Seabrook Costs Force N.H. Utility to Default on Bonds

In the first financial default by a major investor-owned electrical utility since the Great Depression, Public Service Co. of New Hampshire, principal owner of the controversial Seabrook nuclear plant, said Tuesday that Seabrook costs will force it to skip more than $37.5 million in interest and principal payments due on $800 million of its bonds starting this week.

The move could be the utility’s first step toward bankruptcy--also a development not seen among such power companies in more than 50 years.

It is likely, moreover, to intensify a national debate over the cost and necessity of nuclear power, and could even have some impact on the presidential campaign of Massachusetts Gov. Michael S. Dukakis, a fierce opponent of plans to begin generating power at Seabrook.

A PSNH bankruptcy could plunge into unprecedented uncertainty the company’s 750,000 customers--about three-quarters of New Hampshire’s population--as well as holders of its $1.4 billion in debt and its other creditors. For one thing, there are virtually no precedents indicating how a federal bankruptcy court would go about administering a public service otherwise regulated by state officials.

Although in recent years several small utilities have declared bankruptcy--one of them a tiny Maine company broken by its indirect ownership of Seabrook--as has the municipal utility consortium Washington Public Power Supply System (WPPSS), there has not been a major privately owned utility bankruptcy since the Depression.

Several nuclear utilities have come to the brink of filing for protection from creditors under Chapter 11 of the bankruptcy code, but in every case state regulators have approved emergency rate relief “motivated in part by fears of Chapter 11,” said Paul Parshley, a utilities analyst for DLJ Securities.

The root and substance of PSNH’s dire condition is Seabrook, of which it currently owns 35.6%. PSNH broke ground for the plant in a modest southern New Hampshire beach town two miles from the Massachusetts border in 1976, when it was expected to cost $2 billion. Since then Seabrook has been halved in size by the cancellation of one of its two proposed reactors, but the price tag has risen to $5 billion.

Hurt by Cost Escalation

PSNH’s $2.1-billion share of this severe cost escalation has made it one of the two most financially unsound private utilities in the country. (The second, Long Island Lighting Co., is the owner of the similarly overpriced and controversial Shoreham nuclear plant outside of New York City.)

The utility’s stock has plummeted by more than 50% in the past 1 1/2 years and has not paid a dividend in three. Many of its bonds trade for less than 50 cents on the dollar, and it has been shut out of the public finance markets for years, despite the best efforts of some of the most creative investment-banking minds in the country.

Meanwhile the Seabrook plant has had an inescapable impact on the pro- and anti-nuclear power lobbies and even on politics in its home state of New Hampshire. Three-term New Hampshire Gov. Meldrim Thomson campaigned for reelection in 1978 by opposing a state law preventing PSNH from charging its ratepayers for the costs of ongoing construction at Seabrook before the plant was actually in operation; Thomson was defeated and the law enacted.

Because the plant never has operated--and is at least two years from doing so--those construction costs now represent the utility’s main liability. PSNH’s share of Seabrook construction costs represents more than two-thirds of the company’s entire net worth.

The plant site has been a favorite rallying point for a full generation of anti-nuclear protesters, who have occasionally halted construction work. Although construction has been completed, Seabrook’s operation has been held up most recently because of doubts about the efficacy of its mandated emergency evacuation program.

Among other problems, following the Chernobyl nuclear disaster in the Soviet Union last year, Dukakis announced that Massachusetts--parts of which are well within the 10-mile radius for which disaster planning is required--would refuse to participate in evacuation planning on grounds that a safe evacuation would be impossible. Under federal rules, the state’s position might prevent Seabrook from ever opening.

Tuesday’s announcement of default was not entirely unexpected. On Sept. 18, when it proposed an offer to exchange many of its outstanding bonds for new securities designed to give it financial breathing room, the utility said it was likely to suspend debt-service payments on certain bonds after Oct. 1. The first payments after that date come due Thursday.

Under the bond provisions, the company has until Nov. 15 to make good on the suspended payments, something that is not expected to happen. After that, creditors have the right to push PSNH into declaring bankruptcy.

Still, a bankruptcy filing is not likely to happen that soon, said several utility analysts, because the claims of bondholders, other creditors, and shareholders remain subject to negotiation.

“This is one of many steps along the way to the ultimate filing of a bankruptcy,” said James Bennett, chief operating officer of R.D. Smith & Co., an investment firm that specializes in ailing companies. “But I think it’s going to be difficult to avoid.”

One group of creditors holding some $175 million of PSNH bonds, for example, has proposed an exchange offer of its own to compete with the company’s own Sept. 18 proposal. That group, known as Consolidated Utilities and Communications and headed by Martin J. Whitman, a New York investor specializing in distressed companies, has proposed to freeze PSNH power rates for three years, transfer Seabrook to a new company, and have current unsecured bondholders absorb more than $400 million in losses.

Whitman, who could not be reached Tuesday night for comment, has indicated that he would present a similar plan to any bankruptcy court that might receive jurisdiction over PSNH.

Several other developments might also forestall bankruptcy. One is approval by the state Public Utility Commission of a 15% rate hike requested by PSNH, which has said it would run out of cash by year end without it. A second is a ruling by the New Hampshire Supreme Court on the utility’s claim that the 1978 construction-costs law is unconstitutional. Observers doubt the court will take that step, in part because even the current state administration argues that by not challenging the law earlier, the utility signaled it accepted the statute.

Bailout by Court?

The appeal “means the state supreme court has to decide on whether to bail out the company,” said Parshley. “I don’t put a high probability on success there.”

PSNH is also asking the federal Nuclear Regulatory Commission for permission to begin low-power testing of Seabrook notwithstanding the absence of a disaster plan. Its assumption apparently is that a low-power license would hearten creditors about the prospects of ultimate operation.