Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1997, for Northeast Utilities (NU) and its subsidiaries. NU is a holding company for a utility system providing franchised retail electric service in Connecticut, New Hampshire, and western Massachusetts through subsidiaries including Connecticut Light and Power (CL&P), Public Service Company of New Hampshire (PSNH), and Western Massachusetts Electric (WMECO). The system serves approximately 30% of New England's electric needs.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1997 | Six Months Ended June 30, 1996 |
|---|---|---|
| Operating Revenues | $1,878.7 million | $1,900.1 million |
| Operating Income | $92.3 million | $215.1 million |
| Net Loss | $(46.9) million | $77.2 million (Income) |
| Loss Per Common Share | $(0.36) | $0.60 (Earnings) |
| Net Cash from Operating Activities | $152.5 million | $504.0 million |
| Cash and Cash Equivalents (End of Period) | $137.6 million | $275.8 million |
| Total Assets | $10,454.3 million | $10,741.7 million |
| Long-Term Debt | $3,591.5 million | $3,613.7 million |
| Common Shareholders' Equity | $2,209.7 million | $2,277.1 million |
Material Changes Versus Prior Period
- Profitability Reversal: The company reported a net loss of $46.9 million for the six months ended June 30, 1997, compared to net income of $77.2 million in the same period in 1996. This represents a swing of approximately $124 million.
- Revenue Decline: Operating revenues decreased by 1% ($21.4 million) primarily due to lower fuel recoveries ($39 million) and a 2.3% drop in retail sales attributed to mild weather in the first quarter of 1997.
- Expense Increases: Fuel, purchased, and net interchange power expenses increased by 21% ($106 million) due to replacement power costs from nuclear outages. Other operation and maintenance expenses increased by $58 million, driven by Millstone outage costs ($75 million) and Seabrook outage costs ($13 million).
- Cash Flow Contraction: Net cash provided by operating activities decreased by approximately $351 million year-over-year, largely due to higher cash expenditures for Millstone outages and the paydown of year-end 1996 accounts payable.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Millstone Restart Schedule: Management projects Millstone Unit 3 will be ready for restart by the end of Q3 1997, Unit 2 in Q4 1997, and Unit 1 in Q1 1998. Actual operation is expected to begin several months after readiness due to NRC review processes.
- Cost Projections: Replacement power costs averaged $28 million per month in the first half of 1997 and are projected to average $26 million per month for the remainder of the year. Total 1997 nonfuel O&M costs for Millstone are projected at $442 million, an increase from the previous estimate of $386 million.
- Break-Even Expectation: Based on current assumptions and normal weather, NU expects results of operations for the full year 1997 to be approximately break-even.
Risks and Contingencies
- Regulatory Disallowance: The Connecticut Department of Public Utility Control (DPUC) issued a decision disallowing recovery of an estimated $600 million in replacement power costs and $360 million in incremental O&M costs related to Millstone outages. CL&P has appealed this decision but does not expect a material financial impact on 1997 results as costs are being expensed as incurred.
- Credit Rating Downgrades: Moody's and Standard & Poor's downgraded NU system securities to below investment grade due to extended Millstone outages and the failure of the Connecticut legislature to pass utility restructuring legislation. This may adversely affect the availability and cost of funds.
- Maine Yankee Closure: The Maine Yankee Atomic Power Company (MYAPC) voted to permanently cease power production. NU holds a 20% interest and is responsible for a proportionate share of decommissioning costs, which are expected to be recoverable from customers.
- Litigation: Non-NU owners of Millstone 3 have filed demands for arbitration and lawsuits seeking damages in excess of $200 million. NU intends to defend these claims vigorously.
Investor Verification Checklist
- Verify the status of the Millstone restart schedule and any delays in NRC approval processes.
- Monitor the outcome of the CL&P appeal regarding the DPUC's disallowance of $600 million in replacement power costs.
- Assess the impact of below-investment-grade credit ratings on future borrowing costs and liquidity.
- Review the final decommissioning cost estimates for Maine Yankee and the regulatory approval for cost recovery.
- Track the progress of litigation filed by non-NU owners of Millstone 3 and shareholder derivative suits.