Why did NU swing from a loss in 1998 to a profit in 1999?

The main reason was better nuclear performance. Millstone 3 returned to service in mid-1998 and Millstone 2 in May 1999, which cut replacement power costs by $215 million. Strong retail sales growth and tight control of operation and maintenance expenses also helped. The 1998 loss had included $133 million of after-tax write-offs, while 1999 included $83 million.

What will NU shareholders receive under the Con Edison merger, and what could change the value?

The base price is $25 per share, paid in a mix of cash and Con Edison common stock, with the stock portion fixed within a $36 to $46 Con Edison share price collar. If Con Edison's average stock price falls below $36, the stock portion is worth less. Shareholders can also receive an extra $1 per share if definitive agreements to sell CL&P's and WMECO's Millstone 2 and 3 interests are reached by the later of December 31, 2000, or closing. Consideration rises $0.0034 per share per day for each day the deal closes after August 5, 2000.

How significant is the pending New Hampshire settlement for PSNH?

It is very significant. The settlement would resolve 11 NHPUC dockets and PSNH's federal lawsuit, require a $225 million after-tax write-off of stranded costs, and lower PSNH rates by an average of 18.3%. Implementation depends on $725 million of rate reduction bonds, which need NHPUC and legislative approval. The auditors flagged substantial doubt about PSNH's ability to continue as a going concern, because discontinuing SFAS No. 71 could cause technical covenant defaults that would let lenders accelerate roughly $516 million of PSNH debt and $405 million of NAEC debt.

What are the main risks in NU's unregulated businesses?

Select Energy, the largest wholesale and retail electricity marketer in New England, posted a $38.8 million net loss in 1999. Its results are hurt by volatile power prices and a lack of load-following generation, which make it hard to match purchases with sales commitments. The planned 1,329 MW purchase from Northeast Generation Company in 2000 is intended to reduce that risk. NU has also guaranteed about $190 million of unregulated subsidiary obligations.

What major legal or contingent liabilities remain open?

The largest is the Millstone 3 minority owner arbitration and lawsuits, which seek roughly $300 million in compensatory damages plus punitive and treble damages. Settlements with owners holding 58% of the minority interest cost $36.4 million, but no liability has been recorded for the remaining owners. Other exposures include shareholder class actions over the Con Edison merger, the nuclear securities class actions (agreed in principle), an environmental remediation reserve of $24.8 million, and the DOE spent fuel and enrichment-fee claims.

ES 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2000. Cited figures are marked; the original filing is the authoritative source.

Northeast Utilities (NU), the parent of CL&P, PSNH, WMECO and NAEC, closed 1999 with a return to profitability: net income of $34.2 million^a, or $0.26 per share, versus a loss of $146.8 million ($1.12 per share) in 1998.

Excluding significant one-time items, management says NU earned $0.89^b per share, and 1999 included $83 million ($0.63 per share) of after-tax write-offs. Revenues passed $4 billion for the first time, reaching $4.47 billion (up 18.7%), driven largely by Select Energy's wholesale and retail electricity marketing, and by 3.8% growth in regulated retail sales. The return to service of Millstone 2 and 3 cut replacement power costs by $215 million, which was the main driver of the improved operating performance.

Operating income rose to $344.5 million^c from $224.7 million. The company's outlook depends on several pending events. The largest is the agreed merger with Consolidated Edison, under which Con Edison will pay about $25 per NU share in cash and stock, plus a possible $1 per share if the Millstone 2 and 3 divestiture condition is met.

The deal is targeted to close around July 2000 and is subject to shareholder and multi-agency regulatory approvals. Investors should also note that NU closed its Yankee Energy acquisition on March 1, 2000, adding a natural gas distribution business. Restructuring is far from complete: the New Hampshire settlement with PSNH, which would require a $225 million^d after-tax write-off, is still awaiting NHPUC approval.

The Connecticut nuclear divestiture auction and planned securitizations are also still pending. Several risks stand out. Select Energy lost $38.8 million in 1999 on $554.9 million of revenue, and its profitability depends on balancing supply and sales commitments.

The financial statements of PSNH and NAEC carry going-concern explanatory paragraphs from Arthur Andersen, tied to the New Hampshire restructuring. Litigation also remains open, including a Millstone 3 minority owner claim of roughly $300 million in damages and shareholder class actions related to the Con Edison merger. The company's equity ratio and debt covenants are the other items to monitor.

02—Key points

Key Highlights

Net income of $34.2 million ($0.26/share) in 1999, a sharp turnaround from a $146.8 million loss ($1.12/share) in 1998; excluding one-time items, EPS was about $0.89.
Revenues rose 18.7% to $4.47 billion, the first year above $4 billion, driven by Select Energy's $554.9 million in sales and a 3.8% increase in regulated retail sales.
Returning Millstone 2 and 3 to service reduced replacement power costs by $215 million, the main driver of improved operating income ($344.5 million vs. $224.7 million).
Pending Con Edison merger: about $25 per share in cash and stock, plus up to $1 per share more if the Millstone divestiture condition is satisfied; closing is targeted for around July 2000.
Yankee Energy System acquisition closed March 1, 2000 (about $478 million in cash and stock plus $164 million of assumed long-term debt), adding Connecticut's largest gas distributor.
PSNH's New Hampshire restructuring settlement, which would require a $225 million after-tax write-off and $725 million of securitization, is still awaiting NHPUC and legislative approval; PSNH and NAEC auditor reports include going-concern paragraphs.
Select Energy lost $38.8 million in 1999 on $554.9 million of revenue, and NU's unregulated energy marketing remains a key risk to earnings.

03—Questions

Frequently Asked Questions

Why did NU swing from a loss in 1998 to a profit in 1999?
The main reason was better nuclear performance. Millstone 3 returned to service in mid-1998 and Millstone 2 in May 1999, which cut replacement power costs by $215 million. Strong retail sales growth and tight control of operation and maintenance expenses also helped. The 1998 loss had included $133 million of after-tax write-offs, while 1999 included $83 million.
What will NU shareholders receive under the Con Edison merger, and what could change the value?
The base price is $25 per share, paid in a mix of cash and Con Edison common stock, with the stock portion fixed within a $36 to $46 Con Edison share price collar. If Con Edison's average stock price falls below $36, the stock portion is worth less. Shareholders can also receive an extra $1 per share if definitive agreements to sell CL&P's and WMECO's Millstone 2 and 3 interests are reached by the later of December 31, 2000, or closing. Consideration rises $0.0034 per share per day for each day the deal closes after August 5, 2000.
How significant is the pending New Hampshire settlement for PSNH?
It is very significant. The settlement would resolve 11 NHPUC dockets and PSNH's federal lawsuit, require a $225 million after-tax write-off of stranded costs, and lower PSNH rates by an average of 18.3%. Implementation depends on $725 million of rate reduction bonds, which need NHPUC and legislative approval. The auditors flagged substantial doubt about PSNH's ability to continue as a going concern, because discontinuing SFAS No. 71 could cause technical covenant defaults that would let lenders accelerate roughly $516 million of PSNH debt and $405 million of NAEC debt.
What are the main risks in NU's unregulated businesses?
Select Energy, the largest wholesale and retail electricity marketer in New England, posted a $38.8 million net loss in 1999. Its results are hurt by volatile power prices and a lack of load-following generation, which make it hard to match purchases with sales commitments. The planned 1,329 MW purchase from Northeast Generation Company in 2000 is intended to reduce that risk. NU has also guaranteed about $190 million of unregulated subsidiary obligations.
What major legal or contingent liabilities remain open?
The largest is the Millstone 3 minority owner arbitration and lawsuits, which seek roughly $300 million in compensatory damages plus punitive and treble damages. Settlements with owners holding 58% of the minority interest cost $36.4 million, but no liability has been recorded for the remaining owners. Other exposures include shareholder class actions over the Con Edison merger, the nuclear securities class actions (agreed in principle), an environmental remediation reserve of $24.8 million, and the DOE spent fuel and enrichment-fee claims.

04—Continue

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