01—Abstract
Summary
Summary of the 10-K filed March 25, 1997. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU) and its operating subsidiaries (CL&P, PSNH, WMECO, NAEC) reported a near-breakeven 1996 with earnings of just $0.01a per share, down from $2.24 in 1995, as the prolonged shutdown of the three Millstone nuclear units (out of service since late 1995 and early 1996) drove roughly $480 million in costs, including about $260 million of replacement power and $403 million of Millstone-related non-fuel O&M.
Total System debt stood at $4.15 billionb, NU's common equity ratio was 34.6%, and several borrowing covenants were breached or only waived, forcing NU to obtain a limited waiver and to pledge CL&P and WMECO first mortgage bonds as collateral. Management expects only a break-even result in 1997 while the units remain offline, and the Board is being urged to consider suspending the common dividend, which had already been cut from $0.44 to $0.25 per quarter in 1996. The most urgent risk, however, is the February 28, 1997 New Hampshire Public Utilities Commission restructuring order.
It would force PSNH to write off more than $400 millionc after tax by discontinuing SFAS 71 accounting, and would trigger lender acceleration rights over roughly $686 million of PSNH debt and $515 million of NAEC debt. A federal temporary restraining order issued March 10, 1997 currently stays the most damaging elements, but if it is not extended, PSNH and NAEC could be forced toward Chapter 11, and both auditors included going-concern paragraphs for those two entities. Credit ratings were downgraded in March 1997, and the Connecticut and Massachusetts restructuring proposals add further uncertainty about stranded-cost recovery, which the company estimates at about $3.6 billion of nuclear investment and $2.2 billion of regulatory assets.
For investors, the filing describes a company whose equity value depends heavily on three near-term events: the timing of Millstone restarts (management targets one unit in Q3 1997 and the others in Q4 1997 and Q1 1998, with no assurance), the outcome of the federal court proceedings on New Hampshire restructuring, and the ability to refinance or waive covenants on the New Credit Agreement. The filing also discloses substantial ongoing legal exposure, including shareholder class actions, derivative suits, NRC enforcement matters, and a criminal investigation in which NU has been told it is a target.
02—Key points
Key Highlights
- 1996 EPS collapsed to $0.01 from $2.24 in 1995 (net income $1.8 million vs. $282.4 million), with about $480 million (~$2.18 per share) of Millstone-related costs and replacement power expenses.
- Millstone 1, 2 and 3 remain out of service; management targets restart of one unit in Q3 1997 and the other two in Q4 1997 and Q1 1998, but the NRC must approve each restart and no timing is assured.
- NHPUC February 28, 1997 restructuring orders would require PSNH to write off over $400 million after tax and discontinue SFAS 71, potentially triggering acceleration of about $686 million of PSNH debt and $515 million of NAEC debt; a federal TRO stayed the most damaging parts as of March 10, 1997.
- Covenant pressure: NU's operating income to interest coverage was 0.87x against a 1.25x requirement and its common equity ratio was 34.4%, against a 30% minimum; NU obtained only a limited waiver, and CL&P and WMECO expected to miss their 1997 coverage tests.
- Dividend under review: the quarterly dividend was cut to $0.25 per share in 1996 and management will recommend that the Board consider suspension, which would conserve about $140 million annually.
- Credit ratings cut by Moody's and S&P in 1996 and again in March 1997 for NU, PSNH and NAEC; none of PSNH's or NAEC's securities are investment grade, raising the cost and reducing the availability of financing.
- Heavy legal and regulatory exposure: shareholder derivative and class actions, NRC enforcement and Section 2.206 petitions, a U.S. Attorney criminal investigation in which NU is described as a target, and potential non-NU Millstone 3 joint-owner claims.
03—Questions
Frequently Asked Questions
Why did Northeast Utilities' earnings fall so sharply in 1996?
The prolonged outages at Millstone 1, 2 and 3 caused about $480 million of costs in 1996, including roughly $260 million of replacement power, higher Millstone O&M costs, a $63 million reserve for future 1997 Millstone O&M, and costs to secure Connecticut generating capacity. These costs reduced earnings by about $2.18 per share, leaving 1996 EPS at $0.01 versus $2.24 in 1995. CL&P's rate settlement and higher cogeneration costs also weighed on results.
What is the biggest near-term financial risk to PSNH and NAEC?
The NHPUC's February 28, 1997 restructuring orders would force PSNH to stop applying SFAS 71 and write off over $400 million after tax, as early as Q1 1997. That write-off would breach contractual minimum equity ratios and income tests, letting lenders accelerate about $686 million of PSNH debt and $515 million of NAEC debt. A federal temporary restraining order issued March 10, 1997 currently stays the most damaging elements, but if it is not extended or made applicable, the companies could be forced into Chapter 11, and their auditors have included going-concern explanatory paragraphs.
When are the Millstone nuclear units expected to return to service, and what could delay them?
Management estimates one unit will be ready for restart in Q3 1997, with the other two ready in Q4 1997 and Q1 1998, but these are estimates only. Each restart requires NRC review, completion of independent corrective action verification and third-party employee-concerns reviews, and a formal NRC commission vote. Management says it cannot estimate when the NRC will allow any unit to restart and hopes for at least one unit operating in the second half of 1997. Any delay extends replacement power costs, expected to average about $35 million per month across the system.
Is the dividend safe, and how is liquidity holding up?
The dividend has already been reduced from $0.44 to $0.25 per quarter, and management will recommend that the Board consider suspending it, which would save about $140 million a year. Liquidity relies on the New Credit Agreement (a $313 million three-year facility) plus receivables sales of up to $200 million at CL&P and $40 million at WMECO. Access to that facility is currently under a written arrangement that caps NU borrowings at $27 million, and CL&P and WMECO expect to need waivers or amendments, potentially including first mortgage bonds as collateral. Cash on hand at year-end was about $200 million, largely from a CL&P bond issue made to pre-fund an April 1997 maturity.
What are the main legal and regulatory exposures beyond the New Hampshire orders?
Exposures include shareholder securities class actions and derivative suits tied to Millstone operations, with no reserves recorded; a U.S. Attorney criminal investigation in which NU has been told it is a target (though management says no senior officer is a target); NRC enforcement conferences and possible civil penalties; potential claims by non-NU Millstone 3 owners for outage costs (estimated at $13 million O&M and $40 to $50 million replacement power at WMECO/CL&P level); a CMEEC contract dispute; and Connecticut tax litigation over the Connecticut Yankee plant. Management believes most of these claims are without merit but cannot predict outcomes.
04—Continue