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Just Do It
UI's new top dog copes with the realities of utility deregulation
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Business New Haven
11/2/1998
By: BNH
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Nathaniel Woodson probably didn't skip school much. After all, he has a mechanical engineering degree from Yale, a nuclear engineering degree from MIT, an MBA from the University of Pittsburgh, and went through an advanced management program at Harvard. But it was the crucible of 30 years' management experience at Westinghouse that formed Nat Woodson's corporate values and which he brought to New Haven when he was named in February to replace retiring CEO Richard J. Grossi and lead New Haven's 99-year-old United Illuminating Co. into a new era of utility deregulation - including the October 4 announcement of a $272 million deal to sell UI's Bridgeport and New Haven generating stations to a subsidiary of Wisconsin Energy Corp. - and into a new century.
What made you decide to come here after 30 years at Westinghouse?
As the strategic changes at the Westinghouse Corp. [now CBS] unfolded, it became a good time for me to get on and do something else. I was off actually enjoying myself when someone said there was a utility on the eastern coast of the U.S. that had begun to consider making a change in leadership, and in fact that the change was being initiated by the current chairman and CEO [Richard J. Grossi, who will retire as chairman at year's end]. I had been a supplier to the electric industry during all my years at Westinghouse so I had some familiarity with what was going on in the industry and a little bit about UI, and became quite intrigued. It was a company that had a reputation for being well-managed; a company that had taken the early, difficult steps to begin to prepare itself for new competition [under coming deregulation]; and [recognized that] strategic change was going to be of paramount importance to the corporation: What were we going to do with United Illuminating to preserve and grow the value that we had - not only in the communities we served, but obviously to the shareholders who had invested in the company. Managing change, creating strategy, are areas I really enjoy getting involved in.
Has anything surprised you since your arrival at UI?
Not really. Clearly deregulation was coming - coming to Connecticut, and coming all over the United States - and with the first efforts to enact legislation during the 1997 [state] legislative session having come up just short, and then getting ready to do it again in 1998, that was clearly was going to be a major driver of what was going to be impacting on our company. And it's what the company had been preparing itself for. This has been very complex legislation - some 156 pages - and it's taken a while to get one's head around it. But given the fact that deregulation's going to occur, it's better to get it written down and get on with it. So I applaud what they did there, and we're prepared to go forward now and implement the legislation. We're right in that stage where legislation turns into regulation, and we're trying to work constructively with all the interested parties - the DPUC [the state's Department of Public Utility Control], the Office of Consumer Counsel, the attorney general, other suppliers who want to come into the state, and other interest groups. All those groups - minus the electric utilities - were involved in the creation of the legislation this year. And by design the legislative balancing act that produced the restructuring act of 1998 was done absent the specific input of the electric utilities. Now we just have to figure out how to take that legislative intent and get it written down into rules of the road and how we operate our ongoing wires business.
So UI's not going to be looking for any add-on legislation or legislative clarification of the act?
At this point in time, I don't have an agenda of that nature. Now, when you write 156 pages of complex legislation on a very complex industry that's fundamental to the well-being of all the communities we serve, there may be something that comes up that we may feel the need to have clarification on. But if our understanding is correct, I'd like to get on and go do it.
The legislation mandates that companies like UI must be either in the transmission/distribution side of the business or the power-generation side. How did UI decide that it was going to concentrate on the 'wires' [distribution] end?
What's happened here in Connecticut is that they said, 'We want to take the classical definition of the regulated utility, and reach in and take one part - the generation part - and move it out of the regulatory climate and into an open, competitive merchant environment. That was the starting point. Then there were concerns that the regulated utility didn't do any sort of 'self-dealing' with the generating plants that it might own. The concern was to have good, competitive pricing for the generated electricity. What the state legislature wrote was that, first, UI and CL&P [Connecticut Light & Power, the subsidiary of Northeast Utilities, or NU] must offer our non-nuclear generating assets for sale - right now. Secondly, if we wished to, through an unregulated arm of the company, we could bid in the open marketplace for our own units. Now, If I believe what I read in the press, you see NU positioning CL&P to offer its fossil units - its non-nuclear units - for sale, but NU may in fact be bidding to acquire those for another part of the NU system. We looked around the country and saw an opening-up of the generation market. It was going to be characterized by competitors who could amass billions of dollars, make investments around the country, and be at least very large regional, if not national, purveyors of a commodity - not a regulated, protected commodity, but an open merchant commodity called electricity - in a very capital-intensive business. And capital-intensive businesses, they can be brutal if you're not at the right scale. We're a small company. We don't have the capital strength...the two stations [fossil-fuel stations in Bridgeport and New Haven] that you saw sold [October 4] don't create a portfolio to really build from. You need a much bigger platform to start from. So given our small size, and our small platform to begin with, we don't have enough capital to be a large regional player or a national player. We have other assets as a company that we need to maximize.
How did the deal for the New Haven and Bridgeport plants evolve?
Back in May, we made two announcements. One was that we would only offer our [power-generating] units for sale, but that we would not bid on our own units, and we would exit the business of generating electricity for retail sale. And secondly, that we were going to begin immediately to run an auction to sell our [power] stations. NU has a much greater number of plants that they're going to be selling. We wanted to move quickly in order not to be overshadowed by NU, when we'd be all by ourselves in New England. So we hired Morgan Stanley as our investment-banker advisor, and we made contact with about 230 organizations that might be interested in properties such as [the two power stations]. From that we created a short list; [companies on the short list] came through and did all their due diligence, provided binding proposals to us in early September, and then we worked with the [companies] we felt were of greatest potential value to us from those binding offers.
What will UI earn from the sale, and what happens with the proceeds?
We have to pay down the book costs of the plants. We have to pay down certain tax assets sitting on our balance sheet associated with these plants. If there's any gain above that, we obviously have to pay a tax on the [capital] gain. Because of the complexity of the tax laws, we're still going through what the final net cash will be, but we will end up with net cash of $160 million to $170 million. Any earnings that exist above the book values will be used to reduce the stranded costs of our nuclear investments [in the Seabrook, N.H. and Millstone nuclear power plants].
How do you calculate what those stranded costs are?
From our perspective, the stranded costs are everything that's on our balance sheet now less the current value of those assets - which is approximately zero at this time.
Is this sale a good deal for UI?
This deal is a good deal for us, for our employees, for WisVest. It's fundamentally a smart deal.
Why?
Because we got the best price and terms and conditions.
What did this sale tell you about how strong the market is for the plants?
When I came on board in February, there were well-developed debates, but no decisions, having to do with whether we should proceed with divestiture. Because at that point the [deregulation] legislation wasn't in place. Our interest was, would we get book value? We don't have a large portfolio of plants here. We were very pleased with the number of [energy companies] that participated in the first phase, and the second phase. We achieved what we were after.
Where does UI go from here?
[Laughs.] It's strikingly clear: forward. We're in a period of irreversible change for this company. Whether it's the legislation that's taking effect; whether it's the fact that we're selling the power stations; or whether because there are other utilities changing their shape and form around us - we have to change. What are the strengths we have to work with? I'm very impressed with the people who run our [transmission and distribution] business. We're known and respected by our customers. So the first area we'd want to look at is to do more of the same, and try to find alliances or acquisitions in the electric or gas distribution businesses in Connecticut or [nearby] states. If we do that, it means that the proceeds we get from generation, from our own operations, we're putting back into other regulated assets. If we do it right, either by getting diversity of fuel - e.g., by adding gas to our electric distribution - or by diversity of states, that allows us to blend the perceived investment risk, that will also be beneficial to our share price.
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