Business Context and Reporting Period
Company: Northeast Utilities (NU) and its subsidiaries (The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, North Atlantic Energy Corporation).
Reporting Period: Fiscal year ended December 31, 1998.
Overview: NU is a holding company for a system of electric utilities serving Connecticut, New Hampshire, and western Massachusetts. The system is one of the 24 largest in the U.S. by revenue. The 1998 period was defined by significant electric industry restructuring in all three states, requiring the divestiture of generation assets and the unbundling of operations. The system faces substantial "stranded costs" (approximately $2.3 billion in regulatory assets and over $1 billion in above-market power obligations) due to high nuclear investments and legacy contracts.
Key Financial Metrics
Revenue and Profit: The filing text does not provide consolidated revenue or net income figures for the system in the narrative; these are incorporated by reference from the Annual Report to Shareholders. However, NU (Parent) reported a net loss of $146.8 million for 1998, primarily driven by a $145.9 million equity loss in subsidiaries.
Debt and Capitalization:
- Total System Debt: $3.87 billion as of December 31, 1998 (down from $4.15 billion in 1997).
- Short-Term Debt: $30 million outstanding to unaffiliated lenders as of December 31, 1998.
- Equity Ratios: NU's common equity ratio was 33.27%; CL&P was 29.86%; WMECO was 32.20%; PSNH was 53.41%.
- Interest Coverage: NU consolidated ratio was 2.58 to 1; CL&P was 2.21 to 1; WMECO was 1.40 to 1.
Liquidity and Cash Flow: NU (Parent) reported net cash flows from operating activities of $52.3 million. Dividends on NU common shares were suspended indefinitely as of March 1997 and none were paid in 1998.
Market Data: Aggregate market value of NU common shares held by nonaffiliates was approximately $2.06 billion (based on $15.00/share closing price on Feb 26, 1999).
Material Changes and Operational Highlights
- Restructuring Progress: Connecticut and Massachusetts enacted restructuring laws permitting stranded cost recovery. New Hampshire restructuring remains in litigation, with a federal court injunction freezing state orders that would have forced a write-off of regulatory assets.
- Asset Divestiture: CL&P was authorized to auction ~3,500 MW of non-nuclear assets. WMECO agreed to sell 290 MW of fossil/hydro generation for $47 million. Nuclear assets are scheduled for divestiture by 2004.
- Nuclear Operations: Millstone 1 was permanently shut down in July 1998. Millstone 3 returned to service in July 1998 but was shut down again in December for valve modifications. Millstone 2 remained out of service since 1996, with a restart targeted for Spring 1999. Seabrook operated at an 82.7% capacity factor.
- Rate Decisions: The Connecticut DPUC ordered a 9.68% reduction in CL&P's annual revenue requirements (approx. $232 million), retroactive to September 1998. Massachusetts rates were reduced by 10% in 1998, with a further 5% reduction required by September 1999.
- Competitive Businesses: Select Energy secured significant contracts, including a $100 million five-year retail contract and a $300 million wholesale contract with Boston Edison.
Guidance, Outlook, and Risks
Financing Requirements: The System estimates aggregate capital requirements for 1999 at approximately $795 million, primarily for construction ($364 million), nuclear fuel ($34 million), and debt maturities ($254 million).
Management Commentary: Management anticipates that earnings prospects in a restructured environment will be affected in ways that cannot be estimated. The ability to recover stranded costs is critical to financial strength. Management plans to securitize stranded costs for CL&P and WMECO in 1999.
Key Risks and Contingencies:
- Regulatory Risk: Uncertainty regarding the recovery of stranded costs, particularly in New Hampshire where litigation is ongoing. Rate reductions in Connecticut and Massachusetts impact revenue requirements.
- Nuclear Risk: Continued regulatory scrutiny of Millstone units (NRC watch list). Potential for further outages or inability to restart Millstone 2. Significant decommissioning liabilities exist ($1.67 billion estimated for Millstone and Seabrook).
- Legal Proceedings: Ongoing shareholder class actions regarding nuclear disclosures. Arbitration and lawsuits from non-NU owners of Millstone 3 seeking damages exceeding $200 million. Environmental remediation liabilities estimated between $21.5 million and $36.4 million.
- Financial Covenants: Recent rate decisions required waivers or amendments to debt covenants for CL&P and WMECO regarding common equity and interest coverage ratios.
Investor Verification Checklist
- Stranded Cost Recovery: Verify the status of New Hampshire litigation and the specific mechanisms (securitization vs. rate charges) approved for recovering stranded costs in Connecticut and Massachusetts.
- Nuclear Restart Status: Confirm the timeline and regulatory approval for the restart of Millstone 2 and the operational stability of Millstone 3.
- Dividend Policy: Note that NU has suspended dividends; verify if any subsidiary dividends are restricted by accumulated deficits (e.g., CL&P has a $330 million accumulated deficit).
- Debt Covenants: Review the amended terms of the Revolving Credit Agreement and NU Credit Agreement to ensure compliance with the reduced equity and coverage ratios.
- Asset Sales: Monitor the closing of the CL&P non-nuclear asset auction and the WMECO fossil/hydro sale to Consolidated Edison Energy.