Wall Street Trends, Speculation and Myths

Dave Parker

Senior Utility Analyst

What Drives Wall Street?

Information World/National Events Economic Data Company/Sector Specific News The Rumor Mill – Chat Rooms,

etc.

Efficient Market?

Yes, short term Information overload can create

knee jerk reactions CNBC effect

The Sky Theory Trees rarely grow to the sky The sky rarely falls

Information Filter

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Indexed Prices9/30/94 = 1009/8/94 to 9/9/04

NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:DISTRIBUTION

Switching from Bear to Bull

Credibility Accountability Predictability Irrational Pessimism Long-term investing dead?

Buy and Hold/ Market Timing

Buy S&P 500 bottom/sell top - 400% actual 140%

Recent 52-WeekPrice Price

Company Ticker 9/7/04 Range 3 MO 6 MO 1 YR 2 YR 5 YR 10 YR

UGI Utilities UGI 35.74 35.74 - 28.85 14.5 10.8 21.9 64.7 201.1 412.2

MDU Resources MDU 25.50 25.70 - 21.85 9.8 10.9 15.1 67.4 83.3 373.2

Southern Company SO 30.65 31.00 27.44 5.9 2.5 10.9 18.0 135.7 365.1

NJ Resources NJR 41.80 42.40 - 35.76 7.4 9.7 18.0 41.2 95.4 359.5

Exelon EXC 37.68 37.78 - 29.76 14.7 13.3 30.0 81.8 116.7 349.4

Sempra SRE 37.19 37.19 - 26.36 9.3 14.5 29.4 77.5 110.8 327.0

Entergy ETR 61.05 61.62 - 50.64 12.4 5.9 16.0 59.6 146.3 313.5

Energy East EAS 24.70 26.05 - 21.64 5.3 3.0 16.7 34.9 21.6 312.2

So Jersey Ind SJI 46.35 46.95 - 37.73 10.2 12.2 24.1 55.8 97.2 311.5

ONEOK OKE 23.94 27.70 - 19.20 12.0 5.4 17.6 33.8 86.5 309.3

PP&L Resources PPL 48.30 48.39 - 38.88 13.7 4.8 23.2 54.5 108.8 303.3

Total Return

Sleeping Easier

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Indexed Prices9/30/94 = 1009/8/94 to 9/9/04

NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:DISTRIBUTION

Investors’ Perspective

Sky is going to fall. Why? Uncertain

Terrorism, War, US/World political Uncertainty, Inflation, Deflation, Rising Interest Rates….

Directionless market a plus for utility stocks

Utilities Outperform

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Indexed Prices9/9/03 = 1009/9/03 to 9/10/04

NASDAQ INDEX COMPOSITECOMPNEW STANDARD & POORS 500 INDEX NEWSPXCLIENT:UTILITYSECTOR

Big Change From Bull Market

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Indexed Prices3/20/98 = 1003/19/98 to 4/3/00

UTILITYSECTORNEW STANDARD & POORS 500 INDEX NEWSPX

Sector Positives

Significant investment needed to improve reliability and keep up with demand growth

Regulators are lowering risk by pre-approving projects

Improving financial fundamentals reflecting Back-to-Basics strategy

Sector again focused on what they do well

Rewarding Back to Basics Strategy

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Indexed Prices9/10/99 = 1009/9/99 to 9/10/04

DIVERSIFIEDDISTRIBUTIONCLIENT:COMMODITY

Rewarding Back to Basics

Total Return Total Return

Company Ticker 3 MO 6 MO 1 YR 2 YR 5 YR Company Ticker 3 MO 6 MO 1 YR 2 YR 5 YR

Williams WMB 0.4 18.7 33.4 301.3 -66.3 El Paso EP 18.3 15.2 11.6 -41.4 -74.9AES Corp. AES 4.7 13.9 40.4 261.2 -69.1 SEMCO Enterprises SEN -14.9 -13.2 23.4 -33.9 -52.1Edison International EIX 10.0 15.8 45.9 150.5 17.8 NUI Corp. NUI -0.4 -21.1 -16.1 -30.3 -36.3PGE Corp PCG 3.2 4.5 24.8 148.6 6.6 Aquila ILA -21.8 -30.0 10.5 -23.0 -84.5Dynegy DYN 4.3 1.2 21.3 140.6 -73.1 Calpine CPN -5.8 -34.6 -35.3 -21.1 -69.4Xcel Energy XEL 5.5 1.2 22.9 132.4 0.3 Allegheny Energy AYE 1.3 13.2 58.7 -14.6 -47.5Reliant Resources RRI 1.4 21.2 88.6 112.8 TECO Energy, Inc. TE 12.7 -9.2 17.0 -6.4 -15.6Westar Energy WR 8.6 6.4 20.8 94.7 29.0 CMS Energy Corp. CMS 11.8 4.8 34.6 -4.2 -69.9Exelon EXC 14.7 13.3 30.0 81.8 116.7 TXU Corp TXU 16.0 53.4 96.6 -2.2 37.0

2 YEAR

Boring Utility Returns

UTILITY TOTAL RETURN

Recent 52-WeekPrice Price

Company Ticker 9/7/04 Range 3 MO 6 MO 1 YR 2 YR 5 YR 10 YR

S&P 500 sp50 1121.30 1163.23 - 990.36 -1.7 -3.1 9.8 25.4 -17.0 138.1

NASDAQ comp 1858.56 2153.83 - 1750.82 -8.0 -9.2 0.0 43.5 -34.5 143.2

Dow Utility Index dj15 293.56 294.34 - 241.65 6.6 4.4 20.5 25.2 -6.7 60.6

S&P Utility Index SP825 127.73 127.73 - 107.56 7.3 3.0 17.8 22.5 -20.0

Philadelphia Utility Index uty 334.31 334.44 - 280.11 7.3 3.5 19.0 23.5 4.9 53.8

Distribution Index 7.8 2.3 18.7 23.0 41.8 146.5

Diversified Services Index 3.3 -1.6 15.5 10.7 23.2 122.0

Commodity Index 6.9 5.3 29.3 -20.2 -4.8 69.7

Total Return

Near-Term Challenges

Stock prices at upper end of expected trading range

Mild weather most likely will pressure 3Q04 EPS

Kerry not a fan of lower taxes on dividends

Short interest is at record highs

Appendix

Why Own A Utility Stock?

IncomeSafetyPredictable returnsWidow’s and Orphan’s Stocks

Distribution

Highly regulated provides slower but steady EPS growth

Higher yields Lower risk Returns in line with historical

utility returns

Diversified Services

EPS growth above utility average, EPS can have peaks and valleys

More price volatility but tracks ups and downs of utility sector

Appeals to investors looking for some yield but understand total return = yield + price appreciation

Commodity

Big swings in EPS performance with changes in electricity commodity prices

Limited yield due to EPS volatility

Trading like cyclical stocks, tracking economy’s ups and downs

What Fuels Investors’ Optimism

Substantial investment returns Long term – quarter or two Key issues typically overlooked

Risk for potential reward What goes up won’t always go up What goes up will come down What goes down, can go up

Deregulation Changes Landscape Limited regulation so significant upside

potential as demand outpaced supply

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Indexed Prices1/3/00 = 1001/3/00 to 5/1/01

SP500 SOFTWARE&SERVICES .GSP705NEW STANDARD & POORS 500 INDEX NEWSPXCOMMODITY

Deregulation Changes Landscape Limited regulation so significant downside

potential supply outpaced demand

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Indexed Prices5/1/01 = 1005/1/01 to 9/6/02

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“Boring” Is Good

In a Bear market investors want certainty

No news, better than average chance of meeting EPS estimates

Yield – Yes please

Risk/Reward for Differing Strategies

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Indexed Prices9/10/99 = 1009/9/99 to 9/10/04

DIVERSIFIEDDISTRIBUTIONCLIENT:COMMODITY

Outlook for Energy Investors’ expectations

realistic again Evolution of business

strategies from rate of return is value added

Challenges: Overcoming irrational

pessimism Rebuilding confidence