Natural Gas Prices Recover From Current Lows By Q2 2010 According To Macquarie Capital: US$8.75/MMBTU Average In 2011

Ms. Storozynski: Our E&P analysts expect a positive outcome from the current sharp pullback in natural gas prices. It should lead to a further reduction in gas drilling, which in turn should lead to natural gas shortages by the second quarter of 2010, and thus a sharp pick up in natural gas prices. They expect natural gas prices to average US$8.75/MMBtu in 2011, while the current forward natural gas curve is showing just US$6.40.

TWST: So it's the typical cycle then?

Ms. Storozynski: Yes, it is, and it was to be expected. But as in each cycle we go through bottom, like right now, and tops, which are hopefully coming soon.

TWST: As we look at, we've got the administration talking, I guess cap and trade, what is that going to mean for the sectors as we look forward?

Ms. Storozynski: This is a very interesting topic, both the future of the carbon cap-and-trade and federal renewable mandates. Unfortunately, it seems like the healthcare debate seems to be overshadowing any interest in these issues in Washington. As re result we are no longer hopeful the bill passes this year. However, the latest version of the Waxman-Markey bill proposes to allocate emission allowances for carbon dioxide to utilities and coal-fired merchants, which in turn should largely erase any earnings erosion to those companies through 2025.If a federal renewable mandate is imposed, we believe that many wind farms will be built in the Midwest, which in turn should compress margins of conventional power plants in the region and so, companies like Dynegy, Ameren (AEE), Edison Mission (EIX), and Exelon (EXC) could feel an earnings pinch longer term. On the other hand the CO2 caps should have a very positive earnings uplift to all low carbon power generation companies like Exelon or Entergy (ETR). We tend to believe that the two pieces will be in separate bills, and that the renewable portion is going to be passed first.

TWST: I guess if we go back a couple months ago, it kind of looked like it was a death knell for coal plants, but I guess they've gotten to re-breathe.

Ms. Storozynski: When you think about the fact that 50% of power demand in this country is served by coal-fired plants, you cannot pass a bill that's going to destroy this capacity. Secondly, merchant coal plants would need to recoup the additional costs associated with the CO2 caps, which would simply lead to higher power prices. I think that even if the carbon bill were to be more stringent than its current house or senate version, I would still assume that merchant generation companies and their margins should be fine at least through 2025.