Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

1. September 18, 2006
Natural Gas Trade Opportunities
Derivatives Strategy
Ryan Renicker, CFA • We expect near-term downside for utilities names exposed to natural gas prices - EXC, D, TXU,
1.212.526.9425 and NRG. However, we are fundamentally bullish on these names over the medium term, on the
ryan.renicker@lehman.com basis of tightening U.S. power markets and Q406 shareholder events.
Devapriya Mallick
1.212.526.5429
• We suggest two derivatives strategies that efficiently express this fundamental view with different
dmallik@lehman.com
risk-reward characteristics.
Power & Utilities
Daniel Ford, CFA • Purchasing Oct puts and Jan call spreads lets investors gain from any near-term lows and provides
1.212.526.0836 participation to any upside in the fourth quarter and early next year.
daford@lehman.com
Gregg Orrill
1.212.526.0865 • An alternative strategy involving higher risk would buy Oct puts and 1x2 call spreads expiring in
gorrill@lehman.com January. This reduces the initial premium and provides greater leverage, but leaves investors short
the upside beyond the interim target price.
Lehman Brothers 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.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them,
where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 6.

2. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Investment Conclusion
We expect near-term downside for utilities names exposed to natural gas prices - EXC, D, TXU, and
NRG. However, we are fundamentally bullish over the medium term based on expected catalysts. We
explore two derivatives strategies for expressing this view using relatively cheap options on these
names. The first strategy is to buy Oct puts and Jan 07 call spreads. A higher risk alternative is
purchasing Oct puts and Jan 1x2 call spreads, with the higher strike close to the interim target.
Fundamental View – Daniel Ford/Gregg Orrill
Our fundamental view is that these 4 companies are advantaged by tightening U.S. power markets
coupled with shareholder events in Q4'06 that should propel them at least halfway to our 12 month
price targets by January. These catalysts include:
EXC: a 12/12 analyst meeting where we expect a dividend hike, share repurchase and
2007/2008 EPS guidance. Our 12 month target is $71 is premised upon applying a 15% premium
to the integrated utilities group, or 14.3x our $4.97 estimate for ‘08. However, our interim target is
$65 which reflects ½ of the potential upside to our 12 month target.
D: completion of strategic business review, potential structural changes announced. Our 12 month D
price target of $79 reflects an integrated multiple of 11.2x our 2008 EPS estimate of $7.12.
However, our interim target is $78 which reflects ½ of the potential upside to our 12 month target.
Our long-term rating on D is a 2-Equal weight as we are skeptical on the timeliness of recognizing the
strategic upside of the assets, however, we believe that within the derivatives context detailed herein,
particularly due to the near-term weakness in gas prices, there is a buying opportunity.
TXU: the likely air permit for a major power plant in Texas in mid-October followed by development
company debt and equity financing in Q4'06. Our 12 month TXU price target is $69, however, our
interim target is $65 which reflects ½ of the potential upside to our 12 month target.
More specifically, our 12 month target is premised upon the average of three valuation
methodologies, which are: 14.9x the Utility business and 17.7x the Energy Business plus a value of
the retail business of $1,178 per customer which yeilds $63; 7.4x '07E EBITDA of $5.4B less
$12.4B in debt which is $63; and a free cash yield of 7.9% on $2.8B in '07 which is $80.
NRG: investor meeting on 10/17 to review a generation development program. Our 12 month target
is $59, however, our interim target is $53 which reflects ½ of the potential upside to our 12 month
target.
More specifically, our 12 month target for NRG reflects the average of four valuation methodologies
following and $2/share of NOLs NPV including: IPP average 7.5x 2008 EBITDA of $1.72B less
$5.9B of net debt and 144M diluted shares; free cash yield of 10.5% on $846M or $56; asset
based values of $53 and Open EBITDA average of $2.35B 2008 EBITDA of 6.6x less $6.0B of net
debt.
Near-term this fundamental view is challenged by collapsing natural gas prices due to unprecedented
storage levels, coupled with lack of supply disruptions (hurricanes) and normal seasonal declines in
usage. In similar past periods these stocks have tracked gas down and corrected 10-15% notably in
10/05 and 5/06. We believe this trough could last until winter heating season begins to ramp-up in
November.
September 18, 2006 2

3. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Figure 1: Nat Gas Trade Milestones Figure 2: Average Implied Vol for EXC, D, TXU andNRG
Interim 30%
Current Recovery
Stock 9/18/06 Downside Positive Catalysts Target 28%
D $76.87 $72-$68 Strategic review announcements $78
EXC $58.73 $57-$54 Dividend hike, stock buyback, '07/'08 guidance $65 26%
NRG $48.08 $46-$43 10/17 investor meeting in TX. $53 24%
TXU $62.29 $59-$57 Air permit for TX plant and devco financing. $65
22%
20%
Avg 3m Implied Vol
18% Avg 1m Implied Vol
16%
6
06
06
6
06
6
06
06
06
-0
l-0
-0
p-
n-
n-
b-
g-
r-
ay
ar
Ju
Ja
Ju
Fe
Ap
Se
Au
M
M
Source: Bloomberg, Lehman Brothers Source: Lehman Brothers, OptionMetrics
Based upon past patterns, we posit that the stocks could see lows of $59-$57 for TXU, $46-$43 for
NRG, $57-$54 for EXC, and $72-$68 for D.
Figure 1 summarizes the potential key catalysts along with the expected downside and recovery target
for each of these stocks.
We would begin buying these stocks at the high end of the correction range and aggressively
purchase at the bottom end. Our point of view is backed by a long-term view of gas and power prices
outlined in "Just the Beginning" 8/21/06.
Implied Vols Still Fairly Low
Implied volatility for Utilities names has been rising concurrently with the sell-off over the last two weeks.
Figure 2 shows that average implied vols for these 4 stocks have been on the ascent over this period.
However, these options are still trading cheap relative to their vols since the beginning of the year. In
the event of a near-term trough being attained, volatility could rise even further, hence biasing us
towards long option strategies.
We suggest two possible options strategies with different risk-reward profiles that efficiently express our
fundamental view.
September 18, 2006 3

4. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Strategy I: Oct Puts vs Jan Call Spreads
• Expectations of a near-term pullback merit purchasing short-dated puts expiring in October.
• Long call spreads expiring in January give participation to any potential upside in the later
part of the fourth quarter and early next year.
• We show the payoff from a strategy of buying TXU Oct 60 puts and TXU Jan 07 62.5-65
call spreads (Figure 3).
• The trade benefits from any downside below $60 as of the October expiration and gains
from TXU rising to $65 by the January expiration.
• The up-front premium is $2.15, or approximately 3.5% of TXU’s closing price last night. This
represents the maximum downside from the trade.
• Figure 4 shows the expiration payoff of the strategy for TXU, for different underlying prices as
th th
of the October 20 and January 19 expirations.
• Per our fundamental expectations, if TXU retreats to $57 by October 20 and rallies back to
$65 by January 19, the trade stands to pay off $5.5 at expiration, over 250% of the initial
premium.
Figure 3: Puts vs Call Spreads Payoff – TXU Figure 4: Strategy I P/L for TXU Under Different Scenarios
6 Maximum downside limited to Max gain if TXU retracts in near-term
premium paid and rallies before Jan
5 Payoff (9/18/06)
4 Benefit from Payoff (10/20/06) TXU Price as of Jan 07 Expiration
50 52 54 56 58 60 62 64 66 68 70
pullback till Oct Payoff (1/19/07) 7.9 7.9 7.9 7.9 7.9 7.9 7.9 9.4 10.4 10.4 10.4
3 50
Strategy Payoff
TXU Price as of Oct Expiration
52 5.9 5.9 5.9 5.9 5.9 5.9 5.9 7.4 8.4 8.4 8.4
2 54 3.9 3.9 3.9 3.9 3.9 3.9 3.9 5.4 6.4 6.4 6.4
56 1.9 1.9 1.9 1.9 1.9 1.9 1.9 3.4 4.4 4.4 4.4
1
58 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 1.4 2.4 2.4 2.4
0 60 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
62 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
-1
64 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
-2 66 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
68 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
-3 70 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -2.2 -0.7 0.4 0.4 0.4
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
TXU Price
Source: Lehman Brothers, Bloomberg Source: Lehman Brothers, Bloomberg
September 18, 2006 4

5. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Strategy II: Oct Puts vs Jan 1x2 Call Spreads
• A higher risk alternative to the previous strategy would be to purchase 1x2 call spreads
expiring in January.
• This reduces the initial premium and provides greater leverage but leaves the investor short the
upside beyond the near-term target price.
• The strategy makes more sense for stocks with an upward sloping term structure of implied
volatility, such as NRG.
• Figure 5 shows the payoff on different dates from a long position in NRG Oct 45 puts and
NRG Jan 07 50-55 1x2 call spreads.
• The initial cost of setting up the trade is $1.5, or about 3.1% of NRG’s closing price last
night.
• Figure 6 shows the suggested strikes and breakevens for the other stocks. The upper is the
price above which the stock has to finish in order for the 1x2 call spreads to start losing.
Figure 5: Puts vs 1x2 Call Spreads Payoff - NRG Figure 6: Puts vs 1x2 Call Spreads Payoff – Suggested Strikes
10
8 1x2 call spreads start losing
6 beyond upper breakeven
4 Lower Upper
Net
Strategy Payoff
2 Ticker Oct Leg Jan Leg Breakeven Breakeven
Premium
(Oct 06) (Jan 07)
0
-2 D B 75 Put B 75-80 1x2 Call Spread 1.7 74.3 81.6
-4 Payoff (9/18/06) EXC B 60 Put B 60-65 1x2 Call Spread 3.05 58.1 71.35
-6 Payoff (10/20/06) NRG B 45 Put B 50-55 1x2 Call Spread 1.5 44.4 58.1
Payoff (1/19/07) TXU B 60 Put B 60-65 1x2 Call Spread 0.9 59.1 66.3
-8
-10
35
37
39
41
43
45
47
49
51
53
55
57
59
61
63
65
NRG Price
Source: Lehman Brothers, Bloomberg Source: Lehman Brothers, Bloomberg
September 18, 2006 5

6. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Analyst Certification:
We, Ryan Renicker, Daniel Ford and Gregg Orrill, hereby certify (1) that the views expressed in this research email accurately reflect our personal views about any
or all of the subject securities or issuers referred to in this email and (2) no part of our compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this email.
To the extent that any of the conclusions are based on a quantitative model, Lehman Brothers hereby certifies (1) that the views expressed in this research email
accurately reflect the firm's quantitative research model (2) no part of the firm's compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.
Important Disclosures
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conflict of interest that could affect the objectivity of this email communication.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to
them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of
this research.
Investors should consider this communication as only a single factor in making their investment decision.
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generated by investment banking activities.
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And may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM , 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY
10019
Mentioned Stocks
Dominion Resources (D - USD77.16) 2-Equal weight / Negative A/D/E/J/K/L/M
Risks Which May Impede the Achievement of the Price Target: Dominion is exposed to the electricity, natural gas, and oil commodity markets which can create
earnings volatility.
Other Material Conflicts: Lehman Brothers is acting as financial advisor to Equitable Resources in connection with the potential acquisition of Dominion Peoples and
Dominion Hope from Dominion Resources
Exelon Corp (EXC - USD59.21) 1-Overweight / Negative D/J/L
Risks Which May Impede the Achievement of the Price Target: Risks to the outlook include wholesale commodity prices, generation development market conditions,
the outcome of regulatory proceedings, rating agency actions, interest rates, and access to the capital markets.
Other Material Conflicts: Lehman Brothers is currently acting as a financial advisor to Exelon Corp. with respect to its restructuring of Commonwealth Edison.
NRG Energy (NRG - USD47.30) 1-Overweight / Negative D/F/J/L
Risks Which May Impede the Achievement of the Price Target: Key risks include power and gas prices, weather volatility, higher interest rates and wider credit
spreads, and power markets regulation.
TXU Corp (TXU - USD61.45) 1-Overweight / Negative A/D/E/F/J/L
Risks Which May Impede the Achievement of the Price Target: Key risks are Texas regulation, U.S. power and gas prices, interest rates, and credit rating
downgrades.
September 18, 2006 6

7. Equity Derivatives Strategy | Natural Gas Trade Opportunities
Disclosure Legend:
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Options are not suitable for all investors and the risks of option trading should be weighed against the potential rewards.
Supporting documents that form the basis of the recommendations are available on request. Please note that the trade ideas within
this report in no way relate to the fundamental ratings applied to European stocks by Lehman Brothers' Equity Research.
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1-Positive - sector coverage universe fundamentals are improving.
2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals are deteriorating.
September 18, 2006 7

8. Equity Derivatives Strategy | Natural Gas Trade Opportunities
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September 18, 2006 8