 years from the most recently reported
quarter.
Price Target Impediment: Prolonged global recession, bad acquisitions/investments, terrorism, negative headlines, political/currency
risk, commodity prices, weather.
Allegheny Energy, Inc. (AYE)
Valuation: Our calculated net asset value (CNAV) for AYE is $55 and target price is $38 per share. Our target price is set at a
discount to our CNAV due to IPP weakness in the near term. We estimate strong organic growth over the next three years, based on
strong FCFAID, good growth prospects, a strong balance sheet and strategic options. This potential is balanced against strategic risks
of cash deployment, outstanding regulatory issues, potential for over-hedging, potential for increasing the cost of capital due to lower
leverage ratio, and project delays or changes.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
currently valued at 7.22%. Our terminal value multiple of 11.5x is calculated at 297 months from September 2008.
Price Target Impediments: Prolonged economic recession, regulatory interference/change, operations outside of management's
control, lack of growth projects in the future, weather, interest rates, and commodity prices.
Black Hills Corp. (BKH)
Valuation: Our calculated net asset value (CNAV) for Black Hills is $34, and our target price is $29 per share. Uncertainty remains
around the future of oil and gas production, as well as challenges of the macroeconomic conditions; we therefore assign our target
price at a 15% discount to CNAV at this time.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 8.86%. Our terminal value multiple of 10.3x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Integration of Aquila acquisition, rate regulations may not be favorable, particularly for gas utilities (post-
ILA deal close), higher volatility due to commodity-price exposure from E&P business and other unregulated businesses could derail
move towards target, moderate weather patterns could be damaging, economic turmoil, interest rate risk, tied to capital market access.
CenterPoint Energy, Inc. (CNP)
Valuation: Our target price is $18, which is set at approximately a 25% discount to our calculated net-asset-value (CNAV) of $24 per
share. We determine our CNAV based on a full discounted cash flow model using an average of Free Cash Flow to the Firm and Free
Cash Flow to Equity. We apply a multistage growth rate with a terminal multiple of 15.7x based on a dynamic WACC with an initial
rate of 4.66%. The terminal value is calculated at approximately 25 years from the latest reported quarter.
Our 25% discount is predicated on our belief that more visibility is needed for certain long-term projects before the full value of CNP
will be realized by investors, as well as uncertainty around macroeconomic issues and current market conditions. We look for
continued development and investments in growth projects, potential accretive acquisitions, and the steady increase in earnings and
dividend that characterizes a strong utility.
Price Target Impediment: Poor Texas economic performance and states in which CNP has operations, moderate weather,
unexpected transmission and distribution outages, poor acquisitions, spiking commodity could have an indirect effect, inability to
expand its electric and natural gas transmission and distribution system.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
9
Calpine Corporation (CPN)
Valuation: Our calculated net-asset-value (CNAV) is $36. Our target price is $12 and set at a discount to the CNAV due to current
economic weakness and lower demand forecasts for 2009-2010. We determine our CNAV based on a full discounted cash flow
model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate with a
terminal multiple of about 12.6x based on a dynamic WACC with an initial rate of 7.53%. The terminal value is calculated
approximately 25 years forward.
As an independent power producer with primarily natural gas assets in areas of strong demand, we expect CPN to outperform its
peers. CPN’s young fleet should capitalize on expanding heat rates as new capacity additions have been stalled or canceled.
Additionally, its relatively low emissions profile is naturally defensive compared to its peers if and when carbon legislation comes to
fruition. Current economic conditions may pressure the stock in the short-term, but it should still shine over its peer from a relative
perspective before capturing its full value in the medium – longer term.
Price Target Impediment: Commodity prices, weather, economy, interest rates, technical and operating risks, environmental
concerns and regulatory risk, active shareholders, and new management team, among others.
Duke Energy Corporation (DUK)
Valuation: Our calculated net-asset-value (CNAV) is $24 and our target price is $22. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of 10.9x based on a dynamic WACC with an initial rate of 8.34%. The terminal value is
calculated about 25 years from the latest quarter.
As a pure-play electric utility with a small fleet of commercial generation, Duke Energy continues to perform as expected with solid
operations, reliable earnings, and steady dividends. Due to current economic conditions, we assign our target at a discount to CNAV
at this time.
Price Target Impediment: Decline in value of power portfolio, unfavorable regulatory rulings, onerous carbon emission legislation,
cost overruns on capex projects, unwise acquisitions, unforeseen operational setbacks or shutdowns.
Dynegy Inc. (DYN)
Valuation: Our target price is $3 and CNAV is $8 per share. We determine our CNAV based on a full discounted cash flow model
using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate with a terminal
multiple of 11.3x based on a dynamic WACC with an initial rate of 7.97%. The terminal value is calculated roughly 25 years from the
most recently reported quarter. Our target price is discounted to our CNAV due to macroeconomic woes anticipated for 2009 and
possibly into 2010.
We believe that given its minimalist hedging strategy, valuation upside is the strongest with Dynegy among its peers, which can make
it the most enticing investment vehicle in an upward bound commodity fundamental environment. That being said, it will take time for
those fundamentals to return. In the meantime, we believe the stock will perform in line with its peers. Additionally, restrictions on
LS Power buying or selling shares expire in April. Speculation about the future of those shares should weigh on the stock.
Price Target Impediment: Lower than modeled natural gas prices, prolonged economic recession, prolonged reduced demand, lack
of opportunities for growth, regulatory interference, slow or no deregulation, weather, change of strategy, basis differentials, and
M&A.
Edison International (EIX)
Valuation: Our calculated net-asset-value (CNAV) is $56. Our target price is $40 and is at a discount to the CNAV due primarily to
general market and economic weakness in the U.S., lower demand in the IPP sector, need for capital to finance growth, need for
regulatory approval for projects and settlement of the lease tax issue with the IRS. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of about 11.8x based on a dynamic WACC with an initial rate of 7.07%. The terminal value is
calculated approximately 25 years forward.
As a regulated electric utility with a solid growth prospects and a favorable regulatory structure, we expect SCE’s utility operations to
outperform its peers. However, the expected weakness of the Edison Mission Group should diminish these results. Accordingly, we
expect EIX as an entity to perform in line with its peers.
Price Target Impediment: Prolonged poor industrial demand, weather, economy, interest rates, environmental concerns, regulatory
risk, access to capital markets, IRS tax settlement, development cost increases, among others.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
10
U.S. Geothermal Inc. (HTM)
Valuation: Our target price is $3 and our calculated net-asset-value (CNAV) is $4. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of about 9.6x based on a dynamic WACC with an initial rate of 9.16%. The terminal value is
calculated approximately 24 years forward. Our target price is discounted to our CNAV due to macroeconomic woes anticipated in
2009.
As a geothermal operator and developer, HTM should benefit from the considerable federal and state support of renewable energy.
Although a relative start-up operation, projects in the pipeline have secured contract commitments from utilities. As global warming
fears continue, concerns over energy security persist, and carbon legislation becomes a reality, HTM should have power plants coming
online and ready to capture the upside from geothermal energy. We believe the upside potential outweighs the risks at this time. We
have modeled conservatively and increased the beta to account for the risk profile.
Price Target Impediment: Contract risks, tax law risks, access to capital markets, construction cost overruns, exploration risks,
commodity prices, operational risk, and regulatory risk.
IDACORP, Inc. (IDA)
Valuation: Our calculated net-asset-value (CNAV) is $38 and we assign a target price of $33. We determine our CNAV based on a
full discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of 11.1x based on a dynamic WACC with an initial rate of 7.98%. The terminal value is
calculated approximately 25 years forward.
As a pure-play electric utility with a significant hydroelectric generation fleet, IDA operates in a heavily regulated environment.
Considering the risk management policies of IDA, the Idaho regulatory structure, solid operations and the above-average population
growth for the service territory, the company continues to perform as expected. Due to hydrology and regulatory risk and
macroeconomic weakness anticipated for 2009, we assign our target price at a discount at this time.
Price Target Impediment: Volatile hydrology, unfavorable regulatory decisions, poor growth project selections, operational
setbacks, changes in credit ratings, environmental regulations, cost overruns with the capex projects and weather.
Cheniere Energy, Inc. (LNG)
Valuation: Our target price is $8 and calculated net asset value (CNAV) is $10. We determine CNAV based on a discounted cash
flow model, using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate with a
terminal multiple of about 15.1x based on a dynamic WACC with an initial rate of about 5.75%. The terminal value is calculated
approximately 25 years forward. Our target price discount to our CNAV is due to current macroeconomic conditions.
Given its objective of developing a pure-play LNG company, its business model, and aspirations for cargo deliveries, we believe
Cheniere should be able to provide value to shareholders in the longer-term; however, not without risk. We will continue to assess
both risk and opportunity as the company commences operations of Sabine Pass, and continues its efforts to attract significant cargos.
Price Target Impediment: Chapter 11 filing risk, start-up nature, commodity prices, ability to secure contracts (under favorable
terms), ability to secure steady supply, regulatory risk, weather, access to capital markets, increasing construction costs, and potential
environmental legislation.
Mirant Corporation (MIR)
Valuation: Our calculated net asset value (CNAV) for Mirant is $34 per share, but our target price is $21. The discount is due to
uncertainty around the company’s risk management practices, hedging strategy and difficulties due to current economic environment.
On a stand-alone basis, we believe that cash return to shareholders, development of its brownfield projects, and increase in macro
fundamentals are positives, which are offset by its hedging program and lack of a long-term cohesive growth program.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 8.50%. Our terminal value multiple of 10.8x is calculated at approximately 25 years from the most recently reported
quarter.
Price Target Impediment: Potential high cost of capital, decreasing margins from high fuel costs, political risk, high levels of
environmental capital spending, economic recession, risk management complications.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
11
NRG Energy, Inc. (NRG)
Valuation: Our calculated net-asset-value (CNAV) is $36, but our target price is $27. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of 11.9x based on a dynamic WACC with an initial rate of 7.39%. The terminal value is
calculated about 25 years from the most recently reported quarter. The Target discount to our CNAV is due to on-going financial
market disruption, pending hostile takeover by Exelon, increased risk premium, and poor asset valuations in the current market.
While the hostile takeover persists, we believe that NRG should trade relative to Exelon. NRG’s hedging strategy may produce
stronger financial results that some of its peers in 2009, but the weight of the takeover remains an obstacle and thus we rate it as a
Sector perform.
Price Target Impediment: Interest rates, leverage, fuel prices, weather, economy, hedging, strong fundamental uplift, and regulatory
risk.
NV Energy, Inc. (NVE)
Valuation: Our target price is $13, which is set at a discount to our calculated net-asset-value (CNAV) of about $16 per share. We
determine our CNAV based on a full discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow
to Equity. We apply a multistage growth rate with a terminal multiple of about 12.3x based on a dynamic WACC with an initial rate of
7.05%. The terminal value is calculated at about 25 years from the most recently reported quarter.
Our discount is predicated on our belief that NVE’s organic growth potential will outweigh current economic concerns as projects
become more visible, but perhaps not in the next 12 months due to continued weakness in the Las Vegas economy. Given our strong
estimated CAGR over the next five years, our CNAV, strong FCFAID, good growth prospects, improving balance sheet, strategic
options, strong regulatory relationships, conservative valuation and strong rate-based investment growth, we believe that our valuation
is appropriate at this time.
Price Target Impediment: Equity issuances, commodity-price volatility, weather, economy, interest rates, access to capital markets,
credit rating initiatives and regulatory risk among others.
ONEOK, Inc. (OKE)
Valuation: Our calculated net asset value (CNAV) for ONEOK is $40 per share and target price is $32. Current economic conditions
and their implications for commodity prices and production growth compel us to assign our target at a 20% discount to CNAV at this
time.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 6.53%. Our terminal value multiple of 13.2x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Long-term commodity fundamentals and LNG, which may lead to obsolescence of certain business, near-
term commodity price risk, access to growth opportunities or acquisitions for OKS, regulatory interference or short-sightedness,
demographic shift, economic malaise, weather.
Ormat Technologies, Inc. (ORA)
Valuation: Our calculated net-asset-value (CNAV) is $65. Our target price of $51 is set at a discount until more visibility on future
projects is realized, and general market recovery occurs in the U.S. economy. We determine our CNAV based on a full discounted
cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate
with a terminal multiple of 9.4x based on a dynamic WACC with an initial rate of 9.91%. The terminal value is calculated at about 25
years forward.
We believe that certain regulatory stimuli should benefit the geothermal industry as a whole. As the most experienced pure-play
geothermal player in the U.S. with the strongest balance sheet, we believe that ORA should outperform its peers amidst these expected
positive regulatory and legislative catalysts.
Price Target Impediment: Drilling difficulties for new projects, thermal reservoir problems and execution risk, economy, permitting,
land management, legislative risk and regulatory risk.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
12
PG&E Corporation (PCG)
Valuation: Our calculated net asset value (CNAV) for PG&E is $53 per share. Our target price of $47 is at an 11% discount to our
CNAV, largely due to uncertainties in the current challenging macroeonomic environment. Longer term, we believe additional rate-
based growth projects will provide additional upside to management’s stated long-term EPS growth rate of 8%, and a rational
regulatory regime should continue to support consistent earnings for electric and gas distribution. We believe PCG value will be
fueled by strong rate-based growth, high management credibility, good strategic vision, solid execution to date, and strong regulatory
relationships. In the near-term, there are financial considerations posed by current state of credit markets. If debt market conditions
worsen, earnings could suffer as a result of increased interest expense, and stock could drop before reaching our target. However, we
believe these credit concerns are temporary, and PCG is well positioned given its investment grade ratings, credit quality and strong
regulatory relationships.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 5.96%. Our terminal value multiple of 13.3x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Near-term credit market concerns, poor economic performance in California, regulatory and legislative
risks and impediments, activists (environmental, legislative, regulatory, among others), warmer than normal summer weather or colder
than normal winter weather, unexpected transmission or distribution outages (electricity and natural gas), inability to expand
transmission and distribution system (electricity and natural gas), and volatility in commodity prices.
PNM Resources, Inc. (PNM)
Valuation: Our CNAV is $17 per share and our target price is $12. We determine our CNAV based on a full discounted cash flow
model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate with a
terminal multiple of 11.3x based on a dynamic WACC with an initial rate of 7.29%. The terminal value is calculated at approximately
25 years from the last reported quarter.
Our discount is predicated on our belief that investors will not look past the immediate regulatory concerns and towards the potential
growth until the matters are resolved in 1H09. We believe that the company is capable of achieving these objectives with time and
regulatory understanding.
Price Target Impediment: Valuation of PNM assets for JV, plant availability, bad regulatory outcomes, turbulent wholesale markets,
NIMBY issues, and prolonged regional economic recession.
Reliant Energy, Inc. (RRI)
Valuation: Our calculated net-asset-value (CNAV) is $18. We determine our CNAV based on a full discounted cash flow model
using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage growth rate with a terminal
multiple of 10.1x based on a dynamic WACC with an initial rate of 9.28%. The terminal value is calculated at about 25 years forward.
We set are target price at $9, a discount to our CNAV, based on unquantifiable Retail risks, market uncertainty, and commodity-price
expectations.
We believe that RRI's approach to achieving wholesale upside, combined with higher pricing in the PJM, tightening supply/demand
fundamentals, and flexibility with investments and growth strategies will continue to drive solid earnings.
Price Target Impediment: Regulatory and political interference, higher than expected decay in retail gross profit due to higher
defection of price-to-beat customers, lower than expected increase in customer conversion to RRI outside of Houston area, economic
recession, particularly in Texas, credit risk, moderate weather, difficult wholesale market environment, worsening electricity market
liquidity.
Spectra Energy Corp. (SE)
Valuation: Our calculated net asset value (CNAV) for Spectra is $33 per share; our target price is set at $19. The target price
discount to our CNAV is due to risks associated with an expansion program, as well as macroeconomic issues and current market
conditions. Existing operations and growth projects in response to strong demand should produce good earnings growth into the
future. Additionally, rate based pipeline businesses provide stability to the platform. Strategically, the company is well positioned to
take advantage of the inflow of LNG into North America. The strong asset base and growth plan, as operated by an experienced
management team, indicates the potential for further upside value in the stock price. We believe the intrinsic value of the company is
higher due to extensive growth projects than the short-term upside; accordingly, we set our target of $19 at a discount of 42% to our
CNAV of $33.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
13
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 6.95%. Our terminal value multiple of 12.4x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Unfavorable commodity prices, project cost overruns, poor acquisitions, operational setbacks,
environmental concerns, lower demand, weather.
Sempra Energy (SRE)
Valuation: Our calculated net asset value (CNAV) for Sempra Energy is $69 and target price is $57. The discount exists due to
capital spending requirements, construction in progress, and other capital projects that are in progress or in the planning stages, as well
as stemming from higher macro-risk environment. In the longer-term, we believe SRE exhibits strong organic growth
potential, fueled by the growing need for risk management products, LNG and generation growth opportunities, utility sector
consolidation and tightening reserve margins.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 7.42%. Our terminal value multiple of 11.4x is calculated at roughly 25-years from the most recent quarter.
Price Target Impediment: California risk (political, regulatory, environmental, legislative and activist), NIMBY issues, poor
infrastructure in California, moderate or very extreme weather, poor acquisition decisions, poor economic performance in California,
cost escalations.
Southern Union Company (SUG)
Valuation: Our calculated net asset value (CNAV) for Southern Union is $21 per share and our target price is $15. We assign our
target price at a discount of 29% to CNAV due to expected diminished results at Gathering and Processing, limited near-term growth
projects, and challenges of the current economic environment. In the longer term, we believe SUG’s strategic objective is to be well
positioned for the arrival of LNG to North America, and expand delivery capability into the Midwest, Florida and the Northeast.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 7.46%. Our terminal value multiple of 11.6x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Commodity price volatility, dependent on volatility of E&P business, changing fundamentals in natural
gas, moderate or very extreme weather, poor acquisition decisions, economic recession, sub-optimal reasons for formation of MLP.
TECO Energy, Inc. (TE)
Valuation: Our calculated net-asset-value (CNAV) is $17 and our target price is $14. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity after the sale of Transport.
We apply a multistage growth rate with a terminal multiple of about 12.3x based on a dynamic WACC with an initial rate of 6.95%.
The terminal value is calculated approximately 25 years forward. Our target price is discounted due to macroeconomic weakness
anticipated for 2009.
We believe that continued weakness in the FL economy, combined with decreasing coal prices, should offset the stability of the utility
operations for the foreseeable future.
Price Target Impediment: Commodity prices, weather, regulatory risk, access to capital markets, construction cost overruns, FL
economy, and potential environmental legislation.
Unitil Corporation (UTL)
Valuation: Our target price is $26 and our calculated net-asset-value (CNAV) is $30. We determine our CNAV based on a full
discounted cash flow model using an average of Free Cash Flow to the Firm and Free Cash Flow to Equity. We apply a multistage
growth rate with a terminal multiple of about 14.5x based on a dynamic WACC with an initial rate of 6.11%. The terminal value is
calculated approximately 24 years forward.
UTL is a traditional and conservative utility within the competitive market structure of New England with typical organic growth of 3-
5%. UTL is defined by its low-risk profile and strong dividend which we believe appeals to investors amidst the current economic
woes.
Price Target Impediment: Regulatory risk, contract risk, access to capital markets, commodity prices, operational risk, and
integration risk.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
14
The Williams Companies, Inc. (WMB)
Valuation: Our calculated net asset value (CNAV) for Williams is $36 per share and target price is $18. We assign our target price at
a 50% discount to our CNAV, which denotes longer-term value, due to macroeconomic issues and current market conditions, as well
as uncertainty around the outcome of the company’s announced evaluation of structural alternatives.
We determine our CNAV using a full discounted cash flow model assuming a multi-stage growth profile, using a dynamic WACC
initially valued at 8.58%. Our terminal value multiple of 10.7x is calculated at approximately 25 years from the most recently
reported quarter.
Price Target Impediment: Reduction in E&P production and reserves, lack of takeaway capacity from the Rocky Mountains,
increasing costs, lower-than-expected gathering volumes, commodity price risk, decline in throughput on the company’s pipelines,
weather and economic factors.

For the calendar quarter ended September 30, 2008, the author of this report did not attest in the time frame required under Regulation
AC that (i) the views expressed by the author in all public appearances during such calendar quarter actually reflected the author's own
personal views at that time about any and all of the subject securities or issuers discussed, and (ii) no part of the author's compensation
was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the author in such public
appearances; provided, however, that the author has, as of the date of this report, affirmatively made the foregoing attestations for such
calendar quarter.
Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
15
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Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009
16
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Navigating Treacherous Waters: Strategic Impetus for Next 24 MonthsFebruary 3, 2009