Does the utility industry have the financial strength sufficient to meet the combined challenges of: (1) sharply increasing and highly volatile fuel and purchased-power costs; (2) significant...
CFOs speak out: Growth Strategy for the 21st Century
the buck. Looking at it in several pieces, some of it is going to pay down debt, some of it is to grow the dividend, some of it is going to reinvest in the business, and some of that will go to environmental controls in the future.
Some experts believe that some utilities are pursuing the dividend at their peril, sinking more and more money into it, at the expense of growth. Do you think investors down the road will penalize these companies?
RM:I think just the opposite. I think investors are beginning to appreciate where utility stocks fit in to the risk/reward spectrum. I think they learn that utility stocks are not necessarily always going to be growth stocks, but there is a place for a more conservative, lower-risk, higher-yielding kind of investment. I don't think investors will penalize utilities, I think they will reward them. I think you'll see a lot of money flow into utilities, as once again investors understand where they stack up in the overall investment arena.
Are you concerned about competing with fixed-income securities, as interest rates are forecasted to increase?
RM:To the degree that interest rates do continue to rise, that historically has put pressure on utility prices. So, if interest rates continue to climb, I think the group as a whole will see some pricing pressure. To the degree you have a healthy and growing dividend, that certainly offsets that somewhat. … I still think that even if rates rise there will be a small number of companies that can differentiate themselves successfully and carry a premium valuation to the overall utility market, and that's what we are trying to do.
Many utilities have been confronted with a situation where they must control O&M spending on an infrastructure that continues to age. You undertook a significant technology spend for obvious reasons. How is it affecting your bottom line? How would you recommend other utilities go about it?
RM:The biggest technology spend we have had is our implementation of SAP, which is a very large enterprise resource management program. We implemented that in July of 2003. That was a big, big project. That was probably a $90 million investment. It had a big payback as well. We are now on a common platform across the entire organization. FirstEnergy companies were on Oracle. Therefore, it really impeded our ability getting more efficiencies out of the business. Putting that common platform across the company was a priority for us. While there was a big upfront technology investment, it's already paying benefits for us.
What is your overall view of the deregulation and how it has affected FirstEnergy's business?
RM:It's a little bit different story in the three states that we operate. In New Jersey, generation has been deregulated successfully. We have only a distribution company in New Jersey. Every year there is an auction for generation service. That process in many respects has gone well. It hasn't necessarily produced lower prices for generation service for customers, but it has certainly worked from a