01—Abstract
Summary
Summary of the 10-K filed March 14, 1996. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), parent of Connecticut Light & Power (CL&P), Public Service Co. of New Hampshire (PSNH), Western Massachusetts Electric (WMECO) and North Atlantic Energy Corp. (NAEC), reports a 1995 10-K that combines modest earnings with significant structural and regulatory risk.
Earnings per share were $2.24a in 1995, down from $2.30 in 1994, on revenues of $3.75 billion and net income of $282 million. The decline reflected higher operating expenses, lower wholesale revenues and higher fuel and purchased-power costs, partly offset by rate increases and lower income taxes. Retail kWh sales fell 0.1%, and the company expects flat sales in 1996.
Regulatory assets of about $2.0 billionb are a central concern, since recovery depends on rate negotiations that begin as current rate agreements expire in 1996 and 1997. The bigger investor issues are competition and credit quality. Management sees strandable-cost exposure from high-cost nuclear investment and above-market purchased power, and the industry is moving toward retail wheeling in New England and New Hampshire.
Moody's and S&P have both rated PSNH's first mortgage bonds below investment grade, and NAEC's securities were never investment grade, which raises future borrowing costs. Millstone Station was placed on the NRC's 'watch list' on January 31, 1996, and Millstone 2 was shut down again on February 21, 1996, adding replacement-power costs of roughly $8.5 to $9 millionc per month. The dividend was held at $0.44 per quarter, and the board chose not to raise it given regulatory uncertainty and nuclear performance.
On balance, the filing describes a utility with a strong cash-coverage position on its dividend (about 4:1) and a deliberate plan to reduce regulatory assets, but with near-term earnings pressure, nuclear operating risk, a leveraged PSNH balance sheet, and unresolved restructuring outcomes. Investors should weigh the dividend's coverage against these uncertainties.
02—Key points
Key Highlights
- 1995 EPS of $2.24 vs. $2.30 in 1994; net income $282.4 million on operating revenues of $3.75 billion.
- Regulatory assets of approximately $2.0 billion at year-end 1995, with a stated strategy to reduce them over the next five years; recovery depends on rate negotiations in 1996-1997.
- PSNH first mortgage bonds rated below investment grade by Moody's (Oct. 1995) and S&P; NAEC has never been investment grade. Both raise future financing costs.
- Millstone 1, 2 and 3 placed on NRC 'watch list' (Jan. 31, 1996); Millstone 2 shut again Feb. 21, 1996, with replacement power costs of roughly $8.5-9 million per month.
- Quarterly dividend held at $0.44 ($1.76 annualized); cash coverage of the common dividend was about 4:1 in 1995.
- Competition risk: New Hampshire approved a 3% retail wheeling pilot starting May 1996, and Connecticut and Massachusetts recognize recovery of 'net, nonmitigatable' stranded costs, with final restructuring terms still unset.
- NU total System debt declined to $4.25 billion from $4.54 billion in 1994; NU common equity ratio was 35.7% at year-end 1995.
03—Questions
Frequently Asked Questions
How did Northeast Utilities perform financially in 1995?
NU earned $2.24 per share in 1995, down $0.06 from $2.30 in 1994, with net income of $282.4 million on operating revenues of $3.75 billion. Lower earnings reflected higher operation expenses, lower wholesale revenues and higher fuel and purchased-power costs, partly offset by rate increases, higher fuel recoveries and lower income taxes.
Is the dividend at risk?
The quarterly dividend was held at $0.44, and the board declared another $0.44 in January 1996. Cash coverage of the common dividend was about 4.2 times in 1995, which provides a substantial cushion. The board chose not to raise the dividend, citing regulatory uncertainty, a weak regional economy and the need to improve Millstone operations. Dividends remain subject to board discretion and to dividend restrictions in subsidiary debt agreements.
What are the main risks from electric industry restructuring?
The system faces strandable-cost risk from its large nuclear investment, above-market purchased power and about $2.0 billion of regulatory assets. Connecticut and Massachusetts regulators have allowed recovery of net, nonmitigatable stranded costs, but New Hampshire has not made a similar finding. Final restructuring rules are not yet set, and FERC's proposed open-access rules are expected to be finalized in 1996. Management says the outcome cannot be predicted.
Why is Millstone a concern for investors?
On January 31, 1996, the NRC placed the three Millstone units on its watch list because of long-standing performance problems and employee-concern issues. Millstone 1 is in an extended outage, expected to return to service in mid-to-late 1996, and Millstone 2 was taken off line again on February 21, 1996. Replacement-power costs run about $6.5 million per month for Millstone 1 and $8.5-9 million per month for Millstone 2. Recovery of these costs is subject to prudence reviews in Connecticut and Massachusetts, and NRC actions could add costs that cannot yet be estimated.
How does the credit rating situation affect borrowing?
Moody's lowered PSNH's first mortgage bonds below investment grade in October 1995, following an earlier S&P downgrade, and NAEC's securities have never been investment grade. Management warns that PSNH's and NAEC's borrowing costs have increased and that future access to funds could be restricted. PSNH may need to issue significant new debt in 1996 to fund a $172.5 million bond maturity and possible payments of more than $100 million to wood-fired NUGs.
04—Continue