01—Abstract
Summary
Summary of the 10-K filed March 19, 1998. Cited figures are marked; the original filing is the authoritative source.
Northeast Utilities (NU), the parent of Connecticut Light and Power (CL&P), Public Service Company of New Hampshire (PSNH), Western Massachusetts Electric (WMECO) and North Atlantic Energy Corp. (NAEC), reported a 1997 net loss of $135.7 milliona, or $(1.05) per share, versus earnings of $0.01 per share in 1996 and $2.24 in 1995.
The loss was driven primarily by the prolonged shutdown of the Millstone nuclear units, which have been offline since late 1995 and early 1996. Replacement power costs and nonfuel O&M at Millstone were far higher than in 1996, and the company expensed these costs as incurred. Dividends on common stock were suspended in March 1997, and the company's credit ratings were cut below investment grade by Moody's and S&P in late 1997 and early 1998.
The balance sheet and liquidity position are under heavy strain. Management says the System's exposure to strandable costs and above-market purchased power obligations exceeds shareholders' equity. Several subsidiaries face restrictive borrowing covenants, and the company says it must constrain 1998 spending to stay in compliance.
A federal court temporary restraining order is currently blocking a New Hampshire restructuring order that would have forced PSNH to write off more than $400 millionb of regulatory assets, and the filing warns that a write-off could trigger defaults and possibly Chapter 11 filings at PSNH and NAEC. Massachusetts enacted restructuring legislation in November 1997 requiring a 10% rate cut on March 1, 1998, and Connecticut restructuring is pending. The near-term outlook depends heavily on the restart of Millstone 3 (targeted for early spring 1998) and Millstone 2 (three to four months later), NRC approval for each restart, the outcome of the New Hampshire litigation and settlement talks, and Connecticut and Massachusetts restructuring decisions.
Management expects Millstone-related expenses to fall in 1998 if the restart schedules hold, but the filing acknowledges no assurance that financial covenants will be met. Note that this is a combined filing covering five registrants, and the 1998 information reflects management's forecasts at the time of filing.
02—Key points
Key Highlights
- 1997 net loss of $135.7 million, or $(1.05) per share, compared with earnings of $0.01 per share in 1996 and $2.24 per share in 1995
- All three Millstone nuclear units have been out of service since 1995–1996; NU's share of 1997 nonfuel Millstone O&M expense was about $566 million, and replacement power costs were about $340 million
- Common stock dividend suspended in March 1997; NU paid $0.25 per share in Q1 1997 and nothing thereafter
- Moody's and S&P downgraded CL&P and WMECO senior secured debt and NU's securities to below investment grade in December 1997 and January 1998; all NU system securities remain under review for further downgrade
- Management says the System's strandable cost and purchased-power exposure (~$3.5B nuclear investment, ~$2.2B regulatory assets, >$1B above-market purchase obligations) exceeds shareholders' equity
- A federal court restraining order is blocking a NH restructuring order that would have triggered a write-off of more than $400 million at PSNH and potential defaults on about $686M (PSNH) and $495M (NAEC) of debt
- Massachusetts restructuring law requires a 10% rate cut for WMECO and retail choice effective March 1, 1998; WMECO plans to divest nonnuclear plants and securitize about $500 million of stranded costs
03—Questions
Frequently Asked Questions
Why did Northeast Utilities lose money in 1997?
The loss was driven mainly by the continuing outages at Millstone 1, 2 and 3. All three units were offline for the full year, so the system had to buy replacement power, and recovery and restart spending was much higher than in 1996. CL&P, WMECO and PSNH expense these costs as incurred, and the DPUC disallowed recovery of replacement power costs for CL&P in July 1997. NU also took a $25 million reserve on anticipated losses from the sale of Charter Oak Energy investments.
When are the Millstone units expected to return to service, and what could delay them?
Management hopes to restart Millstone 3 in early spring 1998 and Millstone 2 three to four months later. Millstone 1 is in extended maintenance status while management considers restart, early retirement or other options. Restart requires NRC approval after independent verification programs are completed. Management says it cannot predict the NRC's timing. A substantial delay could leave the companies unable to meet cash requirements, and a delayed restart could also lead the DPUC to remove the units from rates.
Is NU at risk of defaulting on its debt or filing for bankruptcy?
The filing does not say NU itself will default, but it describes material risk. The companies' borrowing facilities contain covenants tied to equity ratios, interest coverage and credit ratings, and management says these became more restrictive during 1998. If a NH restructuring write-off takes effect and is not waived, lenders could accelerate roughly $686 million of PSNH debt and $495 million of NAEC debt, and PSNH and NAEC could seek Chapter 11 protection. The auditors included going-concern explanatory paragraphs for PSNH and NAEC. Management says it is constraining 1998 spending to keep covenants satisfied.
Will shareholders receive dividends again soon?
The filing gives no timetable for resuming dividends. NU suspended common dividends in March 1997, and the 1935 Act limits NU's dividends to amounts received from subsidiaries. Several subsidiary indentures also restrict distributions: CL&P had an accumulated deficit of about $154 million that must be eliminated before it can pay dividends to NU, and NAEC's dividend capacity was about $68.7 million at year-end 1997. Future dividends depend on capital needs, income and financial conditions.
What are the key restructuring risks for investors?
Massachusetts enacted restructuring legislation in November 1997 that cuts WMECO's rates 10% on March 1, 1998, with further cuts later, and allows retail choice; WMECO expects to recover its stranded costs through securitization and asset divestiture, but any delay or lower-than-expected proceeds would hurt its finances. In New Hampshire, a 1997 NHPUC order that would have forced a write-off of over $400 million remains blocked by a federal court, and PSNH has offered a settlement including a 20% rate cut in 1999 and about $1.15 billion of securitization. Connecticut restructuring legislation is being considered in the spring of 1998. Management says it believes it is entitled to full recovery of prudently incurred costs, but outcomes cannot be predicted.
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