February 11, 2013

The NStar way working for NU

Photo | Pablo Robles
Photo | Pablo Robles
Since former NStar chief Tom May took over as CEO and president of Northeast Utilities, the financial services sector has taken a more favorable view of the company, hailing its strong management team.
HBJ File Photo
Northeast Utilities CEO Tom May (far right) picked three top officials each from pre-merger NU and NStar to his six-person executive team.

Since top executives of Boston utility parent NStar took over control of Hartford-based Northeast Utilities, industry analysts and investors have taken a more positive view of the Fortune 500 company, hailing the management team as one of the best in the country.

"We have always prided ourselves on our record," said Tom May, the NU chief executive and president, and the former NStar CEO, president and chairman. "When you take two teams and put them together based on their individual strengths, you come out with a stronger team."

London financial services company Barclays picked NU as its top regulated utility company for earnings and dividend growth, saying since NStar and NU's $5 billion merger in April that the company now has the best-in-class management team. Because of the strong executives, Barclays said NU is poised to take better advantage of its previous growth opportunities, including building transmission lines and expanding its natural gas infrastructure.

Barclays is not alone in hailing NU's new executive team, particularly the top two leaders in Tom May and Jim Judge. Judge, the former NStar chief financial officer, is now NU CFO and executive vice president.

"They ran NStar for 15 years very successfully," said Maurice May, equity analyst for New York financial services firm Wellington Shields & Co. "Investors viewed NStar as being the better management team and afforded the company a premium in its trading whereas NU was never afforded that premium."

Wall Street's praise might seem a surprise in Connecticut, where government, economic, and pre-merger NU officials were forced to adjust to the NStar way of doing business. The company was criticized in October when it started laying off much of its Connecticut economic development team to more closely align with the less hands-on economic development strategy favored by NStar.

"The people have vanished, and I don't know what is going on over there," said Lyle Wray, executive director of the Connecticut Capitol Region Council of Governments. "We are waiting for the other shoe to drop on how it impacts us."

The state has absorbed the greatest portion of the company's layoffs since April, as 70 percent of NU's 173 layoffs have been Connecticut corporate employees. The job reductions were planned as part of the merger savings, but state officials such as Attorney General George Jepsen and Consumer Counsel Elin Swanson Katz want NU to report its employment figures to ensure Connecticut workers aren't disproportionately impacted by the merger. NU had twice as many employees pre-merger as NStar.

While Tom May is the new NU leader, the rest of his six-person executive team is an even split between pre-merger NU and NStar employees. While former NStar CFO Judge is his perceived second-in-command, Chief Operating Officer Leon Olivier, Chief Administrative Officer David McHale, and General Counsel Greg Butler were with NU pre-merger. Olivier and McHale, like Judge, also have the executive VP title.

Pre-merger NU CEO, President, and Chairman Charles Shivery is now the non-executive chairman of the merged company and is retiring in October.

Tom May said analysts' bright view of NU's future is based on the two companies combined strengths, namely NU's reputation as a builder of large projects and NStar's customer-focused and cost-conscious management.

"There has been a lot of focus in the past on our management team," Tom May said. "Analysts and companies like Barclays like the combination of both things."

Investors particularly like the predictability that came with NStar's executives, their ability to deliver on earnings projections and dividend growth.

"They had strategy in place, and they executed it just like they said they would," said Mike Worms, managing director of research for Boston financial services firm BMO Capital Markets. "It was just a good performance all-around."

Before the merger, NStar's stock price traded at roughly 50 percent higher than NU — about $45 per share vs. $30. While much of that is a function of NStar's higher earnings and NU's larger number of shares outstanding, that difference also reflected the premium investors placed on NStar's management, analyst Maurice May said.

NU never had that luxury, Maurice May said. The company's management hit a lull in the mid-1990s and steadily improved over the years, but never got as high as NStar.

With Tom May & Co. at the helm, NU might only have to wait one or two more years before investors hold it in the same regard, Maurice May said.

"Over time, NU will stop trading as an average utility and achieve that premium that NStar was afforded," Maurice May said.

Since the merger on April 10, NU's stock price has risen 14 percent, outpacing the gains of the Dow Jones Industrial Average and the Standard and Poor's 500. On Feb. 15, the company hiked its payout to investors 7 percent, based on its strong outlook for 2013.

Tom May said integrating the two cultures of the companies has been a challenge and his six-person executive team spent much of the first few months planning on how to create a single company. Tom May spent the first three months after the merger making the rounds in Connecticut, meeting pre-merger NU employees. The executive team now splits its time between the dual headquarters in Boston and Hartford.

"Your work begins in the field, and it does take time," Tom May said. "This is not a six-month or a 10-month process. It is a three-year process."

That work extends outside of the company, as NU works to address some of the concerns among Connecticut officials that came before the merger, said Tom May.

"The trepidation that may have existed before the merger was addressed with the (merger settlement agreement), and we have continued to work with them to address their concerns," Tom May said. "We have a constant dialogue."

Connecticut's economic development community is moving on without NU as well. On Feb. 5, the Hartford-Springfield Economic Partnership, a group that was largely funded by NU prior to the merger, was reconstituted with the aid of regional organizations such as the Capitol Region Council of Governments. A laid off NU economic development official, Douglas Fisher, has been named the new executive director of the Hartford-Springfield alliance.

"That is the big news," CRCOG's Wray said. "We are not doing to let that organization fade away."

In executing the three-year NU-NStar integration plan, Tom May said the company will focus on performance standards, including controlling costs, improving reliability, managing infrastructure, and being responsive to customers.

NU presented this plan to the Wall Street analysts in a special conference in October.

"Wall Street likes what they heard," Tom May said. "We have delivered on our other game plans, so we have some credibility with Wall Street."

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