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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

free cash to achieve meaningful growth?

Gerald Luterman: KeySpan finds itself in a unique and enviable position. To begin with, we have a very strong organic growth situation in our core local distribution company (LDC) business. The markets that we participate in are under-saturated from a gas point of view; in the New England area it is something on the order of 50 percent. In the Long Island area it is something on the order of 40 percent. In the Brooklyn and New York area it is up around 80 percent, which was the core or starting point.

If you look at our growth rate, a good part of the growth is coming from the organic growth inherent in these markets and in the excellent demographics of these markets, which have the ability to convert from oil to gas. We estimate that we can virtually double our gross profit margin by the full conversion (which is highly unlikely) of all potential customers from oil to gas. So we have a very strong organic growth composition underpinning our growth strategy. … In addition, like many other companies, we will surround the [LDC] business with additional investments that are complementary, in pipelines, in storage, etc. The third leg is our electric business-the additional investments in facilities like our 250-MW Ravenswood power plant, which was added to our fleet and continues the growth in the electric component. So it will be investments in our core businesses plus the organic growth inherent in our marketplace.

Do you feel limited in any way as to how you can deploy capital?

GL: We have very strict criteria that we like to follow in terms of our investment policies. We are very disciplined in that sense. In the electric area, we have always made it clear that we will not invest in merchant plants, that we will invest only in properties that have either purchased power agreements or located, like our Ravenswood plant, in a load pocket. We will not invest in assets outside of our footprint. We are going to invest in assets that generate additional cash flow and/or are located in our [Northeastern] footprint.

How do you view being acquired or acquiring a company in a merger or acquisition?

GL: We have the size and scale today from a core business point of view that we don't see any need for any type of merger or acquisition in our businesses. In terms of being acquired by somebody else, there is nothing on the horizon, and we are certainly not sending any welcome invitations.

Could you put a number on the percentage growth in the coming years?

GL: We have always said that somewhere on the order of 5- to 6-percent earnings growth per year is consistent with what we see as the potential for our business. Given the low-risk nature of our business and the fact that we are a very strong regional company with a very strong regional presence, 5 to 6 percent is something that we will strive to accomplish. Given our 5-percent yield, when