Gas & Electric
Utilities Outlook
2007-2010 Is Not 1929-1933:
Market Weight

Contents
Energy Utilities, Pipelines, and IPPs – Market Weight 3
2009 Energy Utility/IPP Stock Preferences and Q4/08 Changes 4
Quarterly Review 4
Comparison to 1873, 1929, and Other Global Financial Crises 9
Defensives Have Insulated During Credit Freeze 10
Share Impact, 2009-10 Eps Growth, ROEs, and Valuation 10
Rating Changes in Q4/08 16
2009 Interest Rate Outlook 16
2009E EPS and ROE 16
2009 Economic and Yield Curve Forecasts 17
Q1/09 Geopolitical Issues 17
Normalized Total Return Expectations Unchanged 18
Dividend Yields versus Government Bond Yields 19
EV/EBITDA Comparison with Energy Utility Income Trusts and LPs 22
Frontier Gas Pipelines Revived? 24
Conclusion: Overweight Short Term, Market Weight over One Year 24
Q3/08 Canadian EPS Summary and Observations 25
Q3/08 U.S. EPS Summary and Observations 26
Canadian versus U.S. Energy Utility Stocks 27
Changes in Canadian and U.S. Energy Utility Taxation – 2008-09 29
Canadian Dividend History 30
Credit and Financing 32
Q4/08 Canadian Credit Observations 32
Q4/08 U.S. Credit Observations 34
Q4/08 Financing/Restructuring 35
Q3/08 Financing/Restructuring 35
M&A Activity 36
Recent Initial Public Offerings/Equity Financings 40
North American Power Market Highlights 41
U.S. Trends 42
2008 U.S. Coal Trends 43
U.S. Regulatory Overview 50
Coal/Petroleum Coke Gasification Developments 51
U.S. 2009 ROE and Equity Bases Remain Higher Than Canada’s 53
Canadian Regulatory Overview 54
Canadian Power Trends 56
Provincial Energy Developments 56

Liquefied Natural Gas Developments 71
Canada LNG 72
U.S. LNG 72
LNG Summary – Sharp Global LNG Import Growth Price Sensitive 73
Major Gas Pipeline Projects 75
Frontier Gas Pipelines 75
Other Natural Gas Pipelines 78
Major North American Oil / Condensate / CO2 / Ethanol Pipeline Projects 81
Other Enbridge Oil Pipeline Proposals 82
Condensate Pipeline Projects 84
CO2 Pipelines 86
Oil / Condensate / CO2 / Ethanol Pipeline Project Conclusion – Bullish 87
Nuclear Power Update 89
New Nuclear Plant Construction Costs 92
New Nuclear Plant Features 92
Renewable Power 93
Q4/08 Global Warming, Kyoto, and Carbon Trading Update 94
Canada Update 95
U.S. Update 96
Global / Kyoto Update 97
Global Warming Facts 98
Carbon Trading to Soar 101
CO2 Capture 102
Non-Carbon Growth 105
Non-Carbon Growth Conclusions 105
Appendix 1 – Canadian Energy Utilities & Pipelines – Forecasts and Recommendations 106
Appendix 2 – High Yielding Energy Utilities’ and
Pipelines’ Share Price Performance, Dividend Yields, and P/E Ratios 107
ATCO Ltd. 107
Canadian Utilities Ltd. 108
Emera Inc. 109
Enbridge Inc. 110
Fortis Inc. 111
TransAlta Corporation 112
TransCanada Corporation 113
S&P/TSX Composite Index 114
Appendix 3 – Tax Rates for Dividends and Interest 115
Appendix 4 – Provincial Energy and Conservation Initiatives 116

Energy Utilities, Pipelines, and IPPs – Market Weight
We chose to begin 2009 easing off our overweight position, which we have suggested since mid-August
2008. We last wrote that “there should still be several more quarters of relative outperformance.” This
certainly was true for Q4/08. It was so strong that we could not continue with our overweight
recommendation. That would have implied a belief that we are entering a 1929-32 depression. Bearish
U.S. and Credit Crunch Data Still Favour Defensives and Defensives Should Insulate During the Credit
Freeze were our last two quarterly titles.
By mid-August 2008, we were overweight on both pipelines (first on August 1) and energy utilities due to
(1) collapsing risk-free interest rates, (2) collapsing global economy, and (3) the pounding of materials and
energy stocks in early Q3/08 trading, signalling a full bear market. We went overweight pipelines first
due to our relative preference for them on superior EPS growth rates, which continue entering 2009. Back
in Q2/08, material stagflation risks still worried us as Canada’s central bank forecast a 4.3% inflation peak
in Q1/09. The U.S. CPI had also broken 6% in July 2008. Back then, commodity stocks were still running
hard and LBO deals were being announced weekly. Q2/08 was the quarter to be underweight pipelines
and utilities.
Buys. We like Enbridge Inc. and TransCanada Corporation. If we had to choose a utility, it would be
Fortis below $24, as it has the greenest asset mix.
Sells. We backed off our TransAlta Corporation sell due to its 33% stock price decline to below $24
per share (our #1 sell in 2008). Given its continuing 10% per year EPS growth, which looks mostly
assured through 2010, we moved TransAlta up to 2-Sector Perform. To balance our bell curve
recommendation requirement, we chose Emera Incorporated as our 3-Sector Underperform. Its stock
performed the best in 2008, with some valid reasons, but it was lucky that it was not part of the TSX
60, which was used as cannon fodder by
people shorting the market or getting out of
the market.
Relative performance. Collectively,
Canadian defensives massively
outperformed in Q3/07, Q4/07, Q1/08, and
then again in Q3/08 and Q4/08. Why? The
massive credit crisis dried up lending and
equity deals. This weighed heavily on equity
prices, particularly on junk debt and
commodity companies that needed equity to
start/finish projects. Pipelines and energy
utilities did not fit into that category.
See Exhibit 1.
The credit crisis genesis was in collapsing U.S. housing prices that led to soaring foreclosures and souring
loans. This sent equity and debt investors scurrying for cover out of overlevered financials. Where did they
reinvest? (1) cash, (2) risk-free government bonds, and (3) defensives with no toxic housing-related asset
risks, like pipes and energy utilities.
Falling interest rates relatively positive. The collapse of risk-free rates on government debt tended to
favour pipelines and energy utilities, as they provide the highest dividend yields in equity markets, with
the lowest risk of dividend cuts. Scotia’s economists forecast dramatically lowered short-term rates to
0.5% in Canada and 0.25% in the United States for central bank overnight funds in mid-December 2008
through all of 2009.

U.S./Europe downturns worsen. The U.S. and EU economies have been much weaker than expected
for all data points recently. Much of the United States and EU banking systems are effectively bankrupt,
the way their financial stocks are trading. A final write-off bill of US$1.4 trillion may be US$2.0-$2.5
trillion globally. Only half is written off so far. The average U.S. home price is down 20%, for a loss
of US$10 trillion, with another 10% drop forecast by many. U.S. stock markets (NYSE, Nasdaq, and
S&P 500) are also down about US$10 trillion in value, as well as from peak levels, as U.S. consumer
spending is forecast to compress for another year from this massive US$20 trillion paper and
realized loss. U.S. household assets are falling way faster than household liabilities, which have built
up to be the highest in U.S. history since 1929. This still favours defensives short term.
Interest rates/valuations. Scotia Economics’ latest December 2008 forecast calls for 3.15% 10-year
Canada rates in Q1/10, down 105 basis points in 90 days. Our valuations still assume our October 2008
call for 4.25%, with record wide credit spreads returning to more normal levels. For example, investment
grade BBB 10-year paper at TransAlta is currently yielding about 10% while 10-year Canada yields are
yielding 2.6%. Our 2010 P/Es are lower than historical norms by about 3x as (1) the TSX average P/E has
fallen 6x from peak levels and (2) corporate credit risk premiums are at record highs.
Renewable power stocks: These are now covered by our Alternative and Renewable Energy analyst,
Ben Isaacson.
2 0 0 9 E N E R G Y U T I L I T Y / I P P S T O C K P R E F E R E N C E S A N D Q 4 / 0 8 C H A N G E S
We nudged Enbridge over TransCanada Corporation in late 2008 as risk-free rates collapsed. We still
like pipes over all energy utilities and independent power producers (IPPs). Our favourite energy utility is
Fortis Inc. We find Emera’s stock price more fully valued than others. It was the most resilient in 2008, in
part because it was not included in TSX 60 index, which got beat up by index fund selling and hedge fund
selling, taking down Enbridge, TransCanada, and TransAlta indirectly at times.
We moved up ATCO to 2-Sector Perform from 3-Sector Underperform as of early 2008 as its more
cyclical stock collapsed almost 50%. We now prefer ATCO over its 53%-owned Canadian Utilities,
especially when ATCO’s stock trades below Canadian Utilities’ stock. Our weakest 2-Sector Perform is
more cyclically oriented TransAlta Corporation, which was our #1 sell entering 2008. After its $13 per
share stock price fall in 2H/08 caused in part by the failure of a U.S.-led LBO acquisition, we eased off our
3-Sector Underperform rating on TransAlta to 2-Sector Perform. Recent weakness relates to a collapse of
gas prices below $5/mcf from a peak $14/mcf and some operational issues at its Alberta PPA (power
purchase agreement) coal-fired power plants in January 2009.
Q U A R T E R L Y R E V I E W
Interest rate directions. Through Q4/08 and early Q1/09, the economic events outlined in Exhibit 3 have
been hugely positive for lower short-term, mid-term, and long-term risk-free Canadian government
interest rates. Offsetting to date for equity valuations of high dividend-paying stocks was the blowout of
corporate debt risk premiums to record 1929-30 crisis levels.
Geopolitical events fixated on credit. The U.S. sub-prime mortgage disaster spread over many other
asset classes of credit, freezing them and world credit markets into lending submission as banks feared
their own bankruptcies led by their reckless lending and overleveraging of their balance sheets. This in
turn led to the worst equity crash since 1982, 1974, and 1929. Frozen credit remains the most important
geopolitical event since August 2007. The toxic asset bailouts, bank nationalizations, and overnight rates
heading towards zero in many countries has not yet loosened up credit markets, other than TED
spreads and Libor markets.

U.S. banks and investment house bailouts have wiped out Wall Street as we have known it. Collapsing oil
prices and a flight to the U.S. dollar and U.S. Treasuries have also spectacularly reversed previous
inflation trends. Global deflation is also a much bigger worry now, as numerous articles on Japan’s
20 years of recent deflation and the 1929-33 experience attest to.
This is uncharted financial territory for anyone under 90 years of age in North America. Fear or
panic in stock markets such as now favours defensives on a relative basis. There were massive fund
withdrawals in both the United States and Canada during 2008.
The TSX and the S&P dividend yields relative to bonds have soared way past 100%, the highest
ever! Even A credit investment-grade utility 10-year debenture yields (i.e., Enbridge at A-) have soared to
550 points over risk-free rates. TransCanada did recently do a mid-term $1 billion debt financing at only
450 points over risk-free rates, positively surprising the cautious corporate bond market. In 2004,
TransCanada did 10-year U.S. paper at less than 100 points over risk-free rates!
Outperformance history. Energy utility outperformance periods include the July 2007-February 2009 to
date crisis, the 1998 Asian crisis, the 1991 Kuwait War buildup period, the 1987 crash, the 1981-82
recession, and the 1973-74 recession. Global stock markets knew no fear until mid-July 2007 when the
overlevered high-risk stuff hit the fan. Grossly underpricing credit risk in 2003-07 for sophisticated and
convoluted debt, mortgages, LBO deals, etc. by banks that overleveraged themselves at 10:1 for corporate
and up to 35:1 for investment banks has already made this recession much longer than the average.
2007-09 is a balance-sheet-related and not inflation-related recession, as was the case in the 1973-74 and
1981-82 recessions. Interest rates on overnight government loans, which are now near zero in Q1/09, have
so far not stimulated the economy. Since interest rates cannot go below zero, other draconian
financial measures are required.
The credit crunch rages on into early Q1/09, so perhaps staying overweight defensives is okay short
term. However, massive global government bailouts may lead to some stability and recovery by late 2009-
10. This is why we eased to market weight for one-year time horizon investors. Exhibit 2 shows the
history of credit debacles that have led to major Fed fund easing cycles.