Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998, for EverSource Energy (operating as Northeast Utilities and its subsidiaries: The Connecticut Light and Power Company, Public Service Company of New Hampshire, Western Massachusetts Electric Company, and North Atlantic Energy Corporation). The company provides electric utility services in Connecticut, New Hampshire, and western Massachusetts. The filing includes restated financial data for 1997 to reflect an SEC-mandated change in accounting for nuclear compliance costs, requiring expenses to be recognized as incurred rather than reserved.
Key Financial Metrics (Consolidated Northeast Utilities)
| Metric | Q1 1998 | Q1 1997 (Restated) |
|---|---|---|
| Operating Revenues | $975.4 million | $958.9 million |
| Operating Income | $69.4 million | $40.5 million |
| Net Income | $0.9 million | ($17.9 million) Loss |
| Earnings Per Share | $0.01 | ($0.14) |
| Cash from Operating Activities | $47.2 million | $298.4 million |
| Long-Term Debt | $3.46 billion | $3.65 billion |
| Cash and Equivalents | $268.7 million | $143.4 million |
Material Changes vs. Prior Period
- Profitability Improvement: The consolidated entity reported a net income of $0.9 million in Q1 1998, a significant improvement from a $17.9 million loss in Q1 1997. This shift is largely attributed to the restatement of 1997 results to expense nuclear compliance costs as incurred, rather than reserving them.
- Operating Expenses: Total operating expenses decreased to $906.0 million from $918.4 million. Fuel and purchased power costs dropped to $341.4 million from $353.5 million, while other operating expenses increased to $261.7 million from $243.9 million due to storm costs and higher conservation amortization.
- Cash Flow Volatility: Net cash from operating activities declined sharply to $47.2 million from $298.4 million. This decrease was primarily driven by a reduction in the sale of receivables (which generated $195 million in 1997 but $0 in 1998) and changes in working capital, despite higher cash availability from accounts receivable facilities.
- Subsidiary Performance:
- CL&P: Reported a net loss of $19.6 million (improved from a $31.0 million loss in 1997).
- PSNH: Reported net income of $32.3 million (down from $6.8 million in 1997).
- WMECO: Reported a net loss of $5.0 million (improved from a $1.4 million income in 1997).
Guidance, Outlook, Risks, and Contingencies
Millstone Nuclear Outages
The three Millstone nuclear units have been offline since late 1995/early 1996. Management anticipates a restart for Millstone 3 in June 1998, pending NRC approval, with Millstone 2 following 3-4 months later. No restart work is planned for Millstone 1. Replacement power costs for the outages totaled approximately $86 million for the NU system in Q1 1998.
Regulatory and Rate Matters
- Connecticut: The DPUC removed Millstone 2 from CL&P's rate base effective May 1, 1998, and may remove Millstone 3 by July 1, 1998, if operational milestones are not met. This decision is expected to reduce CL&P's earnings and strain financial covenants. New restructuring legislation caps rates at 1996 levels through 1999.
- New Hampshire: PSNH reached a settlement for a slight rate increase (approx. 1%) to recover fuel costs, deferring some previously incurred costs.
Liquidity and Credit Risks
- Downgrade: On April 22, 1998, Moody's downgraded CL&P and WMECO senior secured debt to Ba3 from Ba2, citing the DPUC rate base decision and financial strains.
- Covenant Compliance: CL&P and WMECO face restrictive financial covenants in their credit agreements. Failure to meet these could trigger acceleration of debt or termination of accounts receivable programs.
- Year 2000 Issue: The company estimates remaining costs of $36 million to address Y2K compliance, funded through operating cash flows.
Investor Verification Checklist
- Verify the status of the NRC vote on the Millstone 3 restart scheduled for June 1998 and the impact of any delays on replacement power costs.
- Confirm CL&P and WMECO's ability to meet restrictive financial covenants in their credit agreements following the Moody's downgrade and rate base reductions.
- Monitor the potential termination of CL&P's $200 million and WMECO's $40 million accounts receivable programs due to credit rating downgrades.
- Review the final impact of Connecticut's utility restructuring legislation on strandable cost recovery and future earnings.
- Assess the progress of the Year 2000 remediation project and any potential cost overruns beyond the estimated $36 million.