Company Rating:. U~date Sectorwighting: Enbridge Inc. OEB Refuses to BO OS^ Allowed ROE

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1 1 January 19,2004 Canadian Pipelines a Utilities E l d Markets Company Rating:. U~date Sectorwighting: Enbridge Inc. OEB Refuses to BO OS^ Allowed ROE Société en commandite Gaz Métro Cause tarifaire 2010, R Equity Research Sector Performer Underweight ENB-TSX ( ) $54.00 i The Ontario Energy Board (OEB) delivered its decision on allowed return on mo. Price Target $55.00 equity for Enbridge Gas Distribution on Friday January 16. The OEB rejected Kev Indices: Toronto, TSXUtils applications for higher ROEs. The outcome is consistent with our assumptions so we are not changing EPS estimates. 3-5-Yr. EPS Gr. Rate (E) : 7.0% 52-week Range $54.14-$40.95 Shares Outstanding 171.5M Float 165.OM shrs Avg. Daily Trading Vol. 552,482 Market Capitaiization $9.3B DividendNield $ % Fiscal Year End Book Value December per Shr 2004 ROE 14.2% LT Debt Preferred Cornmon Equity Convertible Available $6,589.3M $657.7M $3,587.50M No i ' The challenge that Enbridge faced in arguing for a higher allowed ROE at a time when utility stocks are trading at historically high multiples is not unique to Enbridge. Other companies will likely face the same challenge this year at the NEB and AEUB (see comment for details). i A reduction in allowed returns was one of three reasons we downgraded the sectoi on January 6. The other reasons were high valuation and decreased acquisition activity. Again, these issues apply to the whole sector, not just to Enbridge. i But Enbridge is the most expensive stock in the group at 17.7~ fonvard eamings. In the near-term there could be more downside than upside fiom these levels, in our view. At the sarne time, many companies are nearing our targets, so we maintain our Sector Performer on Enbridge. Company Description Earnings per Share Prev Current 2002 $ Enbridge is a North Arnerican pipeline, rnidstrearn and natural gas distribution 2003 $2.80E cornpany $3.05E PIE ~ ~ ~ Stock Price Performance ENBRIDGE INCORPORATED C$ (ENB.Ch) 58 PRlCE 540 DATE sto&valm 56 Matthew Akman 1 (416) Matthew.Akman@cibc.ca Dividends Per Share 2001 $ $ E $ E $1.80 Alda Pavao, CFA I 1 (416) a!da.pavao cibc.m Original : ClBC World Markets Inc., P.O. Box 500,161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 t ClBC World Markets Corp., 417 FiWi Avenue, New York, New York t t Vdme In'lhxrra-dr olmi Al1 fipures are in Canadian dollars unless specified ofherwise. ~ee "~e~al Disclaimer" and "Important ~isclosure Footnotes" sections at the end of this report for important ' disclosures, inciuding potential confli. of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Gaz Métro - 7. ~ ocume$~~~ Find ClBC reçearch on Bloomberg (CIER <go>), firstcall.com, muitex.com, zackç.com and cibcwm.com Page 1 sur 194 I

2 OEB Refuses to Boost Allowed ROE - January 19, 2004 Investment Summary The Ontario Energy Board (OEB) delivered its decision on allowed return on equity for Enbridge Gas Distribution on Friday January 16. The OEB flatly rejected the notion of raising the allowed ROE or of making any changes to its approach to calculating allowed returns. The outcome is consistent with our assumptions so we are not changing our EPS estimates. Enbridge had applied to the OEB together with Union Gas (DUK-NYSE, Not Rated) for a new approach to establishing the allowed ROE based on capital market considerations such as assumed growth rates for utility companies. The utilities had requested allowed after-tax ROEs of 11.5% and 11.65% for Enbridge Gas Distribution and Union Gas. The OEB formula that will be applied results in ROEs of 9.71% and 9.68%. As justification for its decision, the OEB stated its views that: There was no evidence of a disadvantage for Canadian utilities relative to American utilities. There was no evidence that the utilities were experiencing difficulty in raising equity capital from their parent companies or from the markets. There was no evidence that investors are deterred from investing in Canadian utilities because of inadequate prospective returns. The challenge that Enbridge faced in arguing for a higher allowed ROE at a time when utility stocks are trading at historically high multiples is not unique to Enbridge. We expect companies arguing the same point at the National Energy Board and Alberta Energy and Utilities Board will confront similar challenges. Companies still materially exposed to falling allowed ROEs in Alberta include TransCanada (TRP-TSX, Sector Performer), Canadian Utilities (CU-TSX, Sector Underperformer) and ATCO (ACO.X-TSX, Sector Performer). Fortis (FST-TSX, Sector Outperformer) is exposed but to a lesser extent than the others. What regulators may be missing is that valuations on the companies and access to capital may decline significantly once there is a sign that bond yields are rising. When the bond market turns, we seriously doubt that the formula returns will rise sufficiently rapidly to compensate shareholders for the decline in valuation. In that respect, the companies may yet be vindicated that the ROE formula does not work. But it may also be too late to address the problem because regulators across Canada will have already issued their final decisions on the issue. Slower earnings and dividend growth are the consequences of lower allowed returns. These consequences apply as much to other companies in the sector as to Enbridge. With allowed returns of less than 10% and dividend payout ratios of 60%+, it is difficult to achieve annual growth in excess of 3% - 5%. A reduction in allowed returns was one of three reasons we downgraded the sector on January The other reasons were high valuation and decreased acquisition activity. These issues are related as the lower allowed returns are dampening growth rates and acquisition activity is insufficient to offset the decline. Again, these issues apply to the entire sector and not just to Enbridge. But Enbridge is the most expensive stock in the group, now trading at 17.7x forward earnings. From this level, there could be more downside than upside in the near-term, in our view. Since many of the other companies are also nearing our target prices, we maintain our Sector Performer rating on Enbridge. 2 Page 2 sur 194

3 OEB Refuses to Boost Allowed ROE - January 19, 2004 Price Target Calculation Our target price of C$55 is based on a 16.7x multiple of our C$ EPS forecast. It also implies a 3.5% dividend yield. Enbridge s growth rate is among the highest of the Canadian pipelines and utilities group, with a relatively low-risk profile, given its few non-regulated assets. For these reasons, we are using a 16.7x multiple (within the stock s historical range of 12-20x), compared to a group average target P/E of 15.6x. Key Risks to Price Target We see the following risks to our C$55 target price: Rise in bond yields The pipelines and utilities stocks are sensitive to changes in bond yields. If broader market risks dissipate and bond yields rise, valuations in the sector could fall. Falling short of our 2004 and 2005 EPS estimates We are still assuming Enbridge makes acquisitions to reach our 2004 and 2005 EPS estimates. Enbridge may not achieve this forecast unless it uses the rest of the capital it raised from the sale of its interest in Alliance Canada for acquisitions that produce earnings next year. Competition in oil pipelining Increased competition in oil pipelining introduces risks to returns on existing and new oil pipeline assets. Our EPS estimates assume Enbridge continues to earn a high return on its Mainline (tolls must be renewed this year) and obtains shipper support for the reversal of the Spearhead pipeline. Acquisitions that detract from shareholder value In an environment where Canadian pipelines & utilities companies, including Enbridge, have aspirations to grow through acquisitions, there exists the risk that acquisitions detract, not add, to shareholder value. Our view is that these pitfalls can be avoided by extensive due diligence and by using criteria for near-term EPS and cash flow growth. The risk is also mitigated by current market conditions in which there are many more buyers than sellers. 3 Page 3 sur 194

4 OEB Refuses to Boost Allowed ROE - January 19, 2004 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2002 Actual $0.65A $1.40A $0.36A $0.24A $2.65A 2003 Current $0.59A $1.49A $0.52A $0.22E $2.80E 2004 Current $3.05E 4 Page 4 sur 194

5 OEB Refuses to Boost Allowed ROE - January 19, 2004 Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 1/18/2004: Atco Ltd. (11) (ACO.X-TSX, $47.70, Sector Performer) Canadian Utilities Ltd. (11) (CU-TSX, $59.40, Sector Underperformer) Fortis Inc. (2a, 3a, 9a, 11) (FTS-TSX, $61.00, Sector Outperformer) Terasen Inc. (2a, 3a, 11) (TER-TSX, $45.99, Sector Performer) TransCanada Corp. (2a, 9a, 11) (TRP-TSX, $26.94, Sector Performer) Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: Stock Prices as of 1/18/2004: Duke Energy (DUK-NYSE, $20.96, Not Rated) Key to Footnotes: 1) CIBC World Markets Corp. makes a market in the securities of this company. 2) CIBC World Markets Corp., or one of its affiliated companies, has received compensation for investment banking services from this company in the past 12 months. 2a) CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 3) CIBC World Markets Corp., has managed or co-managed a public offering of securities for this company in the past 12 months. 3a) CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 4) This company has a convertible included in the CIBC World Markets convertible universe. 5) An employee of CIBC World Markets is an officer, director or an advisory board member of this company. 6) The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 7) The CIBC World Markets Inc. analyst(s) who covers this company also has a long position in its common equity securities. 8) CIBC World Markets does not cover the underlying equity security into which the security is convertible and expresses no opinion with regard to this company. 9) CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 9a) CIBC World Markets Inc., expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 10) A member of the household of a CIBC World Markets research analyst that covers this company is an officer, director or an advisory board member of this company. 11) CIBC World Markets Corp. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 12) A member of the household of a CIBC World Markets research analyst that covers this company has a long position in the common equity securities of this company. 13) A member of the family of a Director of the Equity Research Department of CIBC World Markets Corp. is an officer of this company. 14) CIBC World Markets Inc., its partners, affiliates, officers or directors, or any analyst involved in the preparation of the research report has provided services to this company for remuneration in the past 12 months. 15) A senior executive member or director of Canadian Imperial Bank of Commerce, or a member of his/her household is an officer, director or advisory board member of this company and/or one of its subsidiaries. 5 Page 5 sur 194

6 OEB Refuses to Boost Allowed ROE - January 19, 2004 CIBCWM Price Chart Historical Performance of CIBC Recommendations for ENB (TSX) Date Change Type Closing Price Rating Price Target Coverage 05/14/ B Peter Case 09/07/ B Peter Case 10/12/ B Peter Case 05/06/ B Peter Case 08/26/ SO Peter Case 09/04/ SO Peter Case 11/08/ SO Peter Case 11/22/ SO Peter Case 01/07/ SO Peter Case 03/13/ SO Matthew Akman 04/25/ SP Matthew Akman 05/21/ SP Matthew Akman 07/09/ SP Matthew Akman 11/12/ SP Matthew Akman 6 Page 6 sur 194

7 OEB Refuses to Boost Allowed ROE - January 19, 2004 CIBCWM Stock Rating System Abbreviation Rating Description Company Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP SU Sector Performer Stock is expected to perform in line with the sector during the next months. Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated Stock is not covered by CIBCWM. Company Ratings Prior To August 26 th 2002 SB Strong Buy Expected total return over 12 months of at least 25%. B Buy Expected total return over 12 months of at least 15%. H Hold Expected total return over 12 months of at least 0%-15%. UP Underperform Expected negative total return over 12 months. S Suspended Stock coverage is temporarily halted. DR Dropped Stock coverage is discontinued. R Restricted Restricted UR Under Review Under Review Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and S&P/TSX Composite in Canada. "-S" indicates Speculative. An investment in this security involves a high amount of risk due to volatility and/or liquidity issues. "CC" indicates Commencement of Coverage. The analyst named started covering the security on the date specified. Ratings Distribution: CIBC World Markets Coverage Universe (as of 18 Jan 2004) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Ratings Distribution: Canadian Pipelines & Utilities Coverage Universe (as of 18 Jan 2004) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Canadian Pipelines & Utilities Sector includes the following tickers: ACO.X, CU, EMA, ENB, FTS, TA, TER, TRP. 7 Page 7 sur 194

8 OEB Refuses to Boost Allowed ROE - January 19, 2004 Important Disclosure Footnotes for ENB 2a CIBC World Markets Inc. has received compensation for investment banking services from Enbridge Inc. in the past 12 months. 9a CIBC World Markets Inc., expects to receive or intends to seek compensation for investment banking services from Enbridge Inc. in the next 3 months. 11 CIBC World Markets Corp. and its affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by Enbridge Inc. 8 Page 8 sur 194

9 OEB Refuses to Boost Allowed ROE - January 19, 2004 Legal Disclaimer Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Conflicts of Interest: CIBC World Markets' equity research analysts are compensated from revenues generated by various CIBC World Markets businesses, including CIBC World Markets' Investment Banking Department. CIBC World Markets may have a long or short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should not rely solely on this report in evaluating whether or not to buy or sell the securities of the subject company. Legal Matters: This report is issued and approved for distribution by (i) in the U.S., CIBC World Markets Corp., a member of the NYSE and SIPC, (ii) in Canada, CIBC World Markets Inc., a member of the IDA and CIPF, (iii) in the UK, CIBC World Markets plc, which is regulated by the FSA, and (iv) in Australia, CIBC World Markets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, "CIBC World Markets"). This document and any of the products and information contained herein are not intended for the use of private investors in the UK. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. This report is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors; their prices, value and/or income they produce may fluctuate and/or be adversely affected by exchange rates. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Before making an investment decision on the basis of any recommendation made in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. This report may contain statistical data cited from third-party sources believed to be reliable, but CIBC World Markets does not represent that any such third-party statistical information is accurate or complete, and it should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice. Although each company issuing this report is a wholly owned subsidiary of Canadian Imperial Bank of Commerce ("CIBC"), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation ("FDIC"), the Canada Deposit Insurance Corporation or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license CIBC World Markets Corp. and CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets is prohibited by law and may result in prosecution. 9 Page 9 sur 194

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11 July 5, 2004 Maureen E. Howe, Ph.D. (Finance) (604) Fai Lee, CGA, CFA (Associate) (604) Robert Kwan, CFA (Associate) (604) All figures in C$ unless otherwise indicated. For Required Disclosures, please see page 4. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. Alberta Regulatory Update AEUB Establishes Generic ROE Formula and Approves Capital Structures Event On Friday, the Alberta Energy and Utilities Board (AEUB) issued a decision to establish a generic ROE formula for all AEUB-regulated utilities and approved the capital structure for each of these utilities. Investment Opinion Generic ROE approach. A common, or generic, ROE will be applied to all electric and natural gas utilities under the AEUB s jurisdiction. Common ROE of 9.60% for All utilities that did not previously have an AEUB-approved 2004 ROE will receive an allowed ROE of 9.60%. Generic ROE formula. Under the AEUB s generic ROE formula, the common ROE for the upcoming year would adjust by 75% of the change in the forecast 30-year Government of Canada bond yield. The common ROE of 9.60% for 2004 would form the starting point for the formula. Deemed capital structures. Subject to adjustments for individual circumstances, the AEUB concluded that an appropriate common equity ratio for a fully taxable electric transmission company, with no preferred shares, is 33%. The AEUB also concluded that 35% was an acceptable common equity ratio for a gas transmission company, 37% was suitable for an electric distribution company and 38% was appropriate for a gas distribution company. Positive regulatory development. We believe that the establishment of a generic ROE approach provides greater visibility and increased certainty for AEUB-regulated utilities, resulting in lower regulatory risk. Impact on our coverage universe. The AEUB generic ROE decision has implications for AEUB-regulated utilities owned by AltaGas Income Trust, Canadian Utilities, Fortis and TransCanada. On a company-specific level, we view the generic ROE decision as slightly positive for AltaGas Income Trust, Canadian Utilities and Fortis and slightly negative for TransCanada. We have revised our EPS estimates for Canadian Utilities, ATCO, Fortis and TransCanada to reflect the decision. Our risk qualifiers for Canadian Utilities and ATCO have been increased to Above Average Risk from Average Risk. Page 11 sur 194

12 RBC Capital Markets Alberta Regulatory Update Details On Friday, the Alberta Energy and Utilities Board adopted a generic approach for setting the return on common equity (ROE) for AEUB-regulated electric and natural gas utilities. It also approved the capital structure for each of these utilities. The following are some of the major highlights from the decision: Adoption of generic ROE approach. The AEUB decided that implementation of a generic approach was in the public interest. A common, or generic, ROE will be applied to all electric and natural gas utilities under the AEUB s jurisdiction. In general, utility specific adjustments such as differences in business risk would be addressed through the approved capital structure. Common ROE of 9.60% for The common ROE of 9.60% is applicable to utilities that did not previously have an AEUB-approved 2004 ROE. To derive the appropriate common ROE, the AEUB started with a Capital Assets Pricing Model (CAPM) estimate of 9.20% 1. Based on other factors, such as estimates provided by alternative ROE methodologies and returns allowed by other regulators, the AEUB concluded that it would be appropriate to establish the 2004 ROE at 40 basis points above the CAPM estimate of 9.20%. Generic ROE formula will determine common allowed ROE starting in The common ROE of 9.60% for 2004 would form the starting point for the formula. The AEUB generic ROE formula is very similar to the National Energy Board s Multi-Pipeline ROE formula. Under the AEUB s formula, the common ROE for the upcoming year would adjust by 75% of the change in the forecast 30-year Government of Canada (GOC) bond yield. The forecast long-canada bond yield would be determined by adding a basis point spread 2 to the average of the 3-month-out and 12-month-out forecasts of 10-year Canada yields as reported in the November issue of Consensus Forecasts Inc. s Consensus Forecasts. The AEUB generic ROE formula is summarized as follows: ROE t =9.60% + [0.75 X (YLD t 5.68%)] where YLD = the forecast long-term Canada bond yield for year t Formula to be reviewed in five years. The AEUB will seek input on whether the adjustment mechanism continues to yield a fair return prior to setting the ROE for the year An early review would be triggered if the ROE resulting from the adjustment mechanism prior to 2009 is less than 7.6% or greater than 11.6%. To trigger an early review, the forecast long-canada bond yield would need to decrease below 3.02% or increase above 8.34%. We view these as unlikely events and assign a low probability to an early review of the AEUB s generic ROE formula. Deemed capital structures established for AEUB-regulated utilities. The capital structures would apply for 2004 and beyond, unless changed by the AEUB in future proceedings for individual utilities. Subject to adjustments for individual circumstances, the AEUB concluded that an appropriate common equity ratio for a fully taxable electric transmission company, with no preferred shares, is 33%. The AEUB also concluded that 35% was an acceptable common equity ratio for a gas transmission company, 37% was suitable for an electric distribution company and 38% was appropriate for a gas distribution company. Implications The AEUB generic ROE decision has implications for AEUB-regulated utilities owned by AltaGas Income Trust, Canadian Utilities, Fortis and TransCanada. Exhibit 1 summarizes the allowed ROE and deemed common equity ratio approved by the AEUB for 2003 and It also compares our estimate of the 2004 deemed common equity ratio with the actual approved ratio and provides information on our previous and current expectations with respect to achieved ROEs, which include assumptions about operating efficiencies, for each utility. 1 Risk free rate of 5.68%; market risk premium of 5.50%; beta of 0.55; flotation costs of 0.50% 2 The basis point spread is equal to the average of the daily difference between the 10-year and 30-year Canada bond yields for the month of October in the previous year, as reported in the National Post. July 5, Page 12 sur 194

13 RBC Capital Markets Alberta Regulatory Update Exhibit 1: Generic ROE Decision Allowed ROE 2004 Achieved ROE Deemed Common Equity Ratio Parent Utility Previous Estimate New Estimate E 2004A AltaGas AltaGas Utilities 9.50% 9.60% 9.50% 9.60% 41.00% 41.00% 41.00% Canadian Utilities ATCO Electric (Transmission) 9.40% 9.60% 11.50% 11.50% 32.00% 32.00% 33.00% ATCO Electric (Distribution) 9.40% 9.60% 11.50% 11.50% 35.00% 35.00% 37.00% ATCO Gas 9.50% 9.60% 12.75% 12.75% 37.00% 37.00% 38.00% ATCO Pipelines 9.50% 9.60% 9.50% 9.60% 43.50% 43.50% 43.00% Fortis FortisAlberta 9.50% 9.60% 9.40% 9.60% 40.00% 35.00% 37.00% TransCanada NOVA Gas Transmission ("Alberta System") n.a % 10.70% 9.60% n.a % 35.00% 1 In 2003, the Alberta System operated under the terms of a negotiated settlement with its shippers. 2 Last approved equity ratio was established in 1995 at 32%. Source: Company reports, AEUB, RBC Capital Market Estimates AltaGas Income Trust We view the AEUB generic ROE decision as slightly positive for AltaGas. The AEUB did not change the deemed common equity ratio for AltaGas Utilities, while the allowed ROE is slightly higher than we had expected. In light of the approved ROE of 9.60%, we have revised our 2004 estimate for AltaGas Utilities achieved ROE from 9.50% to 9.60%. We calculate that the change has no impact on our ACFFO/Unit or CFFO/Unit estimates for AltaGas Income Trust. Canadian Utilities We view the AEUB generic ROE decision as modestly positive for Canadian Utilities. The common ROE of 9.60% for 2004 is higher than the 2003 allowed ROEs for ATCO Electric, ATCO Gas and ATCO Pipelines. The AEUB increased the deemed common equity ratio for ATCO Electric s transmission business from 32.0% to 33.0%, for ATCO Electric s distribution business from 35.0% to 37.0% and for ATCO Gas from 37.0% to 38.0%. The deemed common equity ratio for ATCO Pipelines was decreased slightly from 43.50% to 43.0%. In light of the AEUB decision, we have revised our financial model for Canadian Utilities. Specifically, we have reflected higher allowed common equity components for the Canadian Utilities power and gas utilities, a slightly higher allowed return on equity and a slightly lower allowed common equity component for ATCO Pipelines. Although the company s power and gas utilities received slightly higher allowed ROEs than previous decisions for 2003, our model has these companies significantly over-earning their allowed returns and, as such, we have not reflected higher achieved ROEs in our financial model for these areas relative to those used in previous estimates. As a result of the changes to our financial model, we have increased our 2004, 2005 and 2006 EPS estimates for Canadian Utilities from $3.88, $4.10 and $4.23 respectively to our new estimates of $3.94, $4.16 and $4.29. According to our financial model, Canadian Utilities appears to be over-earning its allowed ROE at ATCO Electric (Transmission), ATCO Electric (Distribution) and ATCO Gas. We have no idea whether the over-earning is sustainable as there is little explanation regarding the details of the over-earning provided by management. While we believe the AEUB decision will increase rates, and therefore should increase the company s earnings, we lack confidence regarding the sustainability of the level of earnings contribution from these areas. As such, we have increased the risk qualifier for Canadian Utilities from Average Risk to Above Average Risk. ATCO Reflecting the impact of the AEUB decision on Canadian Utilities, we have increased our 2004, 2005 and 2006 EPS estimates for ATCO from $4.39, $4.68 and $4.86 respectively to $4.45, $4.74 and $4.92. Reflecting our concerns over the sustainability of the level of earnings contribution from Canadian Utilities, we have increased the risk qualifier for ATCO from Average Risk to Above Average Risk. Fortis We view the AEUB generic ROE decision as slightly positive for Fortis relative to our expectations but modestly negative relative to the company s expectations. Under the decision, the deemed common equity component for FortisAlberta was decreased from 40% to 37%, while its allowed ROE was increased from 9.50% to 9.60%. We believe that the negative impact July 5, Page 13 sur 194

14 RBC Capital Markets Alberta Regulatory Update from the decrease in FortisAlberta s common equity ratio more than offsets the positive impact from the increase in its allowed ROE. In its guidance, Fortis management had expected the common equity ratio and allowed ROE for 2004 to remain unchanged at 40% and 9.50% respectively. In light of the AEUB s October 2003 decision establishing a deemed equity ratio of 35% for ATCO Electric s distribution business, we had anticipated a decrease in FortisAlberta s deemed common equity ratio to 35%, which is slightly lower than the approved ratio for 2004 of 37%. We have revised our financial model to reflect the actual approved common equity ratio for FortisAlberta of 37% and the increase in its allowed ROE to 9.60%. Accordingly, we have increased our 2004, 2005 and 2006 EPS estimates for Fortis from $4.13, $4.26 and $4.57 respectively to our new estimates of $4.16, $4.28 and $4.59. TransCanada In light of the AEUB generic ROE decision, we expect a decline in the earnings contribution from TransCanada s Alberta System. TransCanada estimates the decision will result in 2004 net earnings from the Alberta System of approximately $155 million compared to net earnings of $190 million in In 2003, TransCanada had reached a negotiated settlement with shippers on the Alberta System that provided the company with an opportunity to achieve earnings in excess of the amount that it would have earned under a cost of service methodology similar to the generic ROE approach. We were anticipating net earnings of approximately $177 million for 2004 from the Alberta System, reflecting our assumption that TransCanada would realize operating efficiencies to offset any negative impact from the application of a generic ROE and/or enter into a negotiated settlement with its shippers. Reflecting more modest earnings contributions from the Alberta System, we have decreased our 2004 and 2005 EPS estimates for TransCanada from $1.62 and $1.75 to $1.57 and $1.70, respectively. Notwithstanding the change to our estimates, our outlook for TransCanada remains intact. We believe that the company will successfully integrate the GTN acquisition and that the significant free cash flow of over $900 million per year will provide the company with the financial flexibility to pursue projects in the future. We continue to view the shares as providing investors with an attractive yield, growth potential and a low risk total return. Conclusion We believe that the establishment of a generic ROE approach provides greater visibility and increased certainty for AEUBregulated utilities resulting in lower regulatory risk. We view the generic ROE decision as a positive regulatory development. On a company-specific level, we view the generic ROE decision as slightly positive for AltaGas Income Trust, Canadian Utilities and Fortis and slightly negative for TransCanada. Companies mentioned: AltaGas Income Trust [ALA.UN; $20.45; Outperform, Average Risk] ATCO [ACO, $47.43, Sector Perform, Above Average Risk] Canadian Utilities [CU; $52.99; Sector Perform, Above Average Risk] Fortis [FTS; $57.90; Sector Perform, Average Risk] TransCanada [TRP; $26.02; Outperform, Average Risk] Required Disclosures Explanation of RBC Capital Markets Rating System An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector. Ratings Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present): Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming months; fairly liquid. July 5, Page 14 sur 194

15 RBC Capital Markets Alberta Regulatory Update Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float. Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted. Distribution of Ratings, Firmwide For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three rating categories Buy, Hold/Neutral, or Sell regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). July 5, Page 15 sur 194

16 RBC Capital Markets Alberta Regulatory Update In the event that this is a compendium report (covers more than six subject companies), RBC Capital Markets may choose to provide specific disclosures for the subject companies by reference. To access current disclosures, clients should refer to Ydf8xF or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. July 5, Page 16 sur 194

17 RBC Capital Markets Alberta Regulatory Update References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by a member company of RBC Capital Markets or one of its affiliates. RBC Capital Markets Recommended Lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. RBC Dain Rauscher Inc. Recommended Lists include the Western Region Focus List (1), a former list called Model Utility Portfolio (2), and the Prime Opportunity List (3) (formerly called the Private Client Selects), Private Client Prime Portfolio (4), a former list called Private Client Portfolio (5), and the Prime Income List (6). The abbreviation "RL On" means the date a security was placed on a Recommended List. The abbreviation "RL Off" means the date a security was removed from a Recommended List. Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Dissemination of Research RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. Important Disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. The author(s) of this report are employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada. A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from in the past 12 months. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. RBC Capital Markets has provided with investment banking services in the past 12 months. RBC Capital Markets has provided AltaGas Income Trust with investment banking services in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from in the past 12 months. A member company of RBC Capital Markets or one of its affiliates expects to receive or intends to seek compensation for investment banking services from in the next three months. The securities of discussed in this report are non-voting shares. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to. RBC Capital Markets is currently providing with non-securities services. RBC Capital Markets has provided with investment banking services in the past 12 months. RBC Capital Markets has provided with non-securities services in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from Canadian Utilities Limited in the past 12 months. The securities of Canadian Utilities Limited discussed in this report are non-voting shares. Royal Bank of Canada, together with its affiliates, beneficially owns 1 percent or more of a class of common equity securities of Canadian Utilities Limited. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from Canadian Utilities Limited during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to Canadian Utilities Limited. RBC Capital Markets has provided Canadian Utilities Limited with investment banking services in the past 12 months. RBC Capital Markets has provided Canadian Utilities Limited with non-securities services in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from Fortis Inc. in the past 12 months. A member company of RBC Capital Markets or one of its affiliates expects to receive or intends to seek compensation for investment banking services from Fortis Inc. in the next three months. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from Fortis Inc. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates July 5, Page 17 sur 194

18 RBC Capital Markets Alberta Regulatory Update provided non-securities services to Fortis Inc. RBC Capital Markets is currently providing Fortis Inc. with non-securities services. RBC Capital Markets has provided Fortis Inc. with investment banking services in the past 12 months. RBC Capital Markets has provided Fortis Inc. with non-securities services in the past 12 months. RBC Capital Markets has provided Fortis Inc. with investment banking services in the past 12 months. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from TransCanada Corporation in the past 12 months. RBC Dominion Securities Inc. makes a market in the securities of TransCanada Corporation and may act as principal with regard to sales or purchases of this security. Maureen Howe is an associate of an insider of Terasen Inc., a component of the pipelines and utilities sector. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from TransCanada Corporation during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to TransCanada Corporation. RBC Capital Markets is currently providing TransCanada Corporation with non-securities services. RBC Capital Markets has provided TransCanada Corporation with investment banking services in the past 12 months. RBC Capital Markets has provided TransCanada Corporation with nonsecurities services in the past 12 months. Additional Disclosures RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. 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Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets Corporation. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited ("RBCEL") which is authorized and regulated by Financial Services Authority ("FSA"), in connection with its distribution in the United Kingdom. This material is not for distribution in the United Kingdom to private customers, as defined under the rules of the FSA. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom. To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN , AFSL No ). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. Copyright RBC Capital Markets Corporation Member SIPC Copyright RBC Dominion Securities Inc Member CIPF Copyright Royal Bank of Canada Europe Limited 2004 Copyright Royal Bank of Canada 2004 All rights reserved. July 5, Page 18 sur 194

19 Equity Research Industry Update August 19, 2005 Sector Weighting: Market Weight Pipelines, Utilities, & Power Kinder Just "Trusted" Terasen: Who's Next? Kinder Morgan is using an income trust type structure and paying an income trust premium for Terasen. The other Canadian pipeline and utility corporations must now seek similar valuations if they are available. If Kinder Morgan can pay over 11x EBITDA for Terasen, then other industry players or financial buyers may be willing to pay similar multiples for other Canadian companies. The Terasen acquisition involves the issuance of debt that significantly reduces income tax liability in both Canada and the U.S. As a result, Canadian regulators will be hard-pressed to block or inhibit the conversion of utility assets into income trust structures. In this context, Canadian pipeline and utility companies must explore mergers or further trust conversion to create shareholder value. Given upside to the Terasen takeout multiple, it would be almost irresponsible not to. Matthew Akman 1 (416) Matthew.Akman@cibc.ca Alda Pavao, CFA 1 (416) Alda.Pavao@cibc.ca All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, or at the end of each section hereof, where applicable. Find CIBC research on Bloomberg, firstcall.com, multex.com, and cibcwm.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, BCE Place, Toronto, Canada M5J 2S8 Page (416) sur 194

20 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Investment Summary On August 1, Kinder Morgan (KMI NYSE, Not Rated) announced the acquisition of Terasen (TER TSX, Sector Performer) for approximately $35.90 per share. The acquisition price implies an approximately 20% premium and valuation multiples that are much higher than in other recent pipeline and utility transactions. Canadian pipeline and utility share prices have not moved significantly since the acquisition was announced. Yet, the Terasen deal highlights opportunities to unlock value in several of the other Canadian pipeline and utility companies. How Kinder Morgan, a normally disciplined pipeline company, is going to create shareholder value by paying 23x earnings and 11.8x EBITDA for Terasen is the question most investors and industry observers are now asking. Our take is that Kinder Morgan is effectively turning Terasen into an income trust and realizing the value escalation that normally goes along with a trust conversion. Whether it is through interest deductions or asset transfer into a Master Limited Partnership (MLP), Terasen will pay less income tax and the resulting value will be transferred to shareholders. Special interest deductions will go a long way to reducing taxable income. Kinder Morgan announced it would issue new debt on the order of US$2.0 billion, funding 53% of the acquired equity value. Interest on this debt will be deductible in Canada and the U.S., reducing the effective cost of debt to about 2% after tax. Kinder Morgan may also transfer some of the Terasen assets into its U.S. MLP a company that attracts no income tax by design. Other U.S. companies seeking growth opportunities in Canada have taken notice of Kinder Morgan s methodology and may follow suit. It is always difficult predicting mergers and acquisitions, but large U.S. pipeline and utility companies have often looked toward Canada for growth. The abundance of fossil fuel resources in Alberta and the Arctic will underpin Canadian energy infrastructure growth rates that will likely far exceed growth in the U.S. If cross-border mergers are not used for reducing tax liability and unlocking value, income trust conversions might be. In the past, regulators have inhibited the conversion of pipeline and utility companies into income trusts. Regulators threatened to offset the benefit of conversion by reducing utility rates when income taxes fell. We now see that threat potentially diminishing. In the context of the Terasen deal that reduced tax liability via a cross-border structure, Canadian regulators will be hard-pressed to block or inhibit the conversion of utility assets into income trust structures. The Kinder Morgan deal accomplishes the tax arbitrate that a trust would, and leaves the assets in the hands of a U.S. corporation. A Canadian regulatory policy with a bias toward foreign ownership of domestic infrastructure makes no sense. Yet, in preventing trust conversion, Canadian regulators may be unintentionally promoting this exact bias. Terasen achieved maximum value for its Canadian shareholders. Now the other Canadian pipeline and utility corporations are obligated to seek similar valuations if they are available. Maximizing shareholder value may call for mergers or income trust conversions. The potential valuation upside is significant and has not yet been reflected in the stocks. We count especially TransCanada (TRP TSX, Sector Outperformer) and Fortis (FTS TSX, Sector Outperformer) as undervalued on trust/merger multiples. To a lesser extent, we also see upside in Enbridge (ENB TSX, Sector Performer) and TransAlta (TA TSX, Sector Performer). 2 Page 20 sur 194

21 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Kinder Is Paying Trust Valuation For Terasen We viewed the takeout valuations on Terasen as expensive based on either trailing or forward financial parameters. When the acquisition was announced, Terasen calculated its takeout valuation metrics of 23.8x earnings and 11.5x EBITDA based on 2005 financial forecasts. Our view is that Terasen has excellent long-term growth prospects but few prospects in Therefore, our estimated valuation metrics on 2006 financial parameters are similar to the ones Terasen presented based on 2005 parameters. Terasen s earnings and cash flows will likely not improve much in 2006 because its regulated returns are falling in both the oil pipeline and gas utility business. The lucrative Trans Mountain tolling agreement comes due at the end of this year and the ROE on the gas utilities is reviewed annually. Our 2006 EPS estimate is $1.55, up only $0.05 from our $1.50 forecast in Similarly, our 2006 EBITDA forecast for Terasen is $585 million, up only $15 million from our $570 million forecast in Based on these forecasts, we calculate the acquisition multiples as 23x 2006 earnings and 11.8x 2006 EBITDA. Exhibit 1. TER Takeout Multiples CIBC Forecasts For TER Deal Parameters 2005E 2006E Pro-rata Share Offer Price (C$) $35.91 EPS $1.50 $1.55 (Based On US$88.86 KMI Share Price) Takeout P/E (x) Equity Value (C$ mlns.) $3,790 Assumption Of Debt And Capital Securities $3,144 EBITDA (C$ mlns.) $570 $585 Purchase Price (C$ mlns.) $6,934 Takeout EV/EBITDA (x) Source: Company reports and CIBC World Markets Inc. The valuation parameters of the Terasen deal far exceed valuations on the other Canadian pipeline and utility corporations. They are in line or even higher than multiples ascribed to comparable Canadian income trusts. Most of the corporations trade at 8x 9x EBITDA, although some of the pipeline trusts, namely Pembina (PIF.UN TSX, Sector Performer) and IPL (IPL.UN TSX, Sector Performer), already attract 11x 12x EBITDA multiples. Exhibit 2. Comparative Valuation Of Canadian Pipeline, Power And Utility Companies And Trusts Company Name Ticker Rating Price EPS P/ E (x) Cash Flow Per Share P/ CF (x) 08/17/05 Yield 2005E 2006E 2005E 2006E 2005E 2006E 2005E 2006E Book Value EV/ 2006E EBITDA Enbridge Inc. ENB SP $ % $1.63 $ $3.30 $ TransCanada Corp. TRP SO $ % $1.65 $ $3.85 $ TransAlta Corp. TA SP $ % $0.75 $ $3.25 $ Fortis FTS SO $ % $4.55 $ $12.33 $ Emera EMA SU $ % $0.80 $ $2.45 $ Canadian Utilities CU.NV SP $ % $4.20 $ $9.19 $ Average 3.7% Company Name Ticker Rating Price EPU P/ E (x) Distributable Cash Flow / Unit P/ CF (x) 08/17/05 Yield 2005E 2006E 2005E 2006E 2005E 2006E 2005E 2006E Book Value EV/ 2006E EBITDA Enbridge Income Fund ENF.UN SP $ % $0.43 $ $0.98 $ Fort Chicago Energy Partners FCE.UN SO $ % $0.66 $ $1.10 $ Inter Pipeline Fund (LP) IPL.UN SP $ % $0.40 $ $0.86 $ Pembina Pipeline Income Fund PIF.UN SP $ % $0.60 $ $1.08 $ Average 7.2% Note: Earnings per unit forecasts for FCE.UN, IPL.UN and PIF.UN are IBES estimates. Source: Company reports, IBES and CIBC World Markets Inc. 3 Page 21 sur 194

22 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 The Terasen takeout valuation also far exceeds valuations on other recent pipeline and utility transactions. Most of the companies have been acquired at EBITDA multiples of 8x 9x and earnings multiples of 15x 18x. Exhibit 3. Valuation Parameters On Canadian And U.S. Utility Acquisitions Date Transaction Multiples Announced Buyer Acquired Company Purchase Price Earnings (x) Book Value (x) EBITDA (x) 21-Sep-01 Duke Energy Westcoast Energy US$8 billion Aug-03 Fortis Aquila s Western Canadian utilities C$1.36 billion Dec-04 Exelon Corp. Public Service Enterprise Group US$13.3 billion NA 9-May-05 Duke Energy Cinergy US$9.0 billion May-05 MidAmerican Energy PacifiCorp US$9.4 billion Aug-05 Kinder Morgan Terasen C$6.9 billion Source: Company reports and CIBC World Markets Inc. We have analyzed potential share price appreciation in several of the Canadian stocks based on the 23x P/E and 11.8x EBITDA multiple Kinder Morgan is paying for Terasen. Valuation expansion to the Terasen takeout multiples would drive significant share price appreciation for the Canadian pipelines and utilities. Moving up to the 23x P/E multiple would require anywhere from a 10% to 40% increase in share prices. Moving up to the 11.8x EBITDA multiple would require anywhere from about 10% to 85% increase in share prices. Exhibit 4. Potential Upside To Share Prices ENB EMA FTS TA TRP CU.NV 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Earnings EBITDA Note: We applied Terasen s takeout earnings and EBITDA multiples to our 2006 estimates, with upside derived from closing prices on August 17. Source: Company reports and CIBC World Markets Inc. Several general and specific observations flow from our calculations: Most of the stocks show more upside to the acquisition EBITDA multiple than the acquisition P/E multiple. The ability to pay 11.8x EBITDA for a utility stock was unique and probably relates to the stability of cash flows from Terasen s 100% regulated pipeline and utility business. But achieving 10x 11x multiples is not at all out of the question. 4 Page 22 sur 194

23 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Enbridge shows the least upside to the Terasen acquisition multiple because it trades at a premium to the group. The market has appropriately already recognized much of the strategic value in the Enbridge asset base. TransAlta has little upside to the 23x earnings multiple because its earnings are currently depressed while it operates under legacy contracts to sell power below market prices. We see upside to earnings in the timeframe that would tend to reduce the stock s P/E multiple. In summary, TransCanada, Fortis and TransAlta show the biggest gaps between current valuation metrics and the Terasen takeout multiple. Emera (EMA TSX, Sector Underperformer) and Canadian Utilities (CU.NV TSX, Sector Performer) would have some upside but we see ownership restrictions in both that would likely prevent a takeover. Canadian Utilities is family controlled. Emera still has provisions that prevent concentration in voting shares of more than 15% and concentration of foreign holding of more than 25%. 5 Page 23 sur 194

24 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Kinder Structure Accomplishes Much Of What An Income Trust Does We believe that using a beneficial financing structure was key to supporting the abnormally high valuation Kinder Morgan is paying for Terasen. The structure involves issuing new debt and deducting interest expense for income tax purposes in both Canada and the U.S. In this sense, the structure is similar to an income trust that eliminates taxable income by creating inter-company loans and tax-deductible interest. In the Kinder Morgan example, we estimate Canadian income tax liability could be significantly reduced with the double-dip interest structure. Kinder Morgan has stated it intends to issue about US$2.0 billion in new debt. Kinder s 10-year paper is trading at a premium to U.S. Treasuries of around 105 basis points. Assuming Kinder Morgan s credit rating is unchanged, and based on current 10- Year Treasury yields of 4.4%, Kinder could probably issue the new debt at around 5.45%. The pre-tax interest expense would then amount to about US$109 million. The table below shows Terasen s taxable income and income tax paid in 2004 and then our estimates for 2005 and The 2006 numbers include the new interest expense from the Kinder Morgan acquisition. In 2004, Terasen paid about $78 million in cash income tax. We estimate that by 2006, despite achieving significant growth off of the 2004 base, the Terasen companies will only pay about $30 million in income tax. Exhibit 5. Terasen s Income Tax Expense E 2006E Gas Distribution EBIT $272.4 $279.9 $267.0 Petroleum Transportation EBIT $99.3 $102.1 $104.3 Water Services EBIT $11.4 $21.3 $24.6 Other EBIT ($11.7) ($15.2) ($12.5) Express Pipeline Contribution $15.0 $19.0 $22.0 Total EBIT $386.4 $407.0 $405.4 Financing Expense (TER) ($166.6) ($180.0) ($190.0) Financing Expense (KMI) $0.0 $0.0 ($130.8) Pre-tax Income $219.8 $227.0 $84.6 Tax Rate 35.5% 35.0% 35.0% Income Tax $78.1 $79.5 $ Petroleum Transportation reflects expiry of Trans Mountain tolling agreement at the end of Gas Distribution reflects lower allowed ROE resulting from drop in bond yields. 3. Express EBIT reflects expansion in service April Taxes reflect cash taxes paid in 2004 and forecast cash taxes in 2005/6. Source: Company reports and CIBC World Markets Inc. Using the double-dip financing structure, we estimate Kinder will reduce the income taxes paid by about $50 million. This reduction equates to about 63% of Terasen s otherwise taxable income. And our models conservatively assume none of the Terasen assets are transferred to Kinder Morgan s MLP. The tax reduction would be even larger if that occurs. Income trust structures can eliminate up to 100% of taxable income, but we see the Kinder deal as a reasonable proxy for an income trust structure. 6 Page 24 sur 194

25 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Canadian Regulators May Have To Liberalize Bias Against Utility Trust Conversions Canadian regulators have recently expressed concerns about utility companies collecting taxes in rates but not paying them. Recent precedents suggest regulators may force a rate reduction if a utility converts to a trust structure. In the context of the Terasen deal, we think Canadian regulators may consider lifting some current restrictions and penalties involved in converting Canadian pipeline and utility assets into trust structures: If Canadian pipelines and utilities do not convert to income trusts, U.S. companies may eventually acquire them using a double-dip financing structure. This outcome raises several issues for Canadian governments and their regulatory agencies: Canada could lose most of the corporate income tax revenue it collects from Canadian pipelines and utilities. If Canadian companies are acquired, most of the future income from the assets will be taxed in the U.S. because the vast majority of shareholders will be American. In the case of the U.S. company takeover, Canada also stands to lose head office jobs and some control over key energy infrastructure assets. Canadian companies can realize takeover valuations by instead converting all or a portion of their assets into Canadian income trusts. If Canadian pipelines and utilities convert to income trusts in Canada, most of the income may eventually be taxed in Canada under personal income taxes. In a trust conversion, Canadian utility customers are unharmed because utility bills remain unchanged and tax revenues remain in Canada. Therefore, Canadian regulators blocking income trust conversions in Canada may create the unintended consequences of delivering tax benefits to the U.S. at the expense of Canada and increasing foreign ownership of Canadian infrastructure assets. We are not arguing against U.S. takeovers of Canadian companies, but we are suggesting it is illogical maintaining regulatory policies biased in their favour. Canadian regulators may have to reevaluate their stance to date against the creation of income trusts in the pipeline and utility sector. This stance has been founded on two issues: first, that taxes should not be collected in rates if they might not be paid; and second, that the debt within income trust structures may financially destabilize utilities and jeopardize their operations. The National Energy Board has not tested the income trust conversion issue since it has not received an application for conversion of major pipeline assets. The Alliance Pipeline was converted to a trust but was governed by negotiated tolls, not cost of service rates with annual review. However, provincial regulators have so far deterred the creation of income trusts. The Alberta Energy and Utilities Board (EUB) has placed the biggest obstacle in front of potential income trusts. In the AltaLink case, the EUB reduced the electric transmission company s rates because one of the owners, 7 Page 25 sur 194

26 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Ontario Teachers Pension Plan (OTPPB), was deemed a non-taxable entity. In its Review and Variance response from February 2005 the EUB stated:..the Board was not convinced that there was a reasonable expectation that OTPPB would incur and pay income taxes. In the Board s view, such a result would not be in keeping with the Board s belief that in a cost of service jurisdiction where revenue and costs are forecast on a prospective basis, a cost should only be recoverable in customer rates if there is a reasonable expectation that it will be incurred. The EUB s position on AltaLink has negative implications for conversion of Alberta s utility assets into income trusts. In Alberta, if an income trust, like a pension fund, is viewed as having little probability of paying taxes, it may be forced to reduce regulated rates upon conversion. AltaGas (ALA.UN TSX, Not Rated) must have faced similar resistance to holding regulated Alberta utilities in a trust structure. Having converted from a corporation to a trust structure in 2004, AltaGas on May 25, 2005, announced the spin out of its regulated gas distribution business. On a recent conference call, AltaGas management stated the spin out would be neutral to the company on an operating cash flow basis. What likely motivated AltaGas on the spin out, then, was not an improvement in the company s cash flow, but the threat the EUB would disallow the collection of taxes in gas distribution rates. The British Columbia Utilities Commission (BCUC), like the EUB, has expressed tax and other concerns regarding income trust conversions. On July 29, 2004, the BCUC rejected the Pacific Northern Gas (PNG TSX, Not Rated) request for trust conversion. Tax issues were central to the BCUC s concerns but so were capitalization issues. In an income trust structure, leverage tends to exceed regulated debt capitalization levels and actual equity ratios are thinner than regulated equity. These divergences were central to the BCUC decision: the Commission panel concludes that deeming a capital structure at such wide variance with the underlying reality of the actual capital structure would be a material departure from the Commission s past regulatory practice deeming a component of the cost of service equivalent to income taxes otherwise previously payable by a taxable corporation that had put in place a financial structure to minimize those taxes would establish a regulatory precedent with unknown implications Though Canadian regulators have so far expressed a bias against trust conversions, they have not definitively rejected the concept. In British Columbia, the regulator seemed to indicate that it may approve the Pacific Northern Gas conversion if the company could show how such action would be in the public interest. In Alberta, the regulator seemed to indicate that it may allow for tax collection in rates as long as there was some potential for the utility owner to pay tax. In the U.S., the Federal Energy Regulatory Commission (FERC) has taken a similar but perhaps more liberal and realistic approach to the tax issue. Until May of this year, the FERC maintained the so-called Lakehead Policy that held a limited partnership would be permitted to include an income tax allowance in its rates equal only to the proportion of its limited partnership interests owned by corporate partners. In a recent policy statement (dated May 4, 2005) FERC expanded the tax inclusion policy: Under the [new] policy, all entities or individuals owning public utility assets would be permitted an income tax allowance on the income from those assets, provided that they have an actual or potential (emphasis added) income tax liability on that public utility income. Thus, a tax-paying 8 Page 26 sur 194

27 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 corporation, partnership, limited liability corporation, or other pass-through entity would be permitted an income tax allowance on the income imputed to the corporation, or to the partners or the members of pass-through entities, provided that the corporation or the partners or the members have an actual or potential income tax liability on that income. We believe the new FERC policy, applied to MLPs in the U.S., suggests the MLPs can collect taxes in rates even if the MLP itself does not pay income taxes. It would be collecting taxes on behalf of its members or partners that have a potential tax liability. Allowing utilities converting to income trusts to continue collecting taxes in rates on behalf of the individual income trust unit holders would be the analogous policy for a Canadian regulator. Whether the Kinder Morgan acquisition of Terasen sparks a wave of Canadian pipeline and utility trust conversions remains to be seen. Two new regulatory precedents will likely be established in the coming months: Pacific Northern Gas is still applying to the BCUC for income trust conversion and may find success in its second attempt. Duke (DUK NYSE, Sector Performer) has discussed the potential for creating a Canadian income trust that is bound to include gas-processing assets and may also include pipeline assets regulated by the NEB. In light of the Kinder Morgan deal, there is an argument that regulators should be more lenient in these applications than they have with other income trust applications. A more positive outcome in the Pacific Northern Gas and Duke cases may bode well for the creation of more Canadian utility income trusts in the future. 9 Page 27 sur 194

28 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Conclusion: More Value Creating Deals Likely On The Horizon Canadian pipeline and utility companies must be considering strategic options to achieve the valuation Terasen did. Turning assets into income trusts is one way to surface value in the pipelines and utilities sector. Regulators should be more responsive to that alternative or U.S. companies may wind up owning more Canadian infrastructure with even fewer domestic tax benefits. The future growth plans of the corporations should not deter them from turning assets into income trusts. The pipeline and utility companies could still maintain corporate parents as vehicles for growth. In fact, Kinder Morgan has already established this business model. It uses the MLP as its primary acquisition vehicle and pays cash bonuses for growth targets to the corporate parent. TransCanada has perhaps the most to gain from turning assets into income trusts, yet has come less distance than Enbridge in using the trust vehicle. Enbridge already has an MLP and a Canadian income trust and trades at a relatively high EBITDA multiple. TransCanada hardly uses the structure and trades at a relatively low EBITDA multiple. TransAlta may have upside to a trust structure in the medium term but not short term. The timing may not be right for conversion to a trust because the company is paying little in the way of cash taxes (about $5 million in 2004) and is making significant capital expenditures to improve the Alberta coal plants. Yet later this decade, cash taxes are bound to increase with profitability and spending will subside. At that time, upside from an income trust structure could materialize. In a report dated August 9, 2004, we calculated the shares were worth around $26.00 on a non-taxable basis. The potential conversion of assets to income trusts is the focus of this report but is only one of the many strategic issues arising from the Kinder Morgan acquisition of Terasen. We believe Kinder Morgan has the size, expertise and relationships to undertake a much larger share of energy infrastructure growth opportunities than Terasen did on its own. Enbridge and TransCanada may have to seek more of their growth opportunities outside of Canada now. Apart from creating more trusts, potential strategic responses to the Kinder deal include acquiring more U.S. assets or acquiring U.S. corporations. We see the acquisition of U.S. corporations more as potential upside than downside for Canadian companies. Lately, mergers have caused share price appreciation in both the buyer and target. Kinder Morgan was no exception. A similarly favourable response would likely greet Enbridge or TransCanada were they to acquire a solid U.S. company. Terasen achieved valuations for its shareholders significantly beyond the current market valuation on most other Canadian pipeline and utility stocks. Now the other Canadian pipeline and utility corporations are obligated to seek similar valuations if they are available. TransCanada faces the biggest valuation gap, trading at a 6 7 point P/E discount and a 3-point EBITDA discount to the Terasen takeout valuation. Maximizing shareholder value may call for income trust conversions and/or mergers. Either way, given upside to the Terasen takeout multiple, it would be almost irresponsible not to seriously explore these options now. 10 Page 28 sur 194

29 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Price Target Calculations Our price targets for the pipeline and utility companies are derived from P/E multiples and dividend yields (relative to bond yields) primarily based on our 2006 earnings and dividend forecasts. We also consider our outlooks for the stocks beyond Our target dividend yields range from 2.8% 6.2% (based on a forecast 10-year Canada bond yield of about 4%). Our target P/E multiples range from 16.4x 23x. This range is at the high end of the historical norm due to historically low bond yields. In the past 15 years, the stocks have tended to peak at no more than 17x 18x earnings, but have traded through those levels recently. The differences in target multiples between stocks under our coverage reflect different organic growth rates, potential acquisition activity, and current regulatory environment. Key Risks To Price Targets The main risk to our price targets is unanticipated changes in long bond yields. The correlation between bond yields and utility valuations has been high in recent years. If bond yields rise significantly, valuations across the group are likely to compress. Our price targets are based on 10-year Canada Bond yield of about 4.0%. For individual companies, risks to price targets relate primarily to negative regulatory decisions that reduce returns on regulated assets, low acquisition activity, and unanticipated weakness in power prices. 11 Page 29 sur 194

30 12 Exhibit 6. Comparative Valuation Of Selected Canadian And U.S. Pipeline, Utility, And Power Generation Companies Rating / 52-Week Range EPS P/E Ratios 05E P/E Rel. Dividend Payout Price Total Company Ticker Analyst Price High Low E 2006E E 2006E To Group Rate Yield 2005E Target Return Canadian Pipelines Enbridge Inc. ENB SP / MA $34.60 $36.60 $25.09 $1.41 $1.51 $1.63 $ $ % 61.5% $ % Terasen Inc. TER SP / MA $35.37 $36.95 $23.48 $1.33 $1.40 $1.50 $ $ % 60.0% $ % TransCanada Corp. TRP SO / MA $32.15 $34.16 $26.64 $1.59 $1.53 $1.65 $ $ % 73.9% $ % Canadian Pipelines Average % 65.2% U.S. Pipelines Duke Energy DUK SP / MA $27.92 $30.55 $21.75 $1.28 $1.28 $1.65 $ $ % 75.2% $ % El Paso EP NR $11.45 $13.10 $7.51 ($0.87) ($1.37) $0.70 $0.86 NM NM $ % 22.9% - - Kinder Morgan Inc. KMI NR $91.57 $98.45 $59.14 $3.33 $3.81 $4.29 $ $ % 69.9% - - National Fuel Gas NFG NR $28.09 $30.40 $25.91 $1.89 $1.98 $1.90 $ $ % 61.1% - - NiSource NI NR $23.02 $25.50 $20.53 $1.64 $1.63 $1.50 $ $ % 61.3% - - Williams WMB NR $20.73 $22.40 $11.36 ($0.03) $0.49 $0.86 $1.06 NM $ % 34.9% - - U.S. Pipelines Average % 58.1% Canadian Utilities ATCO ACO.NV.X SU / MA $77.25 $78.40 $48.75 $4.25 $4.62 $4.90 $ $ % 31.0% $64.00 (15.2%) Canadian Utilities CU.NV SP / MA $72.65 $74.45 $53.00 $3.95 $4.01 $4.20 $ $ % 52.4% $ % Caribbean Utilities (US$) CUP.U NR $11.40 $12.74 $9.75 $0.77 $0.13 $0.88 $ NM $ % 75.0% - - Emera Inc. EMA SU / MA $18.21 $19.97 $17.30 $1.26 $1.22 $0.80 $ $ % 111.3% $17.00 (1.8%) Fortis FTS SO / MA $82.10 $84.89 $59.10 $4.25 $4.29 $4.55 $ $ % 50.1% $ % Gaz Metro L.P. GZM.UN SP / AP $21.63 $23.67 $20.50 $1.39 $1.40 $1.31 $ $ % 103.8% $ % TransAlta Corp. TA SP / MA $21.93 $22.44 $15.65 $0.73 $0.66 $0.75 $ $ % 133.3% $ % Canadian Utilities Average % 79.6% U.S. Utilities Consolidated Edison ED NR $45.93 $49.23 $40.75 $2.95 $2.67 $2.89 $ $ % 78.9% - - Dominion Resources D NR $73.50 $79.18 $62.97 $4.50 $4.61 $5.05 $ $ % 53.1% - - DTE Energy DTE NR $44.62 $48.22 $39.61 $2.97 $2.46 $3.48 $ $ % 59.2% - - Exelon EXC NR $50.87 $54.88 $35.89 $2.61 $2.79 $3.09 $ $ % 51.8% - - FPL Group FPL NR $40.73 $44.59 $33.55 $2.45 $2.63 $2.52 $ $ % 54.4% - - PPL Corp. PPL NR $61.20 $65.12 $46.17 $3.71 $3.71 $4.13 $ $ % 48.4% - - U.S. Utilities Average % 57.6% Merchant Generation AES Corporation AES NR $15.25 $17.96 $9.47 $0.56 $0.58 $0.84 $ $ % 0.0% - - Calpine Corp. CPN NR $3.33 $4.07 $1.33 $0.21 ($0.97) ($0.95) ($0.54) 15.9 NM NM NM - $ % 0.0% - - NRG Energy NRG NR $37.55 $41.90 $25.59 ($0.70) $1.80 $1.37 $2.21 NM $ % 0.0% - - Reliant Energy RRI SO / MA $12.38 $13.92 $9.08 $0.66 $0.07 $0.20 $ NM NM $ % 0.0% $ % Merchant Generation Average % 0.0% Estimates are from CIBC World Markets with the exception of those companies that are not rated (sources: company reports, First Call and IBES). Figures for Canadian companies in C$; figures for U.S. companies in US$. EPS estimates for Caribbean Utilities are for the period ending April 30 the following year. EPS estimates for GZM.UN, and NFG are for the period ending September 30. SO = Sector Outperformer; SP = Sector Performer; SU = Sector Underperformer and NR = Not Rated. Source: Company reports and CIBC World Markets Inc. Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Page 30 sur 194

31 13 Exhibit 7. Comparative Valuation Of Selected Canadian And U.S. Pipeline, Utility, And Power Generation Companies Shares O/S Mkt. Cap. Inst. 52-Week % Change Cash Flow Per Share P/CF Ratios Book Price/ ROE Debt To % Unreg. EV/05E Company (mlns.) ($ blns.) Owners High Low E 2006E E 2006E Value Book 2005E Cap 05E EBIT EBITDA Canadian Pipelines Enbridge Inc $ % (5%) 38% $2.92 $3.08 $3.30 $ $ % 62.1% 10.0% 10.5 Terasen Inc $3.7 15% (4%) 51% $2.82 $2.83 $3.01 $ $ % 68.0% 5.0% 11.9 TransCanada Corp $ % (6%) 21% $3.96 $3.52 $3.85 $ $ % 61.0% 16.0% 8.7 Canadian Pipelines Average % 63.7% 10.3% 10.4 U.S. Pipelines Duke Energy $ % (9%) 28% $4.35 $4.44 $2.98 $ $ % 50.0% 25.0% 9.1 El Paso $7.4 79% (13%) 52% $2.06 $ $ % 7.5 Kinder Morgan Inc $ % (7%) 55% $4.89 $ $ % 44.1% 13.1 National Fuel Gas 83.5 $2.3 46% (8%) 8% $4.95 $ $ % 47.7% 6.5 NiSource $6.3 73% (10%) 12% $2.34 $ $ % 54.9% 7.6 Williams $ % (7%) 82% $1.56 $ $ % 59.1% 8.1 U.S. Pipelines Average % 56.3% 8.7 Canadian Utilities ATCO Ltd $2.3 35% (1%) 58% $9.35 $9.95 $10.75 $ $ % 51.0% 20.0% 7.2 Canadian Utilities 63.5 $4.6 15% (2%) 37% $8.30 $8.50 $9.19 $ $ % 52.0% 36.5% 8.2 Caribbean Utilities (US$) 25.0 $0.3 2% (11%) 17% $1.32 $ $ % 53.0% 0.0% 10.6 Emera Inc $2.0 18% (9%) 5% $2.22 $2.80 $2.45 $ $ % 54.1% 5.0% 9.1 Fortis Inc $2.1 32% (3%) 39% $9.28 $12.81 $12.33 $ $ % 58.6% 21.0% 8.9 Gaz Metro L.P $2.5 25% (9%) 6% $3.16 $3.06 $3.15 $ $ % 53.3% 2.0% 10.0 TransAlta Corp $4.3 55% (2%) 40% $2.86 $3.02 $3.25 $ $ % 51.9% 100.0% 8.9 Canadian Utilities Average % 53.4% 26.4% 9.0 U.S. Utilities Consolidated Edison $ % (7%) 13% $6.31 $ $ % 51.6% 9.3 Dominion Resources $ % (7%) 17% $7.25 $ $ % 61.9% 8.5 DTE Energy $7.8 61% (7%) 13% $5.63 $ $ % 60.6% 8.1 Exelon $ % (7%) 42% $5.20 $ $ % 58.2% 9.0 FPL Group $ % (9%) 21% $6.12 $ $ % 54.4% 8.9 PPL Corp $ % (6%) 33% $7.87 $ $ % 62.1% 8.4 U.S. Utilities Average % 58.1% 8.7 Merchant Generation AES Corporation $ % (15%) 61% $2.52 $ $ NM 84.3% 100.0% 7.7 Calpine Corp $1.9 62% (18%) 150% $0.73 $ $ % 80.8% 100.0% 16.4 NRG Energy 87.0 $3.3 81% (10%) 47% - $ $ NM 55.2% 100.0% 11.5 Reliant Energy $3.7 72% (11%) 36% $2.76 $0.96 $1.64 $ $ % 54.9% 100.0% 9.6 Merchant Generation Average % 68.8% 100.0% 11.3 Estimates are from CIBC World Markets with the exception of those companies that are not rated (sources: company reports, First Call and IBES). Figures for Canadian companies in C$; figures for U.S. companies in US$. For those companies not rated, ROE figures are actuals for the most recent fiscal year. EPS estimates for Caribbean Utilities are for the period ending April 30 the following year. EPS estimates for GZM.UN, and NFG are for the period ending September 30. Source: Company reports and CIBC World Markets Inc. Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Page 31 sur 194

32 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department within the Corporate and Leveraged Finance Division. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. 14 Page 32 sur 194

33 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets: Stock Prices as of 08/19/2005: Atco Ltd. (7, 13) (ACO.NV.X-TSX, C$76.55, Sector Underperformer) Canadian Utilities Ltd. (7, 13) (CU.NV-TSX, C$69.30, Sector Performer) Duke Energy (2a, 2d, 2g, 7) (DUK-NYSE, US$28.14, Sector Performer) Emera Inc. (2g, 7) (EMA-TSX, C$18.37, Sector Underperformer) Enbridge Inc. (2a, 2c, 2e, 2g, 7) (ENB-TSX, C$34.25, Sector Performer) Enbridge Income Fund (2a, 2c, 2e, 7) (ENF.UN-TSX, C$13.20, Sector Performer) Fort Chicago Energy Partners, L.P. (2g, 7) (FCE.UN-TSX, C$12.83, Sector Outperformer) Fortis Inc. (2a, 2c, 2e, 7) (FTS-TSX, C$81.86, Sector Outperformer) Gaz Métro Limited Partnership (2a, 2c, 2e) (GZM.UN-TSX, C$21.70, Sector Performer) Inter Pipeline Fund, L.P. (2a, 2e, 2g, 7) (IPL.UN-TSX, C$9.75, Sector Performer) Pembina Pipeline Income Fund (2a, 2e, 2g, 7) (PIF.UN-TSX, C$15.00, Sector Performer) Reliant Energy Inc. (RRI-NYSE, US$12.35, Sector Outperformer) Terasen Inc. (2a, 2c, 2e, 7) (TER-TSX, C$35.55, Sector Performer) TransAlta Corporation (2a, 2e, 2g, 7, 9) (TA-TSX, C$21.56, Sector Performer) TransCanada Corp. (7) (TRP-TSX, C$31.49, Sector Outperformer) Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: Stock Prices as of 08/19/2005: AES Corp (AES-NYSE, US$15.31, Not Rated) AltaGas Income Trust (ALA.UN-TSX, C$26.65, Not Rated) Aquila, Inc. (ILA-NYSE, US$3.82, Not Rated) Berkshire Hathaway (BRK-NYSE, US$ , Not Rated) Calpine Corporation (CPN-NYSE, US$2.93, Not Rated) Caribbean Utilities Company Ltd. (CUP.U-TSX, C$11.21, Not Rated) Cinergy Corp (CIN-NYSE, US$42.20, Not Rated) Consolidated Edison (ED-NYSE, US$46.08, Not Rated) Dominion Resources (D-NYSE, US$74.50, Not Rated) DTE Energy Company (DTE-NYSE, US$45.00, Not Rated) El Paso Corp. (EP-NYSE, US$11.39, Not Rated) Exelon (EXC-NYSE, US$50.89, Not Rated) FPL Group Inc. (FPL-NYSE, US$40.90, Not Rated) Kinder Morgan Energy Partners (KMP-NYSE, US$50.24, Not Rated) Kinder Morgan, Inc. (KMI-NYSE, US$91.63, Not Rated) National Fuel Gas (NFG-NYSE, US$28.20, Not Rated) Nisource (NI-NYSE, US$23.17, Not Rated) NRG Energy (NRG-NYSE, US$37.45, Not Rated) Pacific Northern Gas Ltd. (PNG-TSX, C$19.40, Not Rated) PPL Corporation (PPL-NYSE, US$61.35, Not Rated) Public Service Enterprise Group (PEG-NYSE, US$60.69, Not Rated) 15 Page 33 sur 194

34 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Companies Mentioned in this Report that Are Not Covered by CIBC World Markets: (Continued) Stock Prices as of 08/19/2005: Scottish Power PLC (SPI-NYSE, US$35.13, Not Rated) Williams Cos Inc. (WMB-NYSE, US$20.73, Not Rated) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report. Key to Important Disclosure Footnotes: 1 CIBC World Markets Corp. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months. 2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months. 2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company. 6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company. 8 A partner, director or officer of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries. 16 Page 34 sur 194

35 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Key to Important Disclosure Footnotes: (Continued) 10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares. 17 Page 35 sur 194

36 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 CIBC World Markets Price Chart For price and performance information charts required under NYSE and NASD rules, please visit CIBC on the web at or write to CIBC World Markets Corp., 300 Madison Avenue, 7th Floor, New York, NY , Attn: Research Disclosure Chart Request. CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Stock Ratings Prior To August 26, 2002 SB Strong Buy Expected total return over 12 months of at least 25%. B Buy Expected total return over 12 months of at least 15%. H Hold Expected total return over 12 months of at least 0%-15%. UP Underperform Expected negative total return over 12 months. S Suspended Stock coverage is temporarily halted. DR Dropped Stock coverage is discontinued. UR Under Review Under Review Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. "CC" indicates Commencement of Coverage. The analyst named started covering the security on the date specified. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 19 Aug 2005) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted 7 0.8% Restricted % Ratings Distribution: Pipelines, Utilities, & Power Coverage Universe (as of 19 Aug 2005) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted 0 0.0% Restricted 0 0.0% Pipelines, Utilities, & Power Sector includes the following tickers: ACO.NV.X, CU.NV, DUK, EEP, EMA, ENB, FTS, RRI, TA, TER, TRP. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. 18 Page 36 sur 194

37 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Important disclosures required by IDA Policy 11, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC on the web at or by writing to CIBC World Markets Inc., BCE Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 19 Page 37 sur 194

38 Kinder Just "Trusted" Terasen: Who's Next? - August 19, 2005 Legal Disclaimer This report is issued and approved for distribution by (i) in Canada, CIBC World Markets Inc., a member of the Investment Dealers Association ("IDA"), the Toronto Stock Exchange, the TSX Venture Exchange and CIPF, (ii) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority ("FSA"), and (iii) in Australia, CIBC World Markets Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, "CIBC World Markets"). This report is distributed in the Unites States by CIBC World Markets Inc. and has not been reviewed or approved by CIBC World Markets Corp., a member of the New York Stock Exchange ("NYSE"), NASD and SIPC. This report is intended for distribution in the United States only to Major Institutional Investors (as such term is defined in SEC 15a-6 and Section 15 of the Securities Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major Institutional Investors receiving this report should effect transactions in securities discussed in the report through CIBC World Markets Corp. This report is provided, for informational purposes only, to institutional investor and retail clients of CIBC World Markets in Canada, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This document and any of the products and information contained herein are not intended for the use of private investors in the United Kingdom. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of clients of CIBC World Markets Australia Limited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC World Markets. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. Before making an investment decision with respect to any security recommended in this report, the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances. CIBC World Markets suggests that, prior to acting on any of the recommendations herein, Canadian retail clients of CIBC World Markets contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Non-client recipients of this report who are not institutional investor clients of CIBC World Markets should consult with an independent financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. CIBC World Markets will not treat nonclient recipients as its clients by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal. CIBC World Markets accepts no liability for any loss arising from the use of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to CIBC World Markets. 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This report may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC World Markets has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked thirdparty web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. Although each company issuing this report is a wholly owned subsidiary of Canadian Imperial Bank of Commerce ("CIBC"), each is solely responsible for its contractual obligations and commitments, and any securities products offered or recommended to or purchased or sold in any client accounts (i) will not be insured by the Federal Deposit Insurance Corporation ("FDIC"), the Canada Deposit Insurance Corporation or other similar deposit insurance, (ii) will not be deposits or other obligations of CIBC, (iii) will not be endorsed or guaranteed by CIBC, and (iv) will be subject to investment risks, including possible loss of the principal invested. The CIBC trademark is used under license CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets is prohibited by law and may result in prosecution. 20 Page 38 sur 194

39 Pipelines & Utilities 2007 ROE Preview The Ugly Get Uglier and Is There Trouble Brewing in Ontario? Industry Rating: Market Perform June Toronto, Ontario Karen Taylor, CFA (416) Michael McGowan, CA, CFA (416) Highlights The ugly are getting uglier 2007E ROEs are expected to decline by an average of 10bp. The average expected 2007 ROE is approximately 8.95% versus slightly over 9% in We have reviewed a proposal by Staff of the OEB to set allowed returns for electric distribution utilities in the range of 7.52% to 8.36%, a range we believe to be confiscatory. Lower ROEs may put pressure on expected EPS growth for companies such as Pacific Northern Gas, Gaz Metro, Fortis Inc., and TransCanada Corporation. Companies with limited exposure to ROE adjustment mechanisms include Duke Energy, Enbridge Inc. and TransAlta Corporation. A number of names in our coverage universe do not have exposure to ROE adjustment mechanisms. We rate the shares of Enbridge Inc., Duke Energy, Fortis Inc., and Caribbean Utilities Limited Outperform. We also rate the units of Gaz Metro Outperform. We remain restricted on the units of Calpine Power Income Fund and the shares of Canadian Utilities Limited. This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered/qualified as a research analyst under NYSE/NASD rules. For disclosure statements, including the Analyst s Certification, please refer to pages 15 to 17. Page 39 sur 194

40 Page 2 Pipelines & Utilities We have assessed the 2007E ROE reset using an implied 30-year Government of Canada yield of 4.65%. We believe that the following observations are relevant with respect to this exercise: The ugly are getting uglier - marginally. In our 2005 assessment of prospective 2006 ROEs published on June 10, 2005, we stated that ROEs were looking ugly and presented two 30-year bond scenarios: 5.20% and 4.60%. The latter scenario was closest to reality. Based on the National Energy Board s multi-pipeline decision 2006 reset, which used a forecast bond yield of approximately 4.78%, 2007E ROEs are poised to fall by an average of 10 basis points. The ugly are getting marginally uglier. Lower ROEs may put limited pressure on expected EPS growth (2007 versus 2006) rates for those companies such as Pacific Northern Gas, Gaz Metro, Fortis Inc., and TransCanada Corporation. At the same time, interest rates have bottomed and have increased by approximately 24% versus the low yield of 3.73% reached in September Companies without exposure to ROE adjustment mechanisms include: Canadian Hydro Developers, Caribbean Utilities Company, Ltd., Creststreet Power Income Fund, L.P., Emera Inc., Enbridge Income Fund, Great Lakes Hydro Income Fund, Innergex Power Income Fund, Fort Chicago Energy Partners, L.P., Inter Pipeline Fund, and Pembina Pipeline Income Fund. We have set out our view herein of a proposal made by Staff of the Ontario Energy Board (OEB) to establish the return on equity for local electricity distribution companies in Ontario within a range of 7.52% and 8.36%. We believe this range is confiscatory and likely violates the fair return standard. The allowed rates of return on equity (ROE) allowed by utility regulators are typically established in the fall of each year and are highly dependent on forecast interest rates for the prospective fiscal period. As we have stated in previous versions of this ROE preview, we believe that interest rates: Help establish the relative value of the sectors versus other income-producing investments (i.e., bonds, income trusts and limited partnerships, and other high yielding common stocks). We believe it is consistently understood in the interest sensitive segment of the market that low prevailing and forecast interest rates (i.e., 10-year Government of Canada yields) are positive for income producing investments and result in relatively high valuations, when expressed on a price-to-earnings and price-to-book value basis; Are the key variable in the various automatic adjustment mechanisms that have been adopted by the various federal and provincial regulators. Interest rates are therefore important drivers of our earnings per share outlook for a number of companies in the pipeline and energy utility sectors; and As illustrated in Chart 1, the 10-year Government of Canada bond yield bottomed in 2005 at approximately 3.73% and has since increased by approximately 0.92%, closing on June 26 at a yield of approximately 4.65%. This is a 24.66% increase in yields since September Page 40 sur 194

41 Pipelines & Utilities Page Chart 1: 10-Year Government of Canada Bond Yield BMO Capital Markets Forecast Source: Fame, BMO Capital Markets Tables 1 and 2 contain the key assumptions and parameters embedded in each of the automatic adjustment mechanisms used by federal and provincial regulators: - Equity Risk Premium Assumptions in Each Formula: Table 1 contains the equity risk premium that is inherent in each of the formulas used. The return on equity for a period can be calculated on the fly by simply making an assumption about the prospective 30-year bond yield and adding it to the spread for the corresponding rate level and the regulator in the table. - Indicative Calculated Return on Equity: Table 2 contains the calculated return on equity by regulator and a quick look-up table for those who simply want the answer, being the expected return on equity for a designated 30-year bond yield. Table 1: Equity Risk Premium Inherent in Formula 30-Year Government of Canada Bond Yield Regulator 4.50% 5.25% 6.00% 6.75% 7.50% 8.25% 9.00% 9.75% 10.25% 10.75% National Energy Board 4.19% 4.00% 3.81% 3.63% 3.44% 3.25% 3.06% 2.88% 2.75% 2.63% British Columbia Utilities Commission - Terasen Gas (BCGU) 4.08% 3.90% 3.71% 3.52% 3.33% 3.15% 2.96% 2.77% 2.65% 2.52% British Columbia Utilities Commission - Terasen Gas (Centra) 4.78% 4.60% 4.41% 4.22% 4.03% 3.85% 3.66% 3.47% 3.35% 3.22% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 4.73% 4.55% 4.36% 4.17% 3.98% 3.80% 3.61% 3.42% 3.30% 3.17% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 4.48% 4.30% 4.11% 3.92% 3.73% 3.55% 3.36% 3.17% 3.05% 2.92% Alberta Energy and Utilities Board 4.22% 4.03% 3.84% 3.65% 3.47% 3.28% 3.09% 2.90% 2.78% 2.65% Ontario Energy Board - Enbridge Gas Distribution % 3.90% 3.71% 3.53% 3.34% 3.15% 2.96% 2.78% 2.65% 2.53% Ontario Energy Board - Union Gas % 4.05% 3.86% 3.68% 3.49% 3.30% 3.11% 2.93% 2.80% 2.68% Regie de l'energie 4.16% 3.97% 3.78% 3.59% 3.41% 3.22% 3.03% 2.84% 2.72% 2.59% Nova Scotia Utilities and Review Board Island Regulatory and Appeals Commission Formula Not Presently In Use Newfoundland and Labrador Board of Commissioners of Public Utilities % 4.22% 4.07% 3.92% 3.77% 3.62% 3.47% 3.32% 3.22% 3.12% Notes: (1) Assumed to use the October or November issue of Consensus Economics. (2) Uses the October or November issue of Consensus Economics (3) Total Return Calculation; June 20, 2003 Decision reflected in calculation Source: BMO Capital Markets Page 41 sur 194

42 Page Pipelines & Utilities Table 2: Indicative Calculated Return on Equity by Regulator 30-Year Government of Canada Bond Yield Regulator 4.50% 5.25% 6.00% 6.75% 7.50% 8.25% 9.00% 9.75% 10.25% 10.75% National Energy Board 8.69% 9.25% 9.81% 10.38% 10.94% 11.50% 12.06% 12.63% 13.00% 13.38% British Columbia Utilities Commission - Terasen Gas (BCGU) 8.58% 9.15% 9.71% 10.27% 10.83% 11.40% 11.96% 12.52% 12.90% 13.27% British Columbia Utilities Commission - Terasen Gas (Centra) 9.28% 9.85% 10.41% 10.97% 11.53% 12.10% 12.66% 13.22% 13.60% 13.97% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 9.23% 9.80% 10.36% 10.92% 11.48% 12.05% 12.61% 13.17% 13.55% 13.92% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 8.98% 9.55% 10.11% 10.67% 11.23% 11.80% 12.36% 12.92% 13.30% 13.67% Alberta Energy and Utilities Board 8.72% 9.28% 9.84% 10.40% 10.97% 11.53% 12.09% 12.65% 13.03% 13.40% Ontario Energy Board - Enbridge Gas Distribution 8.59% 9.15% 9.71% 10.28% 10.84% 11.40% 11.96% 12.53% 12.90% 13.28% Ontario Energy Board - Union Gas 8.74% 9.30% 9.86% 10.43% 10.99% 11.55% 12.11% 12.68% 13.05% 13.43% Regie de l'energie 8.66% 9.22% 9.78% 10.34% 10.91% 11.47% 12.03% 12.59% 12.97% 13.34% Nova Scotia Utilities and Review Board Island Regulatory and Appeals Commission Formula Not Presently In Use Newfoundland and Labrador Board of Commissioners of Public Utilities 8.87% 9.47% 10.07% 10.67% 11.27% 11.87% 12.47% 13.07% 13.47% 13.87% Source: BMO Capital Markets Table 3 contains a list of the key variables that drive the adjustment mechanisms, by regulator. Table 3: Key Input Assumptions Year Formula Effective Month of Consensus Economics Regulator Base GOC Equity Risk Adjustment 2002A 2003A 2004A 2005A 2006A 2007E Yield Premium Factor ROE ROE ROE ROE ROE ROE National Energy Board 1995 November 9.25% 3.00% 75% 9.53% 9.79% 9.56% 9.46% 8.88% 8.79% -0.09% British Columbia Utilities Commission - Terasen Gas (BCGU) 2006 November 5.25% 3.90% 75% 9.13% 9.42% 9.15% 9.03% 8.80% 8.70% -0.10% British Columbia Utilities Commission - Terasen Gas (Centra) 2006 November 5.25% 4.60% 75% NA 9.92% 9.65% 9.53% 9.50% 9.40% -0.10% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 2006 November 5.25% 4.55% 75% 9.88% 10.17% 9.80% 9.68% 9.45% 9.35% -0.10% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 2006 November 5.25% 4.30% 75% 9.63% 9.82% 9.55% 9.43% 9.20% 9.10% -0.10% Alberta Energy and Utilities Board 2005 November 5.68% 3.92% 75% N/A N/A 9.60% 9.50% 8.93% 8.79% -0.14% Ontario Energy Board - Enbridge Gas Distribution 1998 October 7.25% 3.40% 75% 9.66% 9.69% 9.69% 9.57% 8.74% 8.71% -0.03% Ontario Energy Board - Union Gas October 7.25% 3.55% 75% 9.95% 9.95% 9.62% 9.63% 8.92% 8.85% -0.07% Regie de l'energie August 5.76% 3.84% 75% 9.67% 9.89% 9.45% 9.69% 8.95% 8.77% -0.18% Nova Scotia Utilities and Review Board Formula Not Presently In Use Island Regulatory and Appeals Commission Newfoundland and Labrador Board of Commissioners of Public Utilities Oct/Nov 5.60% 4.15% 80% 9.05% 9.75% 9.75% 9.24% 8.77% 8.99% 0.22% (1) Issue of Consensus Economics used to calculate allowed ROE has varied. Assume October or November prospectively (reflects change in year-end). (2) Excludes 0.57% of Allowed Incentive Return in 2003, 1.51% in 2004, 1.95% in 2005, 0.38% in 2006, and approximately 0.75% in 2007 (3) Return on Equity for Newfoundland Power Inc. Fixed for two-years at 9.75% in decision dated June 20, Total Return Calculation methodology. Source: BMO Capital Markets Change 2007 vs 2006 Table 4 highlights the anticipated change in the allowed return on equity as would be determined by the automatic adjustment mechanism in each regulatory jurisdiction, given the implied forecast 30-year bond yield of 4.65%. The average anticipated change in ROE is a reduction of approximately 10 basis points (exclusive of the change in ROE for Newfoundland Power). The reduction in estimated 2007 ROEs is largely attributable to a decline in the observed spread between the actual 10-year and 30-year Government of Canada bond yields to approximately 5 basis points (for the 30-day period ending June 23) versus approximately 23 basis points in November Page 42 sur 194

43 Pipelines & Utilities Page 5 Table 4: Change in 2007E Allowed ROE by Regulator Source: BMO Capital Markets Tables 5, 6, 7 and 8 highlight the calculation of the allowed 2007E ROE for the National Energy Board, Alberta Energy and Utility Board, the British Columbia Utilities Commission and the Ontario Energy Board. Table 5: Calculation of the 2007E ROE NEB Multi- Pipeline Cost of Capital Description 2006 Calculated Return on Equity 8.88% 2006 Forecast Yield 4.78% June 2006 Consensus Forecast - 3 Months Out 4.60% June 2006 Consensus Forecast - 12 Months Out 4.60% Average 4.60% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.65% Less: 2006 Forecast Yield 4.78% Difference -0.13% Times 75% Adjustment Factor -0.09% Plus: 2006 Approved Return on Equity 8.88% Equals 2007E Approved Return on Equity 8.79% Notes: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets, National Energy Board Page 43 sur 194

44 Page 6 Pipelines & Utilities Table 6: Calculation of the 2007E ROE AEUB Generic Return on Equity Description 2006 Calculated Return on Equity 8.93% 2006 Forecast Yield 4.84% June 2006 Consensus Forecast - 3 Months Out 4.60% June 2006 Consensus Forecast - 12 Months Out 4.60% Average 4.60% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.65% Less: 2006 Forecast Yield 4.84% Difference -0.19% Times 75% Adjustment Factor -0.14% Plus: 2006 Approved Return on Equity 8.93% Equals 2007E Approved Return on Equity 8.79% (2) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets, Alberta Energy and Utility Board Table 7: Calculation of 2007 ROE BCUC Low- Risk Benchmark Utility Description 2006 Calculated Return on Equity 8.80% June 2006 Consensus Forecast - 3 Months Out 4.60% June 2006 Consensus Forecast - 12 Months Out 4.60% Average 4.60% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % Benchmarket Return per G % Long-Term (30-year)GOC Bond Yield Decision 5.25% 2007 Forecast Yield 4.65% Less: Bond Yield from Decision 5.25% Difference -0.60% Times 75% Adjustment Factor -0.45% Plus: Approved Return on Equity Decision 9.145% Equals 2007E Approved Return on Equity 8.70% Source: BMO Capital Markets, British Columbia Utilities Commission Page 44 sur 194

45 Pipelines & Utilities Page 7 Table 8: Calculation of 2007E ROE OEB Enbridge Gas Distribution Description 2006 Calculated Return on Equity 8.74% 2006 Forecast Yield 4.70% June 2006 Consensus Forecast - 3 Months Out 4.60% June 2006 Consensus Forecast - 12 Months Out 4.60% Average 4.60% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.65% Less: 2006 Forecast Yield 4.70% Difference -0.05% Times 75% Adjustment Factor -0.03% Plus: 2006 Approved Return on Equity 8.74% Equals 2007E Approved Return on Equity 8.71% (1) Average of the actual observed spreads between 10- and 30-year or long term bonds for the last 20 business days that correspond to the Consensus Forecast used (September 9 - October 6) Source: BMO Capital Markets, Ontario Energy Board The anticipated change in estimated 2007 EPS by company arising from the marginally lower ROEs is set out in Table 9. Page 45 sur 194

46 Page Pipelines & Utilities Table 9: Change in 2007E EPS Company Regulator 2007E Ratebase (millions) Deemed Equity (%) Sensitivity to 100 bp change in ROE (millions) Estimated Change ROE (%) Avg Diluted Shares 2007E (millions) Estimated Change in 2007 EPS Estimates Current Diluted 2007E EPS Proforma Diluted 2007E EPS % Change in 2007E EPS ATCO Gas Ltd. AEUB 1, % % ($0.00) ATCO Pipelines Ltd. AEUB % 2.2 NA $0.00 ATCO Electric (Transmission) Ltd. AEUB % 3.1 NA $0.00 ATCO Electric (Distribution) Ltd. AEUB % 2.7 NA $0.00 ($0.00) $2.16 $ % Emera Inc. Nova Scotia Power Inc. 2 UARB 2, % 10.6 NA $0.00 Bangor Hydro 3 MPUC % 1.4 NA $0.00 $0.00 $1.16 $ % Enbridge Inc. Enbridge Gas Distribution OEB 3, % % ($0.00) Non-Routine Adjustments - Liquids Pipeline System NEB % % ($0.00) System Expansion Plan II 4 NEB % % ($0.00) ($0.00) $1.78 $ % Fortis Inc. Newfoundland Power 5 BCPU % % $0.01 Maritime Electric 6 MEA % 1.1 NA $0.00 FortisAlberta AEUB % % ($0.00) FortisBC BCUC % % ($0.00) Fortis Ontario 7 OEB NA NA NA NA $0.00 $0.00 $1.26 $ % Gaz Metropolitain & Company, L.P. Gaz Metropolitain (Distribution) 8 Regie 1, % % ($0.01) Trans Quebec & Maritimes Pipeline (50%) 9 NEB % % ($0.00) ($0.02) $1.24 $ % Pacific Northern Gas Ltd. PNG West Division/Tumbler Ridge BCUC % % 3.6 ($0.01) PNG Fort St. John & Dawson Creek BCUC % % 3.6 ($0.00) ($0.02) $1.59 $ % Terasen Inc. Terasen Gas (BCGU) BCUC 2, % % ($0.01) Terasen Gas (Centra) BCUC % % ($0.00) Terasen Corridor Pipeline 10 AEUB % % ($0.00) ($0.01) $1.38 $ % TransCanada Corporation Canadian Mainline NEB 7, % % ($0.00) Alberta System AEUB 4, % % ($0.00) BC System NEB % % ($0.00) Trans Quebec & Maritimes Pipeline (50%) NEB % % ($0.00) Foothills PipeLines. Ltd. 11,12 NEB % % ($0.00) ($0.01) $1.76 $ % Notes: (1) The AEUB established a fomula to determine Return on Equity in its Generic Cost of Capital Decision dated July 2, Only if a utility files for new utility rates will the recalculated return on equity apply. ATCO Pipelines has not filed for new 2006 rates. Pursuant to the AEUB Janury 27, 2006 decision relating to ATCO Gas 2005 to 2007 General Rate Application, the generic ROE formula will apply for the purpose of determining 2005 to 2007 rates. Pursuant to the AEUB decision dated March 17, 2006 relating to ATCO Electric s 2005 to 2007 General Tariff Application, while the generic ROE forumula applies for the purpose of determining 2005 and 2006 rates, it does not apply for (2) ROE for NSPI is presently set as an allowed range of 9.30% to 9.80% (as per 2005 rate decision). Rates reflect an ROE of 9.55% (3) Multi-year Alternative Rate Plan in effect from Jun 6, 2002 to December 31, ROE allowed to vary between 5% and 17%, subject to performance. (4) System Expansion Plan II is subject to volumetric thresholds, with the allowed return ranging from the Multi-Pipeline Return less 3.00% to the Multi-Pipeline Return Plus 3.00%. (5) Allowed ROE fixed for fiscal 2003 and 2004 at 9.75%. Subject to ROE Adjustment Mechanism thereafter and Total Cost of Capital Methodology. (6) Maritime Electric is subject to regulation under the new Electricity Act, effective Janary 1, Under the new Electricity Act, the company is now subject to a more conventional regulatory process (return on rate base) versus the previous approach involving a rate cap methodology. Customer rates could not exceed 110% of the rates charged by NB Power, subject to two adjustments: an Energy Cost Adjustment and a Cost of Capital Adjustment, both of which were designed to smooth actual performance. Applied for Return on Equity of 10.00% to 10.50%, with rates calculated in the application to reflect an allowed return of 10.25% (7) Fortis Ontario includes the operations of Cornwall Electric, Canadian Niagara Power and various operating arrangements on MEUs owned by 3rd parties. Cornwall Electric s distribution rates are regulated by the 35-year Franchise Agreement between the utility and the City of Cornwall dated July 31, Utility operations are otherwise subject to regulatory oversight by the Ontario Energy Board. Until May 1, 2006 the allowed ROE is capped at 9.88%. (8) Sensitivities are expressed on a pre-tax basis. (9) Sensitivities reflect a 50% ownership interest in the pipeline. (10) The Capital structure and ROE mechanism are confidental. We have assumed that the NEB Multi-Pipeline Decision is used. (11) On December 21, 2005 the National Energy Board approved tolls on the Foothills Pipe Lines Ltd systems and the BC System which included 36% deemed equity. (12) Reflects 100% ownership interest. Regulated on actual capital cost of service basis. Subject to O&M, G&A Incentive Agreement effective January 1, 2003 to December 31, Incentive benefit capped at $45 million over the term of the Agreement. NEB Multi-Pipeline decision remains relevant. Source: BMO Capital Markets Page 46 sur 194

47 Pipelines & Utilities Page Is There Trouble Brewing in Ontario? On April 27, 2006, the Ontario Energy Board issued a letter to interested parties describing the process it intends to use to review the allowed cost of capital and to develop a 2nd generation incentive regulation mechanism. On June 19, the Board posted on its website a report on the cost of capital prepared by Dr. Fred Lazar and Dr. Eli Prisman of the Schulich School of Business dated June 14, 2006 and Staff s Draft Report regarding Proposals for Cost of Capital and 2nd Generation Incentive Regulation for Ontario s Electricity Distributors. Our comments will focus primarily on Board Staff s recommendations for the equity cost of capital. Staff proposes that both the riskless rate of equity and the Equity Risk Premium should be determined in the manner recommended by Lazar and Prisman; i.e., relying exclusively on the Capital Asset Pricing Model or CAPM, which divides ROE into the sum of two terms: the riskless rate and a risk premium, which reflects the risk of the distributor, measured by Beta. Lazar and Prisman do not consider the discounted cash flow test, which measures the equity investors expected return as the dividend yield on a stock or group of stocks plus the expected growth in dividends in the long term, or the comparable earnings test, which measures the experienced returns on book equity of firms that are of similar risk to the utility for which the regulator is setting the fair return. Staff recommends replacing the use of the proxy 30-year Government of Canada bond yield derived from the Consensus Forecasts publication with the forward rate and proposes that forward rates are a better indicator of the future cost of riskless capital. The riskless rate would be set by the average of 5, 10 and 15 year forward rates for Government of Canada bonds. Staff does not favour an annual review of the riskless rate by a panel of experts. Staff is undecided about the most appropriate way of estimating the equity risk premium or ERP a panel of experts to select an appropriate sample of corporate comparators for estimating beta or a formulaic approach to adjust the annual allowable riskless rate for annual differences between the calculated rates. Staff recommends the continued inclusion of a 50-basis-point allowance for floatation and other transactions costs over and above a risk premium calculation. Staff proposes a return on equity of 7.52% to 8.36% and further recommends an annual formula-based update. We believe that the following points are relevant about Staff s proposals and the supporting Lazar and Prisman study: It is unclear whether Lazar and Prisman have filed evidence in other regulatory proceedings and whether their combined recommendations have been reflected or have been given weight in the resulting panel decision. Page 47 sur 194

48 Page 10 Pipelines & Utilities The use of the capital asset pricing model as the sole determinant of the equity cost of capital is fraught with difficulty, as illustrated by the Lazar and Prisman analysis, which we believe has the following deficiencies: 1. The 60-month study period to determine beta and market returns is too short; it does not capture a full business or a full capital markets cycle. We note that evidence filed in conjunction with the recently completed British Columbia Utilities Commission cost of capital proceeding used observation periods of approximately 50 years for the Canadian comparable universe 1956 to Study authors mix apples and oranges in the determination of the key variables in the CAPM equation. The beta was calculated using two 60-month periods ending 2004 and The Market Return was calculated over the January 2000 to April 2006 period. However, to determine the risk free rate and therefore the market risk premium, the authors use a current forward rate of 5.01%. We believe that the risk free return over a comparable study period should have been used to determine the market risk premium. 3. The forward rate is not an unbiased estimator of future expected rates. The forward rate is the rate of interest for a future period that would equate the total return of a long-term bond with that of a strategy of rolling over a series of shorter-term bonds. The forward rate is inferred from the term structure and the actual future rate can vary from the theoretical forward rate. We believe that it is inappropriate to use the forward rate and note that the National Energy Board previously considered this approach and rejected it. 4. The study uses 11 TSX listed entities as a proxy to determine the beta for Ontario electric distribution utilities. The proxy group includes: TransAlta Corporation, Canadian Utilities Limited, Fortis Inc., Emera Inc., Great Lakes Hydro Income Fund, Atlantic Power Corporation, Algonquin Power Income Fund, Boralex Power Income Fund, Canadian Hydro Developers Inc., EPCOR Power L.P., and Northland Power Income Fund. With the exception of Canadian Utilities, Fortis and Emera, none of the other members of the proxy group have substantial exposure to rate-regulated entities. In fact, all or substantially all of the remaining peer group are essentially unregulated, pure-play electric power generating entities. Furthermore, 6 of the entities in the comparables universe are essentially securitization vehicles (i.e., trust/limited partnership/ips structures). We believe that it is no more appropriate to use these securitization vehicles to construct a proxy portfolio for the purpose of determining beta, the resultant cost of equity, and assume it to be comparable to the cost of equity for an electric distribution utility, than it is to calculate the CAPM cost of equity for a GMAC securitization vehicle and assume that it is the cost of equity for General Motors. 5. The study does not acknowledge that the TSX is not likely to meet the CAPM requirement for a diversified market portfolio. At the beginning of the study period, the index was highly concentrated in technology stocks, namely Nortel. In recent years, the relative weights of the financial services and energy have increased dramatically. These sectors represent 29.5% and 27.9% of the S&P/TSX index, respectively, as at June 8, Page 48 sur 194

49 Pipelines & Utilities Page Lazar and Prisman reject the use of other methods of determining the cost of equity on the basis that the other two methods (highlighted above) require estimates of future cash flows and their likelihoods. This is, of course, the essence of the exercise in the first place and should not be assumed away. 7. Lazar and Prisman are unable to reverse engineer the beta used in the current Board-approved equity risk premium ROE method, highlighting the inherent difficulties with the CAPM approach. 8. The range of ROEs highlighted in the study 6.52% to 6.71% using the Lazar and Prisman determined variables (beta of 0.357) and 6.74% to 10.09% using the Lazar and Prisman determined variables and the original beta of 0.8 to 0.9, is too wide to narrow the cost of equity capital debate, focus the issues and add incremental value to the equity cost of capital discussion. The range also inherently highlights the weakness in the CAPM approach the determination of beta. To reiterate, betas are inherently unstable and are influenced by a number of factors, including the sample group and time horizon used in the calculation. In framing its proposal, Staff should have made use of the extensive evidentiary record that was established in conjunction with the National Energy Board s Fair Return proceeding (decision dated June 21, 2002), the Alberta Energy and Utilities Board Generic Cost of Capital Proceeding (decision dated July 2, 2004) and the British Columbia Utilities Commission March 2, 2006 decision relating to an application by Terasen Gas Inc. and Terasen Gas (Vancouver Island) Inc. to determine the appropriate return on equity and capital structure and to review and revise the automatic adjustment mechanism. The cumulative record for these proceedings is comprehensive and complete and is superior to the Lazar and Prisman study commissioned by the Board. A more thorough review of this body of evidence would suggest the following: 1. That there is considerable debate about the actual value of the variables critical to the CAPM approach. 2. Beta is not transparent, is subject to adjustments and these adjustments can be biased by the point of view of the individuals undertaking the review. 3. CAPM is not widely used by the capital market to determine the relevant cost of equity. While it may be true that beta is a published statistic and used by market participants as a measure of the covariation of a stock in the context of the variance of the market portfolio for use in hedging or derivatives based activities, it does not imply that CAPM is widely used by capital markets participants to determine the cost of equity of a particular security. We do not believe that CAPM is widely used without substantial modification in the real-world capital budgeting process. 4. Other methods must be used to compensate for the deficiencies of CAPM. The Staff proposed return on equity range of 7.52% to 8.36% is unsupportable and confiscatory. It is a setback for the Board for the process to have resulted in this proposal. The proposed range likely violates the fair return standard, as established by Canada s Supreme Court and accepted by the National Energy Board in 1971, which states that a fair or reasonable rate of return should: Page 49 sur 194

50 Page 12 Pipelines & Utilities a. Be comparable to the return available from the application of the invested capital to other enterprises of like risk (the comparable earnings standard). b. Enable the financial integrity of the regulated enterprise to be maintained and permit incremental capital to be attracted to the enterprise on reasonable terms and conditions (the financial integrity and capital attraction standards). c. Achieve fairness both from the viewpoint of the customers and from the viewpoint of present and prospective investors (appropriate balance of customer and investor interests). We note that the lower end of the proposed range may be approximately equal to the embedded cost of debt of many distribution utilities. We also point out with respect to the third standard that the Federal Court of Appeal stated in its decision dated April 6, 2004 that, the cost of equity capital does not change because allowing the Mainline to recovery it would cause an increase in tolls The cost to the Mainline of providing that rate of return on the equity component of its deemed capital structure is unaffected by the impact of tolls on customers or consumers. We do not use CAPM to calculate the cost of equity or the expected return associated with the purchase of an equity security. Rather, we essentially use the Discounted Cash Flow approach. As highlighted above, this approach measures the equity investors expected return as the dividend yield on a stock or group of stocks plus the expected growth in dividends in the long term. We typically do not have an Outperform rating on a name in our coverage universe unless the total return (target yield plus the anticipated capital appreciation arising from higher dividends) is at least 10%. The Lazar and Prisman study did not provide the theoretical or practical foundation from which to deviate from the allowed return on equity used in the 2006 Electricity Distribution Rate proceedings: 4.75% 10-year Government of Canada bond yield (from Consensus Forecasts), plus the average difference during April 2005 between 10- and 30-year Government of Canada bond yields of 0.45% and an equity risk premium of 3.80%, for a total allowed return on equity of 9.0%. We believe that the following points are relevant about the current methodology used by the Ontario Energy Board: 1. The Ontario Energy Board is the only regulatory authority that does not publish the calculation of the allowed ROE for the utilities subject to its oversight. We do not believe this is acceptable and believe it to be inconsistent with the Board s focus on transparency. 2. The monthly edition of Consensus Forecasts to be used varies from one utility to another and may be inconsistently applied per utility. We believe that the relevant monthly reference point should be disclosed, applied consistently for each utility and if possible, used on a comprehensive basis across all entities subject to the Board s regulation. With respect to the automatic adjustment mechanisms highlighted in this report broadly, we set out the following points that we made at the recently concluded CAMPUT confer- Page 50 sur 194

51 Pipelines & Utilities Page 13 ence in Ottawa regarding the ROE formulas currently used by the various provincial and federal utility regulators: 1. We like them. The formulas are transparent; we can calculate them and the resulting returns can therefore be fully anticipated and priced into our reasonable expectations. 2. The resulting ROEs are too low. 3. The formulas cannot be overturned. The evidentiary standard is too high and is impossible to meet. In some jurisdictions, the utility has to prove that the formula no longer results in a fair return before it can get into the hearing room to have the formula reviewed. 4. All other regulators have reverted to the mean the National Energy Board Multi- Pipeline decision. 5. Even though every regulator would contest this, we suggest that the ROEs allowed are trending toward the Bare Bones level, not the level established by the fair return standard that we all know and love, largely due to the potential adverse effect on customers. And we remind the reader that the courts have specifically prohibited this practice. Our remarks elicited the following responses from various regulators: 1. Can the utilities still issue equity? The answer is yes; however, in the last five years, we have difficulty providing an example in which a publicly traded entity has issued common equity solely for the purpose of investing the monies raised in fully regulated operations at the allowed rates of return highlighted in this report. The ability of a utility to issue equity to fund general corporate purposes, including non-regulated operations, does not demonstrate the adequacy of the allowed return on equity of its rate regulated entity. It also does not indicate whether or not the issuance of equity dilutes existing equity investors. 2. They are still investing in system assets. This is also true. Utilities will likely continue to invest in rate base despite an unsatisfactory ROE for a number of reasons: (1) requirement to be the supplier or supply of last resort and fulfil the obligation to serve; (2) maintain the safe and reliable operation of the utility; and (3) remain in compliance with a governing licence. It should not be presumed that continued investment is an acquiescence that the allowed ROE adequately meets the fair return standard. 3. The benchmark formula, the National Energy Board s Multi-Pipeline decision, has not been challenged. We believe that regulatory proceedings such as the Fair Return proceeding undertaken by TransCanada PipeLines in 2001/2002 have the potential to seriously impair customer relationships and relationships with the regulator. Page 51 sur 194

52 Page 14 Pipelines & Utilities Table 10: Comparable Equities Canadian Gas Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 26-Jun-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating Duke Energy Corp. 2 DUK 5 $ $31,074 $1.32 $1.73 $1.89 $ $ % $ % Outperform Enbridge Inc. ENB , % % Outperform Enbridge Income Fund ENF.UN % % Underperform Fort Chicago Energy Partners L.P. FCE.UN , % % Market Perform Gaz Métro 4 GZM.UN , % % Outperform Inter Pipeline Fund IPL.UN , % % Market Perform Pacific Northern Gas Ltd. PNG % % Market Perform Pembina Pipeline Income Fund PIF.UN , % % Underperform TransCanada Corp. TRP , % % Market Perform Group Average (Excl. ENF, FCE, GZM, IPL and PIF) % 10.7% Canadian Electric Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 26-Jun-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating Caribbean Utilities Co. Ltd. 2, 3 CUP.U $ $297 $0.77 $0.13 $0.87 $ NMF $ % $ % Outperform Emera Inc. EMA , % % Market Perform Fortis Inc. FTS , % % Outperform Group Average % 8.5% Canadian Multi-Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 26-Jun-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating ATCO Ltd. 1 ACO/X $ $2,101 $2.17 $2.46 $2.68 $ $ % NA NA NR Atlantic Power Corporation 6 ATP.UN (0.57) (0.01) NMF $ % $ % Market Perform Calpine Power Income Fund CF.UN R R R R R R R R Restricted Cdn Hydro Developers, Inc. KHD NMF NA NA % Market Perform Canadian Utilities Ltd. CU , R R R R R R R R Restricted Creststreet Power & Income Fund LP CRS.UN (0.54) (0.04) 0.02 NMF NMF NMF % % Market Perform Great Lakes Hydro Income Fund GLH.UN % % Market Perform Innergex Power Income Fund IEF.UN % % Market Perform TransAlta Corp. TA , % % Underperform TransAlta Power L.P. TPW.UN (0.04) NMF % % Underperform Group Average (Excl. CF, GLH, IEF and TPW) % 4.8% Notes: NA = Not Applicable, NMF = Not Meaningful, NR = Not Rated 1 Estimates from First Call 2 All figures in US Dollars 3 Caribbean Utilities year end is April 30 4 Gaz Metro s year end is Sept Ticker on the New York Stock Exchange 6 Represents Income Participating Securities (IPS). Share price, Market Cap and Dividend in C$; all else in US$. Source: BMO Capital Markets Page 52 sur 194

53 Pipelines & Utilities Page 15 Analyst s Certification I, Karen Taylor, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Michael McGowan, CFA, CA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. General Disclosure The information and opinions in this report were prepared by BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., collectively ( BMO NB ). BMO NB is not subject to U.S. rules with regard to the preparation of research reports and the independence of analysts. BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal and BMO NB in Canada, and BMO Capital Markets Corp. in the U.S. BMO Capital Markets Corp. is an affiliate of BMO NB. BMO NB and BMO Capital Markets Corp. are subsidiaries of Bank of Montreal. Bank of Montreal or its affiliates ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO NB research. A significant lending relationship may exist between BMO Financial Group and certain of the issuers mentioned herein. The reader should assume that BMO NB, BMO Capital Markets Corp., Bank of Montreal or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates and projections contained in this report are those of BMO NB as of the date of this report and are subject to change without notice. BMO NB endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO NB makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO NB or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of BMO NB and its affiliates, which includes the overall profitability of investment banking services. BMO NB, or its affiliates expect to receive or will seek compensation for investment banking services within the next 3 months from all issuers covered by BMO NB. BMO NB or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO NB or its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Company Specific Disclosures Atlantic Power Corp. (ATP.UN-TSX) 9, 10C Fortis Inc. (FTS-TSX) Calpine Power Income Fund (CF.UN-TSX) 1, 3, 9, 10AC Gaz Metro Limited Partnership (GZM.UN-TSX) 1, 3, 9, 10AC Canadian Hydro Developers Inc. (KHD-TSX) 2, 3, 10A Great Lakes Hydro Income Fund (GLH.UN-TSX) Canadian Utilities (CU-TSX) 2, 3, 9, 10AC, 11, 12 Innergex Power Income Fund (IEF.UN-TSX) 2, 3, 9, 10AC Caribbean Utilities Co. Ltd. (CUP.U-TSX) 5, 7, 9, 10AB Inter Pipeline Fund (IPL.UN-TSX) 2, 3, 9, 10AC Countryside Power Income Fund (COU.UN-TSX) 2, 3, 10A Macquarie Power Income Fund (MPT.UN-TSX) 2, 3, 10A Creststreet Power & Inc. Fund (CRS.UN-TSX) 2, 3, 9, 10AC Pacific Northern Gas (PNG-TSX) Duke Energy Corp. (DUK-NYSE) 2, 3, 9, 10AC Pembina Pipeline Income Fund (PIF.UN-TSX) 9, 10C Emera Inc. (EMA-TSX) 9, 10C TransAlta Corporation (TA-TSX; TAC-NYSE) 2, 3, 4, 5, 9, 10AC, 11 Enbridge Inc. (ENB-TSX; ENB-NYSE) 2, 3, 4, 9, 10AC TransAlta Power L.P. (TPW.UN-TSX) 9, 10C Enbridge Income Fund (ENF.UN-TSX) TransCanada Corporation (TRP-TSX; TRP-NYSE) 1, 2, 3, 5, 9, 10AC, 12 Fort Chicago Energy L.P. (FCE.UN-TSX) 9, 10C Page 53 sur 194

54 Page 16 Pipelines & Utilities Disclosure Key BMO NB uses the following Company Specific Disclosure Key. Please refer to the Company Specific Disclosure section above for specific disclosures applicable to issuers discussed in this report: 1 - BMO NB has provided advice for a fee with respect to this issuer within the past 12 months. 2 - BMO NB has undertaken an underwriting liability with respect to this issuer within the past 12 months. 3 - BMO NB has provided investment banking services with respect to this issuer within the past 12 months. 4 - BMO NB, BMO Capital Markets Corp. or an affiliate beneficially owns 1% or more of any class of the equity securities of this issuer. 5 - BMO NB, BMO Capital Markets Corp. or an affiliate makes a market in this security. 6 - BMO Capital Markets Corp. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 7 - BMO Capital Markets Corp. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 8 - BMO Capital Markets Corp. or an affiliate or its officers or partners own options, rights, or warrants to purchase any securities of this issuer. 9 - BMO Capital Markets Corp. or an affiliate received compensation for products or services other than investment banking services within the past 12 months. 10A - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Investment Banking Services 10B - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Non-Investment Banking Securities Related Services 10C - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp.or an affiliate within the past 12 months: Non- Securities Related Services 11 - An employee, officer, or director of BMO NB is a member of the Board of Directors or an advisor or officer of this issuer A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this issuer A household member of the research analyst and/or associates who prepared this research report is a member of the Board of Directors or is an advisor or officer of this issuer The research analysts and/or associates (or their household members) who prepared this research report directly or beneficially own securities of this issuer: [Specify nature of interest: long, short, debt, equity, futures, options, or other derivatives] Page 54 sur 194

55 Pipelines & Utilities Page 17 Distribution of Ratings Rating BMO BMO BMO First Call Category Rating Universe I.B. Clients* Universe** Buy Outperform 40% 49% 48% Hold Market Perform 50% 47% 45% Sell Underperform 10% 4% 7% * Reflects rating distribution of all companies where BMO Capital Markets has received compensation for Investment Banking services. ** Reflects rating distribution of all North American equity research analysts. Ratings Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. Prior to September 1, 2003, a fourth rating tier Top Pick was used to designate those stocks we felt would be the best performers relative to the market. Our six Top 15 lists which guide investors to our best ideas according to six different objectives (large, small, growth, value, income and quantitative) have replaced the Top Pick rating. Dissemination of Research Our research publications are available via our web site Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please contact your investment advisor or institutional salesperson for more information. Additional Matters TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd. TO U.K. RESIDENTS: The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée/Ltd. are Members of CIPF. BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. are Members of SIPC. BMO Capital Markets is a trade-mark of Bank of Montreal, used under licence. BMO (M-Bar roundel symbol) is a registered trade-mark of Bank of Montreal, used under licence. R36663 Page 55 sur 194

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69 Pipelines & Utilities 2007 ROEs Decline to Unprecedented Levels Industry Rating Pipelines: Market Perform Industry Rating Utilities: Market Perform December 7, 2006 Toronto, Ontario Karen J. Taylor, CFA (416) Associate: Benjamin Pham Michael McGowan, CA, CFA (416) Ontario Gets Reprieve Highlights The ugly got uglier actual 2007 allowed ROEs declined by an average of 0.37% versus the average allowed return on equity for The average actual allowed return on equity in 2007 is 8.65% versus 9.01% in The announced allowed returns are fully reflected in our diluted EPS estimates over the 2007 and 2008 forecast period. Although we believe that the allowed returns established by the automatic adjustment mechanisms set out herein likely violate the Fair Return Standard and are confiscatory, they are in line with expectations and therefore neutral to our outlook. Companies with material exposure to these automatic adjustment mechanisms include Canadian Utilities Limited, Pacific Northern Gas, Gaz Metro L.P., Fortis Inc. and TransCanada Corporation. Companies with limited exposure to ROE adjustment mechanisms include: Enbridge Inc., Duke Energy, and TransAlta Corporation. There are a number of companies in our coverage universe with no exposure to these automatic adjustment mechanisms: Canadian Hydro Developers, Caribbean Utilities, and Emera Inc. The pipeline and power trusts/limited partnerships in our coverage universe generally do not have a material exposure to these mechanisms. On November 23, the Ontario Energy Board abandoned its generic licence amendment proceeding, the purpose of which, among other things, was to codify its approach to determining the allowed return on equity. The Board has also rejected the implementation of an alternative approach to determine the allowed return on equity for Ontario s local electricity distribution utilities. We believe that this alternative approach was seriously flawed and had no basis in reality. We rate the units of Fort Chicago Energy Partners, LP, Inter Pipeline Fund, and Northland Power Income Fund Outperform. We also rate the shares of Pacific Northern Gas Ltd., and Caribbean Utilities Co. Ltd. Outperform. We remain restricted on the units of Calpine Power Income Fund. This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered/qualified as a research analyst under NYSE/NASD rules. For disclosure statements, including the Analyst s Certification, please refer to pages 10 to 12. Page 69 sur 194

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71 Table of Contents A. The Calculations... 2 B. Allowed Returns are Confiscatory... 5 C. Ontario Gets a Reprieve... 7 D. Comparable Equity Securities... 9 Page 71 sur 194

72 Page 2 Pipelines & Utilities The allowed rates of return on equity (ROE) for many of the pipeline and energy utility companies in our coverage universe are established by an automatic adjustment mechanism in the fall of each year and are highly dependent on forecast interest rates for the prospective fiscal period. As discussed below, the 2007 allowed ROEs for various jurisdictions have now been established and allowed ROEs, on a cumulative basis, have reached unprecedented lows. A. The Calculations Table 1 sets out the key variables that drive each of the automatic adjustment mechanisms, by regulator. Table 1: Key Input Assumptions Regulator Year Formula Effective Month of Consensus Economics Base GOC Yield Equity Risk Premium Adjustment Factor 2004A ROE 2005A ROE 2006A ROE 2007E ROE Change 2007 vs National Energy Board 1995 November 9.25% 3.00% 75% 9.56% 9.46% 8.88% 8.46% -0.42% British Columbia Utilities Commission - Terasen Gas (BCGU) 2006 November 5.25% 3.90% 75% 9.15% 9.03% 8.80% 8.37% -0.43% British Columbia Utilities Commission - Terasen Gas (Centra) 2006 November 5.25% 4.60% 75% 9.65% 9.53% 9.50% 9.07% -0.43% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 2006 November 5.25% 4.55% 75% 9.80% 9.68% 9.45% 9.02% -0.43% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 2006 November 5.25% 4.30% 75% 9.55% 9.43% 9.20% 8.77% -0.43% Alberta Energy and Utilities Board 2005 November 5.68% 3.92% 75% 9.60% 9.50% 8.93% 8.51% -0.42% Ontario Energy Board - Enbridge Gas Distribution 1998 October 7.25% 3.40% 75% 9.69% 9.57% 8.74% 8.39% -0.35% Ontario Energy Board - Union Gas October 7.25% 3.55% 75% 9.62% 9.63% 8.92% 8.53% -0.39% Regie de l'energie August 5.76% 3.84% 75% 9.45% 9.69% 8.95% 8.73% -0.22% Nova Scotia Utilities and Review Board Formula Not Presently In Use Island Regulatory and Appeals Commission Newfoundland and Labrador Board of Commissioners of Public Utilities Oct/Nov 5.60% 4.15% 80% 9.75% 9.24% 8.77% 8.60% -0.17% Notes: (1) Issue of Consensus Economics used to calculate allowed ROE has varied. October stipulated in June 29, 2006 Reasons for Decision re: 2007 Rates. (2) Excludes 0.57% of Allowed Incentive Return in 2003, 1.51% in 2004, 1.95% in 2005, 0.38% in 2006, and approximately 0.75% in 2007 (3) Return on Equity for Newfoundland Power Inc. Fixed for two-years at 9.75% in decision dated June 20, Total Return Calculation methodology. Source: BMO Capital Markets Page 72 sur 194

73 Pipelines & Utilities Page As set out in Table 1, the allowed ROEs established for the 2007 period are an average of 0.37% lower than in The primary reason for the decline in allowed return is the precipitous drop in the implied forecast 30-year bond yield arising from: (i) reduction in the underlying Consensus Estimate for 2007 versus 2006 to 4.15% from 4.55%; and (ii) decline in the observed spreads between the 10-year and 30-year government of Canada bond yields, as published in the National Post throughout October of 2006 versus a similar period in 2005, to approximately 7 basis points from approximately 23 basis points. Tables 2, 3, and 4 highlight the calculation of the allowed 2007 actual ROE for the National Energy Board (NEB), Alberta Energy and Utility Board (AEUB), and the British Columbia Utilities Commission (BCUC). Table 5 highlights our estimate of the allowed return on equity for Enbridge Gas Distribution, as per the automatic adjustment mechanism notionally used by the Ontario Energy Board (OEB). We note that that the OEB, unlike its utility peer group, does not publish or release the calculation for the allowed return for the utilities subject to its purview. We note that the formulas appear to vary between Union Gas and Enbridge Gas Distribution and also between the electricity and natural gas sectors. Table 2: Calculation of the 2007 Actual ROE Multi- Pipeline Cost of Capital Description 2006 Calculated Return on Equity 8.88% 2006 Forecast Yield 4.78% November 2006 Consensus Forecast - 3 Months Out 4.10% November 2006 Consensus Forecast - 12 Months Out 4.20% Average 4.15% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.22% Less: 2006 Forecast Yield 4.78% Difference -0.56% Times 75% Adjustment Factor -0.42% Plus: 2006 Approved Return on Equity 8.88% Equals 2007E Approved Return on Equity 8.46% Note: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Page 73 sur 194

74 Page Pipelines & Utilities Table 3: Calculation of the 2007 Actual ROE AEUB Description Calculated Return on Equity Per Decision 9.60% Forecast Yield Per Decision 5.68% November 2006 Consensus Forecast - 3 Months Out 4.10% November 2006 Consensus Forecast - 12 Months Out 4.20% Average 4.15% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.22% Less: 2006 Forecast Yield 5.68% Difference -1.46% Times 75% Adjustment Factor -1.10% Plus: Approved Return on Equity 9.60% Equals 2007E Approved Return on Equity 8.51% Note: (2) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Table 4: Calculation of the 2007 Actual ROE BCUC Description 2006 Calculated Return on Equity 8.80% November 2006 Consensus Forecast - 3 Months Out 4.10% November 2006 Consensus Forecast - 12 Months Out 4.20% Average 4.15% Average Spread between 10-year and 30-year GOCs 0.07% Forecast Long-Term (30-year) GOC Bond Yield % Benchmark Return per G % Long-Term (30-year)GOC Bond Yield Decision 5.25% 2007 Forecast Yield 4.22% Less: Bond Yield from Decision 5.25% Difference -1.03% Times 75% Adjustment Factor -0.77% Plus: Approved Return on Equity Decision 9.145% Equals 2007E Approved Return on Equity 8.37% Source: BMO Capital Markets Page 74 sur 194

75 Pipelines & Utilities Page Table 5: Calculation of the 2007E ROE for Enbridge Gas Distribution OEB Description 2006 Calculated Return on Equity 8.74% 2006 Forecast Yield 4.70% November 2006 Consensus Forecast - 3 Months Out 4.10% November 2006 Consensus Forecast - 12 Months Out 4.20% Average 4.15% Average Spread between 10-year and 30-year GOCs 0.08% Forecast Long-Term (30-year) GOC Bond Yield % 2007 Forecast Yield 4.23% Less: 2006 Forecast Yield 4.70% Difference -0.47% Times 75% Adjustment Factor -0.35% Plus: 2006 Approved Return on Equity 8.74% Equals 2007E Approved Return on Equity 8.39% Source: BMO Capital Markets B. Allowed Returns are Confiscatory We believe on a collective basis, that the allowed returns as established by the formulas highlighted above are confiscatory and likely violate the Fair Return Standard. This standard, as established by Canada s Supreme Court and accepted by the National Energy Board in 1971, states that a fair or reasonable rate of return should: 1. be comparable to the return available from the application of the invested capital to other enterprises of like risk (the comparable earnings standard); 2. enable the financial integrity of the regulated enterprise to be maintained and permit incremental capital to be attracted to the enterprise on reasonable terms and conditions (the financial integrity and capital attraction standards); and 3. achieve fairness from the viewpoint of the customers and from the viewpoint of present and prospective investors (appropriate balance of customer and investor interests). We believe that regulators have consistently refused to give weight to a number of arguments that would result in higher allowed returns, solely on the basis that to do so would result in higher customer rates. The North American capital markets are increasingly integrated and investors have the ability to invest in utility assets north and south of the border. There is merit incorporating U.S. market metrics into the analysis and that the Canadian benchmark equity portfolio (the S&P/TSX) may not meet the theoretical requirement for a diversified market portfolio. The returns on comparable investments with similar risk, whether they be Canadian or U.S. examples, should be considered. The allowed return on equity and deemed equity must satisfy all aspects of the Fair Return Standard and that no part of the Standard has priority. Page 75 sur 194

76 Page 6 Pipelines & Utilities The continued reliance on a derived 30-year government of Canada bond yield may not be a relevant proxy for the cost of debt (and/or a proxy for the risk free rate) for two key reasons: (i) the observed and anticipated reduction in the supply of government of Canada securities and the continued conversation in the financial market that the government may cease to issue debt securities at the long end of the curve may result in distortions in the market cost of these securities and thus the observed yields; and (ii) that corporate debt issuers do not have access to the debt capital market at government yield levels. No pipeline or energy utility in our regulated coverage universe has issued equity in the last five years to fund, on an unlevered basis, a dollar-for-dollar equity investment in utility rate base. Continued assertions by regulators that utilities have adequate access to capital are not credible with respect to the equity component, as access to equity has not been tested over the ensuing period. For example, On September 16, 2003, Fortis Inc. announced that it planned to acquire the assets of Aquila British Columbia and Aquila Alberta for $1.36 billion, including assumed debt. The company financed the transaction by assuming approximately $689 million of utility debt and issued approximately $170 million of holdco debt, $200 million of holdco preferred shares and new equity of approximately $350 million. Despite the levered nature of the transaction and the prospect for above average rate base growth at the two target utilities, the common shares of Fortis Inc. declined by 5% at the time the transaction was announced and the transaction was initially widely expected to be dilutive until None of the pipeline projects highlighted in our May 24, 2006, report entitled Exchanging Fire, save and except the Canadian portion of the Southern Access Pipeline (with an approximate cost of $160 million versus an estimated cost to Enbridge of projects currently permitted and/or under way of $8 billion), are expected to earn the National Energy Board multi-pipeline decision return on equity. We note that in many instances, the market-based tolling arrangements with shippers result in a risk profile similar to that of the benchmark pipeline, the TransCanada Mainline pipeline. Continued investment in utility rate base by the owners of utilities is not an acquiescence that the allowed return on equity is appropriate and that investment may relate to other obligations including the utility s obligation to be the supplier or supply or last resort and fulfil the obligation to serve, maintain the safe and reliable operation of the utility, and may be fulfilling specific conditions of its operating licence. A failure by utility companies to annually litigate the allowed return on equity formula does not constitute acceptance of the adequacy of the allowed return. Rather, we believe that the lack of annual litigation reflects the cost of the process, the time required to pursue litigation that detracts from management s ability to focus on the efficient operation of the business and the potential damage to important utility regulatory and customer relationships. The evidenciary standard is too high and almost impossible to meet. Moreover, we believe that notwithstanding decisions from the Supreme Court that stipulate otherwise, utility regulators continue to rely heavily on their quasi-judicial and expert status to impose a bare-bones return on equity and drive down the deemed capital structure of Page 76 sur 194

77 Pipelines & Utilities Page 7 the utility in order to protect customers from prices, without the fear of reconsideration upon appeal. Regulators must establish the cost of equity and deemed equity not because they are experts in this regard, but in order to establish just and reasonable rates. The regulator is not permitted to consider the effects on customers in the determination of the allowed ROE and capital structure, and we do not believe that the regulator is permitted to factor in other policy objectives into its determination of the allowed return on equity; i.e., we do not believe that the regulator is permitted to reduce the allowed return on equity and/or deemed equity for small utility companies in order to encourage consolidation or any other specific policy objective. We believe in these situations, that the inclusion of these other factors in the assessment of cost of equity and designation of deemed equity, unlawfully transfers value to utility ratepayers from its legitimate owner, the utility shareholders. C. Ontario Gets a Reprieve On November 23, the Ontario Energy Board (OEB) issued a notice to participants regarding its Multi-year Electricity Distribution Rate Setting Plan, including the Cost of Capital, 2nd Generation Incentive Regulation Mechanism and Generic Licence Amendment Proceeding. The Board indicated that, pursuant to Staff and Panel recommendations, the Board discontinue its code-based approach (November 17 and November 20, 2006 respectively); that in the interests of achieving a more timely setting of electricity distribution rates for the 2007 rate year, the Board will instead implement its cost of capital and 2nd generation incentive regulation policies by means of guidelines. As a result, the Board discontinued the generic licence amendment proceeding, which was commenced on the Board s own motion. On November 30, the Board issued a Draft Report on the Board on Cost of Capital and 2nd Generation Incentive Regulation for Ontario s Electricity Distributors and Associated Guidelines. The draft report details the Board s policies on cost of capital and 2nd generation incentive regulation, and draws on the work of Board staff and the input of interest parties since this consultation was initiated in April Also included are guidelines to assist parties in understanding how the policies will be implemented and information for distributors in preparing their rate applications for the 2007 rate year. The Draft Report contains the following highlights with respect to the cost of equity capital and deemed capital structure: The Board has determined that the current approach to setting ROE will be maintained. The ROE will be determined based on the Long Canada Bond Forecast rate plus an equity risk premium. The Board s current approach has been in place for six years. The consultation process undertaken by the Board included a review of one method that would have required more time and greater costs for its implementation. We also note that the range of ROE produced by this alternative method was unacceptably low; well below the various rates of return discussed previously. The Board concluded that none of the approaches reviewed is better than the Board s current method. The Board s method will continue to include an implicit premium of 50 basis points (0.5%) for floatation and transaction costs. Page 77 sur 194

78 Page Pipelines & Utilities The current method was established in 1999 as part of a review of cost of capital. The ROE calculated at that time is the starting point for the calculation and is 9.35% (as per Hydro One Network Inc. s RP Decision). This formula is ROE t = 9.35% (LCBF t 5.50%). The Long Canada Bond Forecast will use the average of the January consensus forecast of the 10-year Government of Canada bond yield 3 months ahead and 12 months ahead plus the difference between the observed yields on the 30-year Government of Canada bond yield and the 10-year Government of Canada bond yield as published by the Bank of Canada during the month of January (2007). No incentive returns for capital investments are appropriate at this time. No earnings sharing mechanisms are appropriate for second generation incentive rate making. The Board will include an adjustment to rates in 2008, 2009 and 2010 to transition distributors from their existing capital structures to a single deemed capital structure of 40% equity and 60% debt: o For distributors starting at equity of 35%, the equity component will move in equal increments over two years until it reaches 40%. o For distributors starting at equity of 45%, the equity component will move in equal increments over two years until it reaches 40%; and o For distributors starting at equity of 50%, the equity component will move in equal increments over three years until it reaches 40%. We believe that the following points are relevant about the draft guidelines: The current formula is not expected to result in a return on equity that is materially higher than the formulas previously discussed. We reiterate that the existing formulas result in an allowed return on equity that likely violates the Fair Return Standard and we believe them to be confiscatory. We are not convinced that a one-size fits all capital structure is appropriate and we are concerned that the Board s policy objectives of regulatory efficiency and LDC consolidation are driving force behind the single deemed capital structure approach. This may not be appropriate. We are not disappointed by the Board s decision to abandon the Licence Amendment proceeding and the rejection of the alternative approach to determining the return on equity. This latter item was seriously flawed and had no basis in reality. We set out our views on this approach in comments/reports dated June 27, August 8 and September 7, Page 78 sur 194

79 Pipelines & Utilities Page D. Comparable Equity Securities Canadian Gas Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 5-Dec-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating Duke Energy Corp. 2 DUK 5 $ $35,618 $1.32 $1.73 $1.78 $ $ % $ % Market Perform Enbridge Inc. ENB , % % Market Perform Enbridge Income Fund ENF.UN % % Market Perform Fort Chicago Energy Partners L.P. FCE.UN , % % Outperform Gaz Métro 4 GZM.UN , % % Market Perform Inter Pipeline Fund IPL.UN , % % Outperform Pacific Northern Gas Ltd. PNG % % Outperform Pembina Pipeline Income Fund PIF.UN , % % Market Perform TransCanada Corp. TRP , % % Market Perform Group Average (Excl. ENF, FCE, GZM, IPL and PIF) % 4.2% Canadian Electric Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 5-Dec-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating Caribbean Utilities Co. Ltd. 2, 3 CUP.U $ $314 $0.77 $0.13 $0.87 $ NMF $ % $ % Outperform Emera Inc. EMA , % % Market Perform Fortis Inc. FTS , % % Market Perform Group Average % 4.7% Canadian Multi-Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 5-Dec-06 O/S (mm) Cap. (mm) 2004A 2005A 2006E 2007E 2004A 2005A 2006E 2007E Rate Yield Target Return Rating ATCO Ltd. 1 ACO/X $ $2,525 $2.17 $2.46 $3.13 $ $ % NA NA NR Atlantic Power Corporation 6 ATP.UN (0.57) (0.01) NMF % $ % Market Perform Boralex Power Income Fund BPT.UN % % Market Perform Calpine Power Income Fund CF.UN R R R R R R R R Restricted Cdn Hydro Developers, Inc. KHD NMF % % Market Perform Canadian Utilities Ltd. CU , % % Market Perform Creststreet Power & Income Fund LP CRS.UN (0.54) (0.00) 0.02 NMF NMF NMF % % Underperform EPCOR Power, L.P. EP.UN , % % Market Perform Great Lakes Hydro Income Fund GLH.UN % % Underperform Innergex Power Income Fund IEF.UN % % Market Perform Northland Power Income Fund NPI.UN % % Outperform Maxim Power Corp. 1 MXG % NA NA NR TransAlta Corp. TA , % % Underperform TransAlta Power L.P. TPW.UN (0.04) NMF % % Underperform Group Average (Excl. KHD, MXG, IPS, LPs and Income Trusts) % -8.3% Notes: NA = Not Applicable, NMF = Not Meaningful, NR = Not Rated 1 Estimates from First Call 2 All figures in U.S. Dollars 3 Caribbean Utilities year-end is April 30 4 Gaz Metro s year-end is Sept Ticker on the New York Stock Exchange 6 Represents Income Participating Securities (IPS). Share price, Market Cap and Dividend in C$; all else in US$. Source: BMO Capital Markets Page 79 sur 194

80 Page 10 Pipelines & Utilities Analyst s Certification I, Karen Taylor, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Michael McGowan, CA, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. General Disclosure The information and opinions in this report were prepared by BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., collectively ( BMO NB ). BMO NB is not subject to U.S. rules with regard to the preparation of research reports and the independence of analysts. BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal and BMO NB in Canada, and BMO Capital Markets Corp. in the U.S. BMO Capital Markets Corp. is an affiliate of BMO NB. BMO NB and BMO Capital Markets Corp. are subsidiaries of Bank of Montreal. Bank of Montreal or its affiliates ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO NB research. A significant lending relationship may exist between BMO Financial Group and certain of the issuers mentioned herein. The reader should assume that BMO NB, BMO Capital Markets Corp., Bank of Montreal or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates and projections contained in this report are those of BMO NB as of the date of this report and are subject to change without notice. BMO NB endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO NB makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO NB or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of BMO NB and its affiliates, which includes the overall profitability of investment banking services. BMO NB, or its affiliates expect to receive or will seek compensation for investment banking services within the next 3 months from all issuers covered by BMO NB. BMO NB or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO NB or its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Company Specific Disclosures Atlantic Power Corp. (ATP.UN-TSX) 2, 3, 7, 9, 10AC Fort Chicago Energy L.P. (FCE.UN-TSX) 9, 10C Boralex Power Income Fund (BPT.UN-TSX) 11 Fortis Inc. (FTS-TSX) 2, 3, 7, 9, 10AC Calpine Power Income Fund (CF.UN-TSX) 1, 3, 7, 10A Gaz Metro Limited Partnership (GZM.UN-TSX) 1, 2, 3, 7, 9, 10AC Canadian Hydro Developers Inc. (KHD-TSX) 2, 3, 7, 10A Great Lakes Hydro Income Fund (GLH.UN-TSX) Canadian Utilities (CU-TSX) 2, 3, 7, 9, 10AC, 11, 12 Innergex Power Income Fund (IEF.UN-TSX) 9, 10C Caribbean Utilities Co. Ltd. (CUP.U-TSX) 5, 7, 9, 10AB Inter Pipeline Fund (IPL.UN-TSX) 2, 3, 7, 9, 10AC Countryside Power Income Fund (COU.UN-TSX) Macquarie Power Income Fund (MPT.UN-TSX) Creststreet Power & Inc. Fund (CRS.UN-TSX) 2, 3, 7, 10A Northland Power Income Fund (NPI.UN-TSX) 2, 3, 7, 9, 10AC Duke Energy Corp. (DUK-NYSE) 2, 3, 7, 9, 10AC Pacific Northern Gas (PNG-TSX) Emera Inc. (EMA-TSX) 9, 10C Pembina Pipeline Income Fund (PIF.UN-TSX) 9, 10C Enbridge Inc. (ENB-TSX; ENB-NYSE) 2, 3, 4, 7, 9, 10AC TransAlta Corporation (TA-TSX; TAC-NYSE) 2, 3, 4, 5, 7, 9, 10AC, 11, 12 Enbridge Income Fund (ENF.UN-TSX) TransAlta Power L.P. (TPW.UN-TSX) 9, 10C EPCOR Power, L.P. (EP.UN-TSX) 2, 3, 7, 9, 10AC TransCanada Corporation (TRP-TSX; TRP-NYSE) 2, 3, 5, 7, 9, 10AC, 12 Page 80 sur 194

81 Pipelines & Utilities Page 11 Disclosure Key BMO NB uses the following Company Specific Disclosure Key. Please refer to the Company Specific Disclosure section above for specific disclosures applicable to issuers discussed in this report: 1 - BMO NB has provided advice for a fee with respect to this issuer within the past 12 months. 2 - BMO NB has undertaken an underwriting liability with respect to this issuer within the past 12 months. 3 - BMO NB has provided investment banking services with respect to this issuer within the past 12 months. 4 - BMO NB, BMO Capital Markets Corp. or an affiliate beneficially owns 1% or more of any class of the equity securities of this issuer. 5 - BMO NB, BMO Capital Markets Corp. or an affiliate makes a market in this security. 6 - BMO Capital Markets Corp. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 7 - BMO Capital Markets Corp. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 8 - BMO Capital Markets Corp. or an affiliate or its officers or partners own options, rights, or warrants to purchase any securities of this issuer. 9 - BMO Capital Markets Corp. or an affiliate received compensation for products or services other than investment banking services within the past 12 months. 10A - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Investment Banking Services 10B - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Non- Investment Banking Securities Related Services 10C - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp.or an affiliate within the past 12 months: Non- Securities Related Services 11 - An employee, officer, or director of BMO NB is a member of the Board of Directors or an advisor or officer of this issuer A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this issuer A household member of the research analyst and/or associates who prepared this research report is a member of the Board of Directors or is an advisor or officer of this issuer The research analysts and/or associates (or their household members) who prepared this research report directly or beneficially own securities of this issuer: None Distribution of Ratings Rating BMO BMO BMO First Call Category Rating Universe I.B. Clients* Universe** Buy Outperform 35% 45% 47% Hold Market Perform 55% 48% 46% Sell Underperform 10% 7% 7% * Reflects rating distribution of all companies where BMO Capital Markets has received compensation for Investment Banking services. ** Reflects rating distribution of all North American equity research analysts. Page 81 sur 194

82 Page 12 Pipelines & Utilities Ratings Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. Prior to September 1, 2003, a fourth rating tier Top Pick was used to designate those stocks we felt would be the best performers relative to the market. Our six Top 15 lists which guide investors to our best ideas according to six different objectives (large, small, growth, value, income and quantitative) have replaced the Top Pick rating. Dissemination of Research Our research publications are available via our web site Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please contact your investment advisor or institutional salesperson for more information. Additional Matters TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd. TO U.K. RESIDENTS: The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée/Ltd. are Members of CIPF. BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. are Members of SIPC. BMO Capital Markets is a trade-mark of Bank of Montreal, used under licence. BMO (M-Bar roundel symbol) is a registered trade-mark of Bank of Montreal, used under licence. R36881 Page 82 sur 194

83 Pipelines & Utilities Off the Bottom? July 3, 2007 Toronto, Ontario Industry Rating: Market Perform Karen J. Taylor, CFA (416) Michael McGowan, CA, CFA (416) Associate: Benjamin Pham Will Higher Interest Rates Deliver ROE Relief for 2008? Highlights It is that time of the year again. In this report we preview where allowed ROEs could go in the upcoming fiscal period, being Allowed rates of return declined to unprecedented levels in 2007 the ugly got uglier as forecast 10- year GoC bond yields declined to historical lows. The June edition of Consensus Economics provides some reason to hope that the worst (from an ROE perspective) is behind us: the average of the three-month ahead and 12-month ahead estimate for year GoC bond yields has increased to 4.70% versus 4.15% generally used to establish 2007 allowed ROEs. As set out herein: Allowed rates of return of utilities are poised to increase by an average of 0.36% for 2008, exclusive of proposed increases in fiscal 2008 ROEs as filed by Newfoundland Power Inc. (100% - Fortis) and likely to be filed by Gaz Metro, LP. The Canadian Gas Association elevated the issue to a policy level on June 14, when it issued a discussion paper entitled, Return on Equity: Allowed Returns for Canadian Gas Utilities. Canadian Utilities Limited has indicated that it may spearhead an industry effort in Alberta to elevate the issue to a policy level in the provincial arena. We continue to believe that allowed returns expected for 2008 are less than compensatory and confiscate the private capital of utility shareholders. Evidence suggests the bp differential in allowed ROE for natural gas distribution and electric power transmission/distribution utilities is not supported by differences in operating and business risk. Utilities with maximum leverage to a potential increase in allowed 2008 ROEs include Fortis Inc., Gaz Metro, LP and Pacific Northern Gas. Canadian Utilities Limited, Enbridge Inc., Spectra Energy Corporation and TransCanada Corporation have more limited exposure due to the presence of material, non-regulated businesses and performance incentive mechanisms. We currently rate the shares of Enbridge Inc., Pacific Northern Gas, Spectra Energy Corporation, Caribbean Utilities Co. Ltd. and Fortis Inc. Outperform. This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered as a research analyst under NYSE/NASD rules. For disclosure statements, including the Analyst s Certification, please refer to pages 16 to 18. Page 83 sur 194

84 Page 84 sur 194

85 Table of Contents A. The Calculations... 2 B. The Fair Return Standard... 8 C. The Issues Returns Are Confiscatory... 9 D. Earnings Leverage to Higher Allowed ROE Page 85 sur 194

86 Page 2 Pipelines & Utilities The allowed rates of return on equity (ROE) for many of the pipeline and energy utility companies in our coverage universe are established by an automatic adjustment mechanism in the fall of each year. They are highly dependent on forecast interest rates for the prospective fiscal period. As set out below, we have provided an initial look at the potential allowed rates of return on equity for Higher forecast 10-year Government of Canada bond yields are poised to provide a modest amount of ROE-relief and are fuelling optimism that allowed returns have reached bottom and are upward bound. A. The Calculations Table 1 sets out the key variables that drive each of the automatic adjustment mechanisms by regulator. Table 1: Key Input Assumptions Regulator Year Formula Effective Month of Consensus Economics Notes: (1) Issue of Consensus Economics used to calculate allowed ROE has varied. October stipulated in June 29, 2006 Reasons For Decision re: 2007 Rates. (2) Excludes 0.57% of Allowed Incentive Return in 2003, 1.51% in 2004, 1.95% in 2005, 0.38% in 2006, and approximately 0.75% in Applied for 10.19% for F2008, commencing October 1, Excludes incentive returns possible pursuant to Performance Incentive Mechanism. (3) Return on Equity for Newfoundland Power Inc. Fixed for two-years at 9.75% in decision dated June 20, Total Return Calculation methodology. Applied for allowed Return on Equity in 2008 of 10.25% in rate application filed May 10, Source: BMO Capital Markets Base GOC Yield Equity Risk Premium Adjustment Factor Change 2008 vs A ROE 2005A ROE 2006A ROE 2007A ROE 2008E ROE National Energy Board 1995 November 9.25% 3.00% 75% 9.56% 9.46% 8.88% 8.46% 8.82% 0.36% British Columbia Utilities Commission - Terasen Gas (BCGU) 2006 November 5.25% 3.90% 75% 9.15% 9.03% 8.80% 8.37% 8.73% 0.36% British Columbia Utilities Commission - Terasen Gas (Vancouver Island) 2006 November 5.25% 4.60% 75% 9.65% 9.53% 9.50% 9.07% 9.43% 0.36% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 2006 November 5.25% 4.55% 75% 9.80% 9.68% 9.45% 9.02% 9.38% 0.36% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 2006 November 5.25% 4.30% 75% 9.55% 9.43% 9.20% 8.77% 9.13% 0.36% Alberta Energy and Utilities Board 2005 November 5.68% 3.92% 75% 9.60% 9.50% 8.93% 8.51% 8.87% 0.36% Ontario Energy Board - Enbridge Gas Distribution 1998 October 7.25% 3.40% 75% 9.69% 9.57% 8.74% 8.39% 8.74% 0.35% Ontario Energy Board - Union Gas October 7.25% 3.55% 75% 9.62% 9.63% 8.93% 8.54% 8.89% 0.35% Regie de l'energie August 5.76% 3.84% 75% 9.45% 9.69% 8.95% 8.73% 10.19% 1.46% Nova Scotia Utilities and Review Board Formula Not Presently In Use Island Regulatory and Appeals Commission Newfoundland and Labrador Board of Commissioners of Public Utilities Oct/Nov 5.60% 4.15% 80% 9.75% 9.24% 8.77% 8.60% 10.25% 1.65% The allowed ROEs expected for 2008 are an average 0.36% higher than actual allowed ROEs in The average is exclusive of the difference between the applied for fiscal 2008 ROE versus the actual allowed ROE for fiscal 2007 for each of Gaz Metro, L.P. and Newfoundland Power Inc. (100% - Fortis Inc.). Gaz Metro has applied-for a base-roe of 10.19% versus an allowed return of 8.73% in fiscal 2007, prior to incentive returns, and Newfoundland Power Inc. has applied for an allowed return on equity of 10.25%, versus a return on equity incorporated into the applicable Total Return Calculation methodology of 8.60% in fiscal The expected increase in 2008 allowed ROEs is largely due to an increase in the June Consensus Estimate of 10-year Government of Canada bonds, expressed three months and 12 months in advance, as at June As illustrated in Table 2, the average of the three-month and 12-month in advance estimates of the 10-year Government of Canada Page 86 sur 194

87 Pipelines & Utilities Page 3 bond yield in the June edition of Consensus Economics was 4.70% versus 4.15% in the November 2006 edition and 4.55% in the November 2005 edition. Table 2: Estimate of the 10-Year Government of Canada Bond Yield Month 3-Month 12-Month Average May % 4.90% 4.70% Jun % 4.70% 4.45% Jul % 4.60% 4.40% Aug % 4.60% 4.40% Sep % 4.60% 4.35% Oct % 4.60% 4.40% Nov % 4.70% 4.55% Dec % 4.60% 4.45% Jan % 4.60% 4.45% Feb % 4.60% 4.45% Mar % 4.60% 4.50% Apr % 4.60% 4.55% May % 4.70% 4.70% Jun % 4.60% 4.60% Jul % 4.70% 4.70% Aug % 4.50% 4.50% Sep % 4.50% 4.40% Oct % 4.20% 4.15% Nov % 4.20% 4.15% Dec % 4.20% 4.10% Jan % 4.20% 4.10% Feb % 4.40% 4.25% Mar % 4.40% 4.25% Apr % 4.40% 4.25% May % 4.50% 4.35% Jun % 4.80% 4.70% Source: Consensus Economics BMO Capital Markets Economic Research 10-year Government of Canada bond yield estimate is highlighted in Chart 1. Chart 1: 10-Year Government of Canada Bond Yield BMO Capital Markets Forecast Source: BMO Capital Markets Economic Research Page 87 sur 194

88 Page Pipelines & Utilities Tables 3 and 4 highlight the following: Table 3 Indicative Calculated Return on Equity: This table contains the calculated return on equity by regulator and a quick look-up table for those who simply want, the answer ; i.e., the expected return on equity for a designated 30-year bond yield. Table 4 Equity Risk Premium Assumption in Each Formula: The equity return for a period can be calculated by simply making an assumption about the prospective 30- year bond yield and adding it to the spread for the corresponding rate level and the regulator in the table. Page 88 sur 194

89 Pipelines & Utilities Page Table 3: Indicative Calculated Return on Equity 30-Year Government of Canada Bond Yield Regulator 4.50% 5.25% 6.00% 6.75% 7.50% 8.25% 9.00% 9.75% 10.25% 10.75% National Energy Board 8.69% 9.25% 9.81% 10.38% 10.94% 11.50% 12.06% 12.63% 13.00% 13.38% British Columbia Utilities Commission - Terasen Gas (BCGU) 8.58% 9.15% 9.71% 10.27% 10.83% 11.40% 11.96% 12.52% 12.90% 13.27% British Columbia Utilities Commission - Terasen Gas (Vancouver Island) 9.28% 9.85% 10.41% 10.97% 11.53% 12.10% 12.66% 13.22% 13.60% 13.97% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 9.23% 9.80% 10.36% 10.92% 11.48% 12.05% 12.61% 13.17% 13.55% 13.92% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 8.98% 9.55% 10.11% 10.67% 11.23% 11.80% 12.36% 12.92% 13.30% 13.67% Alberta Energy and Utilities Board 8.72% 9.28% 9.84% 10.40% 10.97% 11.53% 12.09% 12.65% 13.03% 13.40% Ontario Energy Board - Enbridge Gas Distribution 8.59% 9.15% 9.71% 10.28% 10.84% 11.40% 11.96% 12.53% 12.90% 13.28% Ontario Energy Board - Union Gas 8.74% 9.30% 9.86% 10.43% 10.99% 11.55% 12.11% 12.68% 13.05% 13.43% Regie de l'energie 8.66% 9.22% 9.78% 10.34% 10.91% 11.47% 12.03% 12.59% 12.97% 13.34% Nova Scotia Utilities and Review Board Island Regulatory and Appeals Commission Formula Not Presently In Use Newfoundland and Labrador Board of Commissioners of Public Utilities 8.87% 9.47% 10.07% 10.67% 11.27% 11.87% 12.47% 13.07% 13.47% 13.87% Source: BMO Capital Markets Table 4: Equity Risk Premium Assumption in Each Formula 30-Year Government of Canada Bond Yield Regulator 4.50% 5.25% 6.00% 6.75% 7.50% 8.25% 9.00% 9.75% 10.25% 10.75% National Energy Board 4.19% 4.00% 3.81% 3.63% 3.44% 3.25% 3.06% 2.88% 2.75% 2.63% British Columbia Utilities Commission - Terasen Gas (BCGU) 4.08% 3.90% 3.71% 3.52% 3.33% 3.15% 2.96% 2.77% 2.65% 2.52% British Columbia Utilities Commission - Terasen Gas (Vancouver Island) 4.78% 4.60% 4.41% 4.22% 4.03% 3.85% 3.66% 3.47% 3.35% 3.22% British Columbia Utilities Commission - PNG West Division/Tumbler Ridge 4.73% 4.55% 4.36% 4.17% 3.98% 3.80% 3.61% 3.42% 3.30% 3.17% British Columbia Utilities Commission - PNG Ft. St. John/Dawson Creek/FortisBC 4.48% 4.30% 4.11% 3.92% 3.73% 3.55% 3.36% 3.17% 3.05% 2.92% Alberta Energy and Utilities Board 4.22% 4.03% 3.84% 3.65% 3.47% 3.28% 3.09% 2.90% 2.78% 2.65% Ontario Energy Board - Enbridge Gas Distribution % 3.90% 3.71% 3.53% 3.34% 3.15% 2.96% 2.78% 2.65% 2.53% Ontario Energy Board - Union Gas % 4.05% 3.86% 3.68% 3.49% 3.30% 3.11% 2.93% 2.80% 2.68% Regie de l'energie 4.16% 3.97% 3.78% 3.59% 3.41% 3.22% 3.03% 2.84% 2.72% 2.59% Nova Scotia Utilities and Review Board Island Regulatory and Appeals Commission Formula Not Presently In Use Newfoundland and Labrador Board of Commissioners of Public Utilities % 4.22% 4.07% 3.92% 3.77% 3.62% 3.47% 3.32% 3.22% 3.12% Notes: (1) Assumed to use the October or November issue of Consensus Economics. (2) Uses the October or November issue of Consensus Economics (3) Total Return Calculation; June 20, 2003 Decision reflected in calculation Source: BMO Capital Markets Page 89 sur 194

90 Page 6 Pipelines & Utilities Tables 5, 6 and 7 highlight the calculation of the allowed 2008E ROE for the National Energy Board (NEB), Alberta Energy and Utilities Board (AEUB) and the British Columbia Utilities Commission (BCUC). Table 8 highlights our estimate of the allowed ROE for Enbridge Gas Distribution (100% - Enbridge Inc.) in The formula that is used by the Ontario Energy Board to calculate the allowed return for Union Gas Limited (100% - Spectra Energy Corp) incorporates a risk premium that is 15 basis points higher than that for Enbridge Gas Distribution. Table 5: 2008E ROE National Energy Board Multi-Pipeline Decision Description 2007 Calculated Return on Equity 8.46% 2007 Forecast Yield 4.22% June 2007 Consensus Forecast - 3 Months Out 4.60% June 2007 Consensus Forecast - 12 Months Out 4.80% Average 4.70% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2008 Forecast Yield 4.70% Less: 2007 Forecast Yield 4.22% Difference 0.48% Times 75% Adjustment Factor 0.36% Plus: 2007 Approved Return on Equity 8.46% Equals 2008E Approved Return on Equity 8.82% Notes: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Table 6: 2008E ROE Alberta Energy and Utilities Board Generic Return on Equity Description Calculated Return on Equity Per Decision 9.60% Forecast Yield Per Decision 5.68% June 2007 Consensus Forecast - 3 Months Out 4.60% June 2007 Consensus Forecast - 12 Months Out 4.80% Average 4.70% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2008 Forecast Yield 4.70% Less: Decision Forecast Yield 5.68% Difference -0.98% Times 75% Adjustment Factor -0.74% Plus: Approved Return on Equity 9.60% Equals 2008E Approved Return on Equity 8.87% Notes: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Page 90 sur 194

91 Pipelines & Utilities Page 7 Table 7: 2008E ROE British Columbia Utilities Commission Low Risk Benchmark Utility Description 2007 Calculated Return on Equity 8.37% June 2007 Consensus Forecast - 3 Months Out 4.60% June 2007 Consensus Forecast - 12 Months Out 4.80% Average 4.70% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % Benchmark Return per G % Long-Term (30-year)GOC Bond Yield Decision 5.25% 2008 Forecast Yield 4.70% Less: Bond Yield from Decision 5.25% Difference -0.55% Times 75% Adjustment Factor -0.41% Plus: Approved Return on Equity Decision 9.145% Equals 2008E Approved Return on Equity 8.73% Notes: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Table 8: 2008E ROE Ontario Energy Board Enbridge Gas Distribution Description 2007 Calculated Return on Equity 8.39% 2007 Forecast Yield 4.23% June 2007 Consensus Forecast - 3 Months Out 4.60% June 2007 Consensus Forecast - 12 Months Out 4.80% Average 4.70% Average Spread between 10-year and 30-year GOCs % Forecast Long-Term (30-year) GOC Bond Yield % 2008 Forecast Yield 4.70% Less: 2007 Forecast Yield 4.23% Difference 0.47% Times 75% Adjustment Factor 0.35% Plus: 2007 Approved Return on Equity 8.39% Equals 2008E Approved Return on Equity 8.74% Notes: (1) Calculated by using the 10-year and 30-year Government of Canada bond yields published daily in the National Post throughout October of the current year Source: BMO Capital Markets Page 91 sur 194

92 Page 8 Pipelines & Utilities B. The Fair Return Standard By law, utilities are entitled to earn a return on the debt and equity capital employed to provide utility service in the public interest. That return must meet the Fair Return Standard, the definition of which has been determined over time. As per the National Energy Board s (NEB) April 2005 Cost of Capital decision RH for TransCanada PipeLines Limited, a fair or reasonable return on capital should: 1. Be comparable to the return available from the application of the invested capital to other enterprises of like risk (the comparable investment standard); 2. Enable the financial integrity of the regulated enterprise to be maintained (the financial integrity standard); and 3. Permit incremental capital to be attracted to the enterprise on reasonable terms and conditions (the capital attraction standard). The Federal Court of Appeal ruled in 2004 that the required rate of return on equity must be determined solely on the basis of the Mainline s cost of equity capital. The Court found that the impact of any resulting toll increases on customers is not a relevant consideration in that determination. In a presentation at the Ontario Energy Association s ROE Seminar and Dialogue conference on June 19, the current state of the Fair Return Standard was outlined by Jerry Farrell, a solicitor from Fraser Milner Casgrain, LLP. In his remarks, Mr. Farrell indicated that: The Fair return standard is a legal standard; it is a must have both in Canada and the United States; It has three essential requirements, as set out above; The April 5, 2004, decision of the Federal Court of Appeal in TransCanada PipeLines Ltd. v. National Energy Board et al added a fourth requirement to the Standard: It is the overall return on capital the outcome of combining capital structure, cost of equity and cost of debt that counts; The Fair Return Standard is not a means or a tool to achieve a balance of consumer and investor interest. The balance is achieved in the rates themselves the end result and not in the individual cost components. This view is supported by the landmark cost of capital judicial determinations and, as highlighted above, by the April 5, 2004, Federal Court of Appeal decision, which states that, the cost of equity capital does not change because allowing the Mainline to recover it would cause an increase in tolls. Similarly, the Court found that, the cost to the Mainline of providing that rate of return on the equity component of its deemed capital structure is unaffected by the impact of tolls on customers or consumers ; and The regulator can achieve a balance by taking into account the impact on customers or consumers in determining the way in which a utility should recover its costs. As stated by the Federal Court, it is quite proper for the Board to phase in rates, provided that there is, over a reasonable period of time, no economic loss to the utility in the process. In other words, the phase-in tolls would have to compensate the utility for deferring recovery of its cost of capital. Page 92 sur 194

93 Pipelines & Utilities Page C. The Issues Returns Are Confiscatory As set out above, allowed returns for fiscal 2008 are poised to increase modestly off of the distressingly low values enshrined for Notwithstanding this potential, we continue to believe that the allowed rate of return, as determined by each of the respective mechanical formulas, is less than compensatory and confiscate the private capital of utility shareholders. We believe that: Utility regulators continue to approach the Fair Return Standard from the point of view that it includes the reference to an appropriate balance of customer and investor interests; i.e., a Fair Return should achieve fairness from the point of the view of the customers and from the viewpoint of present and prospective investors. As discussed previously, the 2004 Federal Court determination makes it clear that this balance is achieved in the implementation of rates and not in the determination of costs, including the cost of equity capital and the overall return on capital. As per the Supreme Court of Canada s February 9, 2006, determination in ATCO Gas and Pipelines Ltd. (100% - Canadian Utilities) v. Alberta Energy and Utilities Board, et al that the regulatory compact pursuant to which utility assets are made available to customers at a fair price does not transfer onto the customers any property right and that the regulatory protections to the shareholders and customers resulting from the arrangement do not cancel the private nature of the utility. The fact that the formulaic approach used by the National Energy Board and other provincial regulators is easy to calculate, transparent, symmetrical (change in the resulting allowed return on equity is the same for a stipulated increase or decrease in interest rates), and reduces the regulatory burden on all parties does not eliminate the requirement that the resulting allowed equity return meet the Fair Return Standard. Utility regulators have used both capital structure and allowed return to mitigate ratepayer costs, arguably inappropriately tipping the balance in favour of the consumer. As allowed return on equity has declined in lockstep with 10-year Government of Canada bond yields, utilities have generally responded by applying for higher deemed equity ratios, as the degree of risk specific to each individual utility has increased due to financial issues relating to deteriorating cash flow and interest coverage metrics associated with ever-lower rates of return. We believe that as key financial metrics have deteriorated, there has been pressure on credit ratings and the utility regulator has less latitude to affect the balance via the implementation of rates. For example: 1. Nova Scotia Power Inc. (100% - Emera Inc.): in its decisions relating to the utility s fiscal 2002 and 2005 rates, the Utility and Review Board (UARB) disallowed a significant amount of costs, implemented a prolonged recovery of certain taxation costs which the utility had already made cash payments to settle, and lowered the allowed rate of return on equity. In the 2002 decision, the allowed return on equity was lowered to 9.90% to 10.40% with rates reflecting 10.15% from 10.50% to 11% with rates reflecting 10.75% in In that decision, $42.4 million of costs were disallowed. In the 2005 decision, the allowed return on equity was lowered again to 9.30% to 9.80%, with rates reflecting 9.55%, and $18 million of fuel costs were disallowed. On March 10, 2006, the UARB issued its decision regarding the utility s Page 93 sur 194

94 Page 10 Pipelines & Utilities application for 2006 rates. In that decision, approximately $67 million of adjustments and disallowances were made to the utility s applied-for revenue requirement. The allowed rate of return and deemed equity was unchanged. We continue to believe that the regulator inappropriately reduced legitimate utility costs, fuel or otherwise, to protect customers from higher rates. We note that: (i) the senior unsecured credit rating of the utility was reduced by Standard & Poor s to BBB Stable from BBB+ Watch Negative on June 21, The utility was downgraded from A- Stable to BBB+ Stable on December 21, 2001, following the announcement by the Province of Nova Scotia that it intends to gradually introduce competition within the electricity sector. This announcement, in retrospect, was clearly not reflected in the utility s cost of capital or deemed equity; the latter has ranged between 35% and 40% over the 2001 to 2007 period and currently stands at 37.5% for ratemaking purposes; and (ii) in successive regulatory decisions and processes, notably the UARB s September 28, 2006, decision relating to an application by the utility to replace its extra large industrial interruptible rate, the UARB has had to clearly reflect on the implication of a rate methodology/determination from a capital markets/rating agency perspective. In that decision, the UARB indicated that, it would be imprudent and inappropriate, in view of the recent action by rating agencies, to impose on NSPI at this time a stability mechanism which has the likely potential of depriving NSPI recovery of its fuel costs for a period of five years. The Board is very concerned how this might be perceived by the financial markets. Further rating downgrades could compromise the utility s ability to attract capital and access fuel markets, thus leading to generally higher costs, a result which would not be to anyone s benefit 1. Nova Scotia Power Inc. is currently in the midst of constructive discussions with its key stakeholders regarding the implementation of a Fuel Adjustment Mechanism (FAM). A FAM is a transparent way to adjust customer rates to reflect changes in the cost of fuel used to generate electric power and ensure that customers only pay the actual cost of fuel, no more and no less. While we are pleased that the implementation of a FAM appears to be a priority from a regulatory point of view, we are also concerned that the implementation of a FAM may result in a further reduction in allowed ROE in fiscal 2008, due to likely arguments that the utility s risk profile has been reduced. We believe that shareholders have not been properly compensated for bearing fuel cost risk over the 2002 to 2007 period, and that a reduction in ROE due to the implementation of a FAM is inappropriate and unwarranted. 2. Newfoundland Power (100% - Fortis Inc.): On May 10, 2006, Newfoundland Power filed two applications with the Newfoundland and Labrador Board of Commissioners of Public Utilities (PUB) requesting a 5.3% increase in customer rates, of which 1.9% of the planned increase in rates results from an application for an allowed return of 10.25% versus the 8.60% allowed in 2007 for rate-making purposes. As we indicated in our write-up dated May 18, 2007, we have not reflected the applied-for ROE in 1 Nova Scotia Utility and Review Board, NSUARB-NSPI-883, September 28, 2006, Page 60. Page 94 sur 194

95 Pipelines & Utilities Page 11 our estimates for 2008, as we cannot reasonably ascertain whether the arguments presented in the applications and the supporting cost of capital evidence will be adopted by the Board of Commissioners. We note, however, that on March 5, 2007, Moody s Investors Service indicated in a Global Credit Research Credit Opinion that the rating agency states that since its initial rating in 2005, the utility s cash flow credit metrics have weakened somewhat, due to: (i) a lack of a rate increase since 2003; and (ii) the impact of declining bond yields, which have resulted in lower allowed returns on rate base, and ROE by operation of the annual automatic adjustment formula used by the PUB to adjust rates between General Rate Applications (GRAs). Interestingly, Moody s indicated that the rating outlook (Baa1) of Stable is based on the expectation that the utility s 2008 GRA (filed in 2007 and effective for 2008) will result in a strengthening of the company s cash flow credit metrics beginning in If it appears that in 2008 the utility s (CFO-pre W/C)/Debt will be materially below 15% or that its CFO Pre-W/C Interest coverage will be materially less than 3.0x, the company s outlook and rating could be materially impacted. Utility regulators must reintroduce the comparable investment standard and the use of reasoned judgement into the process to establish allowed return on equity. As illustrated by the evidence filed by various intervenors in conjunction with the Ontario Energy Board s nd Generation Incentive Regulation Mechanism and Licence Amendment Proceeding (relating to the cost of capital for the province s electricity distributors) and the recently prepared report by Concentric Energy Advisors entitled, A Comparative Analysis of Return on Equity of Natural Gas Utilities, there is considerable evidence that suggests that the basis point differential in allowed ROEs for Canadian natural gas and electric transmission and distribution utilities versus comparable U.S. utility investments is largely due to the use of formulaic ROE adjustment mechanisms in Canada, rather than differences in operating and business risk. Gaz Metro is expected to file an application with the Regie de l energie shortly, which is likely to include a proposal for a new return on equity formula. The present formula expires at the end of fiscal 2007 (September 30, 2007) and must be either extended or replaced. The partnership is expected to propose the use of the Fama and French Three Factor Model to replace the formula that is currently derived from the Capital Asset Pricing Model. The return on equity range resulting from the Fama and French three Factor model is 9.93% to 11.44%, and the partnership has proposed a rate of 10.19% in the upcoming fiscal 2008 rate application. The Fama and French Three Factor approach is: r = R f + beta * (R m R f ) + (b s *SMB) + (b v *HML) + alpha, where SMB stands for small cap minus big, HML stands for high [book/price] minus low, b s and b v take values on a scale of roughly 0 to 1; b s = 1 would be a small cap portfolio, b s = 0 would be large cap. This is the first proposal by a utility to change the governing methodology since TransCanada PipeLine s Fair Return Application that proposed to determine the Mainline Pipeline s cost of capital for 2001 and 2002 utilizing an After-Tax Weighted-Average Cost of Capital (ATWACC) methodology. While we believe that the ROE proposed by Gaz Metro is within the range required to satisfy the Fair Return Standard, it is not yet reflected in our outlook for the partnership. If Page 95 sur 194

96 Page 12 Pipelines & Utilities approved, we are hopeful that the decision could engender a regulatory response in other Canadian jurisdictions, federally and provincially. On September 12, 2006, Hydro One Networks Inc. (100% - Hydro One Inc.) applied for transmission rates for the 2007 and 2008 test years. The application was updated on February 23, 2007, and includes a number of key metrics: 10.50% return on equity in each of 2007 and 2008 versus the currently approved level of 9.88%, and 40% deemed equity in each year versus 36% currently. We believe that the following points are relevant: - We believe that the Fair Return criteria previously discussed apply to corporatized utilities that happen to be government owned. In this case, government ownership and the propensity of a government shareholder to pierce the corporate veil to impose decision-making that may not otherwise occur increases, rather than reduces, risk. - The imperative to achieve market returns for capital increases as public capital markets are accessed to fund planned capital programs and existing operations. - The Stand-Alone Principle requires it. The Direct Testimony filed by Foster Associates, Inc. in support of Newfoundland Power Inc. s 2008 GRA defines the Stand-Alone Principle as follows: the stand-alone principle encompasses the notion that the cost of capital incurred by the ratepayers should be equivalent to that which would be faced by each division raising capital in the public markets on the strength of its own business and financial parameters. The cost of capital should reflect neither subsidies given to, nor taken from, other activities of the firm. We continue to believe that the appropriate range for allowed return on equity for regulated natural gas and electric transmission and distribution utilities is %, and that investors require a minimum return of 10% on utility investments. D. Earnings Leverage to Higher Allowed ROE The expected change in estimated 2008E diluted EPS by company arising from modestly higher potential allowed rates of return is set out in Table 9. We note the following: Those utilities with a majority of expected diluted 2008 EPS arising from rate regulated operations subject to an automatic adjustment mechanism include Fortis Inc., Gaz Metro, LP, and Pacific Northern Gas Ltd. While Canadian Utilities Limited, Enbridge Inc., Spectra Energy Corporation and TransCanada Corporation also have positive exposure to slightly higher expected 2008E ROEs, rate-regulated operations subject to an automatic adjustment mechanism are a relatively small percentage of overall diluted 2008E EPS, due to the presence of material non-regulated investments or the proliferation of incentive- or performance-based regulation for those operations that would otherwise be subject to cost-based regulation and the automatic adjustment mechanism. Page 96 sur 194

97 Pipelines & Utilities Page 13 The coal-fired assets of TransAlta Corporation and Canadian Utilities Limited that operate under Alberta Power Purchase Arrangements (PPAs) are subject to a compensation arrangement that is subject to annual adjustment and reflects the following formula: ROE = Average Redemption Yield on Long-Term Canadian Government Bonds + Equity Risk Premium of 4.50%. The actual allowed return on these assets, reported by Canadian Utilities in its 2006 MD&A, was 8.75% in 2006 and 9.49% in The estimated 2007 allowed ROE would likely be approximately 8.50%, assuming 10-year bond yields of approximately 4.00% at the beginning of 2007 and could be approximately 9.2%, using the average June estimate from Consensus Economics of 4.70% in Deemed equity is 45%. The Corridor Pipeline acquired by Inter Pipeline Fund on June 15, 2007, and the planned expansion of that pipeline are both subject to confidential tolling agreements that use a sliding scale mechanism, similar to that used by the National Energy Board, to determine the cost of equity for toll-making purposes. There are a number of entities in our coverage universe with no exposure to these automatic adjustment mechanisms: Algonquin Power Income Fund, Atlantic Power Corporation, Boralex Power Income Fund, Creststreet Power & Income Fund, Canadian Hydro Developers, Caribbean Utilities, Emera Inc., Enbridge Income Fund, EPCOR Power, LP, Fort Chicago Energy Partners L.P., Great Lakes Hydro Income Fund, Innergex Power Income Fund, Macquarie Power & Infrastructure Fund, Northland Power Income Fund and Pembina Pipeline Income Fund. We are currently restricted with respect to the units of TransAlta Power, L.P. We currently rate the shares of Enbridge Inc., Pacific Northern Gas, Spectra Energy Corporation, Caribbean Utilities Co. Ltd., and Fortis Inc. Outperform. Page 97 sur 194

98 Page 14 Pipelines & Utilities Table 9: Change in 2008E EPS Company Regulator 2008E Ratebase (millions) Deemed Equity (%) Sensitivity to 100 bp change in ROE (millions) Estimated Change ROE (%) Avg Diluted Shares 2008E (millions) Estimated Change in 2008 EPS Estimates Current Proforma Diluted 2008E Diluted 2008E EPS EPS % Change in 2008E EPS ATCO Gas Ltd. AEUB 1, % % $0.01 ATCO Pipelines Ltd. AEUB % % $0.01 ATCO Electric (Transmission) Ltd. AEUB % % $0.01 ATCO Electric (Distribution) Ltd. AEUB % % $0.01 $0.03 $2.67 $ % Emera Inc. Nova Scotia Power Inc. 2 UARB 2, % 10.1 NA $0.00 Bangor Hydro 3 MPUC % 2.1 NA $0.00 $0.00 $1.22 $ % Enbridge Inc. Enbridge Gas Distribution 4 OEB 3, % % $0.01 Non-Routine Adjustments - Liquids Pipeline System NEB % % $0.00 NW System NEB % % $0.00 System Expansion Plan II 5 NEB % % $0.00 $0.02 $1.93 $ % Fortis Inc. Newfoundland Power 6 BCPU % % $0.04 Maritime Electric 7 MEA % 1.2 NA $0.00 FortisAlberta AEUB 1, % % $0.01 FortisBC BCUC % % $0.01 Fortis Ontario 8 OEB NA NA NA NA $0.00 Terasen Gas (BCGU) BCUC 2, % % $0.02 Terasen Gas (Vancouver Island) BCUC % % $0.00 $0.08 $1.44 $ % Gaz Metropolitain & Company, L.P. Gaz Metropolitain (Distribution) 9 Regie 1, % % $0.11 Trans Quebec & Maritimes Pipeline (50%) 10 NEB % % $0.01 $0.12 $1.25 $ % Pacific Northern Gas Ltd. PNG West Division BCUC % % 3.6 $0.05 Tumbler Ridge BCUC % % 3.6 $0.00 PNG Fort St. John & Dawson Creek BCUC % % 3.6 $0.01 $0.06 $1.13 $ % Spectra Energy Corporation Union Gas Limited OEB 3, % % $0.01 $1.50 $ % TransCanada Corporation Canadian Mainline NEB 7, % % $0.02 Alberta System AEUB 4, % % $0.01 BC System NEB % % $0.00 Trans Quebec & Maritimes Pipeline (50%) NEB % % $0.00 Foothills PipeLines. Ltd. 11 NEB % % $0.00 $0.03 $2.01 $ % Notes: (1) The AEUB established a fomula to determine Return on Equity in its Generic Cost of Capital Decision dated July 2, Only if a utility files for new utility rates will the recalculated return on equity apply. ATCO Pipelines has not yet filed for new 2008 rates. ATCO Electric (Transmission & Distribution) filed 2007/2008 GTA on November 6, As at June 12, 2007 no application for 2008 rates had been filed by ATCO Gas. (2) ROE for NSPI is presently set as an allowed range of 9.30% to 9.80% (as per 2005 rate decision). Rates reflect an ROE of 9.55% (3) Represents Transmission, Distribution and Regulatory Assets. Multi-year Alternative Rate Plan in effect from Jun 6, 2002 to December 31, ROE allowed to vary between subject to performance. (4) Applied for 38% deemed common equity for F2007 rates. (5) System Expansion Plan II is subject to volumetric thresholds, with the allowed return ranging from the Multi-Pipeline Return less 3.00% to the Multi-Pipeline Return Plus 3.00%. (6) Allowed ROE fixed for fiscal 2003 and 2004 at 9.75%. Subject to ROE Adjustment Mechanism and Total Cost of Capital Methodology Applied for ROE of 10.25% in (7) Maritime Electric is subject to regulation under the new Electricity Act, effective Janary 1, Under the new Electricity Act, the company is now subject to a more conventional regulatory process (return on rate base) versus the previous approach involving a rate cap methodology. Customer rates could not exceed 110% of the rates charged by NB Power, subject to two adjustments: an Energy Cost Adjustment and a Cost of Capital Adjustment, both of which were designed to smooth actual performance. June 27, 2006 decision of IRAC - 45% deemed equity implied and maximum allowed ROE of 10.25%. (8) Fortis Ontario includes the operations of Cornwall Electric, Canadian Niagara Power and various operating arrangements on MEUs owned by 3rd parties. Cornwall Electric s distribution rates are regulated by the 35-year Franchise Agreement between the utility and the City of Cornwall dated July 31, Utility operations are otherwise subject to regulatory oversight by the Ontario Energy Board. Until May 1, 2006 the allowed ROE is capped at 9.88%. Ontario distribution utilities subject to 40% deemed equity and 9.00% ROE for (9) Sensitivities are expressed on a pre-tax basis. Applied for ROE of 10.19% based on the three-factor French-Fama model for F2008. Not yet approved by the Regie. (10) Sensitivities reflect a 50% ownership interest in the pipeline. Settlement approved by National Energy Board expired December 31, (11) On December 21, 2005 the National Energy Board approved tolls on the Foothills Pipe Lines Ltd systems and the BC System which included 36% deemed equity. Reflects 100% ownership interest. Regulated on actual capital cost of service basis. Subject to O&M, G&A Incentive Agreement effective January 1, 2003 to December 31, Incentive benefit capped at $45 million over the term of the Agreement. NEB Multi-Pipeline decision remains relevant. Source: BMO Capital Markets Page 98 sur 194

99 Pipelines & Utilities Page 15 Table 10: Comparable Canadian Equities Canadian Gas Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 28-Jun-07 O/S (mm) Cap. (mm) 2005A 2006A 2007E 2008E 2005A 2006A 2007E 2008E Rate Yield Target Return Rating Enbridge Inc. ENB $ $12,427 $1.56 $1.64 $1.75 $ $ % $ % Outperform Enbridge Income Fund ENF.UN % % Market Perform Fort Chicago Energy Partners L.P. FCE.UN , % % Market Perform Gaz Métro 4 GZM.UN , % % Market Perform Inter Pipeline Fund IPL.UN , % % Market Perform Pacific Northern Gas Ltd. PNG % % Outperform Pembina Pipeline Income Fund PIF.UN , % % Market Perform Spectra Energy Corp. 2 SE ,428 NA NA NA NA % % Outperform TransCanada Corp. TRP , % % Market Perform Group Average (Excl. ENF, FCE, GZM, IPL and PIF) % 14.8% Canadian Electric Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 28-Jun-07 O/S (mm) Cap. (mm) 2005A 2006A 2007E 2008E 2005A 2006A 2007E 2008E Rate Yield Target Return Rating Caribbean Utilities Co. Ltd. 2, 3 CUP.U $ $293 $0.13 $0.87 $0.84 $0.92 NMF $ % $ % Outperform Emera Inc. EMA , % % Market Perform Fortis Inc. FTS , % % Outperform Group Average % 16.6% Canadian Multi-Utilities TSX Price (C$) Shares Market Earnings per Share P/E Ratios Dividend 12-Month Total Company Ticker 28-Jun-07 O/S (mm) Cap. (mm) 2005A 2006A 2007E 2008E 2005A 2006A 2007E 2008E Rate Yield Target Return Rating ATCO Ltd. 1 ACO/X $ $2,810 $2.46 $3.27 $3.32 $ $ % NA NA NR Algonquin Power Income Fund APF.UN % $ % Underperform Atlantic Power Corporation 6 ATP.UN (0.01) (0.05) (0.74) NMF % % Underperform Boralex Power Income Fund BPT.UN % % Market Perform Cdn Hydro Developers, Inc. KHD NMF NMF % % Market Perform Canadian Utilities Ltd. CU , % % Underperform Creststreet Power & Income Fund LP CRS.UN (0.54) (0.49) (0.12) 0.22 NMF NMF NMF % % Underperform EPCOR Power, L.P. EP.UN , % % Market Perform Great Lakes Hydro Income Fund GLH.UN % % Market Perform Innergex Power Income Fund IEF.UN % % Underperform Macquarie Pwr & Infrastructure Fund MPT.UN % % Underperform Northland Power Income Fund NPI.UN % % Market Perform Maxim Power Corp. 1 MXG NA NA % NA NA NR TransAlta Corp. TA , % % Underperform TransAlta Power L.P. TPW.UN (0.04) 0.46 R R NMF 18.5 R R R R R R Restricted Group Average (Excl. KHD, MXG, IPS, LPs and Income Trusts) % -6.2% Notes: NA = Not Applicable, NMF = Not Meaningful, NR = Not Rated 1 Estimates from First Call 2 All figures in US$ 3 Caribbean Utilities year-end is April 30 4 Gaz Metro s year-end is Sept Ticker on the New York Stock Exchange 6 Represents Income Participating Securities (IPS). Share price, Market Cap and Dividend in C$; all else in US$. Source: BMO Capital Markets, First Call Page 99 sur 194

100 Page 16 Pipelines & Utilities Analyst s Certification I, Karen Taylor, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Michael McGowan, CA, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Laurie Conheady, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. General Disclosure The information and opinions in this report were prepared by BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., collectively ( BMO NB ). BMO NB is not subject to U.S. rules with regard to the preparation of research reports and the independence of analysts. BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale/institutional arms of Bank of Montreal and BMO NB in Canada, and BMO Capital Markets Corp. in the U.S. BMO Capital Markets Corp. is an affiliate of BMO NB. BMO NB and BMO Capital Markets Corp. are subsidiaries of Bank of Montreal. Bank of Montreal or its affiliates ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO NB research. A significant lending relationship may exist between BMO Financial Group and certain of the issuers mentioned herein. The reader should assume that BMO NB, BMO Capital Markets Corp., Bank of Montreal or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates and projections contained in this report are those of BMO NB as of the date of this report and are subject to change without notice. BMO NB endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO NB makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO NB or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of BMO NB and its affiliates, which includes the overall profitability of investment banking services. BMO NB, or its affiliates expect to receive or will seek compensation for investment banking services within the next 3 months from all issuers covered by BMO NB. BMO NB or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO NB or its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Company Specific Disclosures Algonquin Power Income Fund (APF.UN-TSX) 2, 3, 7, 9, 10AC Fortis Inc. (FTS-TSX) 2, 3, 7, 9, 10AC Atlantic Power Corp. (ATP.UN-TSX) 2, 3, 7, 9, 10AC Gaz Metro Limited Partnership (GZM.UN-TSX) 2, 3, 7, 9, 10AC Boralex Power Income Fund (BPT.UN-TSX) 11 Great Lakes Hydro Income Fund (GLH.UN-TSX) Canadian Hydro Developers Inc. (KHD-TSX) 2, 3, 7, 10A Innergex Power Income Fund (IEF.UN-TSX) 9, 10C Canadian Utilities (CU-TSX) 2, 3, 7, 9, 10AC, 11, 12 Inter Pipeline Fund (IPL.UN-TSX) 9, 10C Caribbean Utilities Co. Ltd. (CUP.U-TSX) 5, 9, 10B Macquarie Power & Infrastructure Inc. Fund (MPT.UN-TSX) Clean Power Income Fund (CLE.UN-TSX) Northland Power Income Fund (NPI.UN-TSX) 9, 10C Countryside Power Income Fund (COU.UN-TSX) Pacific Northern Gas (PNG-TSX) Creststreet Power & Inc. Fund (CRS.UN-TSX) 2, 3, 7, 10A Pembina Pipeline Income Fund (PIF.UN-TSX) 9, 10C Emera Inc. (EMA-TSX) 9, 10C Spectra Energy Corp. (SE-NYSE; SPT.B-TSX) Enbridge Inc. (ENB-TSX; ENB-NYSE) 2, 3, 4, 7, 9, 10AC TransAlta Corporation (TA-TSX; TAC-NYSE) 4, 5, 9, 10C, 11, 12 Enbridge Income Fund (ENF.UN-TSX) 9, 10C TransAlta Power L.P. (TPW.UN-TSX) 9, 10C EPCOR Power, L.P. (EP.UN-TSX) 2, 3, 7, 9, 10AC TransCanada Corporation (TRP-TSX; TRP-NYSE) 1, 2, 3, 5, 7, 9, 10AC, 12 Fort Chicago Energy L.P. (FCE.UN-TSX) Page 100 sur 194

101 Pipelines & Utilities Page 17 Disclosure Key BMO NB uses the following Company Specific Disclosure Key. Please refer to the Company Specific Disclosure section above for specific disclosures applicable to issuers discussed in this report: 1 - BMO NB has provided advice for a fee with respect to this issuer within the past 12 months. 2 - BMO NB has undertaken an underwriting liability with respect to this issuer within the past 12 months. 3 - BMO NB has provided investment banking services with respect to this issuer within the past 12 months. 4 - BMO NB, BMO Capital Markets Corp. or an affiliate beneficially owns 1% or more of any class of the equity securities of this issuer. 5 - BMO NB, BMO Capital Markets Corp. or an affiliate makes a market in this security. 6 - BMO Capital Markets Corp. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 7 - BMO Capital Markets Corp. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 8 - BMO Capital Markets Corp. or an affiliate or its officers or partners own options, rights, or warrants to purchase any securities of this issuer. 9 - BMO Capital Markets Corp. or an affiliate received compensation for products or services other than investment banking services within the past 12 months. 10A - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Investment Banking Services 10B - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp. or an affiliate within the past 12 months: Non- Investment Banking Securities Related Services 10C - This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp.or an affiliate within the past 12 months: Non- Securities Related Services 11 - An employee, officer, or director of BMO NB is a member of the Board of Directors or an advisor or officer of this issuer A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this issuer A household member of the research analyst and/or associates who prepared this research report is a member of the Board of Directors or is an advisor or officer of this issuer The research analysts and/or associates (or their household members) who prepared this research report directly or beneficially own securities of this issuer. Page 101 sur 194

102 Page 18 Pipelines & Utilities Distribution of Ratings Rating BMO BMO BMO First Call Category Rating Universe I.B. Clients* Universe** Buy Outperform 38% 47% 47% Hold Market Perform 52% 45% 46% Sell Underperform 10% 8% 7% * Reflects rating distribution of all companies where BMO Capital Markets has received compensation for Investment Banking services. ** Reflects rating distribution of all North American equity research analysts. Ratings Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. Prior to September 1, 2003, a fourth rating tier Top Pick was used to designate those stocks we felt would be the best performers relative to the market. Our six Top 15 lists which guide investors to our best ideas according to six different objectives (large, small, growth, value, income and quantitative) have replaced the Top Pick rating. Dissemination of Research Our research publications are available via our web site Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please contact your investment advisor or institutional salesperson for more information. Additional Matters TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd. TO U.K. RESIDENTS: The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée/Ltd. are Members of CIPF. BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. are Members of SIPC. BMO Capital Markets is a trade-mark of Bank of Montreal, used under licence. BMO (M-Bar roundel symbol) is a registered trade-mark of Bank of Montreal, used under licence. R37133 Page 102 sur 194

103 RBC Dominion Securities Inc. Robert Kwan, CFA (Analyst) (604) Peter Heusel, CFA (Associate) (604) October 24, 2008 This report is priced as of market close October 23, 2008 ET. All values in Canadian dollars unless otherwise noted. For Required Disclosures, please see page 18. ROE Outlook for 2009 Is the Formula Broken? ROEs Set to Decline Higher Equity Risk Premiums + Credit Crunch = Lower Allowed ROEs? Although the automatic adjustment formulas that annually calculate allowed returns on equity (ROE) for many pipelines and utilities in Canada have been good for transparency, developments over the past year in the equity and credit markets leave us wondering if the ROE formulas are broken. Despite investor concerns about access to credit, let alone higher overall corporate borrowing costs, in addition to higher equity risk premiums, these formulas appear set to further reduce the allowed ROEs for 2009 based on the inputs that the formulas use to calculate the annual ROEs. Based on our early preview calculations, we expect allowed ROEs to modestly decrease in 2009, resuming the downward trend after an uptick in This would represent a decline in allowed ROEs for the fifth time in the past six years. In comparing the various formulas, it appears that allowed ROEs are set to decline by roughly 30 basis points. Formulas Expected to Reduce ROEs by Roughly 30 bps Formula-Based ROEs Expected to Decrease in Although most formula-based ROEs will not be calculated until November, current bond yield data (forecast and actual) suggest a decrease in the allowed ROEs for most companies in the Canadian energy infrastructure sector. Based on current data, we expect the following changes for 2009 compared to 2008: NEB Multi-pipeline ROE: Decrease to 8.40% from 8.71% (down 31 bps). AUC Generic ROE: Decrease to 8.45% from 8.75% (down 30 bps). BCUC Low-Risk Utility ROE: Decrease to 8.31% from 8.62% (down 31 bps). AUC PPAs: Decrease to 8.59% from 8.88% (down 29 bps). La Régie ROE: Decrease to 8.76% from 9.05% (down 29 bps). Forecast ROE Decline Not That Material, but Favours Pipes vs. Utes The Expected Decline in ROE Not Overly Material. With the most significant impact in our sector estimated to be only a 2.4% decline in 2009 EPS (Fortis), the lower forecast ROE for 2009 is not overly material. Yet Another Hurdle for Fortis. As Fortis EPS growth slows over the next couple of years, a lower ROE will put further downward pressure on growth. In addition, with Fortis likely needing to issue a modest amount of equity (i.e. $200-$300 million) over the next 12 to 24 months to improve its capital ratios, the lower ROEs may make it more challenging to attract capital. Our Current Recommendations are Supportive of Pipeline Companies, Which are Allocating Capital to Higher ROE Businesses. Currently, our Outperform ranked stocks include Enbridge and TransCanada. The majority of both companies capital is being allocated to new projects with expected ROEs in the 10% to 15% range (mostly oil pipelines, contracted power generation, and U.S. gas pipelines). The higher expected returns more than offset any differences in risk between these types of projects and Canadian regulated utility assets. Page 103 sur 194

104 ROE Outlook for 2009 October 24, 2008 Table of Contents Executive Summary...3 Allowed ROEs Poised to Decline in 2009 by Roughly 30 bps...3 Canadian ROEs Tied to Interest Rate Movements...4 Lower Forecast 10-Year GOC Yields...4 Actual GOC Bond Yields Have Also Fallen...4 Formula-Based ROEs Expected to Decrease...5 National Energy Board Multi-Pipeline ROE Formula...5 Alberta Utilities Commission...6 British Columbia Utilities Commission...7 Ontario Energy Board...7 La Régie...7 ROEs Based on Observed Yields...8 Newfoundland Power (Owned by Fortis)...8 Alberta Power Purchase Arrangements (PPAs)...8 Modest Negative Impact to EPS Based on Lower ROE Forecast...9 Conclusion: Stick With the Pipeline Companies...10 Recommendations...11 Target Price Justifications...12 Required Disclosures...18 Additional Disclosures Robert Kwan, CFA Page 104 sur 194

105 October 24, 2008 ROE Outlook for 2009 Executive Summary All of the corporates, and some of the income trusts, in our Canadian energy infrastructure coverage universe have some earnings sensitivity to changes in allowed returns on equity (ROE) set by the national and provincial regulators. Typical assets that are subject to regulated allowed ROEs are electric and gas utilities, and natural gas pipelines. Other operations that are subject to regulated returns include certain Alberta power plants and some liquids pipelines. In Canada, most allowed ROEs are set by formulas based on either actual or forecast bond yields. Many regulators use forecast yields derived from Consensus Forecasts, published by Londonbased Consensus Economics Inc. When we published our ROE Outlook for 2008 last October, the 10-year Government of Canada (GOC) bond yield forecast three months forward was 4.40% and the 10-year GOC forecast 12 months forward was 4.70%, for an average of 4.55%. Since that time, we have seen the 10-year GOC bond yield forecast three months forward decline to 3.50% and the 10-year GOC forecast 12 months forward decrease to 3.80%, for an average of 3.65%. For actual yields, the 10-year GOC yield when we published our ROE Outlook for 2008 was 4.30%, compared to the October 22, 2008, 10-year GOC yield of 3.60%. Allowed ROEs Poised to Decline in 2009 by Roughly 30 bps The National Energy Board (NEB), the Alberta Utilities Commission (AUC) and the British Columbia Utilities Commission (BCUC), which set the returns for many regulated utilities in Canada, use the November edition of Consensus Forecasts in deriving their formula-based ROEs for the upcoming year. We have used the October edition of Consensus Forecasts, and current interest rates for ROE formulas based on observed yields, to provide an early preview into the allowed ROEs for Exhibit 1 sets out the various ROE formulas, the allowed ROEs for 2008 and our expectations for Exhibit 1: Summary of Estimates for Formula-Based Allowed ROEs Companies Month that E Change Regulator Impacted ROE is set Allowed ROE Allowed ROE from 2008 NEB TransCanada Mainline November 8.71% 8.40% -0.31% Enbridge Line 9 and NRAs November 8.71% 8.40% -0.31% Foothills November 8.71% 8.40% -0.31% Alberta Oil Sands Pipeline November 8.71% 8.40% -0.31% Norman Wells November 8.71% 8.40% -0.31% TransQuebec & Maritimes November 8.71% 8.40% -0.31% Alberta Clipper (AEDC) November 10.96% 10.65% -0.31% Ontario Energy Board Enbridge Gas Distribution N/A 8.39% 8.39% 0.00% BCUC Terasen Gas November 8.62% 8.31% -0.31% Terasen Gas Vancouver Island November 9.32% 9.01% -0.31% FortisBC November 9.02% 8.71% -0.31% PUB Newfoundland Power November 8.95% 8.95% 0.00% AUC Power Purchase Arrangements Sept.,Oct., Nov. 8.88% 8.59% -0.29% Generic ROE November 8.75% 8.45% -0.30% Régie de l'énergie Gaz Métro August 9.05% 8.76% -0.29% Source: Consensus Economics Inc.; Bloomberg; Financial Post; RBC Capital Markets estimates Robert Kwan, CFA 3 Page 105 sur 194

106 ROE Outlook for 2009 October 24, 2008 Canadian ROEs Tied to Interest Rate Movements With the exception of the formulas implemented by the Board of Commissioners of Public Utilities in Newfoundland and Labrador (PUB) and the Alberta Balancing Pool for the Power Purchase Arrangements, ROE formulas in Canada are based on a forecast of the 10-year GOC bond yield published in Consensus Forecasts. Lower Forecast 10-Year GOC Yields As shown in Exhibit 2, the forecast 10-year GOC bond yield in Consensus Forecasts has resumed the general downward trend after rising in Barring a significant change in the outlook for 10-year GOC yields over the next month, allowed ROEs that are set using forecast yields are expected to decrease approximately 31 bps in Exhibit 2: Historical Forecast 10-Year GOC Yield from Consensus Forecasts 6.50% 6.00% 5.50% 5.00% November % 4.00% 3.50% 3.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan Year Canada Bond Yield Forecast - 3 Months Forward 10-Year Canada Bond Yield Forecast - 12 Months Forward Average of 3 and 12 Months Forward Forecasts Source: Consensus Economics Inc.; RBC Capital Markets Actual GOC Bond Yields Have Also Fallen Actual 10-year and 30-year GOC bond yields have also fallen over the past year, as shown in Exhibit 3. As such, the Alberta Power Purchase Arrangement ROE is expected to decrease by approximately 29 bps. 4 Robert Kwan, CFA Page 106 sur 194

107 October 24, 2008 ROE Outlook for 2009 Exhibit 3: Actual 10-Year and 30-Year GOC Bond Yields 6.50% 6.00% 5.50% November 2007 Yield to Maturity 5.00% 4.50% 4.00% 3.50% 3.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan Year GOC Yield 30-Year GOC Yield Source: Bloomberg; RBC Capital Markets Formula-Based ROEs Expected to Decrease The ROE formulas established by the NEB, AUC (Generic ROE), the BCUC, and Québec s Régie de l énergie (La Régie) rely on a forecast of the 10-year GOC yield published in Consensus Forecasts. The NEB, BCUC and AUC rely on the forecast 10-year bond yield from the November issue of Consensus Forecasts, while the Régie uses the August issue. Each formula adds the actual spread between the 10-year and the 30-year GOC bond yields averaged over a relatively short period around the time when the ROE is set to arrive at a forecast 30-year bond yield. The current year s allowed ROE is then adjusted by the year-over-year change in the forecast of the 30-year GOC bond yield multiplied by an adjustment factor to arrive at the allowed ROE for the upcoming year. The expected result of each regulator s formula based on currently available data is set out in the following exhibits. Each formula has slight nuances, but the level of allowed ROEs and the yearover-year changes are generally similar. National Energy Board Multi-Pipeline ROE Formula The NEB s Multi-Pipeline ROE formula covers the majority of inter-provincial gas pipeline systems in addition to some liquids pipeline systems. Our calculation of the NEB Multi-Pipeline ROE for 2009 based on currently available data is set out in Exhibit 4. TQM Challenge to the Multi-Pipeline ROE Trans Quebec & Maritimes Pipeline (TQM) is currently challenging the allowed ROE formula, and a decision is expected in TQM has applied for an 11% ROE on a 40% equity component (current allowed ROE of 8.71% on a 30% equity component). While challenges to both the NEB and provincial ROE formulas have only been met with limited success, we believe that there could be support for higher allowed ROEs based on a decline in the formula return despite significant weakening in the debt and equity capital markets. Robert Kwan, CFA 5 Page 107 sur 194

108 ROE Outlook for 2009 October 24, 2008 Exhibit 4: Forecast National Energy Board Multi-Pipeline ROE NEB 2009E ROE Calculation Consensus economic forecast 10-yr bond yield (3 Months Out) 3.50% Consensus economic forecast 10-yr bond yield (12 Months Out) 3.80% Average 3.65% Add: average basis point spread between 10-year and 30-year GOC bond 0.49% 2009 Forecast of the 30-year Government of Canada bond yield 4.14% 2008 Forecast of the 30-year Government of Canada bond yield 4.55% Difference between 2009 forecast and 2008 bond yield -0.41% Adjustment Factor % 2008 ROE 8.71% 2009 Forecast ROE 8.40% Source: Consensus Economics Inc.; Financial Post; RBC Capital Markets Alberta Utilities Commission The AUC s generic ROE covers intra-provincial gas pipeline systems, and electric & gas utilities in the province. Our calculation of the AUC Generic ROE for 2009 based on currently available data is set out in Exhibit 5. Review of the Generic ROE In February 2008, the AUC initiated a generic proceeding to determine whether the standardized rate of return methodology and the utility capital structures should be reviewed. On June 18, 2008, the AUC announced that a generic hearing would be convened to review the level of the generic return on equity (Generic ROE) for 2009, the Generic ROE adjustment mechanism and capital structure of utilities on a utility-specific basis. Information requests are ongoing and an oral hearing date is expected to begin in mid Exhibit 5: Forecast Alberta Utilities Commission Generic ROE AUC 2009E ROE Calculation Consensus economic forecast 10-yr bond yield (3 Months Out) 3.50% Consensus economic forecast 10-yr bond yield (12 Months Out) 3.80% Average 3.65% Add: average basis point spread between 10-year and 30-year GOC bond 0.49% 2009 Forecast of the 30-year Government of Canada bond yield 4.14% Board approved LT Canada bond yield (2004 base year) 5.68% Difference between 2009 forecast and 2004 base year bond yield -1.54% Adjustment Factor % 2004 base year ROE 9.60% 2009 Forecast ROE 8.45% Source: Consensus Economics Inc.; Financial Post; RBC Capital Markets 6 Robert Kwan, CFA Page 108 sur 194

109 October 24, 2008 ROE Outlook for 2009 British Columbia Utilities Commission We have set out the BCUC s low-risk benchmark utility formula in Exhibit 6. The result of this formula is applied to Terasen Gas, while a 40 bp risk premium is applied to arrive at the allowed ROE for FortisBC, and a 70 bp premium is applied to arrive at the allowed ROE for Terasen Gas Vancouver Island (TGVI). Exhibit 6: Forecast British Columbia Utilities Commission ROE (Low-Risk Benchmark Utility) BCUC 2009E ROE Calculation Consensus economic forecast 10-yr bond yield (3 Months Out) 3.50% Consensus economic forecast 10-yr bond yield (12 Months Out) 3.80% Average 3.65% Add: average basis point spread between 10-year and 30-year GOC bond 0.49% 2009 Forecast of the 30-year Government of Canada bond yield 4.14% Base 30-year Government of Canada bond yield 5.25% Difference between 2009 and 5.25% base forecast -1.11% Adjustment Factor % Base ROE 9.145% 2009 Forecast ROE 8.31% Source: Consensus Economics Inc.; Financial Post; RBC Capital Markets Ontario Energy Board Historically, earnings for Enbridge Gas Distribution (EGD) were set by the OEB using a formulabased ROE approach similar to the NEB, AUC, the BCUC and Québec s La Régie. However, in February 2008, the OEB approved a five-year ( ) settlement agreement for an incentive regulation rate setting mechanism. Under the incentive regulation, Enbridge has the opportunity to earn an incentive return over and above the cost-of-service model using rates based on an ROE of 8.39% (as set in 2007). Any incentive return over 100 basis points will be shared 50/50 with ratepayers and there is an off ramp to the agreement if the incentive return exceeds 300 bps. La Régie La Régie de l énergie (for Gaz Métro) uses the August edition of Consensus Forecasts to set the formula-based ROE for Gaz Métro. On top of the formula-based ROE, Gaz Métro has an incentive agreement that provides the utility with the potential to earn an additional return. In its decision on Gaz Métro s 2008 rate application, La Régie chose to modify certain parameters of the formula used to establish the ROE, fixing it at 9.05% for the 2008 fiscal year, which was an increase over the 8.91% ROE the formula normally would have produced. Gaz Métro s 2009 rate application proposed a temporary suspension of the automatic adjustment formula and requested the same base ROE as 2008 plus a 20 basis point adjustment, resulting in a requested 2009 ROE of 9.25% (before incentives). However, using the automatic adjustment formula, we estimate that the 2009 allowed ROE (before incentives) will be 8.76%, a 29-basis-point decrease from the 2008 allowed ROE of 9.05%. Robert Kwan, CFA 7 Page 109 sur 194

110 ROE Outlook for 2009 October 24, 2008 ROEs Based on Observed Yields The Alberta Balancing Pool and the Board of Commissioners of Public Utilities in Newfoundland and Labrador (PUB) have adopted ROE formulas that are based on actual historical yields observed in the bond market for Newfoundland Power and Alberta PPAs, respectively. Newfoundland Power (Owned by Fortis) Newfoundland Power operates under cost-of-service regulation and its earnings are regulated on the basis of rate of return on rate base. In 1998, an automatic adjustment formula was established to determine the annual permitted rate of return on rate base. In the absence of a rate decision by the PUB, Newfoundland Power s allowed ROE generally changes only if the return on rate base calculated by the automatic adjustment formula moves outside of the approved range. The automatic adjustment formula uses the observed yields for the three most recent series of longterm GOC bonds during the last five trading days of October and the first five trading days of November in each year of operation of the formula. In May 2007, Newfoundland Power filed a rate case for In the rate case, the company requested an increase in the allowed ROE to 10.25%. In October 2007, Newfoundland Power filed a revised rate case for 2008 that was the result of negotiations with the Consumer Advocate, with the assistance of a PUB-appointed facilitator. In the revised rate case, Newfoundland Power lowered its requested ROE to 8.95% from 10.25%. The requested ROE of 8.95% reflected the ROE that would be expected based on the current formula approach and movements in interest rates at the time. Furthermore, it was agreed that if the application was approved by the PUB, 8.95% would be the allowed ROE for 2008, regardless of changes in interest rates between the time of the new application and the date the allowed ROE would normally be set. Since the revised application was subsequently approved by the PUB in December 2007, Newfoundland Power s allowed ROE for 2008 was set at 8.95%. Using the last 10 trading days ended October 22, 2008, we calculate that the automatic adjustment formula provides a result that remains within the current approximate allowed range of 8.45% to 9.45%. As such, we expect Newfoundland Power s allowed ROE to remain at 8.95% for Alberta Power Purchase Arrangements (PPAs) Owners of generation plants that fall under Alberta Power Purchase Arrangements (e.g. Canadian Utilities Alberta Power (2000) and TransAlta) are entitled to a return on equity equal to the average yield from a Bank of Canada bond index plus a risk premium of 450 basis points. In establishing the ROE to be used for the generation covered by the PPAs, the applied long bond yield is the average redemption yield on all conventional Canadian government bonds with a maturity of 10 years or more, as published by the Bank of Canada (CANSIM Series V39062). The average is calculated over the months of September, October and November of the year prior to the test year. The use of an average over a period of three months helps to mitigate the impact of short-term variability in interest rates, as well as moderating the impact of increasing or declining interest rates. As rates are modestly lower than last year, we calculate that the allowed ROE under the PPAs could decrease by 29 basis points, to 8.59% in 2009, based on the assumption that the average yield observed during the three months ended October 22, 2008 is indicative of the average yield expected for September, October and November Robert Kwan, CFA Page 110 sur 194

111 October 24, 2008 ROE Outlook for 2009 Modest Negative Impact to EPS Based on Lower ROE Forecast Based on the estimated changes in the 2009 ROEs compared to 2008 as summarized in Exhibit 7, it appears that Fortis, on a percentage basis, could realize the greatest negative impact on 2009E EPS (2.4%) in our coverage universe. The exhibit sets out the forecast changes to EPS based on our early preview ROE calculations. Exhibit 7: Forecast EPS Sensitivity (In $MM except per share figures) Company Estimated ROE (if ROE set today) Chng. In ROE Estimated Ratebase Impacted by Change Deemed Equity Deemed Equity Earnings Impact EPS Impact EPS Impact (%) Canadian Utilities PPAs 8.88% 8.59% -0.29% $ % $440 ($1.3) ($0.010) ATCO Electric (Transmission) 8.75% 8.45% -0.30% 1, % 386 (1.2) (0.009) ATCO Electric (Distribution) 8.75% 8.45% -0.30% 1, % 446 (1.3) (0.011) ATCO Pipelines 9.60% 8.45% % % (3.9) (0.031) ATCO Gas 8.51% 8.45% -0.06% 1, % (0.3) (0.003) Total $5,626 $2,175 ($8.0) ($0.064) -2.08% ATCO ROE exposure through 52.4% interest in Canadian Utilities (see above) ($0.072) -1.79% Emera Nova Scotia Power 9.55% 9.35% -0.20% $2, % $1,080 ($2.2) ($0.019) -1.49% Enbridge Line 9 and non-routine adjustments 8.71% 8.40% -0.31% $ % $99 ($0.3) ($0.001) Norman Wells 8.71% 8.40% -0.31% % 58 (0.2) (0.000) Enbridge Gas Distribution 8.39% 8.39% 0.00% 3, % 1, Alberta Clipper (AEDC) 10.96% 10.65% -0.31% 1, % 473 (1.5) (0.004) Noverco preferred shares 8.72% 7.94% -0.78% 182 na 182 (1.4) (0.004) Total $4,236 $1,557 ($3.4) ($0.009) -0.42% Fortis Newfoundland Power 8.95% 8.95% 0.00% $ % $382 $0.0 $0.000 Maritime Electric % % Terasen Gas 8.62% 8.31% -0.31% 2, % 876 (2.7) (0.017) Terasen Gas Vancouver Island (TGVI) 9.32% 9.01% -0.31% % 203 (0.6) (0.004) FortisAlberta 8.75% 8.45% -0.30% 1, % 499 (1.5) (0.009) FortisBC 9.02% 8.71% -0.31% % 368 (1.1) (0.007) Total $6,420 $2,445 ($6.0) ($0.038) -2.40% Gaz Métro Québec distribution 9.05% 8.76% % $1, % $701 ($2.0) ($0.016) -1.29% Pembina Pipeline Income Fund Alberta Oil Sands Pipeline (AOSPL) % 8.40% -0.31% $ % $81 ($0.3) ($0.002) -0.10% TransCanada Mainline 8.71% 8.40% -0.31% $6, % $2,777 ($8.6) ($0.015) Alberta System 8.75% 8.45% -0.30% 4, % 1,614 (4.8) (0.008) TQM 8.71% 8.40% -0.31% % 69 (0.2) (0.000) Foothills & BC 8.71% 8.40% -0.31% % 258 (0.8) (0.001) Total $12,504 $4,719 ($14.5) ($0.025) -1.09% TransAlta PPAs 8.88% 8.59% -0.29% $1, % $574 ($1.7) ($0.009) -0.51% (1) ATCO Pipelines has requested a 47.5% equity component and a 75 bp premium over the AUC generic ROE in its GRA application. (2) ATCO Gas has requested a 40.0% equity component in its GRA application. (3) Includes rate base for Line 9 and non-routine adjustments (except SEP II). (4) There is no formula ROE mechanism. (5) Gaz Metro has requested a temporary suspension of the automatic adjustment formula and requested a 2009 ROE of 9.25%. (6) Measured impact is Adjusted Cash Flow from Operations (ACFFO), not earnings. Source: Bank of Canada; Consensus Economics Inc.; Financial Post; Bloomberg; various regulatory decisions; company reports; RBC Capital Markets estimates Robert Kwan, CFA 9 Page 111 sur 194

112 ROE Outlook for 2009 October 24, 2008 Conclusion: Stick With the Pipeline Companies Based on our early preview calculations, we expect allowed ROEs to modestly decrease in 2009, resuming the downward trend after an uptick in All of the corporate names in our energy infrastructure coverage universe should have some degree of negative earnings impact from lower allowed ROEs, although the estimated impact to earnings is relatively modest across the group. Nevertheless, we believe that the negative impact of lower allowed ROEs on the companies with regulated utility assets provides additional support for our recommendation that investors overweight the pipeline stocks (Enbridge and TransCanada), which are directing a majority of their capital towards higher ROE projects (generally in the 10% to 15% range). We believe that Enbridge and TransCanada provide investors with a defensive component for portfolios, above average earnings growth, favourable access to credit, and good trading liquidity to allow investors to rotate into more offensive sectors when the time is right. 10 Robert Kwan, CFA Page 112 sur 194

113 October 24, 2008 ROE Outlook for 2009 Recommendations Exhibit 8: Energy Infrastructure Universe Normalized Basic EPS Current PRICE Normalized Fully Diluted EPS P/E Ratio Dividend/ Current Payout 1-Year Ticker 23-Oct-08 FY07 FY08E FY09E FY10E FY08E FY09E FY10E Distrib. Yield FY08E Target Recommendation Risk ENERGY INFRASTRUCTURE CORPORATIONS (Analyst: Robert Kwan; ) ATCO Ltd. ACO.X $38.40 $3.79 $4.14 $4.03 $ x 9.5x 9.3x $ % 22.7% $42.00 Outperform Above Average $3.76 $4.11 $4.00 $4.08 Canadian Utilities CU $38.94 $2.74 $3.06 $3.07 $ x 12.7x 12.2x $ % 43.5% $41.00 Sector Perform Average $2.73 $3.05 $3.06 $3.17 Emera EMA $20.69 $1.20 $1.28 $1.29 $ x 16.0x 15.3x $ % 78.9% $19.00 Underperform Average $1.17 $1.25 $1.26 $1.32 Enbridge ENB $39.15 $1.77 $1.88 $2.19 $ x 17.9x 16.0x $ % 70.2% $44.00 Outperform Average $1.76 $1.87 $2.18 $2.42 Fortis FTS $25.74 $1.33 $1.53 $1.57 $ x 16.4x 15.8x $ % 65.4% $24.00 Sector Perform Average $1.30 $1.50 $1.53 $1.61 TransAlta Corp. TA $25.14 $1.33 $1.56 $1.72 $ x 14.6x 13.2x $ % 69.2% $30.00 Sector Perform Above Average $1.33 $1.56 $1.72 $1.91 TransCanada TRP $35.75 $2.09 $2.22 $2.27 $ x 15.7x 14.5x $ % 64.9% $40.00 Outperform Average $2.08 $2.21 $2.26 $2.46 Average: 15.4x 14.7x 13.8x 3.8% 59.2% PRICE CFFO/Unit Price/CFFO Current Current Payout 1-Year Ticker 23-Oct-08 FY07 FY08E FY09E FY10E FY08E FY09E FY10E Distrib. Yield FY08E Target Recommendation Risk Boralex Inc. BLX $8.00 $1.50 $1.42 $1.48 $ x 5.4x 4.3x $ % 0.0% $16.00 Outperform Above Average Brookfield Infr BIP US$14.10 US$1.37 US$1.79 US$ x 7.9x 5.7x US$ % 77.4% US$22.00 Sector Perform Average Canadian Hydro KHD $3.20 $0.18 $0.24 $0.53 $ x 6.0x 4.7x $ % 0.0% $5.50 Outperform Above Average PRICE ACFFO/Unit Price/ACFFO Current Current Payout 1-Year Ticker 23-Oct-08 FY07 FY08E FY09E FY10E FY08E FY09E FY10E Distrib. Yield FY08E Target Recommendation Risk Atlantic Power ATP.UN $6.90 US$1.72 US$1.66 US$1.20 US$ x 7.1x 7.6x $ % 53.0% $8.50 Sector Perform Above Average Boralex Power IF BPT.UN $3.63 $0.79 $0.78 $0.74 $ x 4.9x 4.9x $ % 89.7% $4.25 Sector Perform Above Average EPCOR Power EP.UN $17.64 $2.77 $2.28 $2.45 $ x 7.2x 6.9x $ % 110.5% $18.00 Underperform Average Great Lakes Hydro GLH.UN $17.00 $0.60 $1.59 $1.30 $ x 13.1x 13.0x $ % 78.6% $18.50 Sector Perform Average Innergex Power IEF.UN $9.50 $0.95 $1.05 $1.11 $ x 8.6x 8.4x $ % 95.2% $12.00 Sector Perform Average Macquarie Power MPT.UN $4.72 $1.16 $1.08 $1.13 $ x 4.2x 4.1x $ % 97.2% $7.00 Outperform Average Northland Power NPI.UN $10.45 $1.34 $1.43 $1.48 $ x 7.1x 7.1x $ % 75.5% $11.50 Sector Perform Average Primary Energy PRI.UN $4.02 US$0.54 US$0.77 US$0.71 US$ x 7.0x 6.6x $ % 88.8% $6.00 Outperform Above Average PRICE ACFFO/Unit Price/ACFFO Current Current Payout 1-Year Ticker 23-Oct-08 FY07 FY08E FY09E FY10E FY08E FY09E FY10E Distrib. Yield FY08E Target Recommendation Risk PIPELINE AND MIDSTREAM INCOME TRUSTS (Analyst: Fai Lee; ) AltaGas Income Trust ALA.UN $18.86 $2.66 $2.99 $3.26 $ x 5.8x 5.9x $ % 72.2% $26.50 Outperform Average Enbridge Income Fund ENF.UN $9.00 $0.84 $1.20 $1.17 $ x 7.7x 7.6x $ % 86.0% $10.50 Sector Perform Average Fort Chicago FCE.UN $8.11 $1.14 $1.33 $1.12 $ x 7.2x 6.6x $ % 75.2% $10.50 Sector Perform Above Average Inter Pipeline IPL.UN $8.30 $1.15 $1.29 $1.16 $ x 7.2x 7.8x $ % 65.1% $10.25 Sector Perform Average Keyera KEY.UN $18.07 $2.30 $2.78 $2.78 $ x 6.5x 6.3x $ % 64.7% $22.25 Sector Perform Average Pembina PIF.UN $16.27 $1.43 $1.52 $1.85 $ x 8.8x 8.8x $ % 102.6% $17.25 Sector Perform Average Average 7.3x 7.2x 7.2x 10.8% 77.7% PRICE Normalized EPU P/E Ratio Current Current Payout 1-Year Ticker 23-Oct-08 FY07 FY08E FY09E FY10E FY08E FY09E FY10E Distrib. Yield FY08E Target Recommendation Risk Gaz Métro GZM.UN $14.26 $1.21 $1.24 $1.24 $ x 11.5x 11.5x $ % 100.0% $15.25 Underperform Average Source: RBC Capital Markets estimates, company reports Robert Kwan, CFA 11 Page 113 sur 194

114 ROE Outlook for 2009 October 24, 2008 Target Price Justifications For the majority of the companies we follow, our valuation is weighted toward a yield approach. We believe that when the 10-year Government of Canada bond yield is below 6.0%, income is the primary driver of the valuation for these interest-sensitive stocks. While the fundamentals underlying the companies are important in determining the dividend yield required by investors, the price/earnings multiples must be interpreted cautiously and are not the main factors underlying the companies valuations. The assumptions underlying our yield approach to valuation are set out in Exhibit 9. Exhibit 9: Valuations Dividend Yield Approach Current Price Current Forward Yield (1) Three-year historical spread between 10-year GOC yield and expected yield One-year historical spread between 10- year GOC yield and expected yield Current spread between 10-year GOC yield and Spread used current yield in valuation Required yield used in valuation Forecast Dividend / Distribution (2) Implied Price Target Price Implied 2010E P/E Multiple Canadian Utilities $ % 1.18% 0.69% 0.12% 0.30% 3.70% $1.51 $40.71 $ Enbridge $ % 0.74% 0.48% 0.03% 0.50% 3.50% $1.55 $44.19 $ TransCanada $ % 0.37% -0.04% -0.72% 0.00% 4.00% $1.58 $39.46 $ Fortis $ % 0.80% -0.06% -0.70% -0.75% 4.75% $1.15 $24.19 $ Emera $ % -0.33% -0.63% -1.32% -1.25% 5.25% $1.02 $19.38 $ Average spread 0.55% Current yield on the 10 year GOC bond 3.62% Forecast of 10 year GOC bond yield 4.00% Notes: (1) Represents the expected dividend distributions over the next 12 months (i.e. from October 2008 to October 2009) divided by the current price. (2) Forecast dividend/distribution reflects the prorated allocation of our forecast quarterly dividends over the next 12 months one year from now (i.e. from October 2009 to October 2010). Source: RBC Capital Markets estimates In addition, company-specific factors include the following: AltaGas Income Trust Our target price of $26.50 is consistent with our discounted cash flow analysis, which implies an equity value of between $24.75 and $28.00 per unit based on an unlevered equity discount range of 6.00% to 7.00%. We believe our unlevered equity discount range is appropriate based on expected interest rates and AltaGas risk profile and growth prospects. Impediments to our target price include a material decline in net throughput on the fund s gathering and processing facilities; unexpected costs under its PPA, including costs associated with the implementation of environmental regulations; higher-than-assumed interest rates; and a depressed market for power in Alberta over an extended length of time. ATCO Our target price for ATCO of $42.00 is based on a net asset value (NAV) framework given that its primary asset is its holdings in the publicly traded Canadian Utilities. In calculating our price target, we are reflecting a NAV discount of 18%, which is in line with the estimated average historical discount. A decline in Canadian Utilities actual and/or expected share price would have negative implications for ATCO s NAV and, accordingly, its share price. Atlantic Power Our target price of $8.50 is consistent with our discounted cash flow (DCF) analysis, which implies an equity value between $8.00 and $9.00 per unit based on an unlevered equity discount range of 10% to 11%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Atlantic Power s risk profile and growth prospects. Risks to our price target include, but are not limited to, the following: the availability of cash distributions from entities not controlled by Atlantic Power; the effectiveness of the company s income tax strategy; foreign exchange rates that differ from our assumptions; the attractiveness of future merchant power markets; overall conditions in the income trust market (including the level of interest rates); and the impact of government regulation and litigation on the financial results. 12 Robert Kwan, CFA Page 114 sur 194

115 October 24, 2008 ROE Outlook for 2009 Boralex Inc. Our $16.00 price target is based on a discounted cash flow that models the company s assets that are currently in operation until the end of their useful lives using an unlevered equity discount rate range of 7.50% to 8.50%, which is a 150 basis-point premium to the range we use for Canadian Hydro due to a combination of increased commodity exposure and higher foreign exchange rate risk. Our risk premium is primarily due to the uncontracted nature of a number of the company s assets (i.e., exposure to market prices for RECs, carbon credits, power and wood-residue costs) in addition to significant non-canadian assets. Should markets improve, we believe that there could be an additional $4/share of upside associated with new projects (e.g., Quebec wind, etc.). Impediments to our target price include the ability to win contracts for new projects and to deliver those projects consistent with our expected economics and timeline; long-term wind and hydrological conditions that vary significantly from the long-term averages used in our forecasts; commodity prices (e.g., power, wood residue, RECs and carbon credits) that materially differ from our assumptions; the availability and cost of fuel supply for the wood-residue facilities; foreign exchange rates that materially differ from our forecasts; and the level of 10-year interest rates, which have an impact on our DCF valuation. Boralex Power Our $4.25/unit price target is based on a 45-year discounted cash flow valuation using cash flows until the end of each facility s useful life or the end of their site leases (as applicable). Our discounted cash flow analysis implies an equity value of between $4.00 and $4.50 per unit using an unlevered equity discount rate range of 10% to 11%, which is a 3% premium to the range we use for low-risk power trusts. The discount rate premium is primarily due to the foreign exchange rate risk with respect to the fund s U.S. assets and uncertainty with respect to wood-residue costs and supply availability. Impediments to our price target include hydrological conditions that materially differ from the long-term averages on which our estimates are based; the cost and availability of fuel supply for the wood-residue station; the ability to recontract facilities when their initial contracts expire on terms and conditions consistent with our forecasts; a U.S.-dollar exchange rate that materially differs from our estimate; and variations in the 10-year bond yield that is used in our DCF valuation. Brookfield Infrastructure Partners Our US$22.00 price target is based on our sum-of-the-parts analysis that values each of the partnership s investments separately. From that, we subtract the negative value associated with management and administrative costs and add potential upside value from acquisitions. Our valuation range is US$21.00 per unit to US$27.00 per unit. Impediments to our price target include acquisitions that do not add value or fail to gain the confidence of investors; negative regulatory/legal decisions; an increase in interest rates and/or equity risk premiums; tax issues; and foreign exchange rates impacting the value of non-u.s. dollar generating investments. Canadian Utilities Our target price for Canadian Utilities of $41.00 implies a forward P/E of 12.9x, and a required dividend yield of 3.70% based on a 12-month dividend distribution one year forward of $1.51. A 10 basis-point change in the required dividend yield would affect our price target by approximately $1.00 per share. Factors that could have negative implications for Canadian Utilities earnings and target price include negative regulatory decisions by the Alberta Utilities Commission; depressed prices for power in Alberta over an extended period; an acquisition that fails to gain the confidence of investors; and failure to meet long-term power purchase arrangement obligations. Canadian Hydro Developers Our target price for Canadian Hydro Developers of $5.50 is established using a DCF methodology and represents our estimate of the value of assets that are currently in operation or late-stage construction using a range of unlevered equity discount rates of 6.00% to 7.00%. Should markets improve, we believe there could be an additional $1.75/share of upside associated with new projects (e.g., Dunvegan hydro, etc.). Risks to our price target include, but are not limited to, the following: wind conditions; hydrological conditions; the ability to obtain final regulatory Robert Kwan, CFA 13 Page 115 sur 194

116 ROE Outlook for 2009 October 24, 2008 approvals; actual taxes payable that differ from our forecast taxes; engineering and construction risks associated with building new facilities; unplanned outages resulting in lower than forecast power generation; availability of financing in order to complete planned capital investments; and interest rate and refinancing risk. Emera Our target price for Emera of $19.00 implies a forward P/E of 14.1x, and a required dividend yield of 5.25% based on a 12-month dividend distribution one year forward of $1.02. A 10 basis-point change in the required dividend yield would affect our price target by approximately $0.25 per share. Risks to our earnings estimates and target price include, but are not limited to, the following: the success of business development activities; the completion of the Brunswick Pipeline and actual returns or a risk profile for the pipeline that differs materially from our assumptions; and the impact of future regulatory decisions for NSPI and Bangor Hydro. Enbridge Our target price for Enbridge of $44.00 implies a forward P/E of 18.0x, and a required dividend yield of 3.50% based on a 12-month dividend distribution one year forward of $1.55. A 10 basispoint change in the required dividend yield would affect our price target by approximately $1.25 per share. Our price target is based on the assumption that Enbridge can complete the list of projects that it is pursuing on attractive economic terms and that the company will continue to announce new projects that will help drive future annual EPS growth in the high single digits. The target price further assumes that the company's risk profile does not materially change. Enbridge Income Fund Our target price of $10.50 is consistent with our DCF analysis, which implies an equity value between $9.50 and $11.50 per unit based on an unlevered equity discount range of 6.00% to 7.00%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Enbridge Income Fund s risk profile and growth prospects. Impediments to our target price include: an inability by some or all of the shippers on the Alliance Pipeline to fulfill their obligations under their transportation contracts; an unexpected change in regulation/legislation that adversely affects the operations of Alliance Canada or the Saskatchewan System; an unexpected increase in interest rates; and a material decline in corporate tax rates resulting in lower notional income taxes collected in Alliance Canada s tolls. EPCOR Power Our target price of $18.00 is consistent with our DCF analysis, which implies an equity value between $17.00 and $19.50 per unit based on an unlevered equity discount range of 9% to 10%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and EPCOR Power s risk profile and growth prospects. Impediments to our target price include, but are not limited to, the following: unplanned outages at the company s facilities; the ability of the partnership to secure new power contracts and fuel supplies when the current contracts expire; gas transportation costs; the level of waste heat availability; water flows at the partnership s hydroelectric facilities; foreign exchange rates that differ from our forecast and different interest rates than used in our valuation. Fort Chicago Our target price of $10.50 is consistent with our DCF analysis, which implies an equity value between $9.75 and $11.25 per unit based on an unlevered equity discount range of 6.25% to 7.25%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Fort Chicago s risk profile and growth prospects. Potential impediments to our target price include lower-than-forecast frac spreads; the termination of British Petroleum s agreement with Aux Sable; an unexpected increase in interest rates; a significant decline in the value of the U.S. dollar relative to the Canadian dollar; and an inability by some, or all, of the shippers on the Alliance Pipeline to fulfill their obligations under their transportation contracts. 14 Robert Kwan, CFA Page 116 sur 194

117 October 24, 2008 ROE Outlook for 2009 Fortis Our target price for Fortis of $24.00 implies a forward P/E of 14.7x, and a required dividend yield of 4.75% based on a 12-month dividend distribution one year forward of $1.15. A 10 basis-point change in the required dividend yield would affect our price target by approximately $0.50 per share. The political environment in Belize; the risk of punitive regulatory decisions; economic/tourism conditions in its operating regions; operational or financial issues at newly acquired businesses; and power prices in Ontario could have implications for our target price as well as our earnings and dividend estimates. Gaz Métro Our target price of $15.25 per unit is based on an expected 12-month distribution one year forward of $1.24 and a required yield of 8.1%. We believe that our required yield of 8.1% is appropriate based on expected interest rates and Gaz Métro s growth and risk profile. Our valuation is based on the assumption that Gaz Métro continues to implement its income distribution policy of paying out virtually all of its income to unit holders. Possible target price impediments include negative regulatory rulings; lower-than-forecast normalized volumes; a change in income distribution policy; and interest rate volatility. Great Lakes Hydro Our target price of $18.50 is consistent with our DCF analysis, which implies an equity value between $16.50 and $20.00 per unit based on an unlevered equity discount range of 7% to 8%. We believe our unlevered equity discount range is appropriate based on expected interest rates and Great Lakes Hydro s risk profile and growth prospects. Impediments to our target price include, but are not limited to, the following: foreign exchange rates that differ from our forecast; unplanned outages at the fund s facilities; the ability of the fund to secure various leases, permits, and regulatory approvals upon their expiration on similar terms to those currently in existence; variations in water flows; the ability of the fund to realize higher power prices upon contract expirations; the future ability to maintain income tax efficiency; and different interest rates than used in our valuation. Innergex Power Our price target of $12.00 is supported by our discounted cash flow valuation (range of $11.25 to $13.00 per unit) using an unlevered equity discount rate range of 7% to 8% applied to the cash flows until the expiration of each facility s site permit. Impediments to our target price include, but are not limited to, the following: the ability to secure site leases and permits; unplanned outages at the fund s facilities; variations in water flows; inflation rates that differ from our forecast; differences between our assumptions and the actual results of new contract pricing; the ability to maintain income tax efficiency in the future; and different interest rates than used in our valuation. Inter Pipeline Our target price for Inter Pipeline Fund of $10.25 is consistent with our discounted cash flow analysis, which implies an equity value of between $9.00 and $11.25 per unit based on an unlevered equity discount range of 6.00% to 7.00%. We believe our unlevered equity discount range is appropriate based on expected interest rates and Inter Pipeline's risk profile and growth prospects. Potential impediments to our target price include a material decline in throughput on the conventional oil gathering system where the impact cannot be offset through toll management; an unexpected negative regulatory decision; higher-than-assumed interest rates; and a prolonged decline in crude oil prices or propane-plus extraction margins. Keyera Our target price of $22.25 is consistent with our DCF analysis, which implies an equity value between $20.00 and $24.25 per unit based on an unlevered equity discount range of 6.00% to 7.00%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Keyera s risk profile and growth prospects. Impediments to our target price include depressed margins for the NGL Marketing business; a significant decrease in utilization at Keyera s facilities; and/or a material decline in natural gas prices; and drilling in the WCSB resulting in lower throughput at Keyera s facilities. Robert Kwan, CFA 15 Page 117 sur 194

118 ROE Outlook for 2009 October 24, 2008 Macquarie Power Our target price of $7.00 is consistent with our discounted cash flow analysis for the power assets and a value of $75 million for the 45% Leisureworld investment, which together imply an equity value of between $6.75 and $7.50 per unit. Our DCF for the power assets is based on an unlevered discount rate range of 7% to 8% and uses cash flows for the expected useful lives of each facility. Our Leisureworld valuation is in line with the value ascribed by the fund's affiliate that owns the remaining 55% interest as set out in that affiliate's disclosure documents. Impediments to our target price include, but are not limited to, the following: unplanned outages; the ability of the fund to extend its site lease until the end of the useful life of the Cardinal plant; the ability of the fund to renegotiate its power and gas contracts as they expire or realize market prices similar to our assumptions; gas transportation costs; the level of accretion and investors acceptance of future acquisitions; incentive fees payable not included in our valuation should the fund dispose of assets; distributions that differ from our assumptions; and higher interest rates than are used in our valuation. Northland Power Our target price of $11.50 is consistent with our discounted cash flow analysis, which implies an equity value of between $11.25 and $12.00 per unit based on an unlevered equity discount range of 7% to 8%. We believe our unlevered equity discount range is appropriate based on expected interest rates and Northland Power's risk profile and growth prospects. Impediments to our target price include, but are not limited to, the following: the availability of wind at its facilities; the fund s ability to renegotiate power sales and gas supply agreements upon their expiration; gas transportation costs; unplanned outages at the fund s facilities; foreign exchange rates that differ from our forecast; and higher interest rates than used in our valuation. Pembina Our target price of $17.25 is consistent with our DCF analysis, which implies an equity value between $16.00 and $18.75 per unit based on an unlevered equity discount range of 6.00% to 7.00%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Pembina s risk profile and growth prospects. Potential impediments to our target price include a failure to meet investors growth expectations; a material decline in throughput on the Alberta Pipelines where the impact cannot be offset through toll management; higher-thanassumed interest rates; and any unexpected negative regulatory decision. Primary Energy Our target price of $6.00 is consistent with our DCF analysis, which implies an equity value between $5.75 and $6.50 per unit based on an unlevered equity discount range of 11% to 12%. We believe that our unlevered equity discount range is appropriate based on expected interest rates and Primary Energy s risk profile and growth prospects. Impediments to our price target include, but are not limited to, the following: an unsuccessful auction process; unplanned outages at the company s facilities; the activity levels of the company s steel customers; the ability to renew contracts at similar prices; the effectiveness of the company s income tax strategy; foreign exchange rates that differ from our assumptions; and the overall conditions in the income trust market, including the level of interest rates. TransAlta Our $30.00 price target implies a 7.5x 2010E EBITDA for the base operations plus a $6/share risked upside when the Alberta Power Purchase Arrangements expire in 2017 and The potential upside assumes an $80/MWh net realized power price and a 15% levered equity discount rate. Impediments to our target price include the takeover of the company; valuations for U.S. independent power producers; differences between actual results and our forecasts in the power market; coal costs at the Centralia and Alberta plants; results from trading activities; operational issues; and investors' acceptance of acquisitions and new projects. Note that our risk qualifier for TransAlta is Above Average. 16 Robert Kwan, CFA Page 118 sur 194

119 October 24, 2008 ROE Outlook for 2009 TransCanada Our target price for TransCanada of $40.00 implies a forward P/E of 16.2x, and a required dividend yield of 4.00% based on a forecast 12-month dividend distribution one year forward of $1.58. We estimate that a 10 basis-point change in the required dividend yield would affect our price target by approximately $1.00 per share. There is a risk to our target price from reduced gas flows on the Canadian Mainline in addition to the company investing in new projects that fail to gain the support and confidence of its shareholders. TransCanada also has earnings exposure to power prices and gas prices. Prices that differ from our estimates could cause actual results to be lower than expected. Robert Kwan, CFA 17 Page 119 sur 194

120 ROE Outlook for 2009 October 24, 2008 Required Disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Distribution of Ratings, Firmwide For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three rating categories Buy, Hold/Neutral, or Sell regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Dissemination of Research and Short-Term Trading Calls RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. RBC Capital Markets also provides eligible clients with access to a database which may contain Short-Term trading calls on certain of the subject companies for which it currently provides equity research coverage. The database may be accessed via the following hyperlink The information regarding Short-Term trading calls accessible through the database does not constitute a research report. These Short-Term trading calls are not formal ratings and reflect the research analyst's views with respect to market and trading events in the coming days or weeks and, as such, may differ from the price targets and recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company. Thus, it is possible that a subject company's common equity that is considered a long-term 'sector perform' or even an 'underperform' might be a Short-Term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'outperform' could be considered susceptible to a Short-Term downward price correction. 18 Robert Kwan, CFA Page 120 sur 194

121 October 24, 2008 ROE Outlook for 2009 Conflicts Disclosures RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Important Disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Robert Kwan, CFA 19 Page 121 sur 194

122 Additional Disclosures RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. 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123 Equity Research Company Update December 17, 2008 Stock Rating: Sector Outperformer Sector Weighting: Overweight mo. Price Target $48.00 ENB-TSX (12/16/08) $39.70 Key Indices: Toronto, S&P/TSX Yr. EPS Gr. Rate (E) NM 52-week Range $33.10-$46.27 Shares Outstanding 361.0M Float 361.0M Shrs Avg. Daily Trading Vol. 585,692 Market Capitalization $14,331.7M Dividend/Div Yield $1.48 / 3.7% Fiscal Year Ends December Book Value $16.76 per Shr 2008 ROE (E) 12.1% LT Debt $9,707.8M Preferred $125.00M Common Equity $6,051.5M Convertible Available No Earnings Per Share Prev Current 2008 $1.88E 2009 $2.25E 2010 $2.50E P/E x x x Pipelines, Utilities, & Power Enbridge Inc. A Hard Look At Enbridge's Valuation Investors are struggling to understand Enbridge's valuation and its top-ofthe-s&p/tsx 60 stock performance in recent months despite a credit market meltdown, a collapse in oil prices, and the sudden, significant and ongoing postponement of oil sands projects. In this report, we take a hard look at Enbridge's valuation. We utilize a Dividend Discount Model to study Enbridge's value sensitivity to two key variables: 1) the time it takes to bring post-2012 WAVE 2 liquids pipelines projects into service; and, 2) the equity discount rate. Variable 1 is relevant to understanding how lower oil prices and significant oil project deferrals might impact Enbridge's long-term EPS growth and its value. Variable 2 considers likely Enbridge valuations under panic conditions at one extreme, and completely normal conditions at the other. Key takeaways: 1) An explanation for why Enbridge has significantly outperformed in recent months; 2) An assessment of value and current risk/reward; 3) Suggested tactics for adding to long-term core positions; and, 4) What to watch for ahead of a potentially higher share price. Stock Price Performance Dividend Per Share 2008 $1.32E 2009 $1.48E 2010 $1.66E Yield % % % Company Description Enbridge Inc. is a North American pipeline, midstream and natural gas distribution company. Petro Panarites, CFA 1 (416) Petro.Panarites@cibc.ca Osvaldo Matias, CFA 1 (416) Osvaldo.Matias@cibc.ca Source: Reuters All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) and cibcwm.com Page 123 sur 194

124 A Hard Look At Enbridge's Valuation - December 17, 2008 Table of Contents Introduction... 3 Kicking The Tires On Enbridge s Valuation... 3 Scenarios Defined By Duration Of WAVE 2 In-service Dates... 3 Scenarios Defined By Varying Equity Discount Rates... 4 DDM Structure And Assumptions... 5 Period To Period From 2013 To WAVE 2 Completion Date (Variable)... 5 Period Beyond WAVE 2 Completion... 6 DDM Results And Discussion... 7 Dividend And Earnings Profiles Under Various WAVE 2 Durations... 7 DDM Values Derived Under The Various Scenarios... 8 Some Observations... 8 Conclusions Price Target Calculation Key Risks To Price Target Appendix: DDM Model Summary Page 124 sur 194

125 A Hard Look At Enbridge's Valuation - December 17, 2008 Introduction Kicking The Tires On Enbridge s Valuation Many investors are contemplating Enbridge s (ENB-SO) valuation in light of one of the best stock performances in the S&P/TSX 60 in recent months even as oil prices have collapsed. Recent postponement of oil sands projects in Northern Alberta, along with seizure of the credit markets, raises obvious questions about Enbridge s earnings growth post Specifically, investors wonder about the impact of a potential delay within the roughly $17.5 billion WAVE 2 pipeline project portfolio that Enbridge has identified as the major source of longer-term EPS growth post In this report we develop a rudimentary (but effective) dividend discount valuation model (DDM) for Enbridge, and use it to investigate the likely impact of varying degrees of WAVE 2 postponement on Enbridge s value. In addition we investigate Enbridge s value sensitivity to a range of equity discount rates defined by logical extremes, in a market environment that likes to test extremes. Scenarios Defined By Duration Of WAVE 2 In-service Dates In June 2008, the Canadian Association of Petroleum Producers (CAPP) released its annual crude oil forecast, calling for Western Canadian crude production to increase (in its Moderate Growth Case ) from 2.4 million barrels per day (Bbls/d) in 2007, to 2.7 million Bbls/d in 2010, 3.8 million Bbls/d in 2015 and 4.4 million Bbls/d in For , these forecasts ranged between 200,000 Bbls/d 300,000 Bbls/d lower than forecasts in the prior year, as rapidly rising project costs resulted in moderating project development expectations, even as oil prices in June 2008 approached all time highs above US$140/Bbl (Exhibit 1). Since June, oil prices have plunged to below US$50/Bbl, while credit markets have seized up, prompting sponsors of the majority of pre-construction oil sands developments to announce some degree of deferral, and fueling anticipation that CAPP will once again downgrade its official Western Canadian production forecast. On December 16, CAPP released an interim update to its forecast, which calls for an additional 300,000 Bbls/d-400,000 Bbls/d reduction in the outer years from its June 2008 forecasts. Exhibit 1. CAPP Western Canadian Crude Oil Production Forecast (Mlns. Bbls/d) June 2007 Forecast June 2008 Forecast December 2008 Revised Forecast Source: CAPP 3 Page 125 sur 194

126 A Hard Look At Enbridge's Valuation - December 17, 2008 When we plot the three forecasts onto a single chart (Exhibit 2), we see that the December forecast curve generally anticipates a 3-5 year deferral of production expectations compared with the June 2007 peak forecast. Exhibit 2. Lower Production Forecast Reflects 3-5 Year Deferral 5.0 June 2007 Forecast 4.5 June 2008 Forecast 4.0 December 2008 Revised Forecast Millions Bbls/d year deferal year deferal Source: CAPP and CIBC World Markets Inc. With the downward trend in forecasts in mind, in our analysis we have chosen to vary the range of duration assumed for completion of Enbridge s share of WAVE 2 projects from five years ( , best case) to 15 years ( ), the latter consistent with a 10-year production deferral from peak forecasts, which at this point continues to represent a conservative assumption in the context of CAPP s revised December 2008 forecast. Scenarios Defined By Varying Equity Discount Rates The other important variable that we examine in this analysis is the discount rate, in light of extremely volatile equity risk premiums in the current market environment. Specifically, three equity discount rate scenarios have been reviewed: 6.5%: This represents the rosiest scenario, implying a risk-free rate assumption of 4% (today s 30-year GOC bond yield is actually 3.75%, so it is not as aggressive as it could be), a historical market risk premium of 5% and a beta of 0.5 (typically considered for pipeline & utilities companies). We call this a rosy case because it presumes a return to normal risk premiums, while GOC bond yields stay at current historical lows. It does not consider the significant increase (perhaps temporary) in equity risk premiums that may be inferred in today s markets, which have seen corporate bond yield spreads widen by close to 350 bps in recent months from long-term averages. Moreover, the case also does not consider the mitigating (negative) effect on valuations of likely higher GOC bond yields in the event of some future easing of credit conditions and decline in equity risk premiums towards historical averages. 4 Page 126 sur 194

127 A Hard Look At Enbridge's Valuation - December 17, %: At the other extreme (the extreme bad case), a discount rate of 10% merely represents the best case discount rate of 6.5% to which we have added 350 bps in incremental equity risk premium, as inferred by the recent widening in A -rated corporate bond spreads. Note that we have already concluded that the recent widening of corporate bond spreads likely over-represents the appropriate widening of equity risk premiums for a number of factors unique to the corporate bond market particularly during liquidity crises. These factors have been discussed in greater detail in our recent report: What Is The Corporate Bond Market Telling Us? Stock Valuations In The Context Of Abnormal Credit Spreads (November 25, 2008). Perhaps the most important factor in this regard is the comparative illiquidity in the corporate bond market (and corresponding incremental return required by investors), which is only enhanced during periods of severe illiquidity in the broader capital markets; today s level of corporate bond spreads more likely reflect deteriorating business fundamentals and solvency on the part of lenders rather than on the part of borrowers. 8%: Our middle-of-the-road, or reasonable case at 8% is indicative of a discount rate that is both somewhere in the middle of the two extremes defined above, and likely indicative of a reasonable intermediate-term expectation for the concurrence of the following: o o Credit spreads (and equity risk premiums) to ease back to more normal levels, partially mitigated by, Risk-free bond yields to move higher off of current recessiondepressed levels. DDM Structure And Assumptions A detailed presentation of our model has been provided in the Appendix, along with assumptions, and results for the various scenarios that we have investigated. The model is divided into three distinct time periods. Period To 2012 EPS growth for the period to 2012 is to be driven by the completion and incremental contribution from WAVE 1 projects, the remainder of which are expected to come into service as scheduled between now and 2012 regardless of oil price variability. Enbridge has secured the commercial terms for these projects with producers, and as a result has been able to provide hard guidance for 10%+ EPS growth between 2009 and Our EPS and dividend forecasts for the period to 2012 are consistent with the low end of this guidance (10%). Period From 2013 To WAVE 2 Completion Date (Variable) The second period defined by the model is the post-2012 timeframe during which Enbridge is expected to complete its share of WAVE 2 investment projects (note that the $17.5 billion of identified opportunities are unrisked, meaning that it is open to Enbridge s competitors). While management anticipates that all projects currently in the WAVE 2 portfolio will ultimately proceed, it is reasonable to expect a level of deferment beyond the five-year ( ) best case scenario for completion that might otherwise be achieved in an environment characterized by US$140/Bbl+ WTI, receptive capital markets, and ample supplies of materials and labour. 5 Page 127 sur 194

128 A Hard Look At Enbridge's Valuation - December 17, 2008 Our scenarios range from the best case five-year duration to 15 years for Enbridge to bring WAVE 2 projects into service. The latter timeframe is consistent with a 10-year deferral from peak Western Canadian production forecasts. We have already characterized this timeframe as conservative in the context of CAPP s most recently revised production forecasts. Other notable assumptions for the WAVE 2 period include the following: Enbridge s Fair Share Of WAVE 2: We have assumed that Enbridge is able to win 70% of WAVE 2 opportunities (or $12.25 billion), consistent with its current share of Western Canadian takeaway pipeline capacity. 12% ROE: We have assumed a 12% after-tax, un-levered ROE, which is a typical hurdle rate (and typically achieved) for Enbridge. 100% External Financing: For the sake of model simplicity, we have assumed that Enbridge finances 100% of its share of WAVE 2 with new debt and equity in a 60/40 ratio. We have assumed a 6% debt financing cost (consistent with a conservative long-term assumption for 4.5% government bond yields and 150 bps A -rated corporate bond spreads). Equity funding for WAVE 2 has been assumed to take place at a stock price amounting to a normal 20x 2012E EPS (conservative because it uses 2012 as a base for valuation for equity funding that takes place between 2013 and the end of the WAVE 2 completion). 100% Payout Ratio: Consistent with the assumption of 100% WAVE 2 financing with new debt and equity is a 100% dividend payout ratio for the period post Zero Growth In Enbridge s Other Segments: Given that the WAVE 2 portfolio is comprised exclusively of liquids pipeline projects, and that these projects are assumed to be the sole drivers of post-2012 EPS growth in all of our scenarios, we are by implication assuming zero growth in Enbridge s other segments (Gas Pipelines, Gas Distribution and Services, Sponsored Investments, and International), which is quite clearly a conservative assumption. Period Beyond WAVE 2 Completion For the perpetual period following completion of Enbridge s WAVE 2 projects (the start of which varies with each WAVE 2 duration scenario), we have assumed a dividend growth rate of 0% and payout ratio of 100% in order to determine terminal values. 6 Page 128 sur 194

129 A Hard Look At Enbridge's Valuation - December 17, 2008 DDM Results And Discussion Dividend And Earnings Profiles Under Various WAVE 2 Durations Exhibits 3 and 4 present Enbridge s earnings and dividends profiles, respectively, under varying post-2012 durations for WAVE 2 in-service dates. In each case, the end-of-wave 2 EPS forecast amounts to $5.06/share, which is reached at a different point in time under each scenario. Exhibit 3. EPS Profiles Under Varying WAVE 2 Deferral Scenarios Earnings Per Share EPS STREAM - 5 YRS For Wave 2 ( ) EPS STREAM - 7 YRS For Wave 2 ( ) EPS STREAM - 9 YRS For Wave 2 ( ) EPS STREAM - 15 YRS For Wave 2 ( ) Wave 2 Investments In-Service Post Source: Company reports and CIBC World Markets Inc. Exhibit 4. Dividend Profiles Under Varying WAVE 2 Deferral Scenarios Dividends Per Share DIVIDEND STREAM - 5 YRS For Wave 2 ( ) DIVIDEND STREAM - 7 YRS For Wave 2 ( ) DIVIDEND STREAM - 9 YRS For Wave 2 ( ) DIVIDEND STREAM - 15 YRS For Wave 2 ( ) Wave 2 Investments In-Service Post 2012 Source: Company reports and CIBC World Markets Inc. 7 Page 129 sur 194

130 A Hard Look At Enbridge's Valuation - December 17, 2008 DDM Values Derived Under The Various Scenarios Exhibits 5 and 6 present the DDM values derived from the dividend discount model under the various WAVE 2 deferral scenarios and under various discount rates. Exhibit 5. DDM Values Under Various Scenarios WAVE 2 Duration Of In-Service Schedule Post 2012 Discount Rate 5 Years 7 Years 9 Years 15 Years 6.5% $63.57 $62.32 $61.17 $ % $49.57 $48.45 $47.43 $ % $37.65 $36.68 $35.82 $33.76 Source: Company reports and CIBC World Markets Inc. Exhibit 6. DDM Values Under Various Scenarios $70.00 $60.00 Discount Rate (Equity) = 6.5% $50.00 DDM Value $40.00 $30.00 Discount Rate (Equity) = 8.0% Discount Rate (Equity) = 10.0% $20.00 $10.00 $ Duration of WAVE 2 In-Service Post-2012 (Years) Source: Company reports and CIBC World Markets Inc. Some Observations We would make the following observations regarding the derived values presented in Exhibits 5 and 6: 8% Discount Rate Valuations In The Mid $40s To $50: The values derived under the 8% discount rate scenario ranged from around $45 to $50. We would use these values to represent a reasonable intermediate target for Enbridge, under the assumption that the credit market conditions eventually ease from their current extraordinary state. 10% Discount Rate Valuations In The Low To High $30s: We would view the $34 to $38 range defined by the 10% equity discount rate scenario as representative of panic illiquidity-induced lows, 8 Page 130 sur 194

131 A Hard Look At Enbridge's Valuation - December 17, 2008 consistent with market conditions that have, at times, prevailed in recent weeks. The best parallel to the 10% equity discount rate is the A credit corporate bond spread, which in recent weeks has widened by 350 bps to historical highs and has become completely disjointed from its historical relationship to GOC bond yields. This extraordinary situation is in our view is more indicative of the willingness and ability of lenders to lend, rather than the deterioration of business fundamentals and solvency on the part of borrowers, especially in the case of Pipelines and Utilities borrowers who enjoy generally defensive attributes and relative earning/dividends stability compared with other sectors of the economy. Panic valuation scenarios in the case of Pipelines & Utilities should be exploited opportunistically to add to long-term core positions. 6.5% Discount Rate Valuations In The High $50s To Low $60s: The 6.5% discount rate scenario that yields values ranging from $58 to $64, is the scenario under which broader market conditions take the most favourable (and in our view, unlikely) route in which credit conditions ease to normal, while at the same time government bond yields stay at or near current historical lows. Tactically, we would not bet too heavily on this scenario unfolding, but nevertheless keep it in mind as we look for breaks in present market gridlock. Investors should recall that Enbridge s $47 price high reached during the spring of 2008 represented a P/2009E (at the time) of 21x. Subsequently, despite deteriorating broader economic/market fundamentals and stock valuations, Enbridge s earnings forecasts have trended higher. Our own 2009E EPS forecast for Enbridge has risen from $2.10 in the spring of 2008 to $2.25 currently, while our forecast for 2010 currently stands at $2.50. At 21x our current 2010 EPS forecast, Enbridge s implied value would be around $53. The point to be made here is that there is quite a bit riding on the state of general market liquidity; and when liquidity returns to normal, the rally in Enbridge s stock is likely to be both quick and steep. The Discount Rate Matters Considerably More To The Stock Price Than The Length Of The Deferral Of WAVE 2 Projects: In the context of scenarios that we have defined in this analysis as reasonable extremes (from today s crisis-defined vantage point), it appears that reasonable variation in the discount rate is likely to be more material to Enbridge s stock price than reasonable variation in the length of time (post 2012) it takes for WAVE 2 projects to come into service. A range in the WAVE 2 duration assumption from five to 15 years typically resulted in a value range for Enbridge amounting to only 12% of the current stock price. In contrast a range in equity discount rates between 6.5% and 10% resulted in a value range amounting to 60% of the current stock price. 9 Page 131 sur 194

132 A Hard Look At Enbridge's Valuation - December 17, 2008 Conclusions Key takeaways from our analysis of Enbridge valuations include the following: Explaining Enbridge s Comparatively Strong Performance Against The Broader Market: The fact that Enbridge s stock price has remained firm (as have other pipeline & utilities companies) in the face of steep declines in the broader market reflects in part a reduction in comparative risk for pipelines & utilities earnings streams during times of crisis. Regulated/contractual aspects of large components of pipelines & utilities earnings streams protect reasonable equity returns in the long-term from external shocks (contractual protection exists, often, to both ensure the sustenance of an essential service and to prevent monopoly profits). In contrast, other sectors in general do not enjoy such long-term earnings protection, and without this protection, difficulties encountered by firms during times of crisis tend to compound; negatively impacted earnings lead to financing difficulties, which in turn negatively impact earnings. Consequently, we would reasonably expect an enhanced valuation multiple for companies like Enbridge against the broader market during times of crisis, when the risk of external shocks is generally highest. In this market, downside earnings protection is critical to placing valuations in their appropriate context. Attractive Risk/Reward: Despite a strong recent performance and an apparently high relative valuation when compared to the broader market, our analysis yields considerable upside in Enbridge upon the ultimate return to normal market conditions (normal equity risk premiums and discount rates), even under considerably stressed scenarios for WAVE 2. In the interim, strong comparative EPS resilience provides relative protection against a protracted capital markets crisis. Tactics: Our analysis has identified lower (and logically unreasonable) valuation extremes in the low-to-mid $30s that we would consider highly opportunistic entry points from a longer-term standpoint. The current environment benefits longer-term investors, in that volatility may give rise to a relatively frequent occurrence of such entry points. Watch Closely For A Turn In The Credit Markets: To the extent that they are a proxy for the state of capital market conditions, corporate bond spreads should be watched closely for any sign of easing, in that this would indicate the potential for stock valuations (and equity risk premiums) to return to normal. Watch Closely How Western Canadian Oil Production Forecasts Develop: We have characterized our 15-year duration scenario for WAVE 2 project completion as the bad case. It will be critical to watch developments in the oil patch to confirm the bad case on an ongoing basis. In conclusion, we would suggest that in the current crisis environment, for as long as it remains in place, traditional notions of valuation - cheap or pricy will continue to be severely tested. This is because both risk and the price of risk have gone up in recent months in the broader market context. Failure to accommodate this into considerations of the relative value and investment merit of individual investments will, in our view, lead to costly mistakes. 10 Page 132 sur 194

133 A Hard Look At Enbridge's Valuation - December 17, 2008 Price Target Calculation Our price target of $48 is based upon a 19x 2010E EPS multiple (at the top end of the Pipelines and Utilities group) and is supported by the DDM analysis covered in this report. Key Risks To Price Target Enbridge could fall short of our earnings forecasts (and fail to meet our price target) for various reasons, including the impact of negative regulatory decisions, unforeseen weakness in energy prices, and environmental expenditures to the extent that they are not efficiently passed on through higher rates. Growing competition in the oil pipelines business introduces downward pressure on returns on both existing and new oil pipeline assets. Increased competition for pipeline and utility assets by financial players also raises risks to returns on prospective acquisitions. The pipelines and utilities sector as a whole is sensitive to changes in Canadian interest rates. 11 Page 133 sur 194

134 A Hard Look At Enbridge's Valuation - December 17, 2008 Appendix: DDM Model Summary Exhibit 7. Key Model Assumptions Assumptions Notes EPS CAGR 10% Company guidance is for 10%+ EPS growth for EPS A / Payout Ratio $ % Actual 2008 EPS E / Payout Ratio $ % Current estimate 2009 EPS E / Payout Ratio $ % Current estimate 2010 EPS E / Payout Ratio $ % Current estimate 2011 EPS E / Payout Ratio $ % EPS imputed from LOW END of company growth guidance 2012 EPS E / Payout Ratio $ % EPS imputed from LOW END of company growth guidance WAVE 2 Assumptions (Post 2012) WAVE 2 Total Investment Opportunity ($million) $17,500 Total unrisked opportunity as identified by Enbridge WAVE 2 Enbridge's Fair Share (%) 70% Proportional to Enbridge's share of Western Canadian takeaway capacity WAVE 2 Enbridge's Fair Share ($millions) $12,250 WAVE 2 Unlevered After-Tax ROE 12.0% Enbridge's typical hurdle rate WAVE 2 Interest Cost 6.0% WAVE 2 Tax Rate 33% WAVE 2 External Funding Proportion 100% For the sake of simplicity we are assuming 100% external funding of WAVE 2 WAVE 2 Debt Funding Proportion 60% WAVE 2 Equity Funding Proportion 40% Assumed Share Price Issue P/E On 2012E EPS 20x funding assumption driven off of 2012 EPS valuation (conservative) WAVE 2 Payout Ratio 100% 100% funding assumption consistent with 100% payout ratio Terminal Dividend Growth Rate 0% Dividend Discount Rate Assumptions Risk Free Rate (30 Year GOC Bond) 4.0% Beta 0.50 Normal Market Risk Premium 5.0% Rosy Cost Of Equity Scenario 6.5% Normal credit environment + Low GOC Bond Yields Mid Range Cost Of Equity 8.0% Middle of the Road Credit Crisis Cost Of Equity 10.0% Panic conditions (worst case, temporary) 350 bps over the "normal" discount rate Spread over Normal Cost Of Equity 3.5% Roughly equivalent to 'A' corporate bond spreads currently Source: Company reports and CIBC World Markets Inc. Exhibit 8. Determining EPS Post WAVE 2 WAVE 2 Incremental Earnings ($millions) W AVE 2 Cumulative Enbridge's Share of WAVE 2 Opportunities $12,250 Hurdle Rate (Unlevered After Tax ROE) 12.0% Incremental Unlevered Earnings - After Tax $1,470 Incremental Unlevered Earnings - Pre Tax $2,194 Incremental Interest Expense -$441 Incremental EBIT $1,753 Incremental Tax -$578 Incremental Earnings $1,175 WAVE 2 Cumulative EPS Impact ($millions) Total Earnings 2012 $1,108 Incremental Earnings WAVE 2 $1,175 Total Earnings Post WAVE 2 $2,283 Total Current Shares Outstanding (millions) $357.4 Total 2012 Shares Outstanding 2012 (post $600 million equity financing) (millions) $369.4 Total Shares O/S (post WAVE 2 financing) (millions) $451.0 EPS Post WAVE 2 ($/share) $5.06 Source: Company reports and CIBC World Markets Inc. 12 Page 134 sur 194

135 A Hard Look At Enbridge's Valuation - December 17, 2008 Exhibit 9. DDM Scenario Summary And Resulting DDM Values WAVE 2 Duration Of In-Service Schedule Post 2012 (Years) 5 yr 7 yr 9 yr 15 yr EPS And Dividend Streams Through WAVE 2 EPS Dividend EPS Dividend EPS Dividend EPS Dividend 2009 $2.25 $1.48 $2.25 $1.48 $2.25 $1.48 $2.25 $ $2.51 $1.65 $2.51 $1.65 $2.51 $1.65 $2.51 $ $2.76 $1.81 $2.76 $1.81 $2.76 $1.81 $2.76 $ $3.00 $1.97 $3.00 $1.97 $3.00 $1.97 $3.00 $ $3.41 $3.41 $3.29 $3.29 $3.23 $3.23 $3.14 $ $3.82 $3.82 $3.59 $3.59 $3.46 $3.46 $3.27 $ $4.24 $4.24 $3.88 $3.88 $3.69 $3.69 $3.41 $ $4.65 $4.65 $4.18 $4.18 $3.92 $3.92 $3.55 $ $5.06 $5.06 $4.47 $4.47 $4.14 $4.14 $3.69 $ $4.77 $4.77 $4.37 $4.37 $3.82 $ $5.06 $5.06 $4.60 $4.60 $3.96 $ $4.83 $4.83 $4.10 $ $5.06 $5.06 $4.24 $ $4.37 $ $4.51 $ $4.65 $ $4.79 $ $4.92 $ $5.06 $5.06 PV Dividend Streams Through WAVE 2 6.5% Discount Rate $19.40 $23.37 $26.83 $ % Discount Rate $17.92 $21.32 $24.17 $ % Discount Rate $16.19 $18.94 $21.16 $25.49 Terminal Values P = (terminal dividend) (discount rate - terminal growth rate) Terminal Value Year Terminal Value 6.5% Discount Rate $77.86 $77.86 $77.86 $77.86 Terminal Value 8% Discount Rate $63.26 $63.26 $63.26 $63.26 Terminal Value 10% Discount Rate $50.61 $50.61 $50.61 $50.61 PV Terminal Value 6.5% Discount Rate $44.17 $38.95 $34.34 $23.53 PV Terminal Value 8% Discount Rate $31.65 $27.13 $23.26 $14.66 PV Terminal Value 10% Discount Rate $21.46 $17.74 $14.66 $8.28 DDM Values DDM Value 6.5% Discount Rate $63.57 $62.32 $61.17 $58.21 DDM Value 8% Discount Rate $49.57 $48.45 $47.43 $44.91 DDM Value 10% Discount Rate $37.65 $36.68 $35.82 $33.76 Source: Company reports and CIBC World Markets Inc. 13 Page 135 sur 194

136 A Hard Look At Enbridge's Valuation - December 17, 2008 Our EPS estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2008 Current $0.67A $0.42A $0.24A $0.56E $1.88E 2009 Current $2.25E 2010 Current $2.50E 14 Page 136 sur 194

137 A Hard Look At Enbridge's Valuation - December 17, 2008 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Enbridge Inc. (ENB) 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from Enbridge Inc. in the next 3 months. 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Enbridge Inc. in the next 3 months. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by Enbridge Inc. 15 Page 137 sur 194

138 A Hard Look At Enbridge's Valuation - December 17, 2008 CIBC World Markets Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS' RECOMMENDATIONS FOR ENBRIDGE INC. (ENB) Date Change Type Closing Price Rating Price Target Coverage 10/19/ SP Matthew Akman 01/08/ SP Matthew Akman 01/16/ R - Matthew Akman 02/02/ SP Matthew Akman 05/03/ SP Matthew Akman 09/18/ SO Matthew Akman 01/07/ SO Alda Pavao, CFA 05/08/ SO Alda Pavao, CFA 05/19/ SO Petro Panarites, CFA 11/06/ SO Petro Panarites, CFA 12/03/ SO Petro Panarites, CFA 16 Page 138 sur 194

139 A Hard Look At Enbridge's Valuation - December 17, 2008 CIBC World Markets' Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets' Coverage Universe (as of 17 Dec 2008) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted % Restricted % Ratings Distribution: Pipelines, Utilities, & Power Coverage Universe (as of 17 Dec 2008) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) 0 0.0% Sector Underperformer (Sell) 0 0.0% Restricted % Restricted % Pipelines, Utilities, & Power Sector includes the following tickers: ACO.X, CU, EMA, ENB, FTS, SE, TA, TRP. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IIROC Rule 3400, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 17 Page 139 sur 194

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141 CANADA 23 February 2009 Company Rating Target Enbridge Inc. Outperform $46.00 TransCanada Corp. Neutral $37.00 Spectra Energy Corp. (US$) R ATCO Neutral $45.00 Canadian Utilities Neutral $45.00 Emera Inc. Neutral $21.00 Fortis Inc. Neutral $25.00 TransAlta Outperform $31.00 Canadian Hydro Developers, Inc. Outperform $4.50 Boralex Inc. Outperform $15.00 Innergex Renewable Energy Inc. Underperform $6.50 Algonquin Power Income Fund Outperform $4.00 AltaGas Income Trust Neutral $16.00 EPCOR Power L.P. Neutral $20.00 Innergex Power Income Fund Neutral $12.60 Northland Power Income Fund Outperform $12.00 Source: Macquarie Research, February 2009 Matthew Akman (416) matthew.akman@macquarie.com Jose Alitagtag (416) jose.alitagtag@macquarie.com Gilbert Chan, CFA (416) gilbert.chan@macquarie.com Lillian Rowlatt (416) lillian.rowlatt@macquarie.com Canadian energy infrastructure ROE formula may finally bite the dust (All figures in CAD unless otherwise noted) Event Canada s 14-year-old regulated ROE formula for pipelines and utilities across the country is starting to show cracks. It served the industry well for years, but its key point of attraction a simple and direct link to the government benchmark bond yield is now its downfall. Government bond yields now bear little resemblance to any private company s actual cost of capital. Impact Canada s pipeline and utility companies have been unsuccessfully challenging the regulated ROE formula for years. TransCanada took the matter all the way to the Federal Court of Appeal in 2003, but its proposed weighted average cost of capital approach (so-called ATWACC) was shot down. The utilities are back at it this year before the National Energy Board (NEB) and the Alberta Utilities Commission (AUC). Their timing might be better this time around. Canadian regulated utility companies have argued for years that their US peers have higher regulated ROEs. Our analysis of the North American Macquarie coverage universe supports that claim. More importantly, the required coupon on new debt for a BBB+ or A- infrastructure company in Canada is now in line with the after-tax, regulated ROE (about 8.4%). This convergence of the market cost of debt and the regulated ROE is completely inconsistent with the long-held principle that regulated ROEs should be comparable to returns on investments of similar risk. A decision on TransCanada s recent ROE challenge at the NEB could be released by the end of next month and could establish a precedent for the AUC and other regulators across Canada. We believe Canadian regulators will feel pressure to change the ROE formula. In the absence of any change, the formula could kick out an ROE of about 8.0% for 2010, unless government bond yields rise. Any change would likely be positive for the stocks. Action and recommendation We recommend owning Canadian energy infrastructure stocks in Dividend paying stocks generally outperform over the long term and should serve investors well, especially in today s market conditions. An increase in the allowed ROE would enable the companies to continue growing earnings and dividends while other sectors shrink during the recession. Stocks that could benefit most from an increase in the allowed return are Fortis, TransCanada, Canadian Utilities, ATCO and Enbridge. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website Page 141 sur 194

142 Macquarie Research Equities - Flyer Canadian energy infrastructure ROE formula served Canada well for 15 years now it s time for a change Establishing allowed returns for regulated utilities is important work with a rich history involving some of the brightest financial minds in the land. But that doesn t mean it isn t dead boring. So, in an effort to make our point quickly and effectively, we will limit our review of Canadian regulatory history to the landmark National Energy Board decision delivered in March 1995, which established the formula adjustment mechanism in the first place. Without getting into all the machinations behind the landmark regulatory decision in RH-2-94, suffice to say the NEB established the equity risk premium as the primary ROE methodology in Canada. It also introduced an annual automatic adjustment mechanism based on changes in forecast long-term Government of Canada bond yields. In particular, the formula sets next year s allowed ROE as last year s level plus or minus 75% of the annual change in forecast long bond yields. As these yields have dropped, so has the allowed ROE. Fig 1 NEB benchmark Canadian ROE trend Return on Equity (%) E Note: 2010 estimate is the ROE calculated using current 10 yr, 30 yr government bond yields. Source: National Energy Board, Macquarie Research, February 2009 As recently as one year ago, we argued in a public speech at the annual meeting of Canadian regulatory tribunals (CAMPUT) that the ROE formula was working, and no fundamental change was needed. Financial market conditions since that time have forced a lot of people to re-evaluate a lot of things so it should not come as a total surprise that we have conveniently changed our mind. But the formula did work well on many fronts for many years. It reduced regulatory costs and uncertainty, because it was automatic. Moreover, the companies, their customers and their investors prospered under it. Pipeline and utility valuation multiples went up, the companies became more efficient, their debt and equity financings got done, and their dividends grew. Everything worked because pipeline and utility valuations were so highly correlated with the government bond yield. The market established utility costs of equity capital benchmarked off of the Government of Canada bond yield, so it made sense for regulators to follow suit. Over the past year, though, the correlation has broken down. 23 February Page 142 sur 194

143 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 2 Canadian pipeline & utility dividend yields relative to government bond yields 200% 160% In Canada, the stocks were tightly correlated with govt bonds no longer. Relative Yield 120% 80% 40% 0% Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Relative Yield to 10yr Govt Yield Relative Yield to Corp Bonds Note: Relative yield to government bonds calculated as the average Canadian Pipes & Utes dividend yield divided by the Canadian government 10yr yield. Relative yield to corporate bonds calculated as the average Canadian Pipes & Utes dividend yield divided by the Baa corporate bond yield. Source: Macquarie Research, February 2009 Utility equity valuations globally have become more correlated with utility bond yields, and less correlated with government bonds. As spreads between government and corporate bonds have widened, the correlations with government bonds have broken down. In Canada, utility stocks appear to be correlated with both government and corporate bonds. In the US, they appear to be much more tightly correlated with corporate bonds and show very little correlation with government bonds. Fig 3 US pipeline & utility dividend yields relative to government bond yields 250% Relative Yield 200% 150% 100% In the U.S., it appears the stocks were never consistently correlated with government bonds. 50% 0% Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Relative Yield to 10yr Gov't Yield Relative Yield to Corp Bonds Note: Relative yield to government notes calculated as the average US Utility dividend yield divided by the U.S. government 10yr yield. Relative yield to corporate bonds calculated as the average US Utility dividend yield divided by the Baa corporate bond yield. Source: Macquarie Research, February February Page 143 sur 194

144 Macquarie Research Equities - Flyer Canadian energy infrastructure Equity investors have noted the divergence in correlations. In past years, when government bond yields went down, utility stocks went up. Last year, the opposite happened. In fact, Canadian valuation multiples have significantly contracted over the past two years. Utility stocks have outperformed the broader market (not a difficult benchmark to beat last year) but have largely depreciated in absolute value: P/E multiples have dropped by about four points. Fig 4 Key regulated utility stock price performance 20% 15% 10% 5% Price change (%) 0% -5% -10% -15% -20% -25% -30% -35% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Canadian Utilities Ltd. Emera Inc. Enbridge Inc. Fortis Inc. TransCanada Corp. Source: Macquarie Research, February 2009 Fig 5 Key regulated utility P/E trends Forward P/E Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Canadian Utilities Ltd. Emera Inc. Enbridge Inc. Fortis Inc. TransCanada Corp. Source: Macquarie Research, February February Page 144 sur 194

145 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 7 Softening of valuation multiples is not in itself enough to justify a change in the allowed ROE. The NEB established criteria for a fair return in its RH decision, summarized as follows. Comparable to like-risk investments. Maintain company s financial integrity. Permit capital attraction. Just because P/E multiples have contracted does not mean the companies cannot attract capital. In fact, indications are that markets are still responsive to utility equity issuance. TransCanada issued over $2.3bn of common equity last year, and Fortis issued $300m. The discounts on these issues were steep by recent historical standards for utilities, but were much smaller than the discounts on equity issued recently by companies in other industry sectors. But there are ominous signs equity issuance is getting a lot more difficult, and the terms are getting much tougher. Most of the equity issuance in 2008 was done at modest discounts except for the banks (figure 6). In 2009, however, discounts have widened, and most stocks including the utilities are trading well below the already-discounted issue prices. Given investor experience of late, one has to assume that at some point new equity issuance on reasonable terms will become significantly constrained. Fig 6 Sector equity issues in , and the average discount Total Proceeds Weighted Average Sector ($bln) Discount Metals and Mining $ % Energy $ % Financials and Business Services $ % Industrials and Manufacturing, Infrastructure $ % Medical and Computer $ % Other $ % Source: Macquarie Research, February 2009 Select equity issues in , and price performance to date Price Announcement Proceeds Share Price Current Performance Company Date ($bln) Issue Price Prior Discount Share Price from Issue Price Royal Bank of Canada 08-Dec-08 $2.3 $35.25 $ % $ % Silver Wheaton Corp. 31-Jan-08 $1.6 $14.50 $ % $ % Canadian Imperial Bank of Commerce 14-Jan-08 $1.5 $62.75 $ % $ % Canadian Imperial Bank of Commerce 14-Jan-08 $1.4 $67.05 $ % $ % The Toronto-Dominion Bank 24-Nov-08 $1.4 $39.50 $ % $ % TransCanada Corporation 05-May-08 $1.3 $36.50 $ % $ % ING Canada Inc. 03-Feb-09 $1.3 $26.35 $ % $ % TransCanada Corporation 17-Nov-08 $1.2 $33.00 $ % $ % Manulife Financial Corporation 02-Dec-08 $2.3 $19.40 $ % $ % Bank of Montreal 15-Dec-08 $1.0 $30.00 $ % $ % ING Canada Inc. 03-Feb-09 $0.9 $25.00 $ % $ % Great-West Lifeco Inc. 09-Dec-08 $0.6 $20.75 $ % $ % Canadian Pacific Railway Limited 27-Jan-09 $0.5 $36.75 $ % $ % Fortis Inc. 02-Dec-08 $0.3 $25.65 $ % $ % AltaGas Income Trust 29-May-08 $0.1 $26.20 $ % $ % AltaGas Income Trust 27-Jan-09 $0.1 $16.50 $ % $ % Source: Macquarie Research, February 2009 Lack of comparability between allowed utility ROEs and returns on similar investments is driving the emerging capital access problem. In support of the argument the comparability criterion is not being met, utility customers and their expert witnesses like to point out that allowed returns for U.S. utilities are considerably higher than allowed returns in Canada. No matter how we slice the data, we concur with this opinion. Macquarie covers electric and gas utilities across the US, and we find regulated ROEs are generally in the range of % on allowed equity ratios of %. Contrast these returns to Canada, where allowed ROEs are now about 8.75%, and equity ratios are generally %. 23 February Page 145 sur 194

146 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 8 Allowed returns in Canada vs US utilities in Macquarie s coverage universe Return on Equity (%) 15% 14% 13% 12% 11% 10% 9% 8% 7% SO - Alabama PGN - Carolinas SO - Mississippi DUK - Carolinas (South) PCG PGN - Florida SO - Gulf TE - Tampa Electric SO - Georgia DUK - Carolinas (North) NS Pow er ATCO Electric Distrtibution Maritime Electric DUK - Indiana TRP Alberta System FortisAlberta TRP Canadian Mainline Nfld Pow er ATCO Electric FortisBC BC Gas ATCO Pipelines ATCO Gas Distribution Transmission ENB Gas Distribution 6% 5% 30% 35% 40% 45% 50% 55% 60% Common Equity / Total Capitalization (%) Source: Macquarie Research, February 2009 Canadian Utilities U.S. utilities The Canadian returns are closer to the US returns on an achieved basis. Performance-based regulation is the norm in Canada, and the utilities generally earn at least 50bp above the allowed return. The utilities Macquarie follows in the US tend not to consistently earn a significant premium above their allowed returns. Achieved returns in Canada are therefore closer to allowed and achieved returns in the US. Fig 9 Achieved returns in Canada vs US utilities in Macquarie s coverage universe Return on Equity (%) 15% 14% 13% 12% 11% 10% 9% 8% 7% SO - Alabama PGN - Carolinas SO - Mississippi DUK - Carolinas (South) SO - Gulf PCG PGN - Florida Maritime Electric TE - Tampa Electric SO - Georgia FortisAlberta NS Pow er TRP Canadian Mainline DUK - Carolinas (North) ATCO Electric TRP Alberta System ATCO Pipelines DUK - Indiana Transmission BC Gas ATCO Gas Distribution FortisBC Nfld Pow er ENB Gas Distribution ATCO Electric Distrtibution 6% 5% 30% 35% 40% 45% 50% 55% 60% Common Equity / Total Capitalization (%) Canadian Utilities Source: SNL, Macquarie Research, February 2009 U.S. utilities 23 February Page 146 sur 194

147 Macquarie Research Equities - Flyer Canadian energy infrastructure That Canadian utilities often earn more than the regulated return is interesting but not necessarily relevant. It may just mean that performance-based regulation is working for both customers and shareholders. It may also mean the regulators in Canada are doing an inferior job of holding companies to their allowed returns. But even if that is the case, it is a separate issue from the validity of the current ROE formula and whether it generates a fair return. If a widening gap that between equity returns for like utility companies in Canada and the US is not convincing evidence that the ROE formula is in violation of the comparability criterion, then perhaps a narrowing gap that between the cost of equity and debt for companies in Canada is. The cost of debt for Canadian regulated pipeline and utility companies has marched steadily higher over the past twelve months. As recently as November 2008, high-quality credits like Enbridge were still issuing 10-year debt at around 6.6%. More recently, Fortis issued pure regulated utility debt out of its Alberta subsidiary at 7.1%, and TransCanada despite its A- credit rating issued corporate debt, albeit for 30 years, at 8.1%. Fig 10 Recent debt issuance by regulated Canadian pipeline and utility companies Company Amount of Debt Date issued Duration (yrs) Rate Canadian Utilities Ltd. C$200 million debentures issued by CU Inc. May % C$125 million debentures issued by CU Inc. May % Emera Inc. C$150 million re-opened Series T Medium Term Notes issued by NS Pow er Inc. Dec % C$50 million re-opened Series T Medium Term Notes issued by NS Pow er Inc. Jan % Enbridge Inc. C$200 million debt issuance by Enbridge Gas Distribution. Nov % C$300 million debt issuance by Enbridge Pipelines Inc. Nov % Fortis Inc. C$250 million debentures issued by Terasen Gas (Vancouver Island) Inc. Feb % C$100 million debentures issued by FortisAlberta. Apr % C$60 million bonds issued by Maritime Electric. Apr % C$250 million debentures issued by Terasen Gas Inc. May % C$100 million debentures issued by FortisAlberta. Feb % TransCanada Corp. US$750 million Senior Notes. Jan % US$1.25 billion Senior Notes. Jan % C$300 million debt issuance. Feb % C$400 million debt issuance. Feb % Source: Macquarie Research, February 2009 It is nonsensical, in our view, that a regulator could argue that the cost of equity (which would be only 8.0% based on the formula and where government bonds are trading today) and cost of debt before tax should be equal. This outcome would clearly violate the comparability criterion unless the effective corporate income tax rate was very high or the equity risk premium was much lower than ever in memorable history. Regulators will want to maintain the status quo, because it is easy and it has worked. But when faced with current market conditions, we believe they will change the formula, or at least allow for new discretion to alter the formula outcome in times of financial market turmoil. Several of the companies in our Canadian coverage universe stand to feel the impact of any change (or not) in the allowed ROE. 23 February Page 147 sur 194

148 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 11 Business segments exposed to changes in the allowed return formula AUC regulated company Segment AltaGas AltaLink ATCO ENMAX EPCOR Fortis TransCanada Other utilities 1 EPCOR Energy Alberta ENMAX Energy Direct Energy Regulated Services NEB regulated company TransCanada Enbridge AltaGas Utilities (Distribution) AltaLink Management (Electricity Transmission) ATCO Electric (Distribution and Transmission), ATCO Gas (Distribution), ATCO Pipelines (Gas Transmission) ENMAX Power (Electricity Distribution and Transmission) EPCOR Distribution and Transmission (Electricity) FortisAlberta (Electricity Distribution) NOVA Gas Transmission Ltd. EPCOR Energy Alberta (Regulated Retail Electricity) ENMAX Energy (Regulated Retail Electricity) Direct Energy Regulated Services (Regulated Retail Electricity and Gas) Segment TQM, Mainline, NOVA 2, Foothills ENB System, Clipper, Southern Access 1 The AUC also identified other utilities, aside from those above: City of Lethbridge Electricity Distribution, City of Red Deer Electricity Distribution, and various investor-owned AUC-regulated water utilities. 2 Subject to jurisdiction change from AUC. Source: Macquarie Research, February 2009 The trend toward deregulation and negotiated tolls has reduced company exposure to changes in the allowed ROE. But these trends have not eliminated exposure. In fact, a 50bp change in the allowed ROE assuming it applies at the federal level and at all provincial levels of government, and not just Alberta would materially impact our EPS estimates for Fortis, TransCanada, CU, ATCO and Enbridge. We leave Emera out of the analysis, because there is no formula in Nova Scotia. Fig 12 EPS sensitivity of Canadian utility companies to changes in the allowed ROE Company Systems EPS Impact Relative to 50bp Move ATCO Ltd. ATCO Electric Transmission and Distribution; ATCO Gas Distribution; ATCO Pipelines $0.07 Canadian Utilities Ltd. ATCO Electric Transmission and Distribution; ATCO Gas Distribution; ATCO Pipelines $0.07 Enbridge Inc. Enbridge Gas Distribution; Enbridge System; Alberta Clipper; Southern Access $0.05 Fortis Inc. FortisAlberta; FortisBC; BC Gas; Maritime Electric; New foundland Pow er $0.07 TransCanada Corp. Canadian Mainline; Alberta System $0.04 Source: Macquarie Research, February February Page 148 sur 194

149 Macquarie Research Equities - Flyer Canadian energy infrastructure Debate around Canada s regulated returns for pipelines and utilities should be resolved this year. TransCanada s TQM Pipeline decision could be delivered by the end of next month. The Alberta Utilities Commission s generic return proceeding should resolved by year-end. We believe the outcomes of these two proceedings will guide regulators across the rest of Canada. For the first time in years, the Canadian pipeline and utility industry has a lot at stake in the regulatory review of allowed returns. For now, our forecasts imply no change in the nominal allowed return for next year. If regulators fail to change the formula ROE, there is significant downside in our earnings estimates that could negatively impact valuation and capital access on reasonable terms. Upside in the allowed return could re-affirm the companies as one of the few safe havens of earnings and dividend stability in an otherwise chaotic equity market environment. If logic prevails among regulatory authorities, the latter outcome is more likely, in our opinion. That is one of the reasons why we are maintaining our relatively positive stance on the Canadian energy infrastructure stocks as a place to hide while turbulence prevails in the broader market. 23 February Page 149 sur 194

150 Macquarie Research Equities - Flyer Canadian energy infrastructure Appendix 1 National Energy Board TQM 2007 and 2008 Cost of Capital Application Timetable Event Date TQM files 2007 and 2008 Cost of Capital 17 December 2007 Application NEB acknowledges the TQM application and 22 January 2008 decides to convene an oral public hearing Oral public hearing held 23 September October 2008 Decision expected 1H09 Source: NEB website, Macquarie Research 1 TQM acknowledged that the unusual length of time between the Application and the hearing was due to NEB s determination that a longer-than-normal hearing process was required, due to the complexity of the issue. Key issues identified TQM requests the following from the NEB. 1. A review and variance of the NEB decision for the years in which the ROE was set at 8.46% for 2007, and 8.71% for 2008, both on 30% equity. 2. An approval of: an 11% return on a 40% deemed equity component, or application of the formula rate of 8.46% for 2007 but using a 60% equity thickness; and application the formula rate of 8.71% for 2008 but on a 57.5% equity thickness, or an after-tax WACC of 6.7%. Potential parties impacted Company/Business Group TransCanada Enbridge Source : Macquarie Research, February Subject to jurisdiction change from AUC System TQM, Mainline, NOVA 2, Foothills ENB System, Clipper, Southern Access 23 February Page 150 sur 194

151 Macquarie Research Equities - Flyer Canadian energy infrastructure Appendix 2 Alberta Utilities Commission Generic Cost of Capital Proceedings Timetable Event Date AUC issues Notice of the Generic Cost of 21 February 2008 Capital, Preliminary Questions Proceeding Final Scoping Documents and Final Minimum 4 September 2008 Filing Request issued Evidences and Information received 9 October February 2009 Commission-initiated hearings schedule 19 May June 2009 Decision expected 2H09 Source: AUC website, Macquarie Research 1 July 2008 documents initially showed a schedule of 23 February 2009, but the AUC website informs that the hearings are scheduled for May-June 2009 Key issues identified 1. Does the Generic Cost of Capital Adjustment Formula determined by the EUB in the GCC Decision continue to yield a fair ROE? 2. Should the capital structures for all applicable utilities be addressed on a generic basis? Potential parties impacted Business Group Utilities specifically affected, per AUC AltaGas Company (System) AltaGas Utilities (Distribution) AltaLink ATCO ENMAX EPCOR Fortis TransCanada Other utilities, per AUC 2 EPCOR Energy Alberta ENMAX Energy Direct Energy Regulated Services AltaLink Management (Electricity Transmission) ATCO Electric (Distribution and Transmission), ATCO Gas (Distribution), ATCO Pipelines (Gas Transmission) ENMAX Power (Electricity Distribution and Transmission) EPCOR Distribution and Transmission (Electricity) Fortis Alberta (Electricity Distribution) NOVA Gas Transmission Ltd. EPCOR Energy Alberta (Regulated Retail Electricity) ENMAX Energy (Regulated Retail Electricity) Direct Energy Regulated Services (Regulated Retail Electricity and Gas) Source: AUC Notice of (Commission Initiated) Application and Hearing, Application No , 25 July The AUC also identified other utilities: City of Lethbridge Electricity Distribution, City of Red Deer Electricity Distribution, and various investor-owned AUC-regulated water utilities 23 February Page 151 sur 194

152 Macquarie Research Equities - Flyer Canadian energy infrastructure Appendix 3 Fig 13 Summary position of TQM and intervenors (NEB) Main position Business risk Adequcy of returns and returns relative to other (Canadian) pipelines Returns relative to US pipelines Changes in the environment since the 1994 decision Impact on customers Trans Québec & Maritime Pipeline Inc (TQM) Three options: 1) 11% return on a 40% deemed equity or 2) The formula rates of 8.46% for 2007, and 8.71% for 2008, but applied to ~60% equity thickness, or 3) After Tax WACC of 6.7%. Risk has risen since NEB approved higher equity for other pipelines. Risks include competition from electricity in Quebec, Gaz Metro's dominance, gas usage risk, Becancour plant shutdown, Portland Nat-Gas Transmission's LNG access, competition for WCSB supply from new lines. TQM has been getting lower returns than other Canadian pipelines. TQM quotes expert opinion to argue that comparisons between TQM and US interstate pipelines (which get higher ROEs) and local distribution companies are appropriate and relevant, and that allowed returns on capital for TQM have been lower than those for similar risk. Canadian Association of Petroleum Producers (CAPP) ROE formula continues to be an appropriate method, and produces a more-than-fair ROE. Accepts the expert view to increase common equity ratio to 32% based on comparisons with Alberta transmission operators and the EUB's 2003 decision on AltaLink. Canadian regulatory approach reduces the utility's business and investment risk. The ability to apply for depreciation rate changes reduces the risk to long term capital recovery. TQM's business risk has not increased since 1994, and may even be lower. Cost of capital is being met, since investors continue to invest. The pipeline may only collect its cost, including the embedded cost of debt and the opportunity cost of equity. Pipelines that can step out of the cost-of-service box and make tradeoffs are rewarded with higher return. US regulatory approach is unsafe for a utility. TQM's bond ratings are at a level that a US pipeline or utility would not enjoy. Investors care about the differences between Canadian and US regulation. NEB already ruled out US benchmarks on the argument now used by TQM. Financial market and economic TQM is magnifying the risks changes have passed since of long-term capital recovery 1994, such that the ROE under that, objectively, are not the allowed capital structure and materially greater than they formula does not generate a fair were in return. Jurisprudence dictates that the ROE is determined by the cost of capital, and the impact of toll increases on customers is another matter. The cost-of-service principle states that the ratepayer must pay the cost. Canadian Gas Association (CGA) ROE formula returns no longer comparable to those enjoyed by investments of similar risk. Equity Risk Premium or CAPM approach alone cannot ensure a comparable return. Actual comparisons should be made; overall returns must be comparable to be fair. Risk of Canadian vs. US utilities unchanged since US utilities have not become significantly riskier, Canadian utilities have not become significantly less risky than Current formula used to offer comparable returns, but NEB should stop relying on the formula and exercise its judgment so that overall return is increased by 2 3% to restore comparable returns. Many recent settlements have returns well above those in the 1994 formula. Enormous gap has developed between the returns enjoyed by Canadian and US utilities, ie, Canadian utilities relative to TQM and to US utilities in the intervening 14 years. Canadian and American utilities companies are engaged in similar undertakings. Circumstances have overcome the 1994 formula's ability to produce fair returns. Common carriers are not to be regarded as philanthropists. Industrial Gas Users Association (IGUA) Deny any application for an increase in equity component beyond 32%. Formula ROE is at the high end of possible appropriate ROEs, relative to the very nominal risks TQM bears. All changes to business risk since 1994 have been reductions. TransCanada is the sole shipper on TQM, and this dilutes TQM's high unit cost, providing the company with a high degree of assurance that its costs will be recovered. If TransCanada stops investing in TQM, then others would, so the returns are adequate. Each settlement is contextual, and one cannot infer anything from it. TQM's concern about recovery of capital invested over the life of the pipeline is addressed by depreciation adjustments. Differences in Canadian vs. US regimes are real: The economies are not the same; fiscal policies are not the same. These are manifested recently by the Canadian economy not being as vulnerable as the US system to the current credit crisis. When all the changes are pulled together, on balance there is probably a reduction in business risk, ie, this year (2008) to 1994, the risks are the same. Ministry of Energy, Ontario (Ontario) Rejects TQM's 2007 and 2008 cost of capital application. Current ROE method should be retained; the ATWACC method should be dismissed. Allowing actual cost of debt in its revenue requirement for recovery from customers is standard, and should be granted. Contests claims of increased business risks: changes in Quebec are cutting the risks to nat-gas, no financial risk from Becancour and LNG terminals, nat-gas pipelines are lower risks than oil and not comparable; less reliance on WCSB; Alliance Pipeline did not raise TQM's risk. TQM can attract capital as a standalone firm on favourable terms with the existing ROE framework; neither does it have credit rating difficulties. Wrong to compare TQM ROE with returns from negotiated settlements. US pipelines are not comparable to Canadian. Differences in regulation. High level of financial risk for US pipelines, including shipper bankruptcy, relatively infrequent rate cases, underutilization, construction cost overrun, discounted/negotiated rates. Substantially addressed in the Business Risk section above. Source: NEB website, Macquarie Research, February February Page 152 sur 194

153 Macquarie Research Equities - Flyer Canadian energy infrastructure Appendix 4 Fig 14 Summary position of utilities and intervenors (AUC) Main position Credit rating and cashraising capacity Allowed returns to equity vs bond returns Risks against what the Formula assumes Capital markets changes Validity of comparability with US Returns and common equity ratios vs. peers ROE, equity ratios requested ATCO utilities (Gas, Pipelines, Electric) The old formula is broken, returns on equity for Alberta utilities must be substantially increased. AltaLink Formula does not produce a fair return, and is unlikely to do so in the future. The period precluding a formula review and the range of ROEs should not be fixed. Credit rating under the Credit rating is at risk of Formula would not be downgrade, which would "A". Credit downgrade push tariffs up. Would be will seriously affect cashraising ability in a period AESO's directions to unable to reject/postpone of capex growth. raise capex. Insufficient funds would lead to default. ATCO in 2004 submitted evidence in support of a higher ROE. Even if the 2004 decision were fair, the premium of ROE over bond returns has eroded. Gas business risk is unchanged since Lower risk from proposed weather deferral account is offset by the cost recovery risks from declining customer usage. Since 2005, Canadian bond market has not been just domestic. Cross-border utility comparisons are common. Global capital markets require higher financial parameters. Need ROE at ~11.5% to restore its premium over debt to 2004 levels. ERP has to exceed 4.27%. US regulators normally cut the allowed ROE by <50bp (not 75bp) when the benchmark yield drops 1%. EPCOR (EDTI & EEAI) and Fortis Alberta Inc Current ROE formula will not provide a fair return in An adjustment formula can be recalibrated to produce a 2009 fair return, but unsure that it would work for future years. US regulators normally reduce the allowed ROE by <50bp when the YTM on long-term government bonds falls by 100bp. Canadian utility investors need a higher ERP than the 4.27% implied by the Formula. Risk of cashflow shortfall Volatility of returns on is higher than Risk of returns on utility stocks now equal to or greater than market, so the ERP must be higher than implied by the Formula. Canadian utility stocks now equal to or greater than that on the market index, so the ERP must be higher than the Formula implies. Cost if equity may fall by 50bp for every 100bp drop in the YTM on long Canada bonds, not 75bp. The forward-looking required ERP is ~6.9%, which is higher than the Formula's 4.27%. The Formula produces a lower ROE estimate at a time when the increased risks of volatile economic and capital market conditions are causing capital costs to increase dramatically. Cross-border Financial risk of US peers is less than that of Alberta comparison among utilities. Business risk of EDTI, EEAI, FortisAlberta, and utilities is more common. AltaLink may be slightly less than the average business S&P compares AltaLink, risk of US utilities because (1) many US electric utilities Hydro One, TransAlta are integrated and (2) in some cases, Canadian regulators Corp, and Ontario Power make more use of deferral accounts than US. Generation with US Comparable utilities have higher allowed equity ratio. companies. Investors have greater access to international investments, including US, than pre Allowed equity ratios of other utilities, used to set the deemed equity ratio of Alberta utilities, are materially higher. Pipelines, 12% ROE and 43% equity. Gas, 11% ROE and 40% equity. Transmission, 10.5% ROE and 38% equity. Distribution, 10.6% ROE and 40% equity. The allowed overall rate of return for this utility is significantly less than the overall return that investors can earn in other investments of similar risk. The average cost of equity obtained from using risk premium and DCF methods is 11.2% 2009 ROE of 11%, deemed equity of 38%, premised on a required premium of utility stocks over bonds of %. EPCOR: ROE of 11%, and equity of 40% for Transmission, 44% for Distribution and 42% for RRT Provider FortisAlberta: ROE of 11%, equity 44%. ENMAX Power (EPC) NOVA Gas Transmission Ltd (NGTL) The adjustment formula is flawed ROE formula would not in design, and the flaws worsen result in a fair ROE. No over time. Re-evaluate it to allow significant project has been a fair ROE. proposed in the last decade on the Formula. No position yet as to whether AUC should set a generic ROE. Higher equity components for EPC Distribution/Transmission, are needed due to several business risks. Since 2004, NEB raised TCPL Mainlines' equity ratio and passed a TCPL settlement at 40% equity; OEB allowed higher equity for Toronto Hydro, Hydro One. 11% ROE on 44% equity for Distribution and 40% equity for Transmission. AUC should not ask a regulated entity to attract capital at 8.75% on 35% equity, when alternative investments of similar risk can make higher returns. There have been changes in business risk. Returns for NGTL are lower than those of other Canadian pipelines, and its business risk has increased since 2003 and Changes in capital markets and the cost of capital, investors' views of the Formula mean that NGTL's requested return is consistent with financial market conditions. Global capital markets and the continental nature of pipelines make US comparison relevant. Allowed returns for NGTL have been lower than those for similar risk. Negotiated returns are indicative of market, and thus relevant. Recent settlements for regulated pipelines have higher ROE than the Formula. ROE of 11%, equity component of 40%, or a different combination of ROE and deemed equity that is equivalent to ATWACC of 6.75%. Intervenors Retain the formula. It offers a fair, if not generous, return. Canadian utilities are in a good position to benefit from a "flight to quality" by investors. No evidence of material, systematic risk increases affecting all utilities. Some think the Formula reduced the risk profile of utilities. Short-term capital market conditions should not be a reason to change the long-term cost of equity. US risks, including regulatory risk, are higher. Higher negotiated ROEs on some pipelines are the result of much give and take. Source: AUC website, Macquarie Research, February February Page 153 sur 194

154 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 15 Comparative valuation of Canadian and US pipeline, utility and power generation companies Analyst / Price 52-Week Range Earnings Per Share P/E Ratios '09E P/E Rel. Dividend Payout Target Total Company Ticker Rating 02/20/09 High Low E 2009E 2010E E 2009E 2010E to Group Rate Yield 2009E Price Return North American Pipelines Enbridge Inc. ENB MA / O $40.21 $46.27 $33.10 $1.79 $1.88 $2.25 $ $ % 65.8% $ % TransCanada Corp. TRP MA / N $31.97 $40.71 $29.42 $2.09 $2.33 $2.25 $ $ % 67.6% $ % Spectra Energy Corp (US$) SE R $13.09 $29.18 $13.14 $1.53 $ $ % Williams (US$) WMB Not rated $11.59 $40.75 $11.69 $1.72 $2.16 $1.48 $ $ % 29.7% - - North American Pipelines Average % 54.4% Canadian Power & Utilities ATCO ACO.X MA / N $34.71 $54.40 $32.51 $3.75 $4.57 $4.10 $ $ % 24.4% $ % Canadian Utilities CU MA / N $38.03 $48.11 $33.11 $2.74 $3.18 $3.10 $ $ % 45.5% $ % Caribbean Utilities (US$) CUP.U Not rated $8.99 $12.59 $6.10 $0.87 $0.77 $0.82 $ $ % 80.5% - - Emera Inc. EMA MA / N $19.87 $23.78 $18.06 $1.26 $1.34 $1.40 $ $ % 72.1% $ % Fortis FTS MA / N $23.51 $29.94 $20.70 $1.35 $1.61 $1.55 $ $ % 67.1% $ % Canadian Hydro Developers, Inc. KHD MA / O $2.58 $6.58 $2.01 $0.06 $0.05 $0.16 $ $ % 0.0% $ % Boralex Inc. BLX MA / O $7.89 $18.79 $5.06 $0.66 $0.60 $0.70 $ $ % 0.0% $ % Innergex Renew able Energy Inc. INE MA / U $3.55 $11.60 $2.60 $1.52 nm $0.26 $ nm $ % 0.0% $ % TransAlta Corp. TA MA / O $19.20 $38.10 $18.92 $1.31 $1.46 $1.65 $ $ % 70.3% $ % Canadian Power & Utilities Average % 40.0% Energy Infrastructure Trusts Algonquin Pow er Income Fund* APF.UN MA / O $2.54 $8.28 $1.76 $0.34 $0.45 $0.49 $ $ % - $ % AltaGas Income Trust* ALA.UN MA / N $13.95 $27.50 $13.50 $1.87 $2.13 $1.84 $ $ % - $ % EPCOR Power L.P.* EP.UN MA / N $16.51 $24.70 $15.50 $2.26 $0.94 $1.03 $ $ % - $ % Innergex Pow er Income Fund* IEF.UN MA / N $9.20 $13.23 $8.00 $0.47 $0.39 $0.49 $ $ % - $ % Northland Pow er Income Fund* NPI.UN MA / O $10.08 $13.50 $8.45 $0.59 $0.98 $0.70 $ $ % - $ % Energy Infrastructure Trusts Average % U.S. Utilities(US$) American Electric Pow er AEP Not rated $29.46 $45.95 $25.54 $3.00 $3.17 $3.24 $ $ % 50.6% - - Consolidated Edison ED Not rated $37.54 $46.39 $34.11 $3.45 $3.00 $3.19 $ $ % 73.9% - - Dominion Resources D AS / O $31.69 $48.50 $31.26 $1.47 $3.16 $3.24 $ $ % 48.7% $ % Duke Energy DUK MD / N $14.16 $19.20 $13.50 $1.25 $1.22 $1.27 $ $ % 72.7% $ % Exelon EXC AS / O $47.94 $92.13 $41.23 $4.32 $4.20 $4.16 $ $ % 50.5% $ % FPL Group FPL AS / O $48.99 $68.98 $33.81 $3.49 $3.84 $4.01 $ $ % 44.4% $ % NiSource NI Not rated $8.70 $18.80 $8.79 $1.37 $1.23 $1.20 $ $ % 76.7% - - PPL Corp. PPL Not rated $28.80 $54.00 $26.84 $2.60 $2.07 $1.86 $ $ % 72.0% - - U.S. Utilities Average % 61.2% M erchant Generation(US$) Dynegy DYN AS / N $1.28 $9.92 $1.28 $0.15 $0.10 $0.05 $ $ % 0.0% $ % Mirant Corp. MIR AS / N $13.92 $42.21 $11.99 $1.56 $2.16 $2.91 $ $ % 0.0% $ % NRG Energy NRG AS / O $19.80 $45.78 $14.39 $1.58 $1.20 $1.95 $ $ % 0.0% $ % Reliant Energy RRI AS / N $4.08 $28.06 $2.77 $1.04 $0.32 $0.30 $ $ % 0.0% $ % M erchant Generation Average % 0.0% Notes: Estimates are from Macquarie Capital with the exception of those companies that are not rated (sources: Company reports, Thomson, Bloomberg). Analysts: Matthew Akman (MA), Angie Storozynski (AS), Marc De Croisset (MD). Rating: Outperform (O), Neutral (N), Underperform (U). Figures for Canadian companies in C$; figures for U.S. companies in US$. EPS estimates for Caribbean Utilities are for the period ending April 30th the follow ing year. *For trusts, Earnings per share are based on units and dividends equate to distribution. Source: Macquarie Research, February February Page 154 sur 194

155 Macquarie Research Equities - Flyer Canadian energy infrastructure Fig 16 Comparative valuation of Canadian and US pipeline, utility and power generation companies Shares Outst. MC Inst. 52-Week % change Cash Flow Per Share P/CF Ratios Book Price/ ROE Debt to % Unreg. EV/'10E Company (mil) ($bil) Ow ners High Low E 2009E 2010E E 2009E 2010E Value Book 2008E Cap 08E EBIT EBITDA North American Pipelines Enbridge Inc $ % -13% 21% $3.82 $3.89 $4.44 $ $ % 66.6% 20.0% 8.3 TransCanada Corp $ % -21% 9% $4.95 $5.31 $4.81 $ $ % 60.3% 40.0% 8.6 Spectra Energy Corp (US$) $8.0 14% -55% 0% $2.32 $ $ % 64.5% - Williams (US$) $6.7 77% -72% -1% $ $ % 55.4% North American Pipelines Average % 61.7% 30.0% 6.9 Canadian Power & Utilities ATCO Ltd $2.0 43% -36% 7% $8.08 $9.13 $8.74 $ $ % 63.2% 35.0% 6.1 Canadian Utilities $4.8 15% -21% 15% $5.78 $6.42 $6.42 $ $ % 49.7% 36.0% 6.3 Caribbean Utilities (US$) 28.0 $0.3 2% -29% 47% $ $ % 50.3% 0.0% 8.3 Emera Inc $2.2 16% -16% 10% $3.27 $2.83 $3.05 $ $ % 59.3% 10.0% 8.3 Fortis Inc $4.0 25% -21% 14% $3.56 $3.95 $3.91 $ $ % 59.8% 30.0% 9.3 Canadian Hydro Developers $0.4 71% -61% 28% $0.18 $0.22 $0.46 $ $ % 59.4% 100.0% 7.6 Boralex Inc $0.3 43% -58% 56% $1.51 $1.64 $1.82 $ $ % 33.9% 100.0% 4.1 Innergex Renew able Energy Inc $0.1 57% -69% 37% $1.61 nm $0.51 $ nm $ nm 28.4% 100.0% 6.6 TransAlta Corp $3.8 60% -50% 1% $3.86 $4.17 $4.11 $ $ % 52.8% 100.0% 6.0 Canadian Power & Utilities Average % 50.8% 56.8% 7.0 Energy Infrastructure Trusts Algonquin Pow er Income Fund* 77.3 $0.2 27% -69% 44% $0.95 $0.85 $0.86 $ $ % 56.2% AltaGas Income Trust* 77.5 $1.1 59% -49% 3% $2.72 $3.10 $2.75 $ $ % 37.5% EPCOR Power L.P.* 53.9 $0.9 14% -33% 7% $2.79 $2.35 $2.55 $ $ % 41.8% Innergex Pow er Income Fund* 29.4 $0.3 59% -30% 15% $0.99 $1.11 $1.20 $ $ % 51.6% Northland Pow er Income Fund* 62.4 $0.6 49% -25% 19% $1.28 $1.23 $1.28 $ $ % 25.3% Energy Infrastructure Trusts Average % 42.5% 7.9 U.S. Utilities(US$) American Electric Pow er $ % -36% 15% $ $ % 60.6% Consolidated Edison $ % -19% 10% $ $ % 48.5% Dominion Resources $ % -35% 1% $2.67 $4.94 $5.36 $ $ % 61.3% Duke Energy 1,260.0 $ % -26% 5% $2.55 $2.48 $2.60 $ $ % 41.2% Exelon $ % -48% 16% $6.57 $6.67 $6.75 $ $ % 53.8% FPL Group $ % -29% 45% $6.64 $7.26 $7.93 $ $ % 59.4% NiSource $2.4 73% -54% -1% $ $ % 59.9% PPL Corp $ % -47% 7% $ $ % 57.6% U.S. Utilities Average % 55.3% 6.2 M erchant Generation(US$) Dynegy $1.1 82% -87% -14% $0.59 $0.52 $0.51 $ $ nm 57.5% 100.0% 6.7 Mirant Corp $2.2 80% -67% 16% $2.03 $2.78 $3.93 $ $ nm 44.3% 100.0% 3.5 NRG Energy $5.5 81% -57% 38% $3.75 $5.22 $4.97 $ $ nm 55.4% 100.0% 5.7 Reliant Energy $1.4 78% -85% 47% $2.24 $1.28 $1.62 $ $ nm 40.6% 100.0% 3.9 M erchant Generation Average nm 49.4% 100.0% 4.9 Notes: Estimates are from Macquarie Capital with the exception of those companies that are not rated (sources: Company reports, Thomson, Bloomberg). Figures for Canadian companies in C$; figures for U.S. companies in US$. For those companies not rated, ROE figures are actuals for the most recent fiscal Year. EPS estimates for Caribbean Utilities are for the period ending April 30th the follow ing year. *For trusts, cash flow per share represents distributable cash flow per share, w hich is net of maintenance expense. Source: Macquarie Research, February February Page 155 sur 194

156 Macquarie Research Equities - Flyer Canadian energy infrastructure Important disclosures: Recommendation definitions Macquarie Australia/New Zealand Outperform return >5% in excess of benchmark return (>2.5% in excess for listed property trusts) Neutral return within 5% of benchmark return (within 2.5% for listed property trusts) Underperform return >5% below benchmark return (>2.5% below for listed property trusts) Macquarie Asia Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie USA Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Volatility index definitions* This is calculated from the volatility of historical price movements. Very high highest risk stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendation proportions For quarter ending 31 December 2008 AU/NZ Asia RSA USA CA EUR Outperform 38.55% 50.61% 64.52% 53.13% 65.55% 43.00% Neutral 41.82% 15.92% 25.81% 40.63% 27.73% 48.00% Underperform 19.64% 33.47% 9.68% 6.25% 6.72% 9.00% Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). 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The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. 23 February Page 156 sur 194

157 Macquarie Research Equities - Flyer Canadian energy infrastructure Other Disclaimers: In Canada, securities research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and to US persons and any person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. Securities research is issued and distributed by Macquarie Capital Securities (Australia) Ltd (AFSL No ) in Australia, a participating organisation of the Australian Securities Exchange; Macquarie Capital Securities (NZ) Ltd in New Zealand, a licensed sharebroker and New Zealand Exchange Firm; Macquarie Capital (Europe) Ltd in the United Kingdom, which is authorised and regulated by the Financial Services Authority (No ); Macquarie Capital Securities Ltd in Hong Kong, which is licensed and regulated by the Securities and Futures Commission; Macquarie Capital Securities (Japan) Limited in Japan, a member of the Tokyo Stock Exchange, Inc., Osaka Securities Exchange Co. Ltd, and Jasdaq Securities Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau(kin-sho) No. 231, a member of Japan securities Dealers Association and Financial Futures Association of Japan); Macquarie First South Securities (Pty) Limited in South Africa, a member of the JSE Limited and in Singapore, Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: C), a Capital Markets Services licence holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. Clients should contact analysts at, and execute transactions through, a Macquarie group entity in their home jurisdiction unless governing law permits otherwise. Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA, accepts responsibility for the content of each research report prepared by one of its non-us affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. The information contained in this document is confidential. If you are not the intended recipient, you must not disclose or use the information in this document in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Macquarie has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FSA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Disclosures with respect to the issuers, if any, mentioned in this research are available at Copyright Macquarie Group Auckland Tel: (649) London Tel: (44 20) Shanghai Tel: (86 21) Bangkok Tel: (662) Manila Tel: (63 2) Singapore Tel: (65) Calgary Tel: (1 403) Melbourne Tel: (613) Sydney Tel: (612) Hong Kong Tel: (852) Montreal Tel: (1 514) Taipei Tel: (886 2) Jakarta Tel: (62 21) Mumbai Tel: (91 22) Tokyo Tel: (81 3) Johannesburg Tel: (27 11) Perth Tel: (618) Toronto Tel: (1 416) Kuala Lumpur Tel: (60 3) Seoul Tel: (82 2) New York Tel: (1 212) Available to clients on the world wide web at and through Thomson Financial, CapitalIQ, FactSet, Reuters and Bloomberg. 23 February Page 157 sur 194

158 Macquarie Capital Markets Canada Head of Equities Alex Rothwell (416) Research Regional Heads of Equity Research David Rickards (Global) (612) Stephen Harris (Canada) (416) Graham Copley (US) (212) Stephen O Sullivan (Asia) (852) Julian Wentzel (South Africa) (2711) Energy Mark Heim (403) Elliott Routly (assoc) (403) Ian Macqueen (403) Paul Nielsen (assoc) (403) Jenny Mikhareva (403) Peter Argiris (assoc) (403) Materials Metals & Mining George Albino (416) John Graham (416) Matthew Sheppard (assoc) (416) Pierre Vaillancourt (416) Daniel Greenspan (assoc) (416) Duncan McKeen (514) Martin Lavigueur (assoc) (514) Commodities & Precious Metals Jim Lennon (London) (44 20) Adam Rowley (London) (44 20) Macro Strategy Stephen Harris (416) Alternative Strategies Blake Hossack (416) Bryan Brown (assoc) (416) Sales Head of Sales Tim Sorensen (416) Toronto Alex Ball (416) Jason Beales (416) Craig Brenner (416) Jessica Butt (416) Sasha Djurdjevic (416) Chris Naprawa (416) Tim Newington (416) Harry Pokrandt (416) Michael Zuk (416) Montreal Michael Marcotte (514) Roy McDowall (514) Stefan Quenneville (514) Vancouver Carly Dean (604) Ryan Males (604) London David Washburn (44 20) Consumer & Agriculture David Pupo (416) Devin Kennealy (assoc) (416) Financials Diversified Financials Blake Hossack (416) Bryan Brown (assoc) (416) Real Estate Property Trusts & Developers Michael Smith (416) Technology Glenn Jamieson (416) Michael Siperco (assoc) (416) Energy Infrastructure Pipelines and Utilities Matthew Akman (416) Jose Antonio Alitagtag (416) Gilbert Chan (assoc) (416) Lillian Rowlatt (assoc) (416) Alternative Energy Stephen Harris (416) Infrastructure Services Avi Dalfen (416) Aung Oo (assoc) (416) Quantitative Yin Luo (212) Javed Jussa (assoc) (212) Trading Head of Trading Perry Catellier (416) Toronto Bob Bastianon (416) John Bellchambers (416) Ben Chiu (416) Paul Dorland (416) Mike Nininger (416) Tony Oram (416) Cheryl Polan (416) Stephen Rawn (416) John Szucs (416) Montreal Aadam Al-Khabyyr (514) Joanne Patterson (514) Cindy Vaincourt (514) Vancouver Jesse Janzen (604) Find our research at Macquarie: Thomson: Reuters: Capital IQ: Factset: Bloomberg: MAC GO For access contact macreseditorial@macquarie.com Macquarie Research (Canada) Principal offices Toronto Bay Street Brookfield Place Toronto, Ontario M5J 2T3 Canada Tel: (416) Fax: (416) Calgary th Avenue SW Royal Bank Building Calgary, Alberta T2P 1C9 Canada Tel: (403) Fax: (403) Montreal Rene Levesque Blvd West Montreal, Quebec H3B 4W8 Canada Tel: (514) Fax: (514) February 09 Page 158 sur 194

159 19 March 2009 Americas/Canada Equity Research Pipelines / Electric Utilities / Gas Utilities Research Analysts Andrew M. Kuske andrew.kuske@credit-suisse.com Paul Tan paul.tan@credit-suisse.com Energy Infrastructure SECTOR REVIEW Regulatory roundup TQM decision highlights: In a long-awaited decision (see file RH ), Canada s National Energy Board determined that the Trans Quebec & Maritimes Pipeline Inc. (TQM) is to use an after-tax weighted average cost of capital (ATWACC) of 6.4% in the calculation of a revenue requirement. We believe this decision is clearly important for TQM, however, the decision may have broader consequences as it substantially re-visited the return calculations set out in the RH proceeding. That decision established the formulaic return calculation that has been in place for well more than a decade. Therefore, the decision is critical for potentially ensuring that all regulated Canadian assets may generate adequate returns in the context of the existing market environment. Fair return standard: We view it fundamentally important that the NEB reaffirmed the Fair Return Standard requiring a fair or reasonable overall return on capital that should be (a) comparable to the return available from other investments; (b) enable financial integrity; and, (c) attract incremental capital. In our view, the NEB s comments about the increased globalization of financial markets clearly expand the past scope of capital attraction. That potential expansion should only be viewed positively for Canadian regulated assets. Transitioning to a transparent ATWACC: We view the NEB s language about transitioning toward an ATWACC calculations are being notable. For instance, the Board finds that the ATWACC approach enables better comparisons of return on capital for companies of similar risk. Further, it is the Board s view that relying on an approach, such as ATWACC, that mirrors the business decision-making process contributes to its validity as an appropriate method for estimating the cost of capital. In choosing to rely on an ATWAAC approach, transparency was an important factor considered by the Board. Selected investment implications: Given the general application of the NEB formula by many of the Provincial regulators, we believe the TQM decision may have a broad impact on future returns. Companies facing a variety of regulatory regimes that may benefit from potentially improved future returns, include: Brookfield Infrastructure Partners; Canadian Utilities; Emera; Enbridge; Fortis; Gaz Metro; and, TransCanada. DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit researchdisclosures or call +1 (877) U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Page 159 sur 194

160 19 March 2009 Companies Mentioned (Price as of 19 Mar 09) Brookfield Infrastructure Partners LP (BIP, $13.23, NEUTRAL, TP $14.00) Canadian Utilities Ltd. (CU.TO, C$39.53) Emera Inc. (EMA.TO, C$19.79, NEUTRAL, TP C$24.00) Enbridge Inc. (ENB.TO, C$38.36, NEUTRAL, TP C$44.00) Fortis Inc. (FTS.TO, C$22.30, NEUTRAL, TP C$27.50) Gaz Metro Ltd. (GZM_u.TO, C$14.20) TransCanada Corp. (TRP.TO, C$30.92, NEUTRAL, TP C$38.00) Disclosure Appendix Important Global Disclosures I, Andrew M. Kuske, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows***: Outperform (O): The stock s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months. Underperform (U)**: The stock s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months. *The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock ratings are relative to the analyst s industry coverage universe). **In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions. ***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return overlay applied. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 37% (57% banking clients) Neutral/Hold* 44% (55% banking clients) Underperform/Sell* 17% (48% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Energy Infrastructure 2 Page 160 sur 194

161 19 March 2009 Important Regional Disclosures Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating. The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Andrew M. Kuske, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (Canada), Inc.. Paul Tan, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (Canada), Inc.. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) Disclaimers continue on next page. Energy Infrastructure 3 Page 161 sur 194

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163 North American Pipelines Industry Rating: Market Perform March 20, 2009 Carl Kirst, CFA BMO Capital Markets Corp Michael Pope, CFA TQM Raises the Bar: New Precedent Points to Higher Canadian ROEs Setting a new precedent. The Canadian National Energy Board (NEB) broke with history on the much-anticipated Trans Québec & Maritimes Inc. (TQM) rate case, agreeing to depart from its previous methodology by setting a higher cost of capital than what was indicated by its historic formula whose sole variable was the Canadian long bond. In effect, the NEB recognized new realities over the last 15 years changing economic and financial market conditions within the natural gas pipeline industry and the broad market in general had increased risks to TQM and were not being adequately reflected. While we stress this rate case is specific only to TQM a relatively small pipe owned jointly by TransCanada and Gaz Metro we nonetheless believe it opens the door for higher equity returns in future NEB pipe (and possibly utility) cases and even possibly within Provincial jurisdictions as well. ROEs Moving Up. Specifically, the NEB has departed from the long standard RH-2-94 Decision by both 1) shifting to an after-tax weighted average cost of capital (ATWAAC) approach that does not explicitly outline a capital structure and 2) granting a total capital return of 6.4%, a level that is 90 bps higher than would otherwise be indicated by the original formula. If we assume the 40% equity thickness that TQM originally requested, the implied ROE is 9.75% below the 11.0% requested, but fully 100 bps above the 8.71% 2008 benchmark. Moreover, if we assume the equity thickness as being unchanged at 30%, the allowed ROE bumps up to 11.6%, closer to allowed returns by its US counterparts (although US pipelines typically have equity layers closer to 50%). Summary The National Energy Board has in effect broken with its recent ROE mechanism and the strict linkage to Canadian Treasuries, acknowledging that changing risks over the last 15 years were not adequately reflected in TQM s rates. The positive upshot: the changing broad market dynamics the NEB specifically cited would appear to be applicable to utilities in general, and so while we again stress this rate case is TQM specific, we think it nonetheless could auger for a +100 bps increase in Canadian utility ROEs at some point in the future. At the very least, the NEB is not wed to its history, and is proactively trying to account for shifting risks to help ensure Canadian pipes retain access to capital. While not overly material on a net consolidated basis, and with no immediate change to any company s 2009/2010 EPS outlook, we have four companies that could be positively affected at the margin in the coming years: Gaz Metro, TransCanada, Enbridge, and Spectra (page 3). Gaz Metro is our one name that could see an impact as soon as 2010 should the Québec regulatory body (the Régie) follow the NEB s precedent, or some variation thereof. A +100 bps increase in the Québec utility s ROE would add $0.05 to earnings, or 4%-5% of earnings power. Refer to pages 5 to 6 for Important Disclosures, including Analyst's Certification. For Important Disclosures on the stocks discussed in this report, please go to Page 1 March 20, 2009 Page 163 sur 194

164 BMO Capital Markets North American Pipelines Recognizing New Realities The Canadian National Energy Board broke with history on the much-anticipated TQM rate case, agreeing to vary from its previous methodology by setting a higher after-tax weighted average cost of capital (ATWAAC) after accounting for changing economic and financial market conditions within the natural gas pipeline industry and broad market in general. While we stress this rate case is specific to TQM which is 50% owned by TransCanada and Gaz Metro we believe it nonetheless opens the door for higher equity returns in both future NEB rate cases and potentially within Provincial utility jurisdictions as well. Consequently, in our North American Pipeline group this could have long-term positive implications, at the margin, not just for Gaz Metro and TransCanada, but Enbridge and Spectra too (although we stress this is a long-term nominal positive, and not material near term). Previously, TQM s equity return (like most federally regulated pipes) was set by the NEB s RH-2-94 Decision, a rate decision originally established almost 15 years ago in late From an original 12.2% ROE benchmark in 1995, a Canadian pipeline s ROE subsequently changed on an annual basis in 75% correlation to projected changes in Canadian Treasuries and the yield curve. Given generally declining interest rates, allowed regulated ROEs have since fallen from 12.2% to 8.71% in The major weakness here is that this formula does not take into account changes in industry conditions over time (shifting industry risks) nor does it take into account changes in the broad market, such as today s higher risk premiums (indeed, the flight to quality and strengthening of government treasuries has perversely has eroded the allowed 2009 ROE to 8.57% at the very time investors are demanding higher returns). In late 2007, TQM requested the NEB alter its return profile by both strengthening its deemed equity layer to 40% from 30% and increasing its allowed ROE to 11.0% from the formulaically driven 8.71%. In conjunction with its cost of debt, TQM s requested ATWAAC was 6.65% versus 5.5% under a no-change scenario. The NEB reevaluated its original RH-2-94 decision in context of then and now, recognizing changing realities over the last 15 years. The NEB noted significant changes in the financial markets as well as in general economic conditions (i.e., greater globalization and competition for capital, changes in government debt to GDP, currency exchange rates), which were not being taken into account by the formula s sole variable, the Canadian long bond. The result: the NEB has departed from the RH-2-94 decision by both 1) shifting to an ATWAAC approach that does not explicitly outline a capital structure and 2) granting a total capital return of 6.4%, a level that is 90 bps higher than would otherwise be indicated by the original formula. If we assume, however, a 40% equity thickness that was requested by TQM, the implied ROE is 9.75%; while this is below the 11.0% requested, it is fully 100 bps above the 8.71% 2008 benchmark. Moreover, if one viewed the equity thickness as being unchanged at 30%, the allowed ROE bumps up to 11.6%, almost in line with its US counterparts (although US pipelines typically have equity layers closer to 50%). The upshot: the broad market dynamics the NEB has cited would appear to be applicable to other utilities, and so while we again stress this rate case is TQM specific, we think it nonetheless could auger for a +100 bps increase in Canadian utility ROEs at some point in the future (at least for those that haven t already moved to negotiated rates). At the very least, the NEB is not wed to history, and is proactively trying to account for shifting risks to help ensure Canadian pipes retain their access to capital. Page 2 March 20, 2009 Page 164 sur 194

165 BMO Capital Markets North American Pipelines Company Implications Gaz Metro GZM is most directly affected by this decision owing to its 50% ownership of TQM, its relative market cap size, and a possible carryover effect to its Québec distribution operation in the future. With respect to the specific earnings of TQM, we had already assumed a rate case decision in this range, so there is no change to our EPS forecast. However, we do believe the TQM decision will open the door for provincial regulators to at least evaluate alternate forms of allowed ROE mechanisms, and we expect GZM will file with its Québec regulators later this year as a result. While difficult to predict, we note a 100 bps increase in the utility s ROE could lift EPS by $0.05-$0.06 in 2010, or 5% of annual earnings. TransCanada Also for TransCanada, the direct ownership of TQM has no impact given the outcome is in line with our assumptions. Moreover, the near-term future impact is a bit muted as TRP s Mainline is currently under a five-year rate settlement, while the newly NEB regulated Alberta System (NOVA) is under a two-year settlement, so we do not expect any EPS impact before Even so, as the settlement allows for incentive earnings, we already model the TRP Mainline with 40% equity and a 9.5% ROE (in line with the TQM decision), although we use a lower 35% equity / 8.75% ROE for NOVA. That said, given a combined rate base of $11.5 billion, an assumed 100 bps rise in the pipes ROE would provide an EPS uplift of potentially $0.05-$0.10, or 2%-4% of annual earnings power in Enbridge Enbridge has little exposure on the pipeline side given its systems are based on negotiated rates. The closest asset would be its 50% ownership of the Alliance Pipeline, which operates with an 11.25% ROE and 30% equity layer, only slightly below the TQM decision. However, there had been concern that once Alliance s rate settlement expires in 2015 the pipeline would be facing downside recontracting risk, and the TQM decision could help mitigate this. We also note ENB has a large utility operation in Consumers Gas which is currently operating under a 5-year incentive settlement through And while we expect this ROE to continue expanding, we note for sensitivity that a 100 bps increase in Consumer s ROE would lift ENB s 2013 EPS by ~$0.04, or 1%-2% of earnings power. Spectra Spectra could also have a potential benefit given their ownership of Union Gas (Westcoast is already regulated on a complaint/light-handed regulation basis). However, Union Gas is currently under a five-year incentive settlement through 2012 which allows for sharing in upside. Given this, our current model reflects an 8.39% return (base rate agreed in 2008) plus 50 bps for incentives, and a further 25 bps incentive increase per annum through Due to the settlement, no EPS impact is expected until at least 2013, although once reevaluated the upligt is limited: a 100 bps rise in Union s ROE would only translate to an EPS uplift of ~$0.01. Page 3 March 20, 2009 Page 165 sur 194

166 BMO Capital Markets North American Pipelines 19-Mar EPS P/E Mkt Cap North American Pipelines Rating Price Target 2008E 2009E 2010E 2008E 2009E 2010E Div Yld Book ($mm) AGL Resources Inc. (AGL) Market Perform $27.37 $34 $2.85 $2.72 $ $ % $ ,105 CenterPoint Energy (CNP) Market Perform $10.39 $13 $1.25 $1.05 $ $ % $5.93 3,576 Cheniere Energy (LNG) Market Perform $4.98 $6 -$6.69 -$6.51 na nm nm na $ % -$ El Paso Corp. (EP) Outperform $6.97 $10 $1.31 $0.91 $ $ % $4.70 4,869 Enbridge Inc. (ENB) Market Perform $38.44 $42 $1.92 $2.28 $ $ % $ ,338 Energen Corporation (EGN) Market Perform $29.60 $46 $4.38 $3.22 $ $ % $ ,129 Gaz Metro (GZM_UN) Market Perform $14.20 $15 $1.27 $1.23 $ $ % $8.37 1,710 National Fuel Gas Co. (NFG) Market Perform $30.64 $33 $3.17 $2.38 $ $ % $ ,424 NiSource Inc. (NI) Market Perform $9.70 $12 $1.25 $1.04 $ $ % $ ,660 ONEOK, Inc. (OKE) Market Perform $22.66 $27 $3.01 $2.54 $ $ % $ ,368 Questar (STR) Outperform $32.00 $45 $3.96 $3.01 $ $ % $ ,550 Southern Union (SUG) Outperform $15.52 $18 $1.81 $1.73 $ $ % $ ,924 Spectra Energy Corp (SE) Market Perform $14.10 $16 $1.84 $0.97 $ $ % $9.05 8,616 TransCanada Corporation (TRP) Outperform $30.82 $41 $2.24 $2.27 $ $ % $ ,000 UGI Corp. (UGI) Market Perform $23.42 $26 $1.99 $2.26 $ $ % $ ,546 Williams Companies (WMB) Outperform $12.11 $17 $2.15 $0.84 $ $ % $ ,008 ENB and TRP are priced in Canadian dollars. Source: BMO Capital Markets estimates and company reports. Page 4 March 20, 2009 Page 166 sur 194

167 BMO Capital Markets North American Pipelines Important Disclosures Analyst's Certification I, Carl Kirst, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Burns, and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclosures For Important Disclosures on the stocks discussed in this report, please go to BMO Capital Markets Corp. Rating System OP = Outperform: We believe the stock s total return, including dividends, will exceed the S&P 500's return by more than 15%. Mkt = Market Perform: We believe the stock s total return will generally match that of the S&P 500. Und = Underperform: We believe the stock s total return will fall short of the S&P 500's return by more than 15%. NR = Not rated. (R) = Restricted: Dissemination of research is currently restricted. In addition, apart from our stock ratings, we apply the Speculative investment (S) postscript to those companies that have de minimis revenue and whose enterprise value appears to be contingent upon unprovable assumptions (e.g., the future approval of a drug or the successful completion of an oil well). SECTOR RATINGS OUTPERFORM - We believe the sector will outperform the S&P 500 Index. MARKET PERFORM We believe the sector s return will generally match that of the S&P 500. UNDERPERFORM - We believe the sector will underperform the S&P 500 Index. Prior BMO Capital Markets Corp. Rating System (prior to June 19, 2006) Our rating system prior to June 19, 2006, compared a stock s expected performance with that of an index of comparable companies over a 9-15 month horizon. Our sector ratings were based on the expected performance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19, 2006, we did not use the (S)-Speculative postscript. PRIOR STOCK RATINGS OUTPERFORM - We believe the stock s total return, including dividends, will exceed the group average by over 15%. NEUTRAL - We believe the stock s total return will generally match the group average. UNDERPERFORM - We believe the stock s total return will fall short of the group average by more than 15%. PRIOR SECTOR RATINGS POSITIVE - We believe the sector will outperform the S&P 500 Index. NEGATIVE - We believe the sector will underperform the S&P 500 Index. Breakdown of Rating Distribution and Banking Clients (As of December 31, 2008) Buy Hold Sell Unrated % of total BMO Capital Markets Corp. coverage within rating category 29.4% 65.8% 4.8% 0.0% % of stocks within rating category for which the Firm provided banking services over the past 12 months 14.4% 6.0% 0.0% 0.0% Other Important Disclosures For more specific information, please refer to For Important Disclosures on the stocks discussed in this report, please go to or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY Dissemination of Research BMO Capital Markets Equity Research is available via our web site Please contact your investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO Capital Markets Corp. client groups entitled to our research. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research, which is available at General Disclaimer The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate of BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd. in Canada (collectively BMO Nesbitt Burns ), and BMO Capital Markets Ltd in the United Kingdom. This information is not intended to be used as the primary basis of investment decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer Page 5 March 20, 2009 Page 167 sur 194

168 BMO Capital Markets or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates, and projections contained in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets Corp. makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or its affiliates that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets Corp., BMO Nesbitt Burns, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Additional Matters To Canadian Residents: BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd., affiliates of BMO Capital Markets Corp., furnish this report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Burns Inc. and/or BMO Nesbitt Burns Ltee/Ltd. This research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Burns Inc. To UK residents: The contents hereof are intended solely for the use of, and may only be issued or passed on to, (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ) or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons ). The contents hereof are not intended for the use of, and may not be issued or passed on to, retail clients. ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by the Bank of Montreal investment banking group, which includes Bank of Montreal, BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltée/Ltd. in Canada and BMO Capital Markets Corp. in the US. BMO Capital Markets Corp. is a member of SIPC. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée/Ltd. are members of CIPF. Nesbitt Burns is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. BMO Capital Markets is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. COPYRIGHT 2009 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group Page 6 March 20, 2009 Page 168 sur 194

169 CANADA 20 March 2009 Company Rating Target Enbridge Inc. Outperform C$46.00 TransCanada Corp. Neutral C$37.00 Spectra Energy Corp. Outperform US$18.00 ATCO Neutral C$45.00 Canadian Utilities Neutral C$45.00 Emera Inc. Neutral C$21.00 Fortis Inc. Neutral C$25.00 TransAlta Outperform C$31.00 Canadian Hydro Developers Outperform C$4.00 Boralex Inc. Outperform C$12.00 Innergex Renewable Energy Inc. Underperform C$6.50 Algonquin Power Income Fund Outperform C$4.00 AltaGas Income Trust Neutral C$16.00 EPCOR Power L.P. Neutral C$14.00 Innergex Power Income Fund Neutral C$9.40 Northland Power Income Fund Outperform C$12.00 Source: Macquarie Research, March 2009 Matthew Akman (416) Jose Alitagtag (416) Gilbert Chan, CFA (416) Lillian Rowlatt (416) Canadian energy infrastructure ROE formula DOES bite the dust! Event Last night the National Energy Board (NEB) issued what we consider a landmark decision in TransCanada's Trans Quebec & Maritimes cost of capital hearing. In Decision RH , the NEB granted a weighted average cost of capital approach (6.4% up from 5.5%) to setting the TQM return instead of the traditional formula ROE in place since Impact The impact of the regulatory decision should be positive for most Canadian pipeline and utility companies. In a full report published on 23 February 2009 called "ROE formula may finally bite the dust", we anticipated the NEB may increase allowed returns as the formula ROE was resulting in an unfair return that was, in our opinion, too low in today's market context. The TQM decision establishes a total return that implies an equity return of 9.7% on a 40% equity ratio for (2009 is to be negotiated but presumably if no settlement is available and litigation ensues, the NEB would apply the same WACC approach to 2009 as well). This implied ROE is about 110 basis points higher than the 2009 allowed ROE based on the old formula linked to government bonds. More important, we believe the NEB decision establishes a precedent for future NEB cases and potentially for provincial regulators as well. Our read of the decision is that the old ROE formula is dead and that the new WACC approach is the standard. We draw this conclusion because the NEB reasons were founded on long-term changes in financial markets, such as globalization and government debt. The NEB's reasons were not founded on current dislocation in credit markets or nearterm factors. In addition, the NEB concluded that separating equity ratio from equity thickness is not reflective of how business decisions are made, thereby effectively rejecting the entire notion of establishing a stand-alone ROE by formula. The fact that the implied ROE is higher than the old ROE formula is as important as the fact the board effectively set aside the old formula. The board's determination that US returns (which we noted in our 23 February report are higher than Canadian returns) are "very informative" for determining a fair return also signals that Canadian allowed returns are moving up. In our 23 February report we quantified the impact of a 50-basis-point increase in ROEs for each company. Doubling that to 100 basis points (the approximate increase in the TQM decision) could potentially add 9.0% to EPS for Fortis, 4.6% for Canadian Utilities, 4.4% for Enbridge, 3.6% for TransCanada, and 3.4% for ATCO. (cont d) Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website Page 169 sur 194

170 Macquarie Research Equities - Flyer Canadian energy infrastructure (cont d) We note that in order for these impacts to be realized, the provincial regulators would have to follow the NEB. We see a high likelihood they will follow, if not in methodology then at least in direction. The bottom line is that ROEs across Canada appear to be moving higher. Action and recommendation We are not changing our EPS estimates today but will review the estimates for all of our companies in the coming days, considering not only the upside potential discussed above but also the risk that certain provincial regulators may not follow the NEB or may follow with a lag of up to a year. In any event, an increase in allowed returns will likely enable most companies in our coverage universe to continue growing earnings and dividends while other sectors shrink during the recession. Enbridge remains our top pick, but we are generally favourable on the overall sector for its unique combination of growth and safety in today's challenging market conditions. 20 March Page 170 sur 194

171 20 March Source: Company data, Macquarie Research, March 2009 Analyst / Price 52-Week Range Earnings Per Share P/E Ratios '09E P/E Rel. Dividend Payout Target Total Company Ticker Rating 03/20/09 High Low E 2010E 2011E E 2010E 2011E to Group Rate Yield 2009E Price Return North American Pipelines Enbridge Inc. ENB MA / O $38.44 $46.27 $33.10 $1.88 $2.25 $2.50 $ $ % 65.8% $ % TransCanada Corp. TRP MA / N $30.82 $40.71 $28.86 $2.32 $2.25 $2.35 $ $ % 67.6% $ % Spectra Energy Corp (US$) SE MA / O $14.10 $29.18 $11.21 $1.83 $1.05 $1.25 $ $ % 95.2% $ % Williams (US$) WMB Not rated $12.11 $40.75 $9.52 $2.40 $0.90 $1.32 $ $ % 48.7% - - North American Pipelines Average % 69.3% Canadian Power & Utilities ATCO ACO.X MA / N $38.53 $54.40 $32.51 $4.57 $4.10 $4.15 $ $ % 24.4% $ % Canadian Utilities CU MA / N $39.60 $48.00 $33.11 $3.18 $3.10 $3.15 $ $ % 45.5% $ % Caribbean Utilities (US$) CUP.U Not rated $8.51 $12.59 $6.10 $0.89 $0.70 $ $ % 94.3% - - Emera Inc. EMA MA / N $19.81 $23.78 $18.06 $1.34 $1.40 $1.40 $ $ % 72.1% $ % Fortis FTS MA / N $22.03 $29.94 $20.70 $1.61 $1.55 $1.60 $ $ % 67.1% $ % Canadian Hydro Developers, Inc. KHD MA / O $2.65 $6.58 $2.01 $0.01 $0.09 $0.23 $ $ % 0.0% $ % Boralex Inc. BLX MA / O $6.35 $18.79 $5.06 $0.54 $0.70 $0.90 $ $ % 0.0% $ % Innergex Renew able Energy Inc. INE MA / U $3.89 $11.21 $2.60 nm $0.26 $0.38 $0.25 nm $ % 0.0% $ % TransAlta Corp. TA MA / O $19.14 $38.10 $17.96 $1.46 $1.65 $1.80 $ $ % 70.3% $ % Canadian Power & Utilities Average % 41.5% Energy Infrastructure Trusts Algonquin Pow er Income Fund* APF.UN MA / O $2.48 $8.28 $1.76 nm $0.40 $0.44 $0.36 nm $ % - $ % AltaGas Income Trust* ALA.UN MA / N $13.73 $27.50 $12.25 $2.18 $1.81 $1.67 $ $ % - $ % EPCOR Pow er L.P.* EP.UN MA / N $14.00 $24.70 $12.90 nm $0.92 $0.97 $0.81 nm $ % - $ % Innergex Pow er Income Fund* IEF.UN MA / N $8.95 $13.23 $8.00 $0.42 $0.49 $0.49 $ $ % - $ % Northland Pow er Income Fund* NPI.UN MA / O $10.73 $13.50 $8.45 $0.98 $0.70 $0.73 $ $ % - $ % Energy Infrastructure Trusts Average % U.S. Utilities(US$) American Electric Pow er AEP Not rated $28.01 $45.95 $24.07 $3.43 $3.20 $3.41 $ $ % 51.3% - - Consolidated Edison ED Not rated $38.02 $46.39 $32.56 $4.38 $3.21 $3.37 $ $ % 73.5% - - Dominion Resources D AS / O $31.20 $48.50 $27.15 $3.16 $3.24 $3.38 $ $ % 48.7% $ % Duke Energy DUK MD / N $14.17 $19.20 $11.72 $1.21 $1.27 $1.38 $ $ % 72.7% $ % Exelon EXC AS / O $44.81 $92.13 $38.41 $4.20 $4.16 $4.36 $ $ % 50.5% $ % FPL Group FPL AS / O $49.91 $68.98 $33.81 $3.84 $4.01 $4.81 $ $ % 44.4% $ % NiSource NI Not rated $9.70 $18.80 $7.79 $1.27 $1.09 $1.16 $ $ % 84.3% - - PPL Corp. PPL Not rated $28.96 $54.00 $24.25 $2.02 $1.81 $3.82 $ $ % 74.2% - - U.S. Utilities Average % 62.5% M erchant Generation(US$) Dynegy DYN AS / N $1.52 $9.92 $1.00 $0.10 $0.05 $0.12 $ $ % 0.0% $ % Mirant Corp. MIR AS / O $11.15 $42.21 $9.11 $2.16 $2.89 $1.75 $ $ % 0.0% $ % NRG Energy NRG AS / O $17.77 $45.78 $14.39 $3.50 $2.12 $2.44 $ $ % 0.0% $ % Reliant Energy RRI AS / N $2.93 $28.06 $2.03 nm nm $0.06 $0.69 nm nm nm $ % 0.0% $ % M erchant Generation Average % 0.0% Note s: Estimates are from Macquarie Capital w ith the exception of those companies that are not rated (sources: Company reports, Thomson, Bloomberg). Analysts: Matthew Akman (MA), Angie Storozynski (AS), Marc De Croisset (MD). Rating: Outperform (O), Neutral (N), Underperform (U). Figures for Canadian companies in C$; figures for U.S. companies in US$. EPS estimates for Caribbean Utilities are for the period ending April 30th the follow ing year. *For trusts, Earnings per share are based on units and dividends equate to distribution. Fig 1 Comparative valuation of Canadian and US pipeline, utility and power generation companies Page 171 sur 194 Macquarie Research Equities - Flyer Canadian energy infrastructure

172 20 March Source: Company data, Macquarie Research, March 2009 Shares Outst. MC Inst. 52-Week % change Cash Flow Per Share P/CF Ratios Book Price / ROE Debt to % Unre g. EV/'10E Company (mil) ($bil) Ow ners High Low E 2010E 2011E E 2010E 2011E Value Book 2009E Cap 08E EBIT EBITDA North American Pipelines Enbridge Inc $ % -17% 16% $3.89 $4.48 $4.91 $ $ % 66.6% 20.0% 8.2 TransCanada Corp $ % -24% 7% $5.31 $4.81 $5.10 $ $ % 60.3% 40.0% 8.4 Spectra Energy Corp (US$) $9.1 14% -52% 26% $2.90 $2.12 $2.33 $ $ % 64.5% Williams (US$) $7.0 77% -70% 27% $ $ % 48.3% North American Pipelines Average % 59.9% 30.0% 7.0 Canadian Power & Utilities ATCO Ltd $2.2 43% -29% 19% $9.13 $8.74 $9.06 $ $ % 64.6% 35.0% 6.5 Canadian Utilities $5.0 15% -18% 20% $6.42 $6.42 $6.66 $ $ % 49.7% 36.0% 6.5 Caribbean Utilities (US$) 28.1 $0.2 2% -32% 40% $ $ % 51.3% 0.0% 8.2 Emera Inc $2.2 16% -17% 10% $2.83 $3.05 $3.06 $ $ % 59.3% 10.0% 8.3 Fortis Inc $3.8 25% -26% 6% $3.95 $3.91 $4.05 $ $ % 59.8% 30.0% 9.0 Canadian Hydro Developers $0.4 71% -60% 32% $0.19 $0.35 $0.56 $ $ % 63.4% 100.0% 8.3 Boralex Inc $0.2 43% -66% 25% $1.45 $1.82 $2.15 $ $ % 34.0% 100.0% 3.7 Innergex Renew able Energy Inc $0.1 57% -65% 50% nm $0.26 $0.38 $0.75 nm $ % 28.4% 100.0% 6.9 TransAlta Corp $3.8 60% -50% 7% $4.17 $4.11 $4.31 $ $ % 52.8% 100.0% 6.0 Canadian Power & Utilities Average % 51.5% 56.8% 7.0 Energy Infrastructure Trusts Algonquin Pow er Income Fund* 79.6 $0.2 27% -70% 41% $0.84 $0.80 $0.83 $ $ % 56.2% AltaGas Income Trust* 78.9 $1.1 59% -50% 12% $3.12 $2.75 $2.65 $ $ % 37.8% EPCOR Pow er L.P.* 53.9 $0.8 14% -43% 9% $2.31 $2.38 $2.50 $ $ % 51.5% Innergex Pow er Income Fund* 29.4 $0.3 59% -32% 12% $1.39 $0.85 $1.59 $ $ % 54.4% Northland Pow er Income Fund* 62.4 $0.7 49% -21% 27% $1.23 $1.28 $1.28 $ $ % 25.3% Energy Infrastructure Trusts Average % 45.0% 8.0 U.S. Utilities(US$) American Electric Pow er $ % -39% 16% $ $ % 62.5% Consolidated Edison $ % -18% 17% $ $ % 50.4% Dominion Resources $ % -36% 15% $4.94 $5.36 $5.70 $ $ % 61.7% Duke Energy 1,281.2 $ % -26% 21% $2.48 $2.60 $2.72 $ $ % 40.8% Exelon $ % -51% 17% $6.67 $6.75 $7.13 $ $ % 53.8% FPL Group $ % -28% 48% $7.26 $7.70 $8.88 $ $ % 59.4% NiSource $2.7 73% -48% 25% $ $ % 61.6% PPL Corp $ % -46% 19% $ $ % 61.3% U.S. Utilities Average % 56.4% 6.4 M erchant Generation(US$) Dynegy $1.3 82% -85% 52% $0.52 $0.51 $0.59 $ $ nm 57.6% 100.0% 6.7 Mirant Corp $1.6 80% -74% 22% $2.88 $4.01 $3.13 $ $ nm 41.6% 100.0% 3.6 NRG Energy $4.9 81% -61% 23% $6.06 $4.75 $5.36 $ $ nm 52.6% 100.0% 5.1 Reliant Energy $1.0 78% -90% 44% nm $0.82 $0.96 $1.60 nm $ nm 43.3% 100.0% 5.3 M erchant Generation Average nm 48.8% 100.0% 5.2 Note s: Estimates are from Macquarie Capital w ith the exception of those companies that are not rated (sources: Company reports, Thomson, Bloomberg). Figures for Canadian companies in C$; figures for U.S. companies in US$. For those companies not rated, ROE figures are actuals for the most recent fiscal Year. EPS estimates for Caribbean Utilities are for the period ending April 30th the follow ing year. *For trusts, cash flow per share represents distributable cash flow per share, w hich is net of maintenance expense. Fig 2 Comparative valuation of Canadian and US pipeline, utility and power generation companies Page 172 sur 194 Macquarie Research Equities - Flyer Canadian energy infrastructure

173 Macquarie Research Equities - Flyer Canadian energy infrastructure Important disclosures: Recommendation definitions Macquarie Australia/New Zealand Outperform return >5% in excess of benchmark return (>2.5% in excess for listed property trusts) Neutral return within 5% of benchmark return (within 2.5% for listed property trusts) Underperform return >5% below benchmark return (>2.5% below for listed property trusts) Macquarie Asia Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie USA Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Volatility index definitions* This is calculated from the volatility of historical price movements. Very high highest risk stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendation proportions For quarter ending 31 December 2008 AU/NZ Asia RSA USA CA EUR Outperform 38.55% 50.61% 64.52% 53.13% 65.55% 43.00% Neutral 41.82% 15.92% 25.81% 40.63% 27.73% 48.00% Underperform 19.64% 33.47% 9.68% 6.25% 6.72% 9.00% Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Macquarie Capital Markets Canada Ltd has been registered, in accordance with the Toronto Stock Exchange Rules, to make a market in the shares of Algonquin Power Income Fund, Canadian Hydro Developers, Inc., EPCOR Power L.P., Northland Power Income Fund, TransCanada Corp. The Research Distribution Policy of Macquarie Capital Markets Canada Ltd is to allow all clients that are entitled to have equal access to our research. Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. 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174 Macquarie Research Equities - Flyer Canadian energy infrastructure Other Disclaimers: In Canada, securities research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and to US persons and any person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. Securities research is issued and distributed by Macquarie Capital Securities (Australia) Ltd (AFSL No ) in Australia, a participating organisation of the Australian Securities Exchange; Macquarie Capital Securities (NZ) Ltd in New Zealand, a licensed sharebroker and New Zealand Exchange Firm; Macquarie Capital (Europe) Ltd in the United Kingdom, which is authorised and regulated by the Financial Services Authority (No ); Macquarie Capital Securities Ltd in Hong Kong, which is licensed and regulated by the Securities and Futures Commission; Macquarie Capital Securities (Japan) Limited in Japan, a member of the Tokyo Stock Exchange, Inc., Osaka Securities Exchange Co. Ltd, and Jasdaq Securities Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau(kin-sho) No. 231, a member of Japan securities Dealers Association and Financial Futures Association of Japan); Macquarie First South Securities (Pty) Limited in South Africa, a member of the JSE Limited and in Singapore, Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: C), a Capital Markets Services licence holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. Clients should contact analysts at, and execute transactions through, a Macquarie group entity in their home jurisdiction unless governing law permits otherwise. Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA, accepts responsibility for the content of each research report prepared by one of its non-us affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. The information contained in this document is confidential. If you are not the intended recipient, you must not disclose or use the information in this document in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Macquarie has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FSA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Disclosures with respect to the issuers, if any, mentioned in this research are available at Copyright Macquarie Group Auckland Tel: (649) London Tel: (44 20) Shanghai Tel: (86 21) Bangkok Tel: (662) Manila Tel: (63 2) Singapore Tel: (65) Calgary Tel: (1 403) Melbourne Tel: (613) Sydney Tel: (612) Hong Kong Tel: (852) Montreal Tel: (1 514) Taipei Tel: (886 2) Jakarta Tel: (62 21) Mumbai Tel: (91 22) Tokyo Tel: (81 3) Johannesburg Tel: (27 11) Perth Tel: (618) Toronto Tel: (1 416) Kuala Lumpur Tel: (60 3) Seoul Tel: (82 2) New York Tel: (1 212) Available to clients on the world wide web at and through Thomson Financial, CapitalIQ, FactSet, Reuters and Bloomberg. 20 March Page 174 sur 194

175 Macquarie Capital Markets Canada Alex Rothwell (Head of Equities) (416) Research Regional Heads of Equity Research John O Connell (Global Co-Head) (612) David Rickards (Global Co-Head) (612) Graham Copley (US) (212) Stephen Harris (Canada) (416) Stephen O Sullivan (Asia) (852) Alan Watson (Europe) (44 20) Julian Wentzel (South Africa) (2711) Energy Mark Heim (403) Elliott Routly (assoc) (403) Ian Macqueen (403) Paul Nielsen (assoc) (403) Jenny Mikhareva (403) Peter Argiris (assoc) (403) Materials Metals & Mining George Albino (416) John Graham (416) Matthew Sheppard (assoc) (416) Pierre Vaillancourt (416) Daniel Greenspan (assoc) (416) Duncan McKeen (514) Martin Lavigueur (assoc) (514) Commodities & Precious Metals Jim Lennon (London) (44 20) Adam Rowley (London) (44 20) Macro Strategy Stephen Harris (416) Quantitative Yin Luo (212) Javed Jussa (assoc) (212) Sales Head of Sales Tim Sorensen (416) Toronto Alex Ball (416) Jason Beales (416) Craig Brenner (416) Jessica Butt (416) Sasha Djurdjevic (416) Chris Naprawa (416) Tim Newington (416) Harry Pokrandt (416) Michael Zuk (416) Montreal Michael Marcotte (514) Roy McDowall (514) Vancouver Carly Dean (604) Ryan Males (604) London David Washburn (44 20) Consumer & Agriculture David Pupo (416) Devin Kennealy (assoc) (416) Financials Banks Sumit Malhotra (416) Bryan Brown (assoc) (416) Real Estate Property Trusts & Developers Michael Smith (416) Melissa Papanayotou (assoc) (416) Technology Glenn Jamieson (416) Michael Siperco (assoc) (416) Energy Infrastructure Pipelines and Utilities Matthew Akman (416) Jose Antonio Alitagtag (416) Gilbert Chan (assoc) (416) Lillian Rowlatt (assoc) (416) Alternative Energy Stephen Harris (416) Infrastructure Services Avi Dalfen (416) Aung Oo (assoc) (416) Trading Head of Trading Perry Catellier (416) Toronto Bob Bastianon (416) John Bellchambers (416) Ben Chiu (416) Paul Dorland (416) Mike Nininger (416) Tony Oram (416) Cheryl Polan (416) Stephen Rawn (416) John Szucs (416) Montreal Aadam Al-Khabyyr (514) Joanne Patterson (514) Cindy Vaincourt (514) Vancouver Jesse Janzen (604) Find our research at Macquarie: Thomson: Reuters: Capital IQ: Factset: Bloomberg: MAC GO For access contact macreseditorial@macquarie.com Macquarie Research (Canada) Principal offices Toronto Bay Street Brookfield Place Toronto, Ontario M5J 2T3 Canada Tel: (416) Fax: (416) Calgary th Avenue SW Royal Bank Building Calgary, Alberta T2P 1C9 Canada Tel: (403) Fax: (403) Montreal Rene Levesque Blvd West Montreal, Quebec H3B 4W8 Canada Tel: (514) Fax: (514) March 09 Page 175 sur 194

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177 RBC Dominion Securities Inc. Robert Kwan, CFA (Analyst) (604) ; Energy Infrastructure Goodbye Formula, Hello Higher Returns INDUSTRY COMMENT MARCH 20, 2009 Event The National Energy Board (NEB) released a cost of capital decision that we believe will have a positive impact on the sector. Highlights NEB Decision Scraps the ROE Formula. The NEB released its cost of capital decision for the TQM pipeline for the years 2007 and 2008, which we believe may have industry-wide implications. The decision moves away from the RH-2-94 formula, better known as the Multi-Pipeline ROE, in favour of an After-tax Weighted Average Cost of Capital (ATWACC) approach. ROE Increased. In the decision, the NEB did not specify a return on equity (ROE), instead leaving the optimal capital structure up to TQM. However, using TQM's existing 30% equity component, the implied ROE is roughly 11.6% (about 300 bps higher than the Multi-Pipeline formula ROE of 8.46% for 2007 and 8.71% for 2008). Many pipeline and utility assets in Canada have an equity component of roughly 35%, and the decision would imply an ROE of roughly 10.5% (please see the table in Exhibit 1 for implied ROEs based on a range of equity components). Direct Implications for Our Coverage are Minimal; Indirect Impact Could be Very Meaningful. The decision relates specifically to the cost of capital for the TQM pipeline for the years 2007 and Based on the decision, we expect other pipelines and utilities to apply for higher ROEs. Visibility to the Upside Better for NEB-Regulated Pipelines; Immediate Upside Limited. Since the NEB has analyzed the cost of capital as part of the TQM decision, it is the most likely regulator to move quickly to approve higher returns. The impact would be greatest for TransCanada, although the financial benefits might not be realized for a few years due to existing shipper settlements. Over time, we estimate that the decision could positively impact annual earnings by about $0.11/share. Will the Provinces Follow and if so, by How Much? Given the magnitude of the increased returns, we believe it may be difficult for the various provincial regulators to ignore the NEB decision. Citing language in the NEB decision partially supporting a higher return due to increased risk specific to the gas pipeline business in addition to the potential for provincial regulators to be less progressive than the NEB, we see the possibility of a smaller increase in returns over the current formulas. Cost of capital review processes have been initiated in Alberta and Ontario, and we understand that a process may be initiated in British Columbia. Fortis Upgraded to Outperform. As a result of the potential earnings upside, we have upgraded Fortis' shares to Outperform (from Sector Perform). For further details, please see today's Research Comment for Fortis. Priced as of prior trading day's market close, EST (unless otherwise noted). All values in CAD unless otherwise noted. For Required Disclosures, please see Page 4. Page 177 sur 194

178 March 20, 2009 Energy Infrastructure NEB Increases Returns; Scraps ROE Formula in Favour of ATWACC The National Energy Board (NEB) released its decision for the Trans Quebec & Maritimes (TQM) pipeline s cost of capital related to 2007 and In its decision, the NEB awarded TQM an after-tax weighted average cost of capital (ATWACC) of 6.4%. Previously, TQM s returns were based on the RH-2-94 formula, better known as the Multi-Pipeline ROE formula, which is a similar formula that is used to set the annual allowed ROEs for many pipelines and utilities in Canada. So What Does the 6.4% ATWACC Imply for ROEs? In its decision, the NEB has left the optimal capital structure up to TQM. However, we expect TQM to capitalize itself with roughly 40% equity, which is similar to TransCanada s Canadian Mainline in addition to being an equity capitalization fairly similar to TransCanada as a whole. Using a 40% equity component, the implied ROE is 9.7%, which compares to multi-pipeline ROEs of 8.46% in 2007, 8.71% in 2008 and 8.56% in Interestingly, the 9.7% implied ROE based on 40% equity is roughly the mid-point between the average formula ROE for 2007 and 2008, and the 11% ROE requested by TQM. Exhibit 1 sets out the various implied ROEs based on the NEB s decision and the inputs that went into the ATWACC calculation for TQM. Exhibit 1: ROEs Implied by the TQM Decision ATWACC Market Cost of Debt Tax Rate 6.4% NEB Decision 6.1% Embedded debt costs 32% TQM tax rate Equity Implied Thickness ROE 30.0% 11.6% TQM current equity thickness 31.0% 11.3% 32.0% 11.1% 33.0% 10.9% 34.0% 10.7% 35.0% 10.5% 36.0% 10.3% 37.0% 10.2% 38.0% 10.0% 39.0% 9.9% 40.0% 9.7% Canadian Mainline equity thickness Source: National Energy Board; RBC Capital Markets estimates What Does this Mean for Our Coverage Universe? Minimal Immediate Impact. Only TQM is directly impacted by the NEB decision, and only for the years 2007 and More Upside to Come? With increasing bond yields and equity risk premiums, it is possible that the NEB could approve a higher ATWACC for 2009/2010 than the 6.4% in the TQM decision. NEB Regulated Pipelines Have the Most Visibility. Since the NEB has analyzed the cost of capital as part of the TQM decision, it is the most likely regulator to move quickly to approve higher returns. o o Impact Greatest (but Deferred) for TransCanada. Over time, we estimate that the decision could positively impact annual earnings by about $0.11/share (about 5% of 2009E EPS). However, about half of the impact is unlikely to be realized until 2012 after the expiration of the Canadian Mainline s shipper settlement unless the NEB makes a specific amendment to the RH-2-94 ROE formula, which we believe is unlikely. Impact on Enbridge Unclear, but Directionally Positive. Enbridge has very few pipelines that have returns annually set by the NEB s multi-pipeline formula. The vast majority of Enbridge s pipeline system has a return governed by a settlement with its shippers. However, the base return is grounded in the multi-pipeline ROE and the settlement is set to expire at the end of As such, the NEB decision provides support for the upcoming toll negotiations. The Alberta Clipper pipeline (under construction) has a return that is 225 basis points higher than the multi-pipeline ROE. However, based on an estimated 45% equity component, there appears to be little upside in the return for Alberta Clipper as a result of the NEB decision. 2 Page 178 sur 194

179 March 20, 2009 Energy Infrastructure Will the Provinces Follow and if so, by How Much? Given the magnitude of the increased returns for TQM, we believe it may be difficult for the various provincial regulators to ignore the NEB decision. If there is no ROE relief, it may become difficult for provincially-regulated utility businesses to attract capital given what would be a significant difference in ROEs without a meaningfully different risk profile. Citing language in the NEB decision partially supporting a higher return as a result of increased risk in the gas pipeline business in addition to the potential for provincial regulators to be less progressive than the NEB, we see the possibility of a smaller increase in returns over the current formulas. Cost of capital review processes have been initiated in Alberta and Ontario, and we understand that a process may be initiated in British Columbia. o o Fortis Could Have the Greatest Upside; Upgrading to Outperform (from Sector Perform). Using the implied ROEs from the NEB decision, we estimate that Fortis earnings could increase by $0.22/share (about 14% of 2009E EPS). As a result of the potential upside in earnings due to changes in ROE, we have upgraded the shares of Fortis to Outperform (from Sector Perform). Canadian Utilities (and ATCO via CU) Also Has Good Potential Upside. Using the implied ROEs from the NEB decision, we estimate that Canadian Utilities earnings could increase by $0.21/share (about 7% of 2009E EPS). Through its 52.4% interest in Canadian Utilities, we estimate that ATCO s earnings could increase by $0.24/share (about 5% of 2009E EPS). Exhibit 2: Preliminary Estimate of Potential Upside from Higher ROEs Based on the TQM Decision Potential EPS Impact % of 2009E EPS Comments Canadian UtilitiesPPAs n/a n/a We do not expect the PPA formula to be changed Alberta Utilities Commission % Total $ % ATCO Through 52.4% interest in CU (above) $ % Emera Nova Scotia Power $ % Formula not used in Nova Scotia, but potential uplift as part of a future rate case Enbridge National Energy Board $ % Clipper returns tied to the RH-2-94 formula Fortis Alberta Utilities Commission $ % BCUC % Newfoundland Power % Return parameters appear to be consistent with NEB decision Total $ % TransCanada National Energy Board $ % About half unlikely to be realized until 2012 (Mainline settlement) TransAlta PPAs n/a n/a We do not expect the PPA formula to be changed Source: Company reports; RBC Capital Markets estimates Companies Mentioned ATCO [TSX: ACO.x; $38.53; Sector Perform, Above Average Risk] Canadian Utilities [TSX: CU; $39.60; Underperform, Average Risk] Emera [TSX: EMA; $19.81; Sector Perform, Average Risk] Enbridge [TSX: ENB; $38.44; Outperform, Average Risk] Fortis [TSX: FTS; $22.03; Outperform, Average Risk] TransAlta [TSX: TA; $19.14; Sector Perform, Above Average Risk] TransCanada [TSX: TRP; $30.82; Outperform, Average Risk] 3 Page 179 sur 194

180 March 20, 2009 Energy Infrastructure Required Disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above). Distribution of Ratings RBC Capital Markets, Equity Research Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY[TP/O] HOLD[SP] SELL[U] Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Dissemination of Research RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. RBC Capital Markets also provides eligible clients with access to a database which may contain Short-Term trading calls on certain of the subject companies for which it currently provides equity research coverage. The database may be accessed via the following hyperlink The information regarding Short-Term trading calls accessible through the database does not constitute a research report. These Short-Term trading calls are not formal ratings and reflect the research analyst's views with respect to market and trading events in the coming days or weeks and, as such, may differ from the price targets and recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company. Thus, it is possible that a subject company's common equity that is considered a long-term 'sector perform' or even an 'underperform' might be a Short-Term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'outperform' could be considered susceptible to a Short-Term downward price correction. Conflicts Disclosures RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Important Disclosures The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, 4 Page 180 sur 194

181 March 20, 2009 Energy Infrastructure including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Additional Disclosures RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. 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183 Desjardins Securities MorningPulse Please see disclosure section at the end of this publication for company specific disclosures, analyst certification and legal disclaimers. Gaz Métro Limited Partnership Rating Hold Average Risk 12-month target C$15.00 Symbol GZM.UN Exchange TSX Sector Energy Infrastructure Closing price C$14.30 Potential return 13.6% 52-week range C$ Units O/S 120.5m basic, FD Public float C$499.5m Equity value (basic & diluted) C$1,722.5m Enterprise value C$3,274.3m Year-end Sep-30 EPU 1 1Q08A C$0.56 1Q09A C$ A C$ E C$1.24 Price/earnings 2008A 11.5x 2009E 11.5x Adj debt/total cap 2008A 66.1% Distribution/unit 2 C$1.24 Distribution yield % 1 Actual numbers adjusted for unusual and non-recurring items; Desjardins Securities estimates 2 Based on the most recently announced distribution (annualized) Source: Desjardins Securities Company description Gaz Métro is Québec s largest natural gas distributor, delivering ~97% of the natural gas consumed within the province. The partnership also has interests in Vermont gas and electricity distribution utilities and gas transportation ventures. Gaz Métro Limited Partnership (GZM.UN C$14.30, TSX) NEB determines cost of capital methodology is out of WACC, improving outlook for GZM; maintaining Hold recommendation but increasing target to C$15 (from C$14) Pierre Lacroix, CFA (514) pierre.lacroix@vmd.desjardins.com Jeremy Rosenfield, Associate (514) jeremy.rosenfield@vmd.desjardins.com Shannon Molenaar, CFA, Associate (416) shannon.molenaar@vmd.desjardins.com The Desjardins Takeaway Last week, two important events impacted GZM: (1) The NEB decided to change its cost of capital methodology in the TQM case, paving the way for significant eventual changes to all rate-regulated entities, and (2) GZM adopted a compulsory acquisition mechanism during its AGM, making it easier for a potential acquisition of the partnership in the future. As a result of these events, we believe the outlook for GZM has become more positive. Accordingly, we have adjusted our valuation and price target to C$15 (from C$14), while maintaining our Hold Average Risk recommendation. Event NEB issues its decision on TQM s cost of capital. On Thursday, March 19, the National Energy Board (NEB) issued its decision on the cost of capital application by Trans Québec & Maritimes Pipeline Inc. (TQM). As a reminder, TQM is jointly owned (50% each) by Gaz Métro and TransCanada Corporation (rated Buy Average Risk, C$39 target). In summary, the NEB used a new method of calculating cost of capital and authorized return, which results in an after-tax weighted average cost of capital (ATWACC) of 6.4% for the years 2007 and According to the NEB, the pipeline would have received a total allowed return of ~5.5% had no changes been made to the methodology. GZM annual general and special meeting of partners. On Wednesday, March 18, GZM held its annual general and special meeting of partners in Montréal. During the meeting, management commented on the current economic climate, the outlook for the partnership and the implication of forthcoming SIFT taxes on the partnership s operations. In addition, unitholders voted in favour of a special resolution introducing a compulsory acquisition mechanism. The measure passed by an overwhelming margin during the vote (>97%). Implication The NEB sets TQM s ATWACC at 6.4%: Background. In December 2007, TQM applied to the NEB for approval of the cost of capital to be used in calculating tolls charged to TQM s customers for 2007 and As part of its application, TQM applied for a rate of return on deemed common equity of 11% and an equity component of 40%. However, TQM also challenged the traditional methodology used by the NEB to calculate return on equity (ROE), arguing in favour of an after-tax weighted average cost of capital (ATWACC) calculation. The decision. In its decision, the NEB agreed with TQM s arguments on several points and effectively adopted its proposed ATWACC methodology, granting TQM an approved rate of 6.4%. For comparison purposes, the NEB highlighted that TQM s request amounted to an ATWACC of 6.7%. In essence, the ATWACC determines a fair return for TQM based on current market conditions, whereas previously the NEB had considered only changes to the long (30-year) Government of Canada (GOC) bond yield and no other financial market information. Impact on GZM. Looking at TQM s earnings, we estimate that the financial impact of the NEB s decision could amount to a ~C$0.02 positive impact on GZM s earnings per unit (EPU) vs our previous forecast (refer to the exhibit below for details of our calculation). Note that the impact is immaterial to TRP. Exhibit 1: Impact of various ATWACC calculations on GZM EPU Requested by TQM Granted by the NEB Status quo ATWACC* Net income (C$m) GZM s share of net income (50%) (C$m) Change vs status quo (%) Units outstanding (m) Impact on EPU (C$/unit) * After-tax weighted average cost of capital Source: Desjardins Securities, NEB PAGE 1 MARCH 23, 2009 Page 183 sur 194

184 Desjardins Securities MorningPulse More importantly, the decision sets a new precedent for all rate-regulated entities. The effect of the NEB s decision, however, is greater than the impact on TQM s earnings. The NEB s decision has now effectively opened the door for other regulated entities to request a change in methodology in the future, either to the NEB or to provincial regulators, using the TQM case as a precedent. Hence, we see a significant potential catalyst for rate-regulated entities in general. The impact on GZM a potential revision of QDA s authorized return. In GZM s case, the company is highly leveraged to the regulatory decisions of the Régie de l énergie (the Québec provincial regulator) with respect to the partnership s Québec Distribution Activity (QDA); recall that the QDA business accounts for over 80% of GZM s consolidated earnings. QDA has recently seen its authorized ROE decline as a result of the declining yield on long GOC bonds, the primary determinant in the ROE formula. If GZM were to ask the Régie to change its methodology, and if the Régie were to grant such a change, GZM might be able to recover some ground lost over the past several years due to declining bond yields (refer to the following exhibit). While GZM had requested the Régie change its methodology as recently as last year with the Régie rejecting GZM s request we believe that this result was largely due to a lack of precedent. Thus, we are cautiously optimistic that the Régie will be more receptive this time around. In terms of valuation, we are now removing a portion of the risk associated with a further decline in authorized rates in FY10 (refer to the recommendation section for further details). Exhibit 2: QDA ROE vs 30-year GOC yield % for FY (%) Forecast Authorized base ROE yr GOC Source: Desjardins Securities, Bloomberg, company reports Considering all options for dealing with SIFT taxes. With the imposition of SIFT taxes, GZM s non-taxable business activities (most notably GZM-QDA) will be forced to pay income taxes starting in FY11 (fall 2010). Ceteris paribus, we view this as a significant source of uncertainty and potential risk, especially as it relates to the partnership s distribution this topic is discussed in detail in our initiation of coverage report published on January 26, During its AGM, GZM management stated that the partnership is considering all courses of action open to it, with a likely decision on the best course of action to be determined towards the end of this year. In this vein, management proposed a compulsory acquisition mechanism. Essentially, the proposal would assist a potential acquirer in taking up outstanding units of the partnership during a takeover bid in which over 90% of units are tendered. In our view, this mechanism facilitates a takeover transaction, but more importantly, it removes a potential hurdle in the way of a willing acquirer. As a result, we view this as a positive step for GZM. Change in financial estimates. We have updated our financial model and earnings estimates for GZM as a result of the NEB s decision on TQM. Please refer to the following exhibit for further details. Exhibit 3: Change in financial estimates EPU (C$) Change Year-end Sep-30 Current Previous (C$) (%) 2009E E Source: Desjardins Securities PAGE 2 MARCH 23, 2009 Page 184 sur 194

185 Desjardins Securities MorningPulse Recommendation Outlook for GZM has improved. Our primary concern with regard to GZM relates to the sustainability of the partnership s distribution. On the one hand, the distribution is being pinched by declining bond yields and authorized ROE, while on the other hand, uncertainty remains with regard to the partnership s distribution post the imposition of SIFT taxes on the QDA business. However, given the aforementioned events and their implications, our outlook for GZM has become increasingly optimistic. Increasing price target to C$15 (from C$14) while retaining Hold recommendation. Given our increasing optimism, we have adjusted the probabilities used in our weighted average valuation of GZM s units: Best-case scenario (probability now 50%, previously 25%). We now assume a greater probability that the Régie will accord GZM-QDA some relief in light of the NEB decision. Status quo scenario (probability now 40%, previously 50%). We believe there is still a chance that there will be no changes to the ROE formula, but that interest rates will improve, thereby boosting authorized ROE for the QDA business. Worst-case scenario (probability now 10%, previously 25%). The likelihood that there are no changes to the regulatory framework, causing interest rate declines to lead to lower ROE, seems more remote at this time. Exhibit 4: GZM valuation scenario analysis Best-case scenario Status quo scenario Worst-case scenario 1. Regulatory framework changes to GZM s benefit for FY10 2. No distribution cut required as earnings are expected to improve 3. Equity issuance of ~C$100m to recapitalize the balance sheet (move towards 60% debt/total cap) 1. No change to regulatory framework, but interest rates improve, which boosts QDA authorized ROE 2. No distribution cut required as earnings are expected to improve 3. Equity issuance of ~C$100m to recapitalize the balance sheet (move towards 60% debt/total cap) 1. No change to regulatory framework, interest rates do not improve and QDAauthorized ROE decreases significantly 2. Distribution cut required as earnings are expected to decline materially 3. Equity issuance of ~C$100m to recapitalize the balance sheet (move towards 60% debt/total cap) Desjardins Securities estimated DPU Distribution yield (%) Implied price (C$) Probability (%) Weighted avg price (C$) Assumes that GZM maintains a 100% earnings payout ratio in the best-case and status quo scenarios, while adopting a 97.5% payout in the worst-case scenario Source: Desjardins Securities As a result of our expectations, we arrive at a weighted average value of C$ Therefore, we are increasing our target price to C$15 (from C$14). While we have increased our valuation on GZM, our rating remains Hold Average Risk for the time being. Still, with the improved outlook, we would be more inclined to consider weakness in the shares as a buying opportunity. At the closing price of C$14.30 as of March 20, 2009, our target price reflects a potential total return of 13.6%, inclusive of the C$1.24/unit distribution estimate. PAGE 3 MARCH 23, 2009 Page 185 sur 194

186 Desjardins Securities MorningPulse Exhibit 5: Income fund trading comparables Unit Mkt Dist Dist as Net debt/ Tot debt/ price cap EV EV/EBITDA (x) 3 P/B yield % EBITDA EBITDA tot cap Stability rating 5 Market data as of 20-Mar-09 Ticker (C$) (C$m) 1 (C$m) 2 LTM 2009E 2010E (x) (%) 4 LTM 3 LTM (x) 3 (%) S&P DBRS Gas and pipeline income funds AltaGas Income Trust ALA.UN ,045 1, SR-3/Mod STA-3(middle) Enbridge Income Fund ENF.UN , NR STA-2(middle) Fort Chicago Energy Partners FCE.UN , SR-2/ModAgg STA-2(low) Gaz Métro LP GZM.UN , SR-2/Mod STA-2(middle) Inter Pipeline Fund IPL.UN ,611 3, SR-3/ModAgg STA-3(middle) Keyera Facilities Income Fund KEY.UN , SR-3/Mod NR Pembina Pipeline Income Fund PIF.UN ,920 2, SR-2/ModAgg STA-2(low) Average Average ex high/low Market cap calculated using basic float, excludes sponsor s retained interest; 2 EV calculated based on all units issued & outstanding; 3 LTM adjusted for unusual and non-recurring items; estimates based on Bloomberg consensus; 4 Most recently announced (annualized); 5 S&P s SR ratings are qualified by reference to distribution profile and outlook Source: Desjardins Securities, Bloomberg, company reports PAGE 4 MARCH 23, 2009 Page 186 sur 194

187 Desjardins Securities MorningPulse DISCLOSURES Distribution of ratings Rating Desjardins Desjardins coverage % Desjardins Investment % category rating universe (# of stocks) distribution Banking (# of stocks) distribution Buy Top Pick/Buy Hold Hold Sell Sell Total COMPANY SPECIFIC DISCLOSURES Legend 1. Desjardins Securities makes a market in the securities of the issuer. 2. Desjardins Securities has performed investment banking services for the issuer in the past 12 months. 3. Desjardins Securities has received compensation for investment banking services from the issuer within the past 12 months. 4. Desjardins Securities has managed or co-managed a public offering of securities for the issuer in the past 12 months. 5. Desjardins Securities beneficially owned 1% or more of the common equity (including derivatives exercisable or convertible within 60 days) as of the month end preceding this report. 6a. The Desjardins Securities research analyst(s) and/or associate(s) who covers the issuer discussed has a long position in its common equity securities. 6b. A member of the household of the Desjardins Securities research analyst(s) and/or associate(s) who covers the issuer has a long position in its common equity securities. 7a. The Desjardins Securities research analyst(s) and/or associate(s) has viewed a material operation of the issuer, and the related travel expenses have not been paid for by the issuer. 7b. The Desjardins Securities research analyst(s) and/or associate(s) has viewed a material operation of the issuer, and the related travel expenses have been paid for partially by the issuer. 7c. The Desjardins Securities research analyst(s) and/or associate(s) has viewed a material operation of the issuer, and the related travel expenses have been paid for fully by the issuer. 8. Desjardins Securities has received compensation for non-investment banking, non-securities-related services from the company in the past 12 months. 9. The issuer is a client for which a Desjardins Securities company has performed non-investment banking, non-securities related services in the past 12 months. 10. The issuer is (or was) a client of Desjardins Securities or an affiliate within the Desjardins Group within the past 12 months and received non-securities related services. 11. A partner, director or officer of Desjardins Securities or any analyst(s) involved in the preparation of this publication has provided services (other than for investment advisory or trade execution purposes) to the issuer for remuneration within the past 12 months. 12. An officer or director of Desjardins Securities, outside of the Equity Research Department, or a member of his/her household is an officer or director of the issuer or acts in an advisory capacity to the issuer. 13. The Desjardins Securities research analyst(s) and/or associate(s) had communication with the issuer regarding the verification of factual material in this research publication. 14. The Desjardins Securities research analyst(s) and/or associate(s) had communication with Investment Banking regarding the verification of material in this research publication. 15. A director or officer of the issuer (or any of its affiliates) serves on the board of the Desjardins Group. 16. The issue date for this research publication is within the restricted period for any recent IPO, secondary offering or lock-up agreement between the issuer and Desjardins Securities. 17. The Desjardins Securities supervisory analyst serves as an officer, director or employee of the issuer or acts in an advisory capacity to the issuer. Disclosures for issuer discussed in this publication: 2, 3, 4, 6a-6b, 8, 9, 10, 13 PAGE 5 MARCH 23, 2009 Page 187 sur 194

188 Desjardins Securities MorningPulse STOCK RATING SYSTEM Top Pick Buy Hold Sell Not Rated Desjardins best investment ideas stocks that offer the best risk/reward ratio and that are expected to significantly outperform their respective peer group* over a 12-month period Stocks that are expected to outperform their respective peer group* over a 12- month period Stocks that are expected to perform in line with their respective peer group* over a 12-month period Stocks that are expected to underperform their respective peer group* over a 12-month period Stock is being covered exclusively on an informational basis RISK QUALIFIERS Average Risk Above-average Risk Speculative Risk represented by the stock is in line with its peer group* in terms of volatility, liquidity and earnings predictability Risk represented by the stock is greater than that of its peer group* in terms of volatility, liquidity and earnings predictability High degree of risk represented by the stock, marked by an exceptionally low level of predictability * Peer group refers to all of the companies that an analyst has under coverage and does not necessarily correspond to what would typically be considered an industry group. Where an analyst s coverage universe is such that relative performance against a peer group is not meaningful, the analyst will benchmark the rating against the most appropriate market index OFFICES Montreal 1170 Peel Street Suite 300 Montreal, Quebec H3B 0A9 (514) Toronto 145 King Street West Suite 2750 Toronto, Ontario M5H 1J8 (416) Vancouver 200 Burrard Street Suite 1510, Waterfront Centre Vancouver, British Columbia V6C 3L6 (604) DESJARDINS SECURITIES INC. LEGAL DISCLAIMERS Dissemination of Research Desjardins Securities makes all reasonable effort to provide research simultaneously to all eligible clients. Research is available to our institutional clients via Bloomberg, FactSet, FirstCall Research Direct, Reuters and Thomson ONE. In addition, sales personnel distribute research to institutional clients via , fax and regular mail. 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189 Action Notes March 23, 2009 Equity Research 1 of 6 Pipelines, Power & Utilities Linda Ezergailis, P.Eng linda.ezergailis@tdsecurities.com Robert Hope (Sr. Associate) robert.hope@tdsecurities.com Avery Haw (Associate) avery.haw@tdsecurities.com TQM Decision Has Positive Sector Implications Event The National Energy Board (NEB) released a decision regarding Trans Quebec & Maritimes Pipeline s (TQM) cost of capital application for 2007 and Impact POSITIVE. We believe this decision could have broad positive implications for regulated businesses in Canada, more specifically NEB regulated pipelines. We also believe this decision could be used as a precedent in other jurisdictions, and most imminently in the Alberta Utilities Commission s (AUC) generic cost of capital hearing, which is scheduled to begin in May. We note that TransCanada s Mainline and Alberta systems are operating under negotiated settlements through 2011 and 2009, respectively, and it is our understanding that a change in NEB cost of capital methodology would not be applicable until the settlements conclude. By our calculations, Fortis has the highest positive leverage to increases in regulated returns. We outline estimated EPS sensitivities to regulated ROEs in Exhibit 1. All figures in C$, unless otherwise specified. Exhibit 1. EPS Sensitivities to Changes in Regulated ROEs Company Name Regulatory Jurisdiction 2010E EPS Sensitivity to +50 bps Change in ROE Fortis AUC, BCUC, PUB 3.7% Canadian Utilities AUC 2.4% ATCO AUC 2.0% Enbridge NEB, OEB 1.3% TransCanada NEB 1.2% Note: Larger regulatory jurisdictions include: 1) Alberta Utilities Commission (AUC), 2) British Columbia Utilities Commission (BCUC), 3) National Energy Board (NEB), 4) Ontario Energy Board (OEB), and 5) Board of Commissioners of Public Utilities - Newfoundland and Labrador (PUB). Source: Company Reports, Thomson, TD Newcrest. Details Background: TQM is a relatively small pipeline located in Quebec that is jointly owned by TransCanada and Gaz Metro Limited Partnership. Since 1995, the ROE was governed by the NEB multi-pipeline ROE. In December, 2007, TQM applied for a review of its cost of capital. Decision Represents a Fundamental Shift: The NEB agreed to vary from its previous methodology and set an after-tax cost of capital (ATWACC) for TQM of 6.4% for 2007 and 2008, which represents a significant increase in allowed returns (Exhibit 2). We estimate that this ATWACC corresponds to an ROE of 11.6% on deemed capital structure of 30% equity. We outline estimated ROE sensitivities to various capital structures and ATWACCs in Exhibit 3. Under its previous methodology the NEB relied on a formula to determine its ROE for pipeline companies which was adjusted yearly by 75% of the change in the forecasted yield for a 30-year Government of Canada bond. For 2009, the NEB ROE formula generated an ROE of 8.57%. Please see the final pages of this document for important disclosure information. Page 189 sur 194

190 Action Notes March 23, 2009 Equity Research 2 of 6 Exhibit 2. Overview of TQM Decision Source: NEB, TD Newcrest New Methodology: ATWACC 6.4% 6.4% Previous Methodology: ROE 8.46% 8.71% 8.57% Equity Thickness 30% 30% 30% Estimated ATWACC 5.5% 5.5% 5.5% Exhibit 3. ROE Sensitivities ATWACC Note: Assumes a pre-tax cost of debt of 6.1% and a tax rate of 31.9%. Source: NEB, TD Newcrest. Equity Thickness 0 25% 30% 35% 40% 50% 55% 5.0% 7.5% 6.9% 6.5% 6.2% 5.8% 5.7% 5.5% 9.5% 8.6% 7.9% 7.5% 6.8% 6.6% 6.0% 11.5% 10.2% 9.4% 8.7% 7.8% 7.5% 6.4% 13.1% 11.6% 10.5% 9.7% 8.6% 8.2% 6.5% 13.5% 11.9% 10.8% 10.0% 8.8% 8.4% 7.0% 15.5% 13.6% 12.2% 11.2% 9.8% 9.3% 7.5% 17.5% 15.2% 13.7% 12.5% 10.8% 10.2% Canadian Financial Markets Have Fundamentally Changed: The Board is of the view that there have been significant changes in the Canadian financial markets since its initial ROE determination in In its view the main changes have been: 1) increased globalization of financial markets increasing the competition for capital, 2) decline in the ratio of government debt to GDP, putting downward pressure on government bond yields, and 3) changes in foreign exchange rates. The Board is of the view that these changes cast doubt on the fundamentals underlying its previous methodology. ROE Formula Not Reflecting Changes in Cost of Capital: The Board conceded that factors that could potentially change TQM s cost of capital may not be captured in its previous approach, which relied on a single variable, the long Canada bond yield. We note that under the previous formula, recent declines in government bond yields resulted in a lower ROE for 2009, which is contrary to our view that the cost of capital for regulated companies has increased. We believe this point could be argued for other regulated assets in other Canadian jurisdictions and could be used as a precedent in other cost of capital hearings. We note that the AUC has a generic cost of capital hearing scheduled and that the Ontario Energy Board has initiated a process to determine if its 2009 cost of capital should be adjusted given recent financial markets. Investment Conclusion Never before have we been so optimistic on the potential for regulated returns to increase. We believe the NEB decision is directionally positive for the sector given our view that the capital markets have clearly demonstrated that the cost of capital has risen. Exhibit 4. Summary of Recommendations Curr. Market Ind. EPS P/E 12-Month Total Stock Name Symbol Price Cap (mm) Div. Yield 2007A 2008A 2009E 2010E 2007A 2008A 2009E 2010E Target Return Rating Risk Fortis Inc. FTS $23.48 $4,111.3 $ % $1.28 $1.56 $1.49 $ x 15.0x 15.8x 14.3x $ % AL BUY LOW TransCanada Corp. TRP $31.44 $19,367.0 $ % $2.08 $2.22 $2.15 $ x 14.2x 14.6x 12.7x $ % AL BUY LOW ATCO Ltd. ACO.X $37.67 $2,192.4 $ % $3.81 $4.51 $3.92 $ x 8.3x 9.6x 9.4x $ % BUY LOW Canadian Utilities Ltd. CU $39.41 $4,957.8 $ % $2.78 $3.15 $2.85 $ x 12.5x 13.8x 13.3x $ % BUY LOW Emera Inc. EMA $19.75 $2,216.0 $ % $1.23 $1.26 $1.35 $ x 15.6x 14.6x 14.4x $ % HOLD LOW Enbridge Inc. ENB $38.11 $14,089.3 $ % $1.67 $1.87 $2.29 $ x 20.4x 16.7x 15.9x $ % HOLD LOW TransAlta Corp. TA, TAC $19.00 $3,762.0 $ % $1.27 $1.36 $1.38 $ x 14.0x 13.8x 12.6x $ % HOLD MEDIUM Average 4.7% 21.1x 15.3x 14.9x 13.9x Source: Company Reports, Thomson, TD Newcrest. Page 190 sur 194

191 Action Notes March 23, 2009 Equity Research 3 of 6 Exhibit 5. Justification of and Key Risks to Target Price Stock Name Ticker Exch. Rating Share Price Target Price Justification of Target Price ATCO Ltd. ACO.X T BUY $37.67 $47.00 predicated on ATCO s estimated one-year forward NAV and applying a 20% discount to NAV. ATCO s estimated one-year forward NAV is dependent on our $46.00 Canadian Utilities target price. Our target price implies a 2.0% dividend yield and a price-to-earnings ratio of 11.7 times. Canadian Utilities Ltd. CU T BUY $39.41 $46.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 161% (vs. historical average of 136%), 2) 25% relative dividend yield of 81% (vs. historical average of 73%), and 3) 25% price-to-book ratio of 1.8x (vs. historical average of 1.9x). Our target price implies a 3.2% dividend yield and a 15.5x P/E ratio, compared to historical averages of 4.0% and 14.0x, respectively. Emera Inc. EMA T HOLD $19.75 $22.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 156% (vs. historical average of 134%), 2) 25% relative dividend yield of 117% (vs. historical average of 96%), and 3) 25% price-to-book ratio of 1.5x (vs. historical average of 1.5x). Our target price implies a 4.7% dividend yield and a 16.1x P/E ratio, compared to historical averages of 5.2% and 14.3x, respectively. Enbridge Inc. ENB T, N HOLD $38.11 $44.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 136% (vs. historical average of 118%), 2) 25% relative dividend yield of 90% (vs. historical average of 71%), and 3) 25% P/B ratio of 2.1x (vs. historical average of 2.5x). We believe Enbridge will trade at a premium versus the sector due to its leverage to growing volumes in the oil sands, favourable negotiated settlements with its shippers, above average profitability, and operational diversification. Fortis Inc. FTS T AL BUY $23.48 $29.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 141% (vs. historical average of 132%), 2) 25% relative dividend yield of 93% (vs. historical average of 80%), and 3) 25% P/B of 1.5x (vs. historical average of 1.5x). Our target price implies a 3.7% dividend yield and a price-to-earnings ratio of 17.7x, compared to historical averages of 4.4% and 14.4x, respectively. TransAlta Corp. TA, TAC T, N HOLD $19.00 $26.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 145% (vs. historical average of 114%), and 2) 50% relative dividend yield of 112% (vs. historical average of 97%). Our target price implies a 4.5% dividend yield and a 17.2x P/E ratio, compared to historical averages of 5.1% and 16.8x, respectively. TransCanada Corp. TRP T, N AL BUY $31.44 $42.00 predicated on our 2010 financial estimates as follows: 1) 50% relative earnings yield of 147% (vs. historical average of 142%), 2) 25% relative dividend yield of 95% (vs. historical average of 88%), and 3) 25% price-to-book value of 1.8x (vs. historical average of 1.8x). Our target price implies a 3.8% dividend yield and a price-to-earnings ratio of 17.0x, compared to historical averages of 4.6% and 14.1x, respectively. Stock Name Ticker Exch. Risk Share Price Target Price Key Risks to Target Price ATCO Ltd. ACO.X T LOW $37.67 $ ) higher than expected long bond yields, 2) regulatory surprises, 3) commodity price risk, 4) corporate governance considerations, 5) lack of disclosure, 6) lack of voting control, 7) operational disruptions, 8 ) cyclical nature of industrial business, and 9) share price of Canadian Utilities Canadian Utilities Ltd. CU T LOW $39.41 $ ) higher than expected long bond yields, 2) regulatory surprises, 3) commodity price risk, 4) corporate governance considerations, 5) lack of disclosure, 6) lack of voting control, and 7) operational disruptions Emera Inc. EMA T LOW $19.75 $ ) higher than expected long bond yields, 2) acquisitions that do not create shareholder value, 3) operational disruptions, 4) higher than expected fuel costs, 5) regulatory surprises, and 6) sovereign risk Enbridge Inc. ENB T, N LOW $38.11 $ ) higher than expected long bond yields, 2) acquisitions that do not create shareholder value, 3) operational disruptions, 4) potential reduction in historical valuation premium to sector, 5) tougher-than-expected competition for new oil transmission pipeline capacity, 6) regulatory surprises, 7) substantial delays and/or cancellations of oil sands projects, and 8) WCSB risk Fortis Inc. FTS T LOW $23.48 $ ) higher than expected long bond yields, 2) operational disruptions, 3) regulatory surprises, 4) unexpected large acquisitions, 5) sovereign risk, 6) materially different power prices in Ontario versus our forecast, and 7) integration risk TransAlta Corp. TA, TAC T, N MEDIUM $19.00 $ ) Materially different than expected long bond yields, 2) acquisitions that do not create shareholder value, 3) operational disruptions, 4) lack of share buybacks, 5) materially different than expected power and coal price environments, and 6) unanticipated changes to environmental laws and regulations. TransCanada Corp. TRP T, N LOW $31.44 $ ) higher than expected long bond yields, 2) acquisitions that do not create shareholder value, 3) operational disruptions, 4) surprise regulatory decisions, 5) materially different power prices & fuel costs versus our forecast, and 6) WCSB risk Source: Thomson, TD Newcrest. Page 191 sur 194