American Gas Association Finance Committee Meeting March 9, 2006 St. Louis, Missouri

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American Gas Association Finance Committee
MeetingMarch 9, 2006 St. Louis, Missouri
Daniel M. Fidell, Vice President Gas Utility
Equity Research
May 2004
Disclosure Information Please refer to pages
27-28 of this report for important disclosure
information. All prices and estimates as of
3/7/06 unless otherwise indicated.
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Table Of Contents

• Current Hot Industry Topics. 3-14
• Future Down The Road Issues..... 15-20
• Our Industry Appraisal........ 21-22
• Appendix and Disclosures.... 23-28

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Current Hot Industry Topics
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Current Hot Topics

• High Commodity Prices (And Bills)
• Abnormal Weather Patterns
• Increasing Customer Conservation
• Rising Operating and Bad Debt Costs
• New Regulatory Tariffs/Mechanisms
• Merger and Acquisition Activity

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High Commodity Prices (And Bills)
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Abnormal Weather Patterns
Source Climate Prediction CenterNCEPNWS-NOAA
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Increasing Customer Conservation
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Rising Operating and Bad Debt Costs

• Bad debt expense becoming big issue
• Pension PBOP costs still rising
• System maintenance and security costs rising
• Medical and insurance costs rising
• Tightening employment market
• Steel plastic costs rising

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New Regulatory Tariffs/Mechanisms

• Conservation or De-Coupling Tariffs are
  ingenious in their simplicity -- severing the tie
  between volumetric usage and the ability of the
  gas utility to earn its authorized return on
  equity, allowing companies to encourage customer
  conservation efforts
• Revenue Stabilization Mechanisms
• Margin Recovery Trackers for quick recovery of
  bad debt, pension, capital spending, etc.

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Mergers Acquisitions
There have been several high-profile mergers
announced among electric utilities in the last
twelve months. Exelon has agreed to merge with
Public Service Enterprises. Duke Energy has
agreed to merge with Cinergy. MidAmerican has
agreed to merge with Scottish Powers Pacific
Corp. And, FPL Group has agreed to merge with
Constellation Energy. We do not doubt that
repeal of PUHCA may lead to more mergers,
although we tend to believe that PUHCA has been
so watered down in recent years that it has
prevented very few mergers. We are more
interested in what we believe to be a shift in
the forms of mergers taking place. Source
A.G. Edwards Gas Utilities Quarterly Review dated
January 4, 2006.
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Gas Utility Takeovers 1998-1999
ECGC
BERK
MCN
WIC
FAL
EI
PNT
CNG
KNE
CLG
EFU
PVY
VR
CTG
YES
CNE
VGCO
PGS
SNT
Source A.G. Edwards Sons, Inc.
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Gas Utility Takeovers 2000-2006
CG
WE
KSE
NUI
VGCO
CGP
Source A.G. Edwards Sons, Inc.
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Merger Catalysts Have Gone Away

• Catalyst 1998-1999 Present
• --------------------------------------------------
  -------------------------------------------------
• Deregulation Electrics With Cash Deregulation
  Dead
• Asset Optimization Store Power With
  Gas Trading Collapsed
• Technology Spending Y2K, CIS, etc. Systems
  Implemented
• Distributed Power Losing Customers Technology
  Not There
• Adjunct Products Cable, DSL, Security Unprofita
  ble

Source A.G. Edwards Sons, Inc.
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Mergers Acquisitions
We believe there has been a shift in the utility
merger environment in the last twelve months. In
the past, there was a consolidation between
electric and gas utilities as companies tried to
take advantage of arbitrage opportunities across
fuels. Recent mergers have not attempted to
bridge differences, but exploit strengths. The
Exelon acquisition of Public Service Enterprise
is widely viewed as an attempt by Exelon to
extend its expertise in running nuclear
generations plants to other nuclear assets. The
management of Duke Energy and Cinergy do not talk
about combining the electric and gas assets at
both companies, but of putting the electric
assets together into one company and the gas
asset together into another. Gas utilities such
as El Paso Corporation and Williams Companies who
invested in electric generation have largely sold
off their electric assets. Whereas five years
ago, the electric and gas utilities industries
were coming together, today we believe they are
separating.
Source A.G. Edwards Gas Utilities Quarterly
Review dated January 4, 2006.
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Future Down The Road Issues
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Future Down The Road Issues

• Distributors Under-Earning Authorized Returns
• Dividend Tax Uncertainty
• Prudency Review Risk
• Long-Term Pipeline Contracts

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Distributors Under-Earning Authorized ROEs

• Gold-Plating The Rate Base As The Key To EPS
  Growth
• Conservation Tariffs and Rate Stabilizing
  Mechanisms are near-term positives but they do
  not address longer-term issues of rising
  operating costs and slowly eroding returns on
  equity
• Increasing dependence on regulatory support
• States with positive regulatory climates become
  increasingly important

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Dividend Tax Uncertainty

• Dividendsare going to play a larger and larger
  role in stock investing in the next 10 years.
  But if Congress is stupid enough to raise tax
  rates on capital, that would make me much, much
  less optimistic. Larry Kudlow, Research
  Magazine, March 2006
• We believe the dividend tax reform of 2003 raised
  the groups trading range by 10 to a
  price-to-forward-earnings range of 12.5 to 17.5
  times.
• Currently, gas utility stocks are trading near
  the mid point of this trading range of 15.0
  times.
• The dividend tax reduction is scheduled to sunset
  out in 2008 although there has been some
  discussion of passing a two-year extension.
• Should Congress be unable to pass an extension,
  we would expect gas utility stocks to retreat.

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Prudency Review Risk

• In the past, most state regulatory commissions
  have allowed distributors to recover nearly all
  of their gas purchase costs if a reasonable
  purchase/hedging program is in place
• High commodity prices, combined with increased
  customer complaints from high bills and growing
  political pressure, could result in potential gas
  purchase disallowances

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Long-Term Pipeline Contracts

• To remedy domestic supply issues, numerous
  pipeline projects have been proposed/begun to
  bring needed natural gas to the market
• Pipeline projects bringing gas from the Rockies,
  Alaska and imported LNG from receiving terminals
  are underway
• Most state regulatory commissions do not allow
  gas distributors to enter into longer-term
  capacity contracts to support these initiatives,
  fearing a return of possible liability issues
  decades ago
• Greater involvement by gas distributors could aid
  infrastructure development to address supply
  issues

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Our Industry Appraisal
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Industry Appraisal

• We believe the weakness in gas utility stocks in
  the December quarter can be explained by rising
  interest rates and a growing perception by the
  market that passing through higher gas costs to
  customers may lead to increased bad debt expense
  and decreased gas usage by customers. We share
  these concerns, but view them to be short-term
  issues that will eventually be countered by rate
  relief.
• With the decline, gas utilities are now trading
  at prices we view as reasonable given their
  growth rates and risk profiles. We continue to
  have a bias towards diversified gas utilities.
  We remain somewhat cautious regarding gas
  distributors as we expect companies to lower 2006
  earnings guidance if the aforementioned concerns
  prove true. We would view sharp stock declines
  to individual company announcements as possible
  opportunities to buy higher-quality names. We
  are hopeful that we will have a better buying
  opportunity for the gas distributor group, as a
  whole, after the winter is over.

Source A.G. Edwards Gas Utility Quarterly Update
dated January 4, 2006
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A. G. Edwards Gas Utility Research
Appendix
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Biography
Daniel M. Fidell, Vice President, Gas
Utility Equity Research Daniel M. Fidell
(Dan) joined A.G. Edwards and Sons, Inc.
Securities Research Department in 1992. His
primary responsibility is coverage of small to
mid-cap natural gas distribution companies and
the emerging energy (alternative power
technology) industry. Mr. Fidell received his
bachelor's degree in journalism with a
concentration in business marketing from the
University of Missouri - Columbia and his Master
of Business Administration in finance and
investments from Loyola University in Chicago.
Mr. Fidell is a registered securities analyst and
a registered representative, holding series 7,
63, 86 and 87 accreditations. Mr. Fidell has
been previously recognized as a top stock picker
for gas utilities by Forbes/Starmine and
Greenwich Associates Studies, a "Best on the
Street" analyst for earnings estimate accuracy by
The Wall Street Journal, a ranked analyst for
natural gas research by Institutional Investor
and recognized as a top gas utility analyst for
quality of small- to mid-cap gas utility research
by the Reuters Fund Managers Survey. Mr.
Fidell is frequently quoted in the The Wall
Street Journal, Bloomberg, Dow Jones News,
Fortune, SmartMoney, BuySide, and other national
business and financial publications. He is a
frequent contributor to SNL Daily Energy Watch
and has been quoted in Natural Gas Intelligence,
American Gas, EnergyUserNews and other energy
publications. Mr. Fidell has served three times
as a Wall Street Transcript panelist.
Disclosure Past performance is no guarantee
of future results. Forbes/StarMine, Greenwich,
The Wall Street Journal, Institutional Investor
and Reuters are not affiliated with A.G. Edwards,
nor do they endorse any product or service A.G.
Edwards offers.
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Valuation Methodology / Risks
Several methods are used to value and assign
investment ratings to the stocks we follow.
These include absolute and relative
price/earnings and price/book measures,
discounted cash flow, dividend discount models
and other basic valuation tools, including sum of
the parts analyses. Risks facing utility industry
shares include competition from other equity and
fixed-income investments when interest rates
shift, adverse regulatory decisions that
materially alter earnings and cash flow
prospects, a delay in and/or inability to pass on
rising operating costs to regulated customers,
the potential impact of unfavorable weather,
competition in deregulated markets, and changes
in the general economy.
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Analyst Certification
The research analyst who is primarily
responsible for coverage of any subject
company/companies and securities in this report
has represented that the report accurately
reflects that analysts personal views. The
research analyst further certifies that he or she
receives no compensation that is directly or
indirectly related to the specific
recommendations or views contained within this
report.
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Disclosures
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Disclosures
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