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CFOs speak out: Growth Strategy for the 21st Century

For The 21st Century
Fortnightly Magazine - October 2004

are forecasted to increase?

GL: If Treasuries start to move up, I think that would put pressure on utilities, including KeySpan, to increase their dividend so that they are competitive. It will be important for yield-orientated securities to manage their free cash flow ... to remain competitive against alternative investment vehicles, if they want their stock price to be sustained. ... To remain competitive it will be necessary for us and others in our industry to step up and match or increase the dividend while maintaining the security of our credit rating and maintaining our capital expenditure, which is a big part of all utilities' financial profile.

Thomas O'Flynn , Executive Vice President and Chief Financial Officer, Public Service Enterprise Group, Inc.

"We obviously look at M&A opportunities, but they are hard to do. I think it is a tough time in the market to be doing large M&A deals."

How do you think utilities should deploy their free cash?

Thomas O'Flynn: We have a very strong cash flow story that is an improving story. Bottom line: We are using it to improve the balance sheet, pay down debt, and ensure we continue to pay the dividend with some modest growth potential. Last year was the first in 10-plus years that we raised the dividend. We raised it about 2 percent, and we hope to be able to continue that. But we have reduced our debt-to-cap about 5 percent over the last year and a half. It stands at about 57 percent, as our lenders calculate it. In the next year we are looking to bring it down to the low 50s.

If mergers and acquisitions are part of the growth plan, do you think you would be an acquirer or be acquired? Why or why not?

TO: Our primary focus is to run the business and have safe, reliable, cost-effective operations, and to use our cash to improve the balance sheet to strengthen ourselves and improve our financial flexibility. We obviously look at M&A opportunities, but they are hard to do. … I think it is a tough time in the market to be doing large M&A deals.

How does PSEG see itself as pursuing growth?

TO: I think the primary of the three businesses that we have, PSEG Power, would be our primary growth vehicle. Of the three arms that we have, PSE&G is a very strong transmission and distribution utility but with modest growth in our region here in New Jersey.

There are modest expectations we can have with a very sound, solid, safe, reliable, strong cash-flow-generating company. The other company is PSEG Holdings, and international and non-Northeast business. We have said for the last couple of years that we are not going to be putting new capital into the [international] business. It is a solid business but with a more stable, flat earnings-growth outlook.

PSEG Power is about 40 percent of our earnings. We would expect to have some reasonable, organic growth with the completion of construction on a couple of plants that are coming on line in

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