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TWST: Why should investors consider investing in these stocks at this time?

Mr. Maccarrone: Investors should consider buying local gas distribution companies because of their solid earnings prospects, with especially good momentum near term, and their very reasonable prices. Earnings are rising at an above-trend pace looking at the year ahead. LDCs have strong, predictable, and stable underlying cash flows and earnings. They have the ability to grow at a moderate pace long term, at a minimum, and better than that with the right management that can leverage the opportunities in a deregulating natural gas and power environment, which we fully expect to continue. In terms of valuation, the stocks remain very undervalued relative to historical levels and, on a relative basis, are only modestly improved from a year ago because of exceeded earnings growth expectations. The relative p/e for expected 2001 earnings is about 55% of the S&P 500, and is about 105% of the S&P Electric Index. Changes in the mega-cap stocks in the S&P 500 have made this comparison less helpful, although they remain quite relevant versus the S&P Electric Index. Over the last 20 years, LDCs have traded at an 86% relative p/e ratio of the S&P 500 and at 115% of the S&P Electric Index. There’s also an average LDC yield of 4.5%, which you don’t see much in the market today with declining payout ratios, or no dividends at all. Fundamentally, the LDC group’s prospects appear improved versus prior periods with still relatively limited risk versus the market because of more aggressive and incentivized management teams and increased growth opportunities. And this is a group that should generate solid earnings growth almost regardless of the economic performance of the United States.

TWST: Is there anything that confuses an investor about this group or one of the companies in your experience?

Mr. Maccarrone: The perception many times is that these are simply gas utilities with only their customer growth as the potential and no other businesses. Each of these companies is somewhat of a diversified energy company with a variety of activities. On the surface, it might seem that LDCs are only concerned about delivering gas to a home space heating user. The reality is that these companies and their management teams are increasingly focused on growth initiatives beyond that core utility base. And that is what is going to drive earnings and share price performance at the margin. It’s peeling back that next layer of the onion and doing that next level of research on these nonregulated strategies that may lead to the best future returns.

TWST: Are there any other stocks that you would highlight?

Mr. Maccarrone: There are a number of companies that have initiatives under way that I think are impressive, or various parts of their operations offer excellent potential. KeySpan Energy (NYSE:KSE) has established a unique gas utility growth story by penetrating under-saturated markets with very effective marketing and a trustworthy brand name, which leads to superior long-tern growth prospects. Its earnings have benefited from exposure to commodity prices, gas and oil, as well as power, and we see those trends continuing.