Introduction
Those of you, who know me, know that I come from a very different role than that of many of my counterparts in the financial community. I am part of Morgan Stanley’s investment banking group but my role at Morgan Stanley is different from other bankers you may work with. I follow the industry, much like a research analyst but for my group (not for investors). I also help our clients (many of you sitting in this audience) on issues relating to investor requirements and investor relations questions. In addition, I often step in as a financial analyst to advice on assignments, especially in the changing times when there is a genuine separation between the Street’s research analysts and banking group in order to keep our analysts independent.

This give me the ability to be helpful to the industry and our clients through such organizations as the EEI, NEI, and especially INPO, where I have been privileged to be the financial community representative on its Advisory Council for several years. This role has given me a unique window to the nuclear industry. It also has been one of the most interesting experiences I have had in my career.

Just as an aside, I think that INPO is an amazing organization. It is unique for any industry – its mission, its staff, and its accomplishments have greatly benefited the electric industry and its investors —- and I dare say our nation. You all are fortunate to have its contribution.

(Chart 2 — Topics to be Discussed)
With this background, I would like to talk first today a little about investors’ attitudes toward the electric industry, in general. Then I will talk , more specifically, about investors’ view toward nuclear. Finally, some comments on financial market requirements relating to new nuclear plants.

(Chart 3 — Utility Index)
The electric industry and its investors are at an interesting “taking stock” point of time. As we all know we have been through several years of tremendous turmoil.

For many, I think we are at a much needed “catch your breath” juncture. Stock values have been in a relatively narrow band for about 18 months, after what was clearly a roller coaster — five long exciting years of market momentum upward, aided by the enthusiasm in the market for most industrial segments. This was followed by the rapid decline in values — again for the market as a whole, but even more so for the electric sector, accentuated by the problems begun in California and by Enron and continuing with the collapse of the power markets.

However, in the last 18 months or so, companies in the industry have been focusing on getting their “house” in order and a lot of progress has been made. You have been cleaning up your balance sheets and stabilizing credit ratings. You are addressing organizational and operational problems and focusing on your cost structures. And, importantly, you are thinking a lot about the future and where you go from here.

From both the companies’ and the investors’ point of view, this has been a time where we have heard a lot of discussion of “Back to Basics”.

(Chart 4 — Back to Basics)
The term seems to mean different things to different people…. with some saying they never left the basics, even though they didn’t always keep their eye on the ball, and others using the term to communicate that they will no longer wander from their core business, that they will not make value-destroying investments.

For regulated companies, back to basics means focusing on growing through rate base additions and cost efficiencies. For your companies with large unregulated power subsidiaries, it means concentrating on running your plans well, limiting your marketing and trading to asset-backed transactions, and hedging your generation with contracts to reduce market risks.

The consensus of both companies and investors alike is that this is probably not a going-forward strategy, but a state of affairs that makes sense at this stage of the cycle. Whatever, there is increasing appreciation that the core electric business is good business. Many investors are telling managements that this is what they want in their investment and that is why they buy your stock. Simply put, they are telling you to focus on what you are good at.

(Chart 5 — Core Competencies)
So what do investors think electric companies are good at? What are your core competencies?

First of all, most investors think you are good at creating long-lived assets, recovering these assets, and earning a reasonable return on them. They like that you can raise capital at 7-8% net cost of equity, and that, even in this low interest rate environment, most regulators are still allowing companies to earn 10-12% on your assets…… at such levels , new equity employed in the business is clearly accretive to earnings. As we all know, it’s hard to find investments in your industry that are accretive so, at least for now, many investors say that adding regulated assets is the best investment you can make.

Yes, once again investors are focusing a lot more on regulation…. And, for the most part, you are being given good marks for managing your regulatory environments. Many of us in this room realize that this is easy when you are not trying to increase rates. The real test will be in the coming years as more and more rate cases are needed. The next cycle of rate cases is clearly starting: about 60% of the 50 largest utility companies have filed or are expected to file a rate proceeding in the coming year. Investors today seem pretty sanguine about regulatory risk — saying that you’re your relationships with commissions have improved in the last 5-10 years, that there is more collaboration with regulators, and that the next phase of rate increases will not be as difficult as in the 80’s when you had major rate base additions, primarily nuclear. Only time will tell — let’s hope they are right!

What else do investors think you are good at — clearly producing free cash flow from operations and sending this cash flow back to shareholders in the form of dividends. Again, in today’s markets, this seems to be what investors are most focused on — that is, solid and increasing dividend payouts. And you are hearing them — over the last 12 months, almost 50% of the industry has increased dividends versus only 28% three short years ago. And investors are rewarding these companies: dividend increasing companies generally have had the best total return performance over the last 3 years.

So, for many investors, back to basics is focusing on cash returns and giving that cash back to shareholders in the form of high and growing dividends. As we all know, though, investors may be satisfied now, especially in low interest rate periods — but will they remain content as rates go up, as we all expect and know they will? That will be the challenge!

Finally, to round out my list, investors think that utilities are good at keeping the lights on! For the most part, investors believe that you are good operators of electric systems — as long as you have adequate resources, and are not distracted by non-core challenges.

So, how does this discussion of Back to Basics relate to nuclear and my subject — investors’ attitudes toward nuclear?

Clearly your nuclear operations are tied directly to the most basic part of your Back to Basics business. Let’s look again at my list of core competencies with nuclear in mind… what investors value and want you to focus on:

• Your nuclear assets are Long-lived assets on which you can/do earn a reasonable return.
• You have demonstrated your ability to manage both the economic as well as nuclear regulatory environments relating to them.
• Your nuclear units help you produce predictable and significant cash flow, which support the dividends that your investors want and value.
• And finally nuclear energy is essential to your providing reliable electric service needed to keeping the lights on.

So in general, nuclear operations fit right into the sweet spot of what investors think electric companies should be doing today — but what else do investors think about nuclear?

First of all, investors today really don’t spend a lot of time thinking about nuclear issues or operations — and perhaps that is good. Compared to 10 or even 5 years ago, nuclear has been out of the headlines and, for the most part, only in the footnotes of analyst reports. You have demonstrated your ability to have good nuclear operations, the economics of nuclear are positive, and nuclear regulatory issues are rare. Investors have much more complex and pressing issues to focus on.

That’s really the bottom line on nuclear — and I could almost sit down now.

But of course I want to add a little color to this overview. To help me, and to assure that I properly characterize investors’ view, I have done a little homework…..

Over the last few weeks, I sent an informal survey with about 20 nuclear-related investment questions to 40 of the top utility investors and analysts, from the buy and sell side, debt and equity. I have also talked in depth with a handful of these people – people who are considered thought leaders in the financial community – all perceptive analysts who are not afraid to share their opinions. I have gotten some interesting insights from both these interviews and my questionnaire which I would like to share with you.

(Chart 6 — Investors)
First of all, a little background. As those of you who spend time with the investment community know, there has been a lot of turnover in analysts and investors in recent years with many young, brash analysts replacing the more mature, seasoned analysts who have followed you for years. Today, the average years of utility investment experience is only about 7 years—which means that many of the people following and investing in nuclear companies did not live first hand through the tumultuous years when your nuclear units were “coming of age”, when the NRC had its watch list, when nuclear outages were frequent and public and investor opinion was focused on nuclear problems.

When asked, almost all in my survey responded that they consider themselves VERY knowledgeable about the utility industry but only SOMEWHAT knowledgeable about nuclear issues. Only 20% say that they closely monitor the activities of the NRC— almost none could name even one NRC commissioner, and few could articulate NRC’s role or how it evaluates the industry. (You all know that their answers on similar questions for state or federal economic regulation would be very different since this is were they currently are focusing their attention.)

Turning to my questions on the merits of nuclear in an investment context let me start with the bottom line…. One of my key questions was how the investment community views nuclear generation as they evaluate and make investment decisions.

(Chart 7 — Investors Views)
I am happy and perhaps a little surprised to report that 100% of my respondents said that they currently consider nuclear generation to be POSITIVE from an investment point of view. When can you ever get analysts to agree 100% to anything? And again, all of you know that it hasn’t always been that way – and it wouldn’t be today if you weren’t doing such a good job managing and operating your nuclear units.

My follow-up question tried to get to whether this positive view of nuclear was impacted by the amount of nuclear generation that a company has… that is, does nuclear concentration increase the perceived risk a company faces? Here my survey group responded mostly SOMEWHAT saying that they generally take note when nuclear reaches 30-35% of total generating assets. As a point of reference, our data shows that only about 13 of you have nuclear at that threshold level, which may or may not be comforting to the rest of you.

(Chart 8 — Nuclear vs. Other Fuels)
As part of my survey, I also asked my investment community peers a few questions on how developments relating to coal and gas affected their views on the investment merits of nuclear generation.

First for coal... As one would expect, environmental compliance issues for coal have clearly made nuclear generation more attractive. One analyst told me that he considers nuclear a natural hedge against environmental burdens on coal… when the value of coal generation goes down, the value of nuclear generation goes up, showing the value of a balanced generation portfolio. Most told me that they expect this relative attractiveness to widen in the future, as environmental requirements increase, affecting the cost and risks of coal generation.

With regard to comparisons to gas generation, as one would expect, nuclear generation’s attractiveness and value as an investment has been enhanced by the dramatic increases in gas prices. Today, nuclear generation is seen by some as a proxy for gas reserves — and thus is a valuable resource. If running well, especially in markets where gas is on the margin, nuclear can be a money making machine. Although nuclear generation would be notably less attractive if gas prices were to decline to historically more normal levels, few expect we will see such a drop at least for the next 3-5 years. Several people said that even if gas prices fall, our current experience with volatility in gas prices made them value nuclear for the stability and predictability of its cost structure.

(Chart 9 — Operations)
I next asked a group of questions on investors’ views on nuclear operations .

Investors have clearly taken note of your impressive track record of strong operations. Your diligence in achieving near-term efficiency without sacrificing long-term operations or safety is clearly acknowledged by them.

Like it or not, they focus on capacity factors which is the most measurable and easily available statistic for your operations, even though there could be risk from fixing attention on one relatively short term factor such as that. As an industry, your capacity factors have approached or exceeded 90% for each of the last four years, helped in large part by improving the performance of the lower performing plants.

Overall, investors are comfortable that strong operations can be sustained over the long term. 60 % of my analysts surveyed assume in their investment analysis that the industry will be able to maintain the current high capacity factors and about 20% said that they believed that operations, as measured by capacity factors may even be modestly improved, in line with industry goals to do so. Nonetheless, the remaining 20% expect that the industry will experience some deterioration in capacity factors due partly to that fact that units are getting older and they are being run harder as they age.

Especially for units which operate in deregulated markets, each 1% reduction in capacity factors translates directly into millions of dollars of earnings, putting pressure on financial results and investors’ appraisals of your stocks.

In related questions, I tried to gauge which risk factors relating to nuclear generation are of most concern to investors. I don’t think you will be surprised that sustaining your high levels of efficient operations is the risk most often site by investors. When asked, only 50% of my respondents had HIGH confidence that the industry would be able to indefinitely sustain excellent efficient operations, without some company having a significant unexpected operating issue in the future.

Investors realize the serious financial repercussions of an extended nuclear problem —-witness the financial cost of FirstEnergy’s Davis-Besse outage. Clearly, investors saw Davis Besse as an aberration, a company specific event, and not as an industry issue, but that event came “out of the blue” to the financial community, as it did to most in the industry. FirstEnergy, fortunately, was able to sustain the financial impact of that 25 month outage…… but for others, especially companies where nuclear is fully deregulated, such an occurrence could be a death blow.

On a more positive note, the risk of “safe” operation is not on investors’ minds. As complex as nuclear generation is, your long record of safe operations is appreciated by investors, and as I read your recent public opinion polls, it sounds like this is increasingly being understood by the public as a whole. This is probably one of the most valuable attributes of the nuclear generation industry….. And we know how much diligence and consistent focus is necessary to assure that safety is not compromised.

Importantly, investors also put a low probability of terrorism being a real risk for the industry. I think you have done a good job of explaining to your investors the state-of –the-art security measures you have instituted.

Caveat
All of this on investors’ views is generally very positive, and I’m pleased to make this “sunny” report to you today — especially in such a beautiful location. But I would also like to take a moment to reflect on what you are hearing.

Any of you who were with the industry even 5 years ago know that my comments then would have been very different than they are today. I probably don’t need to tell a group of CFO’s and others meeting on insurance issues, that companies with nuclear operations must be extremely vigilant .

When you think about it, nuclear is one of , if not the only part, of your business where one misstep can make or break your company. When a nuclear unit has an extended outage, the cash drain can be enormous – in both operating and capital costs. A nuclear problem can destroy the fabric of a company, its credibility with all its stakeholders and can completely ruin a reputation which takes years to rebuild. Investors’ views are very fragile and you need to continually keep earning them. You’ve come a long way in this regard … so please keep up the good work with your nuclear operations.

(Chart 10 — Nuclear Ownership Changes)
Now, getting back to my overview, let’s look at the structural ownership changes in the industry. Overall, investors have embraced the consolidation of nuclear generation by the industry. As we know, five of you in the audience have successfully purchased at least one nuclear unit from one of your brethren. Counting the two transactions announced in November of last year, 15 units, totaling about 13,000 mw of generation in the country have changed hands in the last 4 1/2 years.

Over time, investors have reacted increasingly positively to each of these transactions. Looking back, I think we can say that each sale have been seen as value-enhancing events for shareholders on both sides of the transactions. Buyers have been seen as disciplined in their purchases, and have, I think in all cases, been able to realize improvements to the operations of the units they have purchased. On the other side, sellers have been able to get attractive terms, including in most cases, good purchased power contracts, they have used the funds received to strengthen their financial positions and they have been able to better focus on other parts of their business.

For you five companies, who have purchased plants, nuclear is now seen as part of your going forward growth strategy. Investors say that these nuclear purchases have made you more attractive as an investment. Even though there are not now any other units publicly on the market for sale, investors do expect additional plants to change hands in the future and they think the same five companies will be the buyers. As long as you remain committed to operational excellence and appropriate risk management, any additional consolidation in the industry would be seen as positive.

But I do not want to slight those of you with single station operations. By my count, 11 companies operate only one nuclear station, although some of these have 2 units at that site. When I talked to your investors about the effect of single site nuclear companies, there did not seem to be any material impact on your investment attractiveness.

Investors recognize that many single site companies have long term track records of excellence in nuclear operations. Your operating costs are generally competitive with those of multi-station companies and nuclear generation has helped to keep your overall generation costs low for your customers. Single station nuclear generation seems to generally work best when companies are still under traditional ratemaking, because revenue recognition continues when units are down, for routine refueling and also longer outages, if they were to occur. For these companies, your investors clearly benefit from your nuclear generation with little risk from lack of scale and scope.

On the other hand, investors seem to especially value scale and scope when nuclear generation is located in deregulated markets. Here, investors worry about the risk of earnings volatility from nuclear generation. When a company’s only deregulated nuclear unit is down, replacement power must be found. Often the marginal cost of replacement power can be high, and a company usually can’t pass these costs on to customers. It’s your shareholders who have to bear this risk and it’s one for which they may require a higher return.

Just as an aside, one other risk sited by analysts for single plant operators was the ability to attract and maintain the best nuclear management and work force. That is obviously something harder for investors to appraise but this may indeed be an issue for single site nuclear companies. I mention this comment because it was made by 3-4 of my analyst contacts. Perhaps it is something that you single plant companies should address as you talk with your investors

(Chart 11 — New Plants)
The next and almost final area I would like to discuss is investors’ views toward plans for an era of new nuclear generation. Just in the last few months, the investment community has seen the series of announcements relating to exploring the feasibility of new nuclear units.-It’s been well publicized that the industry has three separate proposals, and eight US companies have now joined at least one of these group.

The financial community understands that the purpose of each consortium is to test the feasibility of new nuclear units and specifically to see if the licensing provisions will work to support the construction of economically competitive new nuclear generation.

A logical question from you is what the financial community thinks about all this news? We all know that analysts have very short time horizons — how often have you heard… what are you going to do for me next quarter? Well, when you are talking about licenses by 2010 and new units by 2014, this is clearly not a stock -moving event. I have checked with the Investor Relations directors of several companies which are more active in this effort, and they have had few inquiries about these announcements…so far, questions have centered on how much you are committed to spend and the time frame for a decision to proceed. When investors hear that annual expenditures, at least for the larger consortium (the NuStart group), are capped at $1M per company for the first 7 years, their concern and perhaps interest, immediately dwindles.

Here I might interject some information from my informal survey of nuclear investment issues. My analyst group was evenly split on whether they thought a commitment to actual build new nuclear would be made by the industry within the next 5 years. When asked how a decision to build new nuclear would be viewed, the financial implications was, of course, the big question.

As informed citizens, investors understand as well or better than most, that we, as a country, have few alternatives for clean, reliable and available energy sources. They also intellectually see the role that nuclear energy could play in our energy future. As investors, however, their concern is the economic viability of nuclear. Even the young analysts today who didn’t live through the 1980’s, can still see the financial scars of nuclear cost overruns and the nuclear stranded costs for which customers are still paying.

(Chart 12 — Challenges to New Nuclear Units)
To investors, there are many challenges for new nuclear generation — no one will be surprised at this list—

• Public perception about the safety of nuclear
• Siting and NIMBY issues
• Qualified work forces (both for construction but also operation)
• Storage of spent nuclear fuel
• And, of course, financial issues. They will be the key.

(Chart 13 — Funding of COL)
So what are these…first for phase one — the licensing process. On paper, the Construction and Operation License (COL) process looks good, but no one knows if it will work and to test it will be expensive. (Can I be right when I quote numbers of $800 million for the NuStart plan?) DOE moneys are supposed to foot the bill for about half of this, but this must be allocated from the budget — and there are already questions whether the 2005 funds will be there for the first year’s expenditures.

With regard to the private funds, as I mentioned before, investors do not want you to put a significant amount of their equity into this pre-construction process. So who’s left? To investors, it seems logical that your vendors provide the majority of the private funds needed for this licensing process... They have the most to gain financially from this process. (They also must be willing to bear the responsibility of the economics of the design… i.e., that the design will produce electricity that is competitive with alternate energy sources which in today’s market means clean coal generation.)

(Chart 14 — Funding of Construction Process)
Assuming the pre-construction phase can be financed and a COL is awarded, the next financial question will then be how actual construction is to be financed. I guess that begins in 2010, if everything goes as planned. Even though that’s a long time from now, you must begin to address this issue now. If you ask investors today—they are very leery to say that they will be there to put their money at risk during the construction phases of the early mover plants. No one knows if the COL will work as designed— and investors are unwilling to bear the risks that a plant is completed and for some reason or another, is not allowed to operate. This shouldn’t happen….but it will be hard to convince investors it could not occur. And, finally, the market risk of the economics of this generation will be on investors’ minds….. will the energy from these units be competitive with other energy sources? But who really know what power prices will be in 2014? And, what kind of power markets will we have then…. Will electricity be rate of return regulated? Or will markets determine electricity prices at that time?

I know that there has been a lot of effort to address these issues and that a good amount of progress has been made — and so now is the time to push and move ahead.

(Chart 15 — Governmental Assurances)
The focus must be to convince governmental leaders that nuclear is a national policy issue and that we will need meaningful federal support. You are exploring all the appropriate mechanisms…. Governmental grants, loan guarantees, production tax credits and investment tax credits. Each has its advantages and issues and details must be worked out before we can determine what will be required to get investors on board.

Obviously from the investment communities point of view government grants and loan guarantees are the most attractive — but they are probably just on your wish list. With budget issues, is it realistic that we can count on this being made available especially when we are talking about at least 4 years of construction for each of the 6 proposed first mover plants. Production tax credits are interesting but they have the problem that they would not be available until nuclear generation is produced. At least from Senator Domenici’s point of view, apparently these are the most likely incentive at the current time so perhaps we will be hearing more about them. If they are large enough and secure enough, perhaps they will be an important and helpful assurance.

Budget issues are limiting and everything is in flux given the politics of the year. My understanding is that NEI is working hard to get as much federal financing help as possible…. So let’s hope they are successful!

Also, it may also be that regulatory packages may be worked out to provide for some support during the construction period…. I see Gale Klappa in the room. Wisconsin’s Power the Future plan has been embraced by the financial community. It will allow his company to attract capital at reasonable terms for needed new generation, including a new clean coal project. That plan required wide public support and state legislation… and it looks like it will work... Maybe something like that will be available for nuclear. In any case, it’s early in the process and there is much more work to be done. …
And I imagine we will be hearing a lot more about this in the future.

(Chart 16—Investor Relations Suggestions for Nuclear Issues)

Before closing, I have one more area to discuss— having a captured audience of many CFO’s in the audience and that is your investor relations efforts related to nuclear issues.

I would encourage you to continue to communicate openly and actively about your nuclear operations with your investors. As I mentioned earlier, analysts and investors today are not as informed about nuclear issues as in previous years. Your good nuclear operations mean that this is not a focus for them— many other areas are more in the forefront. However, you have a lot to “brag” about —-- don’t forget to talk about your successes and your progress. But also, help your investors to understand nuclear issues and priorities—- you never know when you will need this understanding by investors. Introduce investors to your nuclear managements —- there used to be a time when the Chief Nuclear Officer of most companies was known to the Street. Now, few are included in your IR efforts.

Talk about the industry’s focus on excellence and safety; describe your commitment to learning from the experience of each other…. We all know that the nuclear industry is only as strong as its weakest link. Joe Colvin and his NEI organization have an active outreach program to the financial community. It does a great job but they need the help of each of your companies. I think there is much more that you can be doing in this area.

Also, corporate governance is a focus area for investors -- most of you have board committees on nuclear or outside nuclear oversight advisors…make sure your investors know what you are doing in this area and how it benefits them as investors.

And finally, with regard to the next generation of nuclear plants, keep investors informed on your plans and progress. The next few years are going to be very important in this area….. the financial community could be an important ally as public policy is developed.

In conclusion, I hope I’ve given you a good overview of my view of Investors’ views toward nuclear. I think the bottom line should be that investors attitudes toward nuclear are the best they’ve been in many years, and possible the best they have ever been. Your nuclear operations are key assets to your investors — and it’s your responsibility to continue to manage these assets safely with excellence in operations so that you will continue to get full value for them from your investors.