01—Abstract
Summary
Summary of the 10-K filed March 25, 1994. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), the parent of a five-company New England utility system that includes The Connecticut Light and Power Company (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric Company (WMECO), and North Atlantic Energy Corporation (NAEC), serves about 30 percent of New England's electric needs.
For 1993, NU reported earnings of $2.02a per share, unchanged from 1992, but earnings before a one-time accounting benefit were $1.60 per share, reflecting one-time charges for a workforce reduction of about 7 percent, a CL&P rate-case disallowance, and the full-year effect of the PSNH acquisition completed in June 1992. Net income was $249.95 million, and the dividend of $1.76 per share consumed about 87 percent of earnings, a payout ratio management says it needs to lower through improved 1994 earnings. The balance sheet is heavily shaped by the 1992 PSNH acquisition.
Deferred charges reached $2.9 billionb, including a $769.5 million PSNH regulatory asset and $1.2 billion of SFAS 109 tax-related regulatory assets. NU's common equity ratio was 30.9 percent at year-end, above the 27 percent threshold in credit agreements, while CL&P's common equity ratio was 39.1 percent, against a 36 percent DPUC review trigger. PSNH's equity ratio of 28.2 percent sits above its covenant floors, but PSNH's cash flow remains constrained by its rate agreement and its dependence on the Seabrook Power Contract.
Long-term debt maturities and sinking-fund requirements total about $1.37 billionc for 1994 through 1998, and the company has pursued aggressive refinancings of high-cost debt. Key risks for investors include the nuclear fleet's performance and related prudence reviews (roughly $66 million and $26 million in contested exposure at CL&P), uncertain Connecticut retail wheeling and rate-regulation outcomes, competitive pressure in wholesale markets, a regional economy with flat 1993 retail sales, and PSNH's exposure to Seabrook costs. Management expects modest sales growth in 1994 and cites reorganization and reengineering as the path to improved earnings.
02—Key points
Key Highlights
- 1993 EPS of $2.02 was flat versus 1992, but EPS before the $51.7 million (about $0.42 per share) cumulative effect of the property tax accounting change was $1.60.
- Dividend of $1.76 per share equaled roughly 87% of 1993 earnings, and management aims to lower the payout ratio through improved earnings.
- PSNH acquisition (June 1992) drove a large regulatory asset ($769.5 million) and increased leverage; NU's common equity ratio was 30.9% at year-end 1993.
- Nuclear performance improved significantly: the five operated units achieved an 80.8% composite capacity factor in 1993, versus 63.7% in 1992.
- Connecticut DPUC approved a three-year CL&P rate plan (about $141.3 million in increases) with ROE reduced to 11.5%–11.7%, while appeals and multiple Millstone prudence reviews remain pending.
- Retail sales were flat in 1993 amid a stagnant New England economy; the system forecasts 1.4% ten-year sales growth, and about 2,000–3,000 MW of regional surplus capacity pressures wholesale prices.
- A 1993 workforce reduction of about 7% (roughly 811 employees) and a Jan. 1, 1994 reorganization into two core business groups aim to lower costs; the associated program cost about $38 million.
03—Questions
Frequently Asked Questions
What was Northeast Utilities' financial performance in 1993?
NU reported net income of $249.95 million and EPS of $2.02, flat with 1992. Excluding the one-time $0.42 per-share benefit from a change in property tax accounting, EPS was $1.60. The decline reflected one-time charges for the workforce reduction and CL&P rate-case disallowances, along with the full-year effect of PSNH acquisition-related items.
How secure is the dividend, and what is the payout ratio?
The quarterly dividend was $0.44 ($1.76 annually) in both 1992 and 1993, and was declared again for March 1994. 1993 dividends equaled about 87% of earnings. Management says the payout ratio needs to fall, which depends on improved 1994 earnings from wholesale marketing, customer retention, and reengineering. Dividends are declared at the Board's discretion and depend on subsidiary dividends, which are restricted by debt covenants and the 1935 Act.
What are the main regulatory and nuclear risks?
CL&P faces a pending appeal of the 1993 DPUC rate decision and a challenge to the multi-year plan's legality. Several Millstone outage prudence reviews could result in disallowances; contested exposure is roughly $66 million and $26 million. The Seabrook joint-owner funding, nuclear decommissioning cost increases, and NRC enforcement actions also present risks. Management believes its nuclear actions were prudent and does not expect material disallowances.
How leveraged is the company and are there covenant concerns?
Following the PSNH acquisition, the system carries substantial debt, with NU's common equity ratio at 30.9% versus a 27% covenant threshold in credit agreements. PSNH's equity ratio of 28.2% exceeds its required levels, which step up to 23% and 25% in later years, and its interest coverage of 2.27x exceeds the 1.5x minimum. NAEC was 78% debt-financed at formation. Management plans continued refinancing of high-cost debt, which it estimates will save about $17 million per year.
What is the outlook for sales growth and competition?
Retail sales were flat in 1993, and the system forecasts about 1.4% annual growth through 2003, or 1.8% without conservation programs. Competition from self-generation, fuel switching, and wholesale suppliers is intensifying, and the regional wholesale market has shifted to a buyer's market. Connecticut is investigating retail wheeling, and Massachusetts legislation is under consideration. Management expects modest economic improvement in 1994 and says the system has no significant dependence on any single customer.
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