01—Abstract
Summary
Summary of the 10-K filed March 23, 1999. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), parent of CL&P, PSNH, WMECO and NAEC, reported a 1998 net loss of $146.8 milliona, or $1.12 per share, compared with a $130.0 million loss ($1.01 per share) in 1997.
The loss was driven by a $143.2 millionb write-off of CL&P's Millstone 1 investment and accelerated amortization of regulatory assets ordered by Connecticut regulators in the February 1999 CL&P rate decision. Operating revenues fell 2% to $3.77 billion, while nonfuel O&M declined and Millstone 3 returned to service, improving operating trends. The company suspended its common dividend in March 1997 and paid none in 1998, and total System debt fell to $3.87 billion from $4.15 billion.
The investment case rests on the outcome of restructuring. Connecticut law permits stranded-cost recovery but requires divestiture of generation assets, and CL&P's rate order cut revenue requirements by about $232 millionc (9.68%) and capped its return on equity at 10.3%. In New Hampshire, PSNH's stranded-cost recovery remains in federal litigation, with a trial expected in mid-to-late 1999, and the auditors include going-concern explanatory paragraphs for PSNH and NAEC.
Covenant waivers and amendments were needed at CL&P, WMECO and NU in March 1999 to avoid defaults, and the NU revolving credit lines expire in 1999. NU's exposure is substantial: roughly $2.9 billiond of nuclear investment, about $2.3 billion of regulatory assets, and above-market purchase-power obligations exceeding $1 billion in net present value.
Key open items include Millstone 2's planned spring 1999 restart, the sale of non-nuclear generation (about $47 million for WMECO's 290 MW), possible securitization of stranded costs, and the potential write-off of CYAPC regulatory assets. Management expects these matters to determine whether earnings and financial flexibility recover.
02—Key points
Key Highlights
- 1998 net loss of $146.8 million ($1.12/share) versus $130.0 million ($1.01/share) in 1997, driven by a $143.2 million Millstone 1 write-off tied to the February 1999 CL&P rate decision
- Operating revenues declined 2% to $3.77 billion, while nonfuel O&M fell to $984 million from $1,055 million and Millstone-related O&M dropped to $392 million from $551 million
- Common dividend suspended since March 1997 and no dividends declared in 1998; board authorized repurchase of up to 10 million shares through July 2000 with none repurchased to date
- CL&P's February 1999 rate order cut revenue requirements by about $232 million (9.68%), with a 10.3% allowed return on equity and $126 million of Millstone 1 investment recoverable over three years
- PSNH's stranded-cost recovery is in federal litigation (trial expected mid-to-late 1999); auditors included going-concern explanatory paragraphs for PSNH and NAEC
- Covenant waivers and amendments in March 1999 reduced common equity and interest coverage tests at CL&P, WMECO and NU; the $313.75 million revolver expires November 1999
- Total System debt declined to $3.87 billion from $4.15 billion, and Millstone 3 returned to service in July 1998 while Millstone 2 is targeted for spring 1999 restart
03—Questions
Frequently Asked Questions
Why did Northeast Utilities report a larger loss in 1998 despite lower operating costs?
The loss reflected non-recurring and accelerated charges rather than core operating weakness. CL&P wrote off about $143 million of its Millstone 1 investment after the DPUC's February 1999 rate decision and an earlier CMEEC settlement, and regulatory assets were amortized faster as ordered by Connecticut regulators. These offset the benefits of lower O&M and the return of Millstone 3 to service.
What are the main risks to NU's stranded-cost recovery?
The System has about $2.9 billion invested in nuclear plants, $2.3 billion of regulatory assets and above-market purchase-power obligations worth over $1 billion in net present value. Connecticut and Massachusetts laws permit recovery, but Connecticut requires divestiture of generation and bars securitization of nuclear costs. In New Hampshire, the 1997 NHPUC orders that would have forced a write-off of over $400 million after tax remain enjoined pending a federal trial, and the outcome is uncertain.
Is the company at risk of defaulting on its debt or credit facilities?
Covenant pressure was significant at year-end 1998 and into 1999. CL&P and WMECO required waivers after the February 1999 rate decision, with common equity tests lowered to 28% and interest coverage relaxed. PSNH and NAEC auditors flagged substantial doubt about going-concern status, and lenders could accelerate about $516 million of PSNH debt and $475 million of NAEC debt if covenants were breached without waivers. Several facilities also expire in 1999, so refinancing is a key near-term issue.
When might NU resume dividends or buy back stock?
The filing gives no timetable. Dividends have been suspended since March 1997, and the SEC limits subsidiary dividends to NU based on distributions received, not retained earnings. CL&P has an accumulated deficit of about $330 million that must be eliminated before it can pay dividends to NU. Management expects asset sale and securitization proceeds to fund debt reduction first, with only a relatively modest portion used for special dividends to the parent or share repurchases.
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