Focus on the CFO

Years of experience are a plus in this capital intensive industry

By Nancy Spring, managing editor

Utility companies in the U.S. are anticipating huge capital improvement programs. Billions of dollars are earmarked for the country’s electric infrastructure. Companies that provide the raw materials for power plants and transmission lines are also gearing up. All this activity takes money and that puts the chief financial officer in the spotlight. What’s topmost in the CFO’s mind?

For David Hauser, group executive and chief financial officer at Duke Energy, the main issues for his company in 2008 will be financing the capital expenditures the company is planning. Duke Energy is one of the largest electric power companies in the U.S., supplying and delivering energy to 4 million U.S. customers.

“My priorities in 2008 will be first, to make certain that Duke Energy is making the right decisions on how to deploy capital, and second, to secure the right mix of capital resources necessary to finance the substantial capex program underway at Duke Energy,” said Hauser. “Over the next five years, we expect to invest around $23 billion. Most of that will be in our regulated electric utility businesses as we make investments necessary to meet growing customer demand on our system and improve the environmental performance of our existing power plants. Fortunately, Duke Energy’s strong balance sheet will provide us with significant flexibility in raising the capital necessary to achieve our capital investment plans.”

Stability at utilities

The average length of tenure for the CFO post across all sectors of the economy is three to five years, according to CFO magazine. At utilities, however, things are more stable.

Duke’s Hauser, for instance, joined Duke Power in 1973. For the first 20 years of his career he held various accounting positions, including controller, vice president, procurement services and materials, senior vice president of global asset development, and senior vice president and treasurer. He was named acting chief financial officer in November 2003 and group vice president and chief financial officer in February 2004. In April 2006, he was named to his current position.

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“It’s always been a more staid industry,” said Richard Jacovitz, senior vice president of Liberum Research, the largest database of C-level executive changes at public companies. “We’ve never seen a high level of management change over time in utilities. It’s a much more stable, structured industry, it’s much bigger and it runs along differently than an industry like oil and gas, which is somewhat dependent on discovery and a variety of other factors that play into how the company is performing.” (See Table 1 for 2007 C-Level changes for all industries.)

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Liberum’s change statistics for CFOs separately totaled 2,263 in 2007. The top industry sectors for CFO changes were Drugs/Biotech—203, Energy (which includes oil & gas companies)—151, and Metals/Mining (which includes coal mining firms)—129. Utilities came in at a mere 21, (see Table 2). The year before, utilities registered only 23 CFO position changes. It is indeed a stable industry.

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Looking at the CFO position at eight utility holding companies in the U.S., admittedly a very small and statistically invalid sampling, certain patterns emerge. For one thing, 2004 seemed to be a big year for CFO change; for another, the CFOs of today often put in many years at the company, like Duke’s Hauser. (See Table 3.)

A new CFO at National Coal Corp.

At the other end of the management change spectrum from the quiet world of Utilities is Metals and Mining. In 2007, Liberum found that sector to be in the No. 3 spot for CFO changes. National Coal Corp. (Nasdaq: NCOC), a producer of high-quality steam coal in Central and Southern Appalachia, is one of the Metal and Mining companies where there was a CFO change: Michael Castle was appointed senior vice president and CFO in December 2007. In an exclusive interview with EL&P, Castle talked about his top three goals for 2008.

“We’re a coal mining company that supplies utilities; 100 percent of our production goes to the electric steam market in the U.S. We have production in Kentucky, Tennessee and Alabama. We’re a small company, I think the smallest publicly traded coal mining company in the country, but now we have a new CEO who’s been here about 15 or 16 months. I’ve been here since December.

“My number one goal as chief financial officer here is to grow the company both organically and by doing some acquisitions and/or mergers in the Central and Southern Appalachia area. We did an acquisition in Alabama that we closed on in October. I was an outside consultant on that transaction and was intimately involved in a lot of the due diligence and in putting that deal together.

“The second goal I have is to provide as much assistance as I can, utilizing my background in the industry, to help our operating guys cut costs anyway we can. When this company was started in 2003/2004, for instance, fuel prices were 78 cents a gallon, now it’s $3-plus. There have been some drastic increases in costs throughout the industry that have driven our costs up. Coal prices are up over the last four years but the cost for mining coal is also up drastically. I’m going to try to bring as much of my knowledge to help us reduce our costs and understand where some areas are that we might be able to benefit from.

“Thirdly, my goal is to help our company understand that we are in a mining business. We need to focus on what we do best—coal mining in the eastern part of this country—and hopefully attract some additional operating and financial expertise. We have been a very financial-oriented company in the past. We’ve had a lot of financial expertise from the board and management on down and we have focused on what our comfort zones have been in the past versus some of the operating issues. We’ve probably focused on some other areas and not necessarily on the day-to-day activities of a mining company.”

Before joining National, Castle ran his own professional practice, initially doing tax and accounting work for small coal companies. As the Central Appalachia coal industry started picking up, he helped coal operators to grow or sell their companies, acting as controller or CFO for several smaller companies as an outsider not an employee. Prior to that, he served as CFO at Quaker Coal Company and at one of the largest thoroughbred stallion complexes in the U.S, Spendthrift Farm. “It was really fun. I looked out my window and there was Sham, who finished second to Secretariat in two of the Triple Crown races. His paddock was right next to my office.”

After working in such diverse industries, we asked him where he’d like to go next. “Hopefully this will last for quite some time at National but my next step will be the beach or a golf course.”

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