CFOs Speak Out: Enter the Mega Utility

Deck: 

Geoffrey S. Chatas, Executive VP and CFO, Progress Energy

Fortnightly Magazine - October 2005

What is the reason your company grew as fast as it did in the last three years?

Geoffrey S. Chatas: The utility business grew organically [in terms of] net income. Also the unregulated business-we ramped up our gas business. That went from contributing nothing to contributing $30 [million] to $40 million. And then our commercial competitive operations went from having negative to positive results in that period. Synthetic fuels had an important impact-but clearly it was not the only driver.

What was the basis or strategy for those consistent earnings over those years?

GSC: Focusing on running efficient utilities in growing states that have favorable regulatory environments so that you have the opportunity to earn that kind of 12 to 13 percent return on equity (ROE) on the utility business combined with not going crazy on the asset investment in terms of plowing billions and billions in investments that don't produce. I think that again the gas businesses has been a very efficient use of capital in terms of producing earnings. We did sell some gas assets last year and added others. So, it has been very efficient in terms of total return. Think of it like a private equity investment. Those are really the major reasons.

What are the top contributors by segment to your earnings?

GSC: The utility contributes 80 percent. Next would be synthetic fuels and then third would be our competitive operations in gas.

What is your strategy going forward? Where will your earnings come from? How will your asset mix change?

GSC: We have always said that we are targeting 80 to 90 percent regulated and 10 to 20 percent unregulated. The real driver of our earnings is the utility, and our cash flow especially is what funds our ability to pour more money back into the utility.

In your forward strategy you would concentrate on growing the regulated utility?

GSC: Obviously, the bulk of the dollars will go to the utility where we are generating these good returns.

You say that being in parts of the country that are growing is your recipe for success. Which of your service territories is growing the fastest?

GSC: Florida is actually growing faster. But North Carolina is growing. In the last 12 months we added 33,000 customers in Florida and 28,000 customers in North Carolina. So, there are lots of people moving in. In percentage terms it is about 3 percent in Florida and 2.5 percent in the Carolinas. … We have good growth. And that's every year. It's always a challenge in converting that in to bottom-line growth, and if we do that successfully we win.

There has been a lot of talk about what Progress Energy will do to replace its earnings from the synthetic-fuel business production business. Could you give us an update on that business?

GSC: With that business we are storing credits up right now. … We actually lose cash flow producing them right now because it costs us more to produce them than we get in actual tax credits that we can use in a given year. So after 2007, when we stop producing, we will no longer have the loss on production, but we will continue to then be able to use the credits. In that sense, we will actually have cash coming in. So, one way to replace those lost earnings is to payoff debt and/or buy back stock. That is one piece. The other is expanding the unregulated piece, just growth in those lines of business to replace some of those lost earnings like coal terminals that we were using for synthetic fuel and freeing up for competitive coal, blending, and marketing.

What kind of unregulated businesses do you favor?

GSC: We have competitive generation in the Southeast and then gas, which is in Louisiana and Texas. The gas is production. We have 225 [+/- 250] billion cubic feet of proven reserves.

How long do you believe high natural gas prices will continue?

GSC: That's a good question. Although for us its an ability to get the gas. We actually bought the gas at an average price of $1. 99 [$/MMBtu]. We are way in the money. Even if prices settle down, we'll still be very profitable.

Will mergers be part of the growth strategy?

GSC: Certainly it is not something we're planning on right now, but something we always look at. No, our current plan would envisage just improving the operational and financial efficiency of the company as it is.