ENERGY CAPITAL MARKETS REPORT - Black & … 2012: ENERGY CAPITAL MARKETS REPORT BLACK & VEATCH | 2...

ENERGY CAPITAL MARKETS REPORT Stock Performance ! Sector Evaluations ! Asset Sales ! Mergers & Acquisitions ! Securities Underwriting

JANUARY 2012

In this Report:

AEP | AVA | BHR | BTU | CAN | CEG | CHK | CHKM | CPNO | DTE | DUK | EIX | EMA | ENB | EPD | ETR | EXC | GXP | LNT | MMP |

SUG | NEE | NI | NRGY | OTTR | PAA | PPL | SRE | STR | VVC | WMB | WPX | WR

---------------------------------------------------------------------------------------------------------------------------- Samuel Glasser; Maggie Stanco Editors

William Kemp Vice President

Contact Information: [email protected] | +1 631-348-4090 ext 222

UNDERWRITING & FINANCIAL RESTRUCTURING Bond issues at favorable interest, redemption of high-interest debt, and shelf registrations marked utility financial activity.

PacifiCorp went to market for $650 million in two slices with coupons of 2.95% and 4.1%; an Entergy unit borrowed $250 million for two years at a sub-2% rate; a Duke subsidiary also offered bonds at less than 2%; Florida Power & Light went to market for the long term at just over 4%.

NiSource had a cash tender offer to buy its outstanding notes at 10.75% and 6.15%, and Williams bought back nearly $2 billion in bonds ranging from 7.5% to 8.75%.

MERGERS & ACQUISITIONS A number of transactions were announced during December and early January. Chesapeake Energy entered into a joint venture with Total E&P USA as the U.S. unit of the French oil major acquired a stake in the liquids-rich area of the Utica Shale in Ohio.

Midstream operators Copano Energy and Magellan Midstream Partners formed a joint venture to deliver Eagle Ford Shale condensate to Corpus Christi, Texas.

The Exelon/Constellation merger received U.S. Department of Justice approval.

Vectren Corp. let go of its gas retailing subsidiary, selling the unit to retailer Direct Energy, which added 280,000 customers as a result. Meanwhile, American Electric Power will jump further into the energy retailing sector with its acquisition of BlueStar Energy and 21,000 customers.

A Sempra subsidiary agreed to buy a small regulated gas utility in Mississippi.

STOCKS & COMMODITIES The Rudden Composite Index of utility stocks gained 3.1% during December. Regulated Electric-Integrated was the strongest performer, gaining 4.2% during the month and 14.8% for the 52 weeks ended December 30. The S&P 500 Index gained 1.1% for the month.

The Rudden Index gained 15.4% for the year ended December 30 and the S&P 500 was flat for the year. The best-performing Rudden sector in 2011 was Natural Gas Transmission and Distribution – Diversified with a 29% gain.

All categories of the Rudden Index gained during the month, although Merchant Electric was marginally higher by 0.4%. All categories gained during the 52 weeks except Merchant Electric, which fell 6.5%.

The Dow Jones Industrial Average ended 2011 at 12,218, up 172 points, 1.4%, from the November close of 12,046 points. The DJIA was up 5.5% or 641 points over the December 31, 2010, close of 11,577.

The spot month gold futures contract had a final settlement for December 2011 delivery at $1,562.90/ounce on the New York Mercantile Exchange, down $147.90 from the $1,710.80/ounce at the final settlement of the November contract.

Copper futures prices settled for December delivery on NYMEX at $3.3600/pound, virtually unchanged from the November contract.

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BL ACK & VEATCH | 2 JANUARY 2012: ENERGY CAPITAL MARKETS REPORT

The light sweet crude oil futures contract for January delivery settled at $97.22/barrel.

The final settlement for the January natural gas futures contract was $3.08 per million British thermal units, down 28 cents from the $3.36/mmBtu for the December contract. Natural gas prices slipped further going into January with the spot month February contract vacillating a few cents on either side of the $3.00 mark during the first

few days of trading, but then dropped below $2.70 during the second week of the month.

The Central Appalachian coal futures contract for January delivery settled at $73.17/ton or $3.05/mmBtu, putting it virtually at parity with natural gas. The prices are based on the NYMEX delivery points at the Henry Hub in Louisiana for gas and at terminals on the Big Sandy River in West Virginia for coal.

Values 12/30/11

Monthly Change

from 12/01/11

Annual Change

from 12/30/10

52 Week High

Change from 52

Week High

All-Time High Since 01/03/07

Change from All-

Time High

S&P 1,257.60 1.05% (0.0%) 1,363.61 (7.8%) 1,565.15 (19.6%)

Rudden Composite Index 104.59 3.14% 15.4% 105.02 (0.4%) 115.44 (9.4%)

Master Limited Partnerships (MLPs) 140.23 3.93% 9.3% 140.23 0.0% 140.23 0.0%

Natural Gas T&D (Diversified) 123.13 1.92% 29.0% 123.54 (0.3%) 124.46 (1.1%)

Regulated T&D (Gas & Electric) 122.89 3.65% 19.0% 123.93 (0.8%) 123.93 (0.8%)

Electric (Merchant) 62.69 0.39% (6.5%) 77.70 (19.3%) 158.58 (60.5%)

Regulated Electric (Integrated) 105.55 4.23% 14.8% 106.27 (0.7%) 106.95 (1.3%)

Electric (Diversified) 89.52 2.77% 13.1% 90.10 (0.6%) 126.65 (29.3%)

UNDERWRITING & FINANCIAL RESTRUCTURING

UTILITY COMPANY SELLS TWO LONG-TERM BOND ISSUES PacifiCorp went to the bond market for $650 million in long-term borrowings at favorable interest rates. The company said in a prospectus dated January 3 that it sold $350 million of 2.95% first mortgage bonds due Feb. 1, 2022, and $300 million in 4.1% first mortgage bonds due February 1, 2042.

PacifiCorp intends to use the proceeds for the repayment of short-term debt, redemption of tax-exempt bonds, to fund capital expenditures and for general purposes. The company’s stock is held by MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway.

ETR Entergy Unit Borrows at Low Interest Entergy Louisiana LLC, a subsidiary of Entergy Corp. is selling $250 million of its first mortgage bonds series 1.875% due Dec. 15, 2014, the company said in a prospectus filed January 5.

The company intends to use the proceeds together with other available funds to repay short-term debt and borrowings and for other general purposes.

NEE FP&L Goes to Market for $600M; Parent Buys Back Stock Florida Power & Light Co. sold $600 million in principal

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amount of 30-year first mortgage bonds bearing interest at 4.125% per year, maturing on February 1, 2042, the company said.

FP&L is a subsidiary of NextEra Energy, Inc. of Juno Beach, Fla. (NYSE: NEE).

In other financial developments, NextEra Energy purchased approximately 6.7 million shares of its common stock for $55.76 per share for a sum of $375 million on December 7, 2011, under an accelerated share repurchase agreement.

The company also said that the NextEra Energy Resources, LLC, subsidiary recently closed on a sale of four natural gas-fired power plants and expected to close on the sale of a fifth plant. The transactions are expected to generate approximately $825 million in cash, a portion of which will be used to repurchase the common stock, NextEra said.

The final settlement of the transaction is expected during the first quarter. All of the repurchased shares will be retired, the company said.

Separately, Redwood Trails Wind, LLC, a subsidiary of NextEra Energy Resources, obtained approximately $234 million in financing for 236.8 megawatts of wind energy projects located in Oklahoma and California, NextEra Energy announced.

The limited recourse term loan has a variable rate and matures in December 2029. NextEra Energy Resources intends to use the proceeds to partially reimburse capital contributions that it made to develop and build the wind energy projects.

CHKM Midstream Operator Privately Places Senior Notes Chesapeake Midstream Partners, L.P. (NYSE: CHKM) commenced an offering through a private placement of $600 million of senior notes due 2022, the company said on January 6. The partnership intends to use the net proceeds of the proposed offering to repay borrowings outstanding under its revolving credit facility and for general purposes.

LNT Midwestern Utility Parent Plans for Nearly $1B in Financing Alliant Energy Corp. (NYSE: LNT), Madison, Wisc., filed a shelf registration statement on December 16 for an unspecified amount of its own securities, as well as for up to $800 million in securities by each of its subsidiaries, Interstate Power & Light Co. and Wisconsin Power and Light Co.

Alliant said in the SEC filing that it may offer common stock, debt securities convertible to common stock, warrants to purchase common stock, and stock purchase contracts and stock purchase units.

PAA Pipeline Partnership Gets Billion-Dollar Credit Line for a Year Plains All American Pipeline, L.P. (NYSE: PAA), Houston, entered into a new $1.2 billion credit facility to provide additional liquidity, the company said. PAA may activate the facility at any time over the next six months, resulting in a maturity 364 days from the activation date.

The credit arrangement enhances the company’s flexibility in accessing capital markets, as it completes the financing for five acquisitions totaling $2.3 billion announced on December 1, the company said.

EIX Edison Unit Closes Financing for Wind Energy Edison Mission Energy (EME), a subsidiary of Edison Mission Group, said that it closed a $242 million financing for a portfolio of three contracted wind energy projects in two states representing 204 megawatts (MW) of generating capacity.

Edison Mission Group is a unit of Edison International (NYSE: EIX).

The transaction was priced at 250 basis points over LIBOR with step-ups through maturity for the 10-year term loan, Edison said.

The projects include two sites operating in Oklahoma with 130 MW and 19 MW capacity, and a site in West Virginia that is nearing completion, which will have a capacity of 55 MW. The projects sell electricity to utilities and public agency customers under long-term contracts.

The financing consists of a 10-year $214 million fully amortizing term loan facility, and 10-year letter of credit and working capital facilities totaling $28 million.

NRGY High-Interest Bonds Tendered Back to Partnership Inergy, LP (NYSE: NRGY), Kansas City, Mo., received tenders for more than 99% in aggregate principal amount of its outstanding 8.75% senior notes due 2015; $94.2 million in aggregate principal amount of the notes were tendered as of December 20, 2011, the company said.

Inergy is a master limited partnership with operations in propane retailing and a propane supply logistics,






transportation and wholesale marketing business serving independent dealers in the U.S. and Canada. The company also operates natural gas storage and liquid petroleum gas storage business, a solution-mining and a salt production company.

AVA Avista Issues Bonds, Amends Line of Credit Avista Corp. (NYSE: AVA) issued $85 million of 4.45% first mortgage bonds due in 2041 under a bond purchase agreement with certain institutional investors in the private placement market. The proceeds from the sale of the new bonds were used to repay a portion of the borrowings outstanding under the company’s $400 million committed line of credit, the company said on December 14.

Avista concurrently announced that it had amended its $400 million committed line of credit agreement with various banks, including a two-year extension of the original February 11, 2015, expiration date and revised pricing.

TVA Redeems Bonds The Tennessee Valley Authority, taking advantage of market conditions, will redeem one issue of bonds from its electronotes series on January 15.

The utility announced on December 15 that it will redeem all of its 2008 4.75% electronotes due Jan. 15, 2028. Approximately $35.4 million of this series is outstanding. TVA's electronotes program offers securities for retail investors.

EMA Emera Inc. Issues $250 Million of Medium Term Notes Emera Inc., Halifax, Nova Scotia (TSX: EMA), completed the issue of $250 million Series H medium term notes. The notes bear interest at the rate of 2.96% per year until December!13, 2016.

The proceeds will be used to repay short term borrowings and for general purposes. Emera is an energy and services company that invests in electricity generation, transmission and distribution, gas transmission and utility energy services. Emera operates throughout northeastern North America, in three Caribbean countries and California. More than 80% of earnings are from regulated investments.

GXP Midwestern Utility Company Amends Credit Agreements Great Plains Energy and its integrated utility subsidiaries KCP&L Greater Missouri Operations Co. and Kansas City Power & Light filed a combined 8-K report discussing

amendments to their respective credit agreements with a consortia of banks.

The term of each credit agreement is extended to December 9, 2016, and can be extended twice for one year by mutual assent.

The amended agreements are revolving credit facilities providing for revolving loans and standby letters of credit not exceeding an aggregate of $200 million for Great Plains Energy, $450 million in the case of Greater Missouri Operations, and $600 million for Kansas City Power & Light.

Each credit agreement also provides for standby letters of credit and swingline loans.

AEP American Electric Power Files Shelf Registration American Electric Power Co., in a shelf registration statement filed on December 15, 2011, registered an indeterminate principal amount or number of senior notes, shares of common stock, junior subordinated debentures, stock purchase contracts and stock purchase units to be offered from time to time.

PPL Electric Company Issues Bonds PPL Energy Supply LLC, a unit of PPL Corp., (NYSE: PPL) completed a $500 million sale of 10-year notes with a 4.6% coupon. The notes were issued on December 16, 2011, and mature on December 15, 2021.

NI Utility Parent Repurchases High-Interest Bonds NiSource Inc. (NYSE: NI) announced the final results of the cash tender offers of NiSource Finance Corp. to purchase any and all of its outstanding 10.75% notes due 2016 and, if less than $250 million in aggregate principal of those notes are tendered, an amount of its 6.15% notes due 2013 to make up the total.

As of the December 12, 2011, expiration, the aggregate principal amount of 2016 notes tendered was $125.3 million, and those of the 2013 notes was $228.7 million for a total tender of $354 million, the company said. All of the tendered 2016 notes will be purchased, while the 2013 notes will be purchased on a pro rata basis in an aggregate principal amount of $124.7 million.


STR Pipeline Unit Sells Long Bonds Questar Pipeline Co., a subsidiary of Questar Corp. (NYSE: STR) Salt Lake City, Utah, entered into an underwriting agreement on December 1, 2011, for the issuance and sale in a public offering of $180 million aggregate principal amount of 4.875% senior notes due 2041. The offering was made under a shelf registration statement filed with the SEC.

DUK Utility Unit Raises $1 Billion at Favorable Interest Duke Energy Carolinas LLC, a Duke Energy Corp. subsidiary, in a prospectus filed December 6 announced the offering of $1 billion aggregate principal amount of first and refunding mortgage bonds in two series.

Duke Energy Carolinas is offering $350 million first and refunding mortgage bonds, 1.75% series due 2016, and $650 million first and refunding mortgage bonds, 4.25% series due 2041. The bonds mature on December 15 in 2016 and 2041, respectively.

The proceeds will be used to fund capital expenditures for an ongoing construction program and for general purposes, including repayment at maturity of the $750 million 6.25% senior notes due January 15, 2012.

WMB Williams Announces Completion of Cash Tender Offers Williams Cos. (NYSE: WMB) completed its cash tender offers for the series of notes and debentures listed below for an aggregate purchase price of $1 billion. Williams received tenders of approximately $1.98 billion aggregate principal amount of the following securities: !" 7.875% notes due 2021!" 7.5% debentures due 2031!" 7.75% notes due 2031!" 8.75% notes due 2032!" 8.125% notes due 2012!" 7.625% notes due 2019!" 8.75% senior notes due 2020!" 7.7% debentures due 2027

DTE Midwestern Utility Parent Sells Junior Long-Term Debt DTE Energy Co. completed the sale of $280 million aggregate principal amount of 2011 Series I 6.5% junior subordinated debentures due 2061, the company said in an 8-K filing with the SEC on December 7, 2011.

OTTR Otter Tail Power Completes Private Placement Otter Tail Power Co., a unit of Otter Tail Corp. (NASDAQ: OTTR), Fergus Falls, Minn., issued $140 million aggregate principal amount of bonds in a private placement, the company declared in an 8-K report.

The senior unsecured notes have a 4.63% coupon, maturing on December 1, 2021.

The utility used a portion of the proceeds to retire $90 million in principal of its 6.63% senior notes due December!1, 2011, and $10.4 million in principal of pollution control refunding revenue bonds due December!1, 2012. The remaining proceeds will be used to repay short-term debt and other expenses.

WR Westar Prepares to Issue Notes Westar Energy, Inc., (NYSE: WR) Topeka, Kan., reported in an 8-K filing that it had entered into a commercial paper program under which the company may issue at any time, on a private placement basis, $1 billion in a maximum aggregate amount outstanding of unsecured commercial paper notes.

The proceeds will go to pay down outstanding balances under its revolving credit facilities, for capital expenditures and for other general purposes. Amounts available under the commercial paper program may be re-borrowed.!

The interest rates will vary based on market conditions as will the maturities which will not exceed one year from the date of issue, Westar said.



MERGERS & ACQUISITIONS

CHK Chesapeake Energy Inks Utica Shale Joint Venture with Total The U.S. unit of the French oil company Total S.A. (NYSE: TOT) acquired a stake in the liquids-rich area of the Utica Shale when it completed a joint venture transaction with Chesapeake Energy Corp. (NYSE: CHK) just as 2011 drew to a close.

Total E&P USA, Inc. acquired an undivided 25% interest in approximately 619,000 net acres spanning 10 counties in eastern Ohio, the companies said. Approximately 542,000 net acres were contributed to the joint venture by Chesapeake and approximately 77,000 net acres by EnerVest, Ltd. of Houston.

The transaction closed on December 30, 2011, resulting in combined value of approximately $2.32 billion, of which $2.03 billion was received by Chesapeake and $290 million by EnerVest, Chesapeake said. Approximately $610 million was paid to Chesapeake in cash and $1.42 billion will be paid in the form of a drilling and completion cost carry, which Chesapeake anticipates fully receiving by year-end 2014, the company said.

Chesapeake will serve as the operator of the joint venture. Total will acquire a 25% share of all additional acreage acquired by Chesapeake in the joint venture area. Total will also participate with Chesapeake and EnerVest in midstream infrastructure related to production generated from the assets with a 25% interest.

Chesapeake and Total have an existing joint venture in the Barnett Shale.

VVC/CNA Direct Energy Acquires Ohio Gas Retailer Electricity and natural gas retailer Direct Energy acquired Vectren Corp.’s (NYSE: VVC) Vectren Source natural gas retail subsidiary. The acquisition is part of Direct Energy’s continued expansion of its North American downstream business in competitive retail markets such as the U.S. Northeast. The price was $39 million in cash plus additional working capital, Direct Energy said on January 3.

Vectren Source, Evansville, Ind., supplies natural gas to 280,000 residential and small business customers in Ohio, Indiana and New York, although 95 percent of its customers reside in Ohio, substantially increasing Direct Energy’s residential customer base in the state.

Direct Energy is the North American subsidiary of Centrica plc (LSE: CNA).

SRE Sempra Unit to Acquire Mississippi Utility Sempra U.S. Gas & Power, a subsidiary of Sempra Energy (NYSE: SRE) will purchase Willmut Gas & Oil Co., Hattiesburg, Miss., Sempra said on January 3. The terms were not disclosed.

The transaction requires approval by the Mississippi Public Service Commission, Sempra said.

Willmut is a privately held natural gas utility providing service to 20,000 customers in greater Hattiesburg as well as portions of Covington, Jones, Rankin and Simpson counties.

The acquisition expands Sempra U.S. Gas & Power's growing natural gas footprint in the Southeast U.S.!The company owns Mobile Gas, a natural gas distribution utility that serves 90,000 residential, commercial and industrial customers in Mobile, Ala., along with several natural gas storage and pipeline assets in Mississippi, Louisiana and Alabama.

AEP AEP Aims to Enhance Unregulated Retail Strategy American Electric Power (NYSE: AEP) and its unregulated subsidiary AEP Retail Energy announced that the company has reached an agreement to acquire BlueStar Energy Holdings Inc. and its independent retail electricity supplier, BlueStar Energy Solutions. BlueStar, based in Chicago, provides electricity supply for retail customers in Ohio, Illinois and other deregulated markets. The company also provides demand response and energy efficiency services nationwide. BlueStar has approximately 21,000 customer accounts in Illinois, Pennsylvania, Delaware, Maryland, New Jersey, Ohio and Washington, D.C.

WMB/WPX Williams Separates E&P; Stock Opens for Trading Williams Cos. (NYSE: WMB), Tulsa, Okla., completed its separation into two stand-alone, publicly traded corporations, the company said on January 3.

Williams’s former exploration and production business, WPX Energy, Inc., began trading on the New York Stock Exchange at the start of the new year under the ticker symbol WPX.

The separation was completed with the Dec. 31, 2011, distribution of one share of WPX Energy common stock for every three shares of Williams common stock held by Williams shareholders.


Williams, including its assets held through Williams Partners L.P. (NYSE: WPZ), is now an energy infrastructure company focused on connecting North America’s significant hydrocarbon resource plays to growing markets for natural gas, natural gas liquids and olefins, the company said. Its operations span from the deepwater Gulf of Mexico to the Canadian oil sands.

CEG/EXC U.S. Justice Department Clears the Way For Exelon-Constellation Merger The U.S. Department of Justice (DOJ) cleared the way for the merger of Exelon Corp. (NYSE: EXC) and Constellation Energy (NYSE: CEG), in connection with its review of the transaction under the Hart-Scott-Rodino Act, the companies said.

The DOJ’s Antitrust Division filed court papers on December 21 seeking approval by the U.S. District Court for the District of Columbia with regard to the merger. These papers detail the conditions agreed to by DOJ and Exelon and Constellation for the companies to merge.

As part of its approval, DOJ requires that Constellation divest three Maryland power plants: the 1,273-megawatt (MW) Brandon Shores station, and the 976-MW H.A. Wagner facility, both in Anne Arundel County, and the 399 MW C.P. Crane plant in Baltimore County.

The merger has been approved by the New York Public Service Commission, the Public Utility Commission of Texas and shareholders of Exelon and Constellation. It also requires regulatory approvals by FERC, the Nuclear Regulatory Commission and the Maryland Public Service Commission, the companies said.

ENB/EPD Enbridge Completes Acquisition of 50% Interest in Seaway Pipeline System Enbridge Inc. (TSX: ENB) (NYSE: ENB), Calgary, Alta., closed on its acquisition of a 50% interest in the Seaway Crude Pipeline System for US$1.15 billion. Enbridge is the joint owner of the pipeline with Enterprise Products Partners L.P. (NYSE: EPD). Enterprise will continue to operate the pipeline system and storage facilities, Enbridge said on December 20.

The 670-mile Seaway Crude Pipeline System includes the 500-mile, 30-inch diameter Freeport, Texas, to Cushing, Okla., long-haul system, as well as the Texas City Terminal and Distribution System, which serves refineries in the Houston and Texas City areas. The system also includes 6.8

million barrels of crude oil tankage on the Texas Gulf Coast and four import docks at two locations.

BTU Peabody Energy Completes Acquisition of Australian Coal Company Peabody Energy (NYSE: BTU) completed the acquisition of all outstanding shares in Macarthur Coal Ltd. of Australia, the company said on December 20. Peabody notified the Australian Securities Exchange to delist Macarthur.

CPNO/MMP Midstream Operators Join To Deliver Shale Condensate Copano Energy, LLC (NASDAQ: CPNO) and Magellan Midstream Partners, LP (NYSE: MMP) have formed a 50/50 joint venture to deliver Eagle Ford Shale condensate to Corpus Christi, Texas.

Double Eagle Pipeline LLC, will construct and own approximately 140 miles of new pipe that will connect with an existing 50-mile segment owned by Copano enabling the delivery of condensate to Magellan's Corpus Christi terminal. The initial capacity of the pipeline will be 100,000 barrels per day. Double Eagle also will construct a new truck unloading facility along the pipeline near Three Rivers, Texas, for deliveries of condensate destined for Corpus Christi.

The project is supported by long-term customer commitments from Talisman Energy USA Inc. and Statoil Marketing and Trading (US) Inc., major producers with significant acreage in the Eagle Ford Shale. The expected cost of the new joint venture facilities is approximately $150 million and will be equally shared by Copano and Magellan. The companies expect to provide limited services by the end of 2012, with full service available in the first quarter of 2013.

Copano will convert its existing 50-mile pipeline from natural gas to condensate service, and Magellan will make enhancements to the Corpus Christi terminal, including the construction of 500,000 barrels of new dedicated condensate storage and a new dedicated dock delivery pipeline.

Copano Energy is a midstream natural gas company with operations in Texas, Oklahoma, Wyoming and Louisiana. Magellan Midstream Partners is a partnership that primarily transports, stores and distributes refined petroleum products and crude oil.


SUG Southern Union Shareholders Approve Merger with Energy Transfer Equity Southern Union Co. (NYSE: SUG) shareholders overwhelmingly approved the proposed merger with Energy Transfer Equity, L.P. (NYSE: ETE), the company announced on December 9. The merger is expected to close during the first quarter of this year.

BHR UK Coal Producer to Develop Coking Coal Resource in Mozambique Beacon Hill Resources Plc (LSE-AIM: BHR), the London-based coking coal producer with primary operations in Australia and Mozambique, entered into a joint venture with Midwest Africa Ltd. to explore and develop a coking coal deposit in Mozambique, the company said December 21. The area is located in the heart of the prospective coking coal basin of the Songo Area of Tete Province, which has proven coal reserves located close to Jindal Steel & Power's Chingodzi Coal Project that has an estimated resource of 720 million metric tons of coking and thermal coal, Beacon Hill said.


ENERGY MARKET REVIEWCRUDE OIL, NATURAL GAS, COAL SPOT MONTH FUTURES PRICES

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Price Premium for Crude Oil Has Impact on Natural Gas Operations Crude oil prices are expected to rise steadily over the next 25 years and the valuation of that resource relative to natural gas will play a key role in the economics of U.S. gas drilling, according to the latest six-month update of the Black & Veatch Energy Market Perspective forecast overview “Adapting to the New Normal,” released in December.

The long-term energy price outlook is for West Texas Intermediate crude oil to increase steadily to approximately $130 per barrel by 2035, up from $100 now, while natural gas prices could average about $7.75 per million British thermal units in 2035, up from about $3 per mmBtu now.

Dr. Ann Donnelly, director of natural gas and power fuels for Black & Veatch’s management consulting business, said that the long-term price of oil will be driven by global demand growth, requiring more expensive marginal

resources, and there will be continuing price volatility related to global events.

The Energy Market Perspective also notes that:!" U.S. natural gas demand is expected to increase by an average of 0.8% per year through 2035.

!" Incremental gas demand will mostly come from the power generation segment, growing approximately 2% per year.

!" Fossil fuel will remain the predominant source of energy for power generation but over time gas will dominate the sector, shifting from coal at present.

Donnelly said that Black & Veatch’s Fall 2011 forecast for gas averages 90 cents per mmBtu lower than the forecast released last spring for the same time period.

Spot market natural gas prices are much lower, too, than last spring. In the second week of January, the spot month benchmark futures contract on the New York Mercantile Exchange went below $2.70 per mmBtu for deliveries to


the Henry Hub in Louisiana after falling fairly steadily from around $4.50 during the summer. Donnelly said, however, that the current natural gas spot prices are not sustainable.

She explained that exploration in the Marcellus Shale is finding more wet natural gas, rich in natural gas liquids (NGL) – propane, butane, ethane and others. NGL prices closely follow WTI crude oil price trends and the great value that oil has over natural gas is expected to persist. For many years, the long-term ratio of crude oil prices to natural gas averaged around 9 to 1 although the relationship was quite volatile. At the turn of the year it was 34 to 1.

The extra revenue brought by the high NGL prices effectively lowers producers’ break-even price levels, Donnelly said. “Eventually, drillers will exhaust the sweet spots or the market for products such as ethane will be saturated. Values will fall and exploration plays will have to stand on their own,” she said. It’s a cycle: supply becomes a glut, prices fall, companies pull back on production, glut disappears, prices rise, drillers go back to work.

As for long-term coal prices, most regional coal commodity price forecasts are fairly constant in real terms, so “there’s lots of stability here,” in comparison to projected gas prices, she said. The prices for Central Appalachian coal (eastern Kentucky and south West Virginia), however, are expected to increase significantly over the next five years due to decreasing production, increased costs, and diminished investment in new mines.

Utilities have been taking advantage of the relatively low price of gas by shifting the dispatch of baseload generation from coal to gas, and this might even be an almost daily decision, Donnelly said. In a broad view of prices, Central Appalachian coal and Henry Hub natural gas, as measured by the spot month futures contracts on the New York Mercantile Exchange, closed out 2011 nearly at parity, with coal at 97% of the price of gas (see graph).

Rob Patrylak, managing director of the Energy Market Perspective, said that over the next 25 years, the future mix of power generation resources – and production – will shift to new gas-fired technologies, although conventional coal capacity will gain slightly during the next few years as projects that are now in advanced stages of development are completed.

Patrylak said that the energy mix – the primary energy that actually generates the nation’s electricity – will also noticeably shift:!" Gas will increase to 44% of generation by 2036 vs. 24% in 2012.

!" Coal is forecast to account for 16% of generation in 2036 vs. 41% in 2012 (and down from 45% in 2010, 50% in 2005, and 52% in 2000), although actual gigawatt-hours generated by coal could fall by 50%.

!" Nuclear’s share will fall to 19% from 20% although actual generation could increase by approximately 24%.

!" Renewables’ share will increase to 13% from 6%.!" Hydro will decrease to 8% of the total from 9%, although actual output will marginally increase.

The shift from coal to gas will be the consequence of significant plant retirements – Black & Veatch estimates that 61,500 megawatts of capacity will be retired by 2020, and that 100,000 MW will be retired over the next 25 years. This raises the question, are we in danger of falling into the trap of single-source dependency?

It is a possibility, Donnelly said. “Gas is abundant; it is not limitless at these low prices.” The ability of drillers to obtain sufficient fresh water supply for hydraulic fracturing and the need for wastewater treatment could be an emerging economic issue, she said. Water issues could drive production costs up by a range of 25 cents to $1.38 per mmBtus and supply growth could be inhibited by 10% to 20% per year, due to growing restrictions on hydro-fracturing.

The most recent Energy Market Perspective forecast overview is available at http://www.bv.com/Downloads/Resources/Brochures/EMP_Fall2011_NewNormal.pdf

Strength in Crude Oil Prices Carries Over into 2012 Crude oil price volatility was on display during December and early January. The saber-rattling that’s been seen around the oil shipping choke point at the Strait of Hormuz apparently has started to be felt in oil prices. The strengthening of prices in December, which saw a few $100 days for the spot month WTI futures contract, was variously attributed to concern over European sanctions precluding purchases of Iranian crude and the covering of short futures contract positions before they went off the board in late December.

Going into 2012, WTI spot month futures for February delivery rose by approximately $4/barrel to around $103 in the first trading days of the new year. Yet, any serious attempt at blocking the strait would cause an immediate, significant and unprecedented spike in oil prices, along with “hyper volatility,” market analysts have said.

The Strait of Hormuz is just 21 miles wide at its narrowest point, although the shipping lanes in total are only four miles wide with a two-mile median strip between them. The U.S. Energy Information Administration says that 17 million barrels per day passed through the strait in 2011, the equivalent of 35% of all seaborne traded oil and 20% of all oil traded worldwide. In addition to crude oil, 2 million b/d of refined products pass through the strait along with more than 25% of the world’s liquefied natural gas supply.

http://www.bv.com/Downloads/Resources/Brochures/EMP_Fall2011_NewNormal.pdf

http://www.bv.com/Downloads/Resources/Brochures/EMP_Fall2011_NewNormal.pdf


STOCK PERFORMANCE

Rudden Composite Index: Consists of 100 energy companies, which are further organized into six sub-categories as shown in the following graphs.

RUDDEN COMPOSITE INDEX

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ALLETE Inc. ALE NorthWestern Corp. NWE

Alliant Energy LNT NV Energy NVE

Ameren Corp. AEE PG&E Corp. PCG

American Electric Power Co. AEP Pinnacle West Capital Corp. PNW

Avista Corp. AVA PNM Resources Inc. PNM

Central Vermont Public Service CV SCANA Corp. SCG

Cleco Corp. CNL Southern Co. SO

CMS Energy Corp. CMS TECO Energy Inc. TE

DPL Inc. DPL UIL Holdings Corp. UIL

DTE Energy Co. DTE UniSource Energy Corp. UNS

El Paso Electric Co. EE Vectren Corp. VVC

Empire District Electric Co. EDE Westar Energy Inc. WR

Great Plains Energy GXP Wisconsin Energy Corp. WEC

IDACORP Inc. IDA Xcel Energy Inc. XEL

MGE Energy Inc MGEE

Regulated Electric — Integrated: Utilities involved in the generation, transmission and distribution of electricity and natural gas; 80% ormore of their total assets are regulated.

REGULATED ELECTRIC — INTEGRATED

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Electric — Diversified: Companies that are involved in the generation, transmission and distribution of electricity; more than 20% of total assets are unregulated.

AES Corp. AES FirstEnergy Corp. FE

Black Hills Corp BKH Hawaiian Electric Industries HE

Constellation Energy Group Inc CEG Integrys Energy Group Inc. TEG

Dominion Resources Inc. D NextEra Energy Inc. NEE

Duke Energy Corp DUK OGE Energy Corp. OGE

Edison International EIX Otter Tail Corp. OTTR

Entergy Corp. ETR PPL Corp. PPL

Exelon Corp. EXC Public Svc Enterprise Group PEG

Sempra Energy SRE

ELECTRIC — DIVERSIFIED

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Electric — Merchant: Companies whose primary activity is the generation of electricity on an unregulated basis.

Calpine Corp. CPN

Covanta Holding Corp. CVA

Dynegy Inc. DYN

GenOn Energy Inc GEN

NRG Energy Inc. NRG

Ormat Technologies Inc. ORA

ELECTRIC — MERCHANT

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Regulated Transmission & Distribution (Gas & Electric): Companies engaged in the transmission and distribution of natural gas and electricity; 80% or more of total assets are regulated.

CH Energy Group Inc. CHG

Consolidated Edison Inc. ED

ITC Holdings Corp. ITC

Northeast Utilities NU

NSTAR NST

Pepco Holdings Inc. POM

Unitil Corp. UTL

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Natural Gas Transmission & Distribution (Diversified): Primary activities are in the natural gas sector; 20% or more of assets are unregulated.

AGL Resources AGL NiSource Inc. NI

Atmos Energy Corp. ATO Northwest Natural Gas Co. NWN

CenterPoint Energy Inc. CNP ONEOK Inc. OKE

Chesapeake Utilities Corp. CPK Piedmont Natural Gas Co. PNY

Delta Natural Gas Co. DGAS Questar Corp. STR

El Paso Corp. EP RGC Resources Inc. RGCO

Energen Corp. EGN South Jersey Industries Inc. SJI

EQT Corp. EQT Southern Union Co. SUG

Laclede Group Inc. LG Southwest Gas Corp. SWX

MDU Resources Group Inc. MDU Spectra Energy Corp SE

National Fuel Gas Co. NFG UGI Corp. UGI

New Jersey Resources Corp. NJR WGL Holdings Inc. WGL

Nicor Inc. GAS Williams Cos. Inc. WMB

NATURAL GAS T&D (DIVERSIFIED)

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Master Limited Partnerships: Primarily owners and operators of natural gas pipeline properties with an emphasis on midstream assets.

Atlas Pipeline Partners LP APL

Boardwalk Pipeline Partners LP BWP

Chesapeake Midstream Partners CHKM

Copano Energy LLC CPNO

Crosstex Energy L.P. XTEX

DCP Midstream Partners LP DPM

El Paso Pipeline Partners LP EPB

Energy Transfer Partners LP ETP

Enterprise Products Partners EPD

Kinder Morgan Energy Partners KMP

ONEOK Partners LP OKS

Regency Energy Partners LP RGP

Spectra Energy Partners LP SEP

MASTER LIMITED PARTNERSHIPS (MLPS)

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NEWS & VIEWSBlack & Veatch Helps Deliver Major Clean Coal Plant in Malaysia Black & Veatch will provide engineering services and procure balance-of-plant equipment systems for China National Machinery Import & Export Corp. (CMC) at the Manjung Unit 4 power project in Malaysia.

The project will deliver 1,000 megawatts of base load, cleaner coal power to Malaysia’s growing industrial and commercial sectors by 2015 using super-critical technology. Supercritical plants require less coal per megawatt-hour compared with conventional coal-fired plants. They typically operate at higher temperatures and increased pressures, resulting in higher thermal efficiencies, lower emissions – including carbon dioxide and mercury – and lower fuel costs per megawatt.

“Malaysia is going through a period of fantastic growth,” said Dr. Hoe Wai Cheong, Managing Director, MEIEA, Black & Veatch’s global energy business. “Industry needs a large volume of power delivered on time and cost effectively.”

The power will be supplied to the national grid, owned and operated by Tenaga Nasional Berhad (TNB), Malaysia’s largest electric utility. CMC and Alstom formed a consortium in April 2011 to deliver the facility to TNB Janamanjung Sdn Bhd (TNBJ), a unit of TNB.

Black & Veatch will procure equipment for the major balance-of-plant facilities outside the power island. The company will also provide technical advisory services to CMC.

“We bring a unique ability to deploy our global supply chain. This ensures that we procure high quality, reliable solutions that also minimize costs,” said Dean Oskvig, President and CEO of Black & Veatch’s global energy business. “As economic and resource issues evolve, there will be more demand for innovation that gives us cost-effective delivery models and technologies.”

The plant is located at Manjung in the State of Perak on the Malaysian Peninsula.


Solutions Magazine

Solutions magazine informs readers of issues relating to the infrastructure arena and promotes innovative thinking and dialogue. Each issue provides insights and answers to complex challenges in the form of solutions that Black & Veatch has implemented for our clients.

© Copyright 2012, Black & Veatch Holding Company. All rights reserved worldwide. This report is prepared for general circulation and is circulated for general information only. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any security or any option, future or other deriva-tive related to such security. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice about investments. Data contained here are obtained from what are considered relia ble sources; however, its accuracy, completeness or reliability cannot be guaranteed. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Black & Veatch’s management con-sulting group is among the world’s premier strategic, economic and management consulting companies specializing in energy, water, information and government matters. We encourage our professionals to publish individual commentary on key industry issues. Any opinions offered are those of the authors and not necessarily official viewpoints of the company or its other employees. Additional information is available at www.bv.com.

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The Energy Capital Markets Report aggregates financial activities across the energy industry with a once-a-month review of stock performance, sector evaluations, asset sales, mergers & acquisitions and securities underwriting activities.

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