ML20116B226
| ML20116B226 | |
| Person / Time | |
|---|---|
| Site: | Seabrook  |
| Issue date: | 07/07/1992 |
| From: | Edelman R AFFILIATION NOT ASSIGNED |
| To: | Nash D NRC |
| Shared Package | |
| ML20116B076 | List: |
| References | |
| FOIA-96-224 NUDOCS 9607290154 | |
| Download: ML20116B226 (13) | |
Text
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RICHARD B, EDELMAN, Ph.D, h.
8515 WillTTIER BOULEVARD WEST BETHESDA, MARYLAND 20817 6816 301 469-9575 1 800 257 8626 i
FINANCIAL AND ECONOMIC ANALYSIS FINANGAL INFORMA110N SYS11NS July 7, 1992 Mr. Darrel Nash U.S.
Nuclear Regulatory Commission Mail Stop 12E4 Washington, DC 20555 RE: Northeast ~0tilities
Dear Darrel:
Enclosed is my analysis of both the economic outlook for New England and the current financial situation for Northeast Utilities.
It appears that the economy, while still deep in recession, has moderated its downturn.
No significant improvement is in sight.
Northeast appears to have recognized these conditions by moderating its leverage and undertaking programs to reduce operating expenses.
I have concluded that the situation appears stable and because Northeast has no plans for major capital investment, it l
should remain so unless there is an unexpected downward turn in the region's economy.
i Sincerely, J
l
/
Dr. Richard B.
Edelman s
9607290154 960716 i
l A REVIEW OF NORTHEAST UTILITIE8 l
I by Richard B. Edelman Professor of Finance l
The American University i
Washington, DC 20016-8044 l
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for The U.S.
Nuclear Regulatory Commission l
Washington, DC 20555 t
July 1992 i
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i b
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A REVIEW OF NORTHEAST UTILITIES The purpose of this paper is to present an annual review of j,
the financial viability of Northeast Utilities.
The paper begins by-discussing the economic conditions in New England and follows with an analysis of the company.
A ratio analysis, analysis of leverage, agency bond ratings and operating expenses are presented.
It is concluded that economic conditions in New England are generally worse than most other areas in the country.
Although there is an ongoing transition away from manufacturing and into a service economy, many areas have begun to realize stability.
However, there is no remarkable increase in activity forecasted and companies operating in this environment must plan l
accordingly.
Northeast has moderated its financial leverage'and has undertaken an program to reduce operating expenses.
Its basic financial viability appears stable and not remarkably different than that observed in the analysis performed during;the spring of 1991.
This stability has been reflected in the bond ratings of the subsidiaries which remain unchanged at the lower end of the investment grade.
ECONOMIC CONDITIONS IN NEW ENGLAND It appears that the recession in New England has begun to diminish.
However, the extent of the downturn and signs of possible recovery are inconsistent throughout the region.
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For example, Richard Syron, President of the Boston Federal 3
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d i
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t Reserve Bank, told an audience of New England mortgage lenders in i
l April that he sees " tangible signs of improvement" in the l
regional economy.
Syron feels that, "we can be fairly certain we are past the worst of it".
However, an examination of the i
situation on a state-by-state basis reveals a less optimistic l
- scenario, l
A Review of the Situation in Each State In Connecticut, Southern New England Telephone sees only a sixty percent chance of recovery by late in 1992.
Almost ten percent of the state's jobs have been lost during the recession and, as a result, consumers remain very cautious.
Electric Boat shipyard is expected to cut 2,000 jobs this year and the state government plans to furlough 2,700 people in the next eighteen l
months.
United Technologies Corporation is expected to eliminate l
l 6,500 jobs by 1996.
Business expansion in the state may be slowed by the possibility of another tax increase and a new 4.5 percent personal income tax may undermine consumer confidence.
The severity of Connecticut's decline in employment has not matched that of Massachusetts and southern New Hampshire.
New Hampshire's economy has yet to hit bottom in this recession and l
l by virtually every indicator of economic activity (bankruptcies, i
foreclosures, bank failures, etc.), this has been the most difficult period for New Hampshire since Word War II.
(Five of the state's largest financial institutions failed last fall.)
The state lost approximately 50,000 nonagricultural wage and salary jobs over the past three years, about 9.5 percent of New 2
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l Hampshire's total 1988 job base.
Unemployment at the end of 1991 l
was 7.8 percent but would have been around 11 percent if not for out-migration.
Consequently, this downturn is striking in terms of both its length and severity.
One positive note has been an increase in Canadians touring and shopping in the north, i
Unfortunately, at the end of the tourist season in 1991, retail I
hiring failed to materialize.
Signs of possible improvement in l
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New Hampshire will come from a national economic recovery, 1
increased housing sales, more public works employment, a
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l stabilization in the banking. sector, tourism and recovery in the l
Boston area.
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Massachusetts has experienced the highest job loss of any state in the region.
It's problems are similar to those of New l
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j Hampshire, but some optimism is seen in public service works in l
l the Boston area.
(Those jobs involve the massive overhaul of Boston's central expressway and the construction of a new Boston Harbor tunnel.)
Banks are generally not lending, so business investment requires the presence of investors who have adequate l
internal capital.
The state has seen growth in biotechnology, l
but that growth is not expected to generate enough jobs to make a l
sizable reduction in the losses.
Rhode Island's future economic growth will remain sluggish as the state's heavy manufacturing industry continues its expected decline.
The only bright spots in the region are Maine and Vermont.
Vermont's real estate slump was not as severe as that experienced 3
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l in southern New England because of a time consuming and strict development law.
Consequently, over investment in real estate speculation did not occur in Vermont but recovery will not be as strong as it might be elsewhere.
In addition, Vermont has been the beneficiary of a high Canadian retail tax that has resulted in a large number of Canadian shoppers visiting northern Vermont.
t Industrial Job Growth l
l One important measure of economic activity is the rate of job growth.
The entire region lost approximately five percent of its job base in the 1990-91 period.
Since that time, some very modest increases in service industries - finance and insurance -
have been experienced.
However, losses continued in the manufacturing and construction industries.
Nearly 45 percent of l
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the jobs in those two segments have been lost in this recession.
This situation points to a shift in the infrastructure of j
the region.
Traditionally, manufacturing played a large role in
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employment.
That role has greatly diminished and these segments may never recover.
Business people in Massachusetts feel that although most all markets are depressed, construction and defense j
"are absolutely miserable".
The Canadian market does not show l
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l promise, but some firms have been successful by increasing l
services offered to their customers.
Conclusion The economy in New England fell before all other regions and declined more than all other regions.
This decline will continue
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as defense spending keeps winding down, stricken banks merge and 4
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downsize and state and local governments contract.
It is expected that much of this process will be complete'by the end of the year and a modest recovery will begin.
However, it is not expected to be a strong recovery and the timing is not certain.
Some encouraging signs have been seen in housing demand has prices have leveled, but even if growth begins again in late 1992 or 1993, it is not expected to be significant.
j For a business to survive in this climate, it must not be over leveraged and it must maintain efficiency.
In addition, it appears that the nature of the market in New England is changing from heavy manufacturing to service.
A business strategy which reflects these changes is necessary.
NORTHEAST UTILITIES
'T Financial Ratio Analysis Table 1 shows a brief financial ratio analysis of the company compared to industry averages for 1991.
Despite the poor economic conditions in New England, the company has performed at or above industry averages.
Return on equity exceeds that of the industry even though sales have declined.
There are no ratios which appear significantly different than average.
Leveraae In the Spring 1991 analysis of Northeast, a major concern i
. was high leverage caused by the PSNH acquisition.
In reality,
- Northeast has utilized only slightly more debt as a percentage of i
total capital than the industry.
This debt is providing 5
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financial leverage magnification of 1.84 times.'
Although the leverage is favorable, the risk, as measured by the degree of financial leverage is 1.96 times.
This figure indicates that should operating income change by ten percent (either up or down) the return on equity will change by 19.6 percent in the same direction.
Therefore, the company has increased its risk through l
l the use of leverage.
l In the 1991 analysis, the financial leverage magnification I
and degree of financial leverage were 2.15 times and 2.44 times respectively.
In addition, the debt ratio was expected to be in the 70 percent range.
In this analysis, it has been found that the leverage magnification, risk and debt ratio were all lower than at this time last year.
This reduction is judged to be favorable in light of the soft economy.
The leverage issue, excluding any remarkable decline in the strength of the New l
England economy, appears to have moderated.
' Financial leverage magnification, L,
is computed as follows: L=(Assets / Equity) * ((NOI-Interest)/NOI).
Financial leverage magnification relates to the return on equity as follows:
Return on Equity = Return on Capital
- L * (1 - Tax Rate)
A value of one for L indicates no financial leverage, greater than one indicates favorable financial leverage (e.g., the return on capital exceeds the cost of debt) and less than one indicates unfavorable financial leverage.
It should be noted that although high amounts of financial leverage magnify the return on equity, risk is also magnified.
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Bond Ratinas A major factor which influences the ability of a company to raise money for expansion or replacement of fixed assets is bond ratings.
For the Connecticut company, the outlook is positive due to a modest rate increase and a small capital budget.
For the Massachusetts company, the outlook is stable.
Both companies l
are rated BBB+ by Standard and Poors primarily due to the feeling that they are adequately insulated from the risk of the PSNH acquisition.
BBB+ is a lower investment grade rating.
j Northeast has issued a modest amount of debt to help fund the Employee Stock Option Plan's purchase of common shares.
This debt has been rated BBB-which is the lowest investment grade rating possible.
Future debt financing should be done by the subsidiaries rather than the holding company in order to prevent the holding company's debt rating from falling into the
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l speculative rankings.
l-Operatina Excenses I
In the section on the New England economy, it was concluded l
that firms must operate as efficiently as possible during the current period.
Northeast seems to have recognized that need by offering early retirement programs and retiring old and costly to operate plants.
In addition, no major construction projects are anticipated and the company will continue to improve transmission and distribution systems.
No major changes are observed from last year and performance is in this area is judged satisfactorily.
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Conclusions Two of the major problems listed in last year's report were the high leverage and poor economic environment within which the company operates.
It appears that Northeast has moderated its leverage and has monitored its operating expenses.
These observations are favorable.
No major problems are anticipated.
The company is working on a modernization of it's transmission and distribution systems and sees no immediate need for significant capital investment.
These factors are viewed favorably and are reflected in the less than average, but investment grade ratings assigned to the company debt.
It is concluded that the company is stable and should remain so unless there is a major, but unexpected, further decline in the New England economy.
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e TABLE 1 A COMPARATIVE FINANCIAL ANALYSIS BETWEEN NORTHEAST AND THE INDUSTRY 1991 Data Operatina Ratios:
Industry Northeast Return on Equity 11.7%
12.6%
Return on Total Capital 7.7%
7.3%
Change in Sales 1.6%
-1.1%
l Change in Customers
.8%
.4%
Debt Manaaement Ratios
- Long-Term Debt Ratio 50.0%
53.7%
Common Equity Ratio 43.5%
35.6%
Fixed Charge Coverage 199%
192%
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REFERENCES Areas Where Prospects are Best. (Business Climate), Spiers, I
Joseph, Fortune, v125, n2, p21(2), Jan 27, 1992.
l Boston Fed Chief Says Region is on the Mend. (Boston Federal Reserve Bank, Richard Syron), American Banker, vi57, n85, p13 (1),
May 4, 1992.
Bottom fishing in New England.
(Upswing in Economy Forecast; Regional Bank Stock Picks),. Jaffe, Thomas, Forbes, 14 9, ni, p292 (1), Jan 6, 1992.
I Cash compensation grows for 5 top NU executives, Hartford Courant, (CT), March 31, 1992, p. B1.
Crashing Down. (New England's Miserable Economy Forces l
Restaurants Out of Business), Brumback, Nancy, Restaurant i
Business Macatine, v91, n4, p58(4), March 1, 1992.
l Draft Decision Favors Takeover of Utility by NU, Hartford l
Courant, (CT), March 21, 1992, p. Bl.
i Energy Agency Backs Merger-of NU, PSNH, Hartford Courant, (CT),
January 30, 1992, p..D1.
Forecasters Say Recovery Under Way, But it Looks a Lot Like the i
l Recession, Mangan, Dan, Fairfield County Business Journal, v31,.n19, p3 (1), May 4, 1992 Hearing Focuses on Pricing Plan for Access to NU Lines, Hartford Courant, (CT), January 9, 1992, p. D2.
l Is the Economy About to Turn? (Economy of New Hampshire),
Gsottschneider, Richard; Mongeon, Gary, BNH (Business of New Hamoshire), V9, n3, p30(3), March, 1992 Mild Recovery Helping _ Banks in New England, Vogelstein, Fred, American Banker, v157, n95, p1(2), May 18, 1992.
New England: Banks on Rise, Economy Drags. (fourth quarter 1991 earnings) (Analysis: Follow-up on the News), Vogelstein, Fred, American Banker, vl57, n42, p1(2), March 3, 1992.
New England Centers Tighten their Belts. (Steel Service Centers),
Sutton, Judy, American Metal Market, v100, n91, p14A(2),
May'11, 1992.
The 1990-91 Recession in Historical Perspective, McNees, Stephen K.,
New Encland Economic Review, PP: 3-22, Jan/Feb 1992.
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Northeast Utilities Completes Purchase Of PS New Hampshire,
. Wall Street Journal, Eastern (Princeton, NJ) Edition June 8, 1992, p. B3.
Northeast Utilities Says Agency Clears Its Acquisition of PS New Hampshire, Wall Street Journal, Eastern (Princeton, NJ)
Edition, January 30, 1992, p. A2.
NU Adopts Process to Save Ozone Layer, New Hamoshire Business Review, June 11, 1992, p. 19.
l NU's Ellis to retire as chairman in 1995, Hartford Courant, (CT), January 30, 1992, p. D1.
Region Gains Jobs After Losing 266,000. (New England), Eew Enoland Real Estate News, v3, n5, p8 (1), Jan-Feb, 1992.
Slow Improvement Expected in Vermont During 1992 (Vermont's Economic Recovery), Bohjalian, Christopher A.,
New Enoland Real Estate News, v3, n5, p15(2). J?n-Feb, 1992 State Backs NU Merger, Adds Condi'. ions to Shield Customers, Hartford Courant,(CT), April 1,
'.992
- p. C1.
Two Banks in Boston Post Better Ea"nings. (Bank of Boston, BayBanks), Vogelstein, Fred, American Banker, vi57, n16, p1(2),
Jan 24, 1992.
Why New England Went the Way of Texas Rather than California Browne, Lynn E.,
New Enoland Economic Review, PP: 23-41, Jan/Feb 1992.
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