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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

can achieve?

RM:You see a lot of integrated utilities like us, if you are talking earnings-per-share growth, clustering around the 4-percent-per-year range. There has been a migration back to the basics and away from some of the higher-growth promises we saw with merchant generation trading and so forth, although many of those were not sustained for any period of time.

I think that is probably going to be typical of a lot of companies, and probably typical of FirstEnergy as well. You have to couple that with the dividend yield. … FirstEnergy has said that when we finish our debt retirement program, which will largely be done by the end of next year, we'll be in a position to use our favorable cash flow to grow the dividend. In fact, we don't think we have to wait until we are entirely done with that program. We just need to be on a good trajectory. That will enhance the overall return to investors and make a risk-adjusted return that is very competitive with anything else for people to get in the market.

What are your projected free cash flows?

RM:This year we had told the Street that we would have free cash flows of at least $825 million, and we are on track to meet or exceed that.

How have you been deploying your free cash flows?

RM:For the last several years, a large chunk of our free cash has been devoted to cleaning up the balance sheet and paying down debt. As a result of the two mergers that we did, and as a result of the nuclear building program the company was on in the 1980s primarily, we did end up with a lot of debt. We believed and continue to believe that paying down the debt and cleaning up the balance sheet is a great use of our cash. So, last year we paid off $1.9 billion of debt. This year we will be trying to pay off an additional $1 billion. That will move us back to a position where we can make a strong case to the ratings agencies-Standard & Poor's in particular-that we are an investment-grade company. Our goal is to get down to where we have the balance sheet and our credit metrics at the median for the S&P credit metrics. We think by the end of next year, we'll be there.

How will you apply those cash flows in the future to specific planned projects?

RM:Going forward, once the debt-repayment program is done, we'll be using at least a significant portion of our cash to reinvest in the business, particularly within the energy delivery or wires business. We plan to rebuild some of the rate base that hasn't been built for a period of time. We'll be investing to increase reliability to our customers, particularly in the transmission and the distribution system, and to really take our reliability to another level. We are working hard to prioritize the use of cash and those projects so we get the most bang for