Why was this 10-K amended, and does the restatement change cash flows?

The SEC advised NU, CL&P, PSNH and WMECO in a March 25, 1998 letter that unavoidable incremental costs of nuclear outages, which had been reserved for in 1996 and 1997, should be expensed as incurred rather than reserved in advance. NU agreed to restate 1996 and 1997 results. The change shifts the timing of expense recognition; it does not change the underlying cash costs of the outages, though it affects reported earnings and equity.

When are the Millstone units expected to return to service, and what does that mean for earnings?

NU hopes to return Millstone 3 to service in early spring 1998 and Millstone 2 three to four months later, but the NRC must complete inspections and vote before any unit restarts. Millstone 1 has been placed in extended maintenance status while management reviews restart, early retirement and other options. Until restart, replacement power and restart O&M continue to be expensed, weighing heavily on earnings. Management expects Millstone-related expenses to fall significantly in 1998 if the timeline holds, but delays could strain liquidity.

How much liquidity headroom do the NU companies have under their credit facilities?

CL&P and WMECO share a $313.75 million revolving credit agreement, with CL&P able to borrow up to about $225 million and WMECO up to $90 million, subject to first mortgage bond collateral. At year-end 1997, $50 million was outstanding under the agreement. NU itself cannot borrow under the agreement until its consolidated interest coverage reaches 2.50 to 1 for two consecutive quarters, which the companies currently cannot meet. Management acknowledges the financial covenants become more restrictive through 1998 and that there is no assurance they will be met.

What is the risk from New Hampshire restructuring for PSNH?

A February 1997 NHPUC order adopted market-based stranded cost recovery and would have required PSNH to discontinue SFAS 71 and write off more than $400 million after tax. A federal temporary restraining order has stayed the order, and the First Circuit denied intervenor appeals in February 1998, allowing District Court proceedings to resume. If the order takes effect, PSNH's lenders could accelerate debt, and the auditors have included going-concern explanatory language. PSNH proposed a settlement in February 1998 including a 20% rate reduction and securitization of about $1.15 billion of stranded costs.

What is the status of the Millstone 3 litigation and related claims?

Non-NU owners of Millstone 3 filed arbitration demands and lawsuits in August 1997 seeking damages, with claims for compensatory damages exceeding $200 million from owners holding about two-thirds of non-NU interests. NU estimates the related costs at about $100 million for incremental O&M and about $100 million for replacement power as of year-end 1997, and no reserves have been established. Management believes the claims lack legal basis and intends to defend vigorously. Separately, CMEEC has withheld payments on Millstone 1 and 2 obligations, and arbitration is scheduled for July 1998.

ES 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed June 12, 1998. Cited figures are marked; the original filing is the authoritative source.

This amended 10-K/A (Amendment No. 1) for fiscal 1997, filed by Northeast Utilities (NU) and its subsidiaries CL&P, PSNH and WMECO, restates the 1996 and 1997 results to expense nuclear compliance costs (unavoidable incremental costs of Millstone outages) as incurred, following an SEC inquiry.

The restatement does not change the cash economics of the outages, but it reflects that these costs were previously reserved rather than expensed. Restated NU 1997 net loss is $129.96 million^a, or $(1.01) per share, versus a 1996 profit of $0.30 per share and 1995 earnings of $2.24. Common dividends were suspended in March 1997, and 1997 dividends paid were $0.25 per share.

The dominant driver of the poor results is the ongoing shutdown of all three Millstone nuclear units (out of service since 1995-1996). Replacement power costs averaged about $28 million^b per month in 1997, and NU's nonfuel O&M at Millstone rose to roughly $556 million from $340 million. Management hopes for restarts of Millstone 3 in spring 1998 and Millstone 2 three to four months later, but restart timing depends on NRC approval.

Regulatory overhang is also significant: PSNH faces a temporary restraining order against a New Hampshire restructuring order that would trigger a write-off of over $400 million^c, and NHPUC and DPUC actions could remove Millstone units from rates. Credit ratings are below investment grade at all NU system companies, and covenant headroom under the $313.75 million credit agreement is tight. Restated NU common equity fell to $2.17 billion, or $16.67 book value per share, from $18.02.

For investors, the central questions are liquidity through the Millstone outage, the outcome of restructuring in New Hampshire and Massachusetts, and whether the Connecticut DPUC will keep Millstone units in rate base. The filing itself is an accounting amendment, so its value lies in the restated figures and risk disclosures rather than new operating news.

02—Key points

Key Highlights

Restated NU 1997 net loss of $129.96 million, or $(1.01) per share, reversing a $0.30 profit in 1996 (restated) after the SEC-required change in accounting for nuclear compliance costs.
All three Millstone nuclear units have been out of service since 1995-1996; NU's replacement power costs averaged about $28 million per month in 1997, with nonfuel Millstone O&M of roughly $556 million versus $340 million in 1996.
Credit ratings were downgraded by Moody's (December 1997) and S&P (January 1998); all NU system securities are rated below investment grade and remain under review for further downgrade.
Quarterly dividends were suspended in March 1997; 1997 common dividends totaled $0.25 per share versus $1.38 in 1996.
PSNH faces a potential write-off of over $400 million (after tax) from New Hampshire restructuring, currently blocked by a federal temporary restraining order, with substantial doubt about PSNH's going-concern status noted by its auditors.
CL&P's Millstone 1 was ordered removed from rate base in a DPUC draft ruling; CL&P's rates were cut about 1.4% effective March 1, 1998, and a full rate case is due June 1, 1998.
Restated NU book value per common share fell to $16.67 at year-end 1997 from $18.02 at year-end 1996; common equity totals $2.17 billion.

03—Questions

Frequently Asked Questions

Why was this 10-K amended, and does the restatement change cash flows?
The SEC advised NU, CL&P, PSNH and WMECO in a March 25, 1998 letter that unavoidable incremental costs of nuclear outages, which had been reserved for in 1996 and 1997, should be expensed as incurred rather than reserved in advance. NU agreed to restate 1996 and 1997 results. The change shifts the timing of expense recognition; it does not change the underlying cash costs of the outages, though it affects reported earnings and equity.
When are the Millstone units expected to return to service, and what does that mean for earnings?
NU hopes to return Millstone 3 to service in early spring 1998 and Millstone 2 three to four months later, but the NRC must complete inspections and vote before any unit restarts. Millstone 1 has been placed in extended maintenance status while management reviews restart, early retirement and other options. Until restart, replacement power and restart O&M continue to be expensed, weighing heavily on earnings. Management expects Millstone-related expenses to fall significantly in 1998 if the timeline holds, but delays could strain liquidity.
How much liquidity headroom do the NU companies have under their credit facilities?
CL&P and WMECO share a $313.75 million revolving credit agreement, with CL&P able to borrow up to about $225 million and WMECO up to $90 million, subject to first mortgage bond collateral. At year-end 1997, $50 million was outstanding under the agreement. NU itself cannot borrow under the agreement until its consolidated interest coverage reaches 2.50 to 1 for two consecutive quarters, which the companies currently cannot meet. Management acknowledges the financial covenants become more restrictive through 1998 and that there is no assurance they will be met.
What is the risk from New Hampshire restructuring for PSNH?
A February 1997 NHPUC order adopted market-based stranded cost recovery and would have required PSNH to discontinue SFAS 71 and write off more than $400 million after tax. A federal temporary restraining order has stayed the order, and the First Circuit denied intervenor appeals in February 1998, allowing District Court proceedings to resume. If the order takes effect, PSNH's lenders could accelerate debt, and the auditors have included going-concern explanatory language. PSNH proposed a settlement in February 1998 including a 20% rate reduction and securitization of about $1.15 billion of stranded costs.
What is the status of the Millstone 3 litigation and related claims?
Non-NU owners of Millstone 3 filed arbitration demands and lawsuits in August 1997 seeking damages, with claims for compensatory damages exceeding $200 million from owners holding about two-thirds of non-NU interests. NU estimates the related costs at about $100 million for incremental O&M and about $100 million for replacement power as of year-end 1997, and no reserves have been established. Management believes the claims lack legal basis and intends to defend vigorously. Separately, CMEEC has withheld payments on Millstone 1 and 2 obligations, and arbitration is scheduled for July 1998.

04—Continue

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