Strong economic activity should drive commodity stocks well into 2019

Warmer than normal summer has led to robust natural gas prices: … we believe that natural gas prices will be… the forward curve would suggest.

· We look for 2018 exit prices in the … and average 2019 price in the range of about …: Assuming …, we’d expect natural gas prices to … by November then move towards the … level by December 2018. We would expect natural gas prices to drift towards the … range by mid-year and break back towards … levels by yearend 2019, averaging about … for the entire year.

· We expect economic growth to … 2H2018: …; we expect … to … at least 2019, if not into YE2020.

· Therefore, we expect 2H2018 and 1H2010 power gross profit … than expectations: … .

· Similarly, we’d expect natural gas infrastructure businesses to … for 2H2018 through 1H2019: … .

· Utility performance is also likely to … economy: … .

· Threat or danger to our thesis is pending …: … .

· We believe LNG is likely … economy and weather: … .

· However, with … economic activity, we’d expect interest rates to …: … .

· Therefore, we believe … underperform …:

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Natural gas: Tailwind; Interest rate: Mild headwind; Election: Tornado

• As expected, natural gas prices started to rally, but about a month ahead of expectations in June
• We expect natural gas prices to generally move upward through 2H2016 and for 2017
• The impact of 1-3 rate increases should not be significant for valuations, but the portend for further rate increases is what would drive valuations down, in our opinion
• We expect that the global migration towards using more natural gas will continue and favor US energy companies, including energy infrastructure companies
• Power industry move towards renewables and natural gas is unlikely to abate, but there are a plethora of issues that would determine whether this is good or bad for investors depending on the industry, pricing mechanism, use of storage and back-up power, and development of new or refurbishment/replacement of old infrastructures
• Regardless, we look for heat rates to become more central in determining power economics moving forward, and likely grows in importance with higher percentage of generation delivered from intermittent renewable power sources

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The Myriad of Changes Are not Challenges, but Rather Opportunities

First time in almost 15 years, the electricity industry is facing rapid changes. Not since the separation of generation from transmission and distribution (T&D) businesses has the industry faced so many changes. Some of these include renewable portfolio standards (RPS), greenhouse gas (GHG) regulations, other regulatory and legislative changes, and the proliferation of distributed generation, energy storage, smart meters and smart grids, electric vehicles, and renewable power. Many view these changes as challenges and hurdles, but we believe that these changes should not be viewed as challenges, but opportunities, particularly for the utility sector and conditionally for the independent power producers (IPP).

Some of the more difficult issues involve RPS, and GHG regulations on the regulatory/legal side and the proliferation of distributed generation, renewable power, energy storage and electric vehicles from a commercial viewpoint. Many of these issues are interrelated and entangled and one change cannot be properly accommodated without integrating another change properly. From a high level, we believe that challenges encompassing these changes are as follows:

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