SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996 Commission File No. 0-505
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BANGOR HYDRO-ELECTRIC COMPANY
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(Exact Name of Registrant as specified in its Charter)
Maine 01-0024370
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
33 State Street, Bangor, Maine 04401
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 207-945-5621
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None
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Outstanding Common Stock, $5 Par Value - 7,347,150 Shares
September 30, 1996
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I - FINANCIAL INFORMATION
PAGE
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Cover Page 1
Index 2
Consolidated Statements of Income 3
Management's Discussion and Analysis
of Financial Statements 4
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 23
Consolidated Statements of Capitalization 25
Consolidated Statements of Cash Flows 26
Consolidated Statements of Retained Earnings 27
Notes to the Consolidated Financial Statements 28
PART II - OTHER INFORMATION 34
Item 6 - Exhibits and Reports on Form 8-K 35
Signature Page 36
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
000's Omitted Except Per Share Amounts
(UNAUDITED)
3 Months Ended 9 Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
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ELECTRIC OPERATING REVENUES $ 47,969 $ 46,025 $ 140,891 $ 137,982
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OPERATING EXPENSES:
Fuel for generation and purchased power $ 21,781 $ 18,623 $ 59,335 $ 78,172
Other operation and maintenance 7,873 11,078 23,369 26,467
Depreciation and amortization 1,868 1,808 5,603 5,164
Amortization of Seabrook Nuclear Unit 424 424 1,274 1,274
Amortization of contract buyouts 5,229 5,190 15,608 7,133
Taxes -
Property and payroll 1,220 1,167 3,803 3,636
State income 164 (65) 694 (110)
Federal income 993 262 3,298 1,266
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$ 39,552 $ 38,487 $ 112,984 $ 123,002
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OPERATING INCOME $ 8,417 $ 7,538 $ 27,907 $ 14,980
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OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used
during construction $ 85 $ 108 $ 270 $ 462
Other, net of applicable income taxes 301 302 891 183
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$ 386 $ 410 $ 1,161 $ 645
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INCOME BEFORE INTEREST EXPENSE $ 8,803 $ 7,948 $ 29,068 $ 15,625
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INTEREST EXPENSE:
Long-term debt $ 5,798 $ 6,150 $ 17,840 $ 11,462
Other 882 1,149 2,642 2,259
Allowance for borrowed funds used
during construction (172) (179) (562) (521)
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$ 6,508 $ 7,120 $ 19,920 $ 13,200
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NET INCOME $ 2,295 $ 828 $ 9,148 $ 2,425
DIVIDENDS ON PREFERRED STOCK 384 450 1,160 1,276
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EARNINGS APPLICABLE TO COMMON STOCK $ 1,911 $ 378 $ 7,988 $ 1,149
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WEIGHTED AVERAGE NUMBER OF SHARES 7,344 7,281 7,328 7,253
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EARNINGS PER COMMON SHARE, based on
the weighted average number of
shares outstanding during the period $ 0.26 $ 0.05 $ 1.09 $ 0.16
============ ========== ============ ===========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.18 $ 0.18 $ 0.54 $ 0.69
============ ========== ============ ===========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis of the Results of Operations and
Financial Condition contained in Bangor Hydro-Electric Company's (the
"Company") Annual Report on Form 10-K for the year ended December 31, 1995
("1995 Form 10-K") should be read in conjunction with the comments below.
EARNINGS
The quarter ended September 30, 1996 resulted in earnings of $.26 per
common share, compared to $.05 per common share for the quarter ended
September 30, 1995. The improvement in earnings is largely attributable to
expenses incurred in the third quarter of 1995 in connection with an early
retirement and severance program. This program resulted in a onetime non-
cash charge of $2.3 million or $.32 per common share (net of income taxes).
IMPORTANT CURRENT ACTIVITIES
MAINE YANKEE - As previously discussed in the 1995 Form 10-K and Form 10-Q
for the second quarter of 1996, in December 1995 the Nuclear Regulatory
Commission's (NRC) Office of the Inspector General (OIG) and its Office of
Investigations (OI) initiated investigations of certain allegations of
wrongdoing by Maine Yankee and Yankee Atomic Power Company (Yankee) in 1988
and 1989 in connection with Maine Yankee Plant operating-license amendments.
On May 9, 1996, the OIG, which was responsible for investigating only the
actions of the NRC Staff and not those of Maine Yankee or Yankee, issued its
report on its investigation. The report found deficiencies in the NRC
Staff's review, documentation, and communications practices in connection
with the license amendments, as well as, "significant indications of possible
licensee violations of NRC requirements and regulations". Any such
violations by Maine Yankee or Yankee would be within the purview of the OI
investigation. A separate internal investigation commissioned by the boards
of directors of Maine Yankee and Yankee and conducted by an independent law
firm noted several areas that could have been improved, including regulatory
communications, definition of responsibilities between Maine Yankee and
Yankee, and documentation and tracking of regulatory compliance, but found no
wrongdoing by Maine Yankee or Yankee or any of their employees.
On June 7, 1996, the NRC formally notified Maine Yankee that it
planned to conduct an "Independent Safety Assessment" (ISA) of the Maine
Yankee plant to provide an independent evaluation of the safety performance
of Maine Yankee and as a "follow-on" to the OIG report. The NRC stated that
the overall goals and objectives of the assessment were to: "(a) provide an
independent assessment of conformance to the design and licensing basis; (b)
provide an independent assessment of operational safety performance; (c)
evaluate the effectiveness of licensee self-assessments, corrective actions
and improvement plans and; (d) determine root cause(s) of safety significant
findings and conclusions." The NRC further informed Maine Yankee that the
ISA would be carried out by a team of NRC personnel and contractors who were
"independent of any recent or significant involvement with the licensing,
regulation or inspection of Maine Yankee".
The Maine Yankee plant operated at essentially the 90-percent level
until July 20, 1996, when it was taken off-line after a comprehensive review
by Maine Yankee of the Plant's systems and equipment revealed the need to add
pressure-relief capacity to the Plant's primary component cooling system.
The Plant returned to a 90-percent operating level on September 3, 1996.
Replacement power costs for the Company during the voluntary shutdown were
approximately $1,472,000. The Company also recorded approximately $427,000
of Maine Yankee investigation and plant restart costs in the third quarter of
1996.
On October 7, 1996, the NRC released the ISA report, which dealt with
each of its stated goals. In evaluating the Plant's conformance to its
licensing basis, the report concluded that the Plant was in general
conformance with its licensing basis although significant items of
non-conformance were identified.
With respect to conformance to the Plant's design basis, the ISA report
found that the quality and availability of design-basis information were good
overall. The report concluded that despite uncorrected and previously
undiscovered design problems specified in the report, the design basis and
compensatory measures adequately supported operation of the Plant at a power
level of 2440 megawatts thermal (the 90-percent operating level). The ISA
team further stated in its report that because of issues relating to the
containment spray pumps and the component cooling water system, it could not
conclude that the design basis supported operation of the Plant at 2700
megawatts thermal (the 100-percent operating level).
Addressing operational safety, the ISA report stated that overall,
performance in the area of operations was very good. The report identified
specific operational strengths in operator performance during routine and
transient operating conditions, shift turnovers, use of risk information, and
the involvement of managers in day-to-day operations. Weaknesses noted
involved the need for operators to work around certain problems with Plant
equipment during shutdown and startup, manual actions under certain transient
operating conditions required by compensatory measures intended to address
design weaknesses, log-keeping, and reviews of events following a trip in one
of the Plant's instruments or systems. The report also concluded that Plant
maintenance was good overall, but that testing was weak. Particular
maintenance strengths were described. The report stated that although the
condition of Plant material was considered good overall, a decline in
material condition following the 1995 outage for sleeving the steam-generator
tubes and other significant material condition deficiencies were noted by the
ISA team. With respect to testing, the report stated that the team identified
inadequacies in the scope and rigor of testing and in the evaluation of test
results. The ISA report also addressed the quality of engineering work,
concluding that it was mixed, but good overall, and indicated specific
strengths and weaknesses in that area.
After evaluating Maine Yankee's self-assessments, corrective actions and
improvement plans as part of the ISA, the ISA team identified weaknesses in
the areas of problem identification and resolution. The report noted that
while Maine Yankee self-assessments were generally good, they occasionally
failed to identify weaknesses or incorrectly characterized the significance of
the findings. Further, the report stated that some corrective actions were not
timely and others were ineffective, leading to repetitive problems. The
report recognized the general effectiveness of planning, but stated that some
weaknesses in implementing improvement plans existed due to resource
limitations.
The ISA team report concluded that overall performance at Maine Yankee
was adequate for operation of the Plant and that the deficiencies noted in
the report stemmed from two closely related root causes. The report indicated
that these root causes were (1) that economic pressure to be a low-cost
energy provider had limited available resources to address corrective actions
and some improvements and (2) that a questioning culture was lacking, which
had resulted in a failure to identify or promptly correct significant
problems in areas perceived by Maine Yankee to be of low safety significance.
The ISA report identified certain deficiencies described in the report
and stated that they will be addressed as part of a separate NRC follow-up to
clarify NRC expectations for the nuclear power industry. On October 10,
1996, Maine Yankee received from the NRC a generic letter that had been sent
to substantially all nuclear plant licensees in the United States requesting
information to be used to verify compliance with the terms and conditions of
a plant's operating license and NRC regulations and that a plant's updated
final safety analysis report properly describes the facilities, as well as to
determine if other inspection activities or enforcement action should be
taken. The written response must be under oath or affirmation and must be
submitted within 120 days of receipt of the generic letter. Maine Yankee has
stated that it believes that it will submit a response satisfying the
requirements of the NRC's request within the allotted time period.
A letter to Maine Yankee from the Chair of the NRC, accompanying the ISA
report noted that overall performance at Maine Yankee was considered adequate
for operation but that a number of significant weaknesses and deficiencies
identified in the report will result in violations. The letter directed Maine
Yankee to provide to the NRC its plans for addressing the root causes of the
deficiencies identified by the ISA and states that the NRC's Region I and
Office of Nuclear Reactor Regulation will be responsible for overseeing
corrective actions relating to issues identified in the ISA and for taking
any appropriate enforcement actions against Maine Yankee. The NRC held a
public meeting on October 10, 1996 in Wiscasset, Maine, at which it discussed
the conclusions in the ISA and responded to questions.
In addition to preparing its formal response to the ISA, Maine Yankee
has developed and commenced implementation of a comprehensive plan for
improved performance in several area, including some areas cited as strengths
as well as others deemed deficient in the ISA or other NRC investigations.
The primary elements of the plan involve allocation of resources,
organizational changes, program enhancements, and cultural and personnel
changes.
Maine Yankee has informed the Company that while it cannot predict when,
or if, the Plant will be allowed to return to maximum capacity, the Plant's
operating level may be limited to 90 percent of capacity until completion of
the Plant's next planned refueling outage, which is now scheduled for
September 1997.
POWER PURCHASE CONTRACT WITH PENOBSCOT ENERGY RECOVERY COMPANY - Also as
discussed before, one of the major problems facing the Company is the adverse
impact of high-cost contracts for the purchase of power from independent,
non-utility generators with which the Company was obliged to contract in the
1980's. In 1993, the Company terminated one such contract by paying the
generator a fixed sum, and in 1995 the Company terminated two other contracts
through similar transactions. While those contract buyouts required a major
financial commitment by the Company, they have resulted and are expected to
continue to result in substantial net savings in power supply costs.
Competitive pressures in the electric utility industry together with
the commitment acknowledged by the Maine Public Utilities Commission (MPUC)
in the Alternative Marketing Plan proceeding to stabilize electric rates are
forcing the Company to continue to explore potential cost savings throughout
its operations, particularly with respect to the costs of generating and
purchasing power. One obvious place to look for savings is the Company's
power purchase contract with the Penobscot Energy Recovery Company (PERC), a
waste-to-energy facility located in Orrington, Maine. That facility is
another of the high-cost, non-utility generators with whom the Company was
obliged to contract in the 1980's. Currently, the Company estimates that it
is required under the contract to pay approximately $15 million annually
above the market value of the power produced at the PERC plant, and it is
expected that this differential will increase during the remaining contract
term of about 22 years.
A solution to the problem caused by the PERC contract is complicated
by the fact that many local municipalities rely on the plant for disposal of
their municipal solid waste. The Company has been exploring a wide range of
possible solutions but has not yet reached any final conclusions on the
preferred course of action. Discussions with various interested parties
(including PERC and the municipalities) are at the very preliminary stage
(even though the Company believes this matter must be resolved
expeditiously). Given the significant benefits that the elimination of this
contractual obligation will have on the Company's financial condition, the
Company will continue to focus much of its attention on resolving this matter
as quickly as possible.
PROPOSED GAS PIPELINE PROJECT - On September 23, 1996, Maritimes & Northeast
Pipeline, L.L.C. (Maritimes) filed an application with the Federal Energy
Regulatory Commission (FERC) seeking authority under the Natural Gas Act to
construct, install, own, operate and maintain certain new natural gas
pipeline, compression and ancillary facilities in the State of Maine. The
facilities for which authorization is sought comprise a portion of a proposed
new high pressure natural gas pipeline system to transport gas in
international commerce from Sable Island, Nova Scotia, Canada through New
Brunswick, Maine, New Hampshire and into Massachusetts. As part of its
system, Maritimes has proposed constructing lateral pipelines that would make
significant quantities of natural gas available to industrial customers of
Bangor Hydro-Electric Company.
On November 4, 1996, the Company filed with the FERC a motion to
intervene in the Maritimes proceeding and requested that the FERC impose
certain conditions on any certification of the proposed pipeline system.
Specifically, the Company noted that if a customer were to use natural gas
as a substitute energy source for its current usage of electrical energy,
the Company and its remaining customers would be saddled with certain
"stranded" costs that were incurred under traditional regulatory structures
providing monopoly protection in return for the undertaking of an obligation
to serve. The Company asked that if the FERC certifies the Maritimes Project,
the authorization should include the requirement that in order for any
electric customer that opts to leave its current electric supplier (in whole
or in part) to receive transmission service from the Maritimes project, it
must agree to pay any stranded costs associated with that departure.
DEMAND-SIDE MANAGEMENT CONTRACT BUYOUT - In the second quarter of 1996 the
Company incurred approximately $1.7 million in costs to terminate a "demand-
side management" contract (an arrangement in which the Company pays for the
installation of conservation measures at customers' premises). These costs
have been deferred, and the Company is in the process of seeking an
accounting order from the MPUC to defer and amortize these costs over a six
year period. It is management's belief that the accounting order will be
issued, since the MPUC has historically allowed deferral of prudently
incurred demand-side management costs. If the MPUC does not allow deferral,
the $1.7 million would be reflected as a charge to operations at the time the
Company learned of the decision. In any event the Company anticipates
realizing approximately $1.3 million in savings from terminating this
contract.
REVENUES
Electric operating revenues increased $1.9 million or 4.2% in the
third quarter of 1996 as compared to 1995, due principally to a $3.2 million
increase in off-system sales (sales related to power pool and interconnection
agreements and resales of purchased power). This increase was offset by the
impact of a 5.4% decrease in kilowatt hour (KWH) sales in the 1996 quarter
and the effects of adjusting prices downward to some customers and for some
uses in order to retain sales that would otherwise be lost to competitive
energy sources. The KWH sales decrease is primarily due to sales to one of
the Company's largest special contract customers (contributing a relatively
low profit margin to the Company). Without the impact of the reduced KWH
sales to this customer, total KWH sales were flat in the 1996 quarter as
compared to 1995. The lack of growth in sales remains a function of the
continued sluggish economy in the Company's service territory.
EXPENSES
Fuel for generation and purchased power expense increased principally
due to the previously mentioned $3.2 million increase in off-system sales in
the third quarter of 1996 as compared to the third quarter of 1995. Also
impacting fuel and purchased power expense in each of the quarters were the
previously discussed shutdowns at Maine Yankee. In the third quarter of 1996
the Company incurred approximately $1.5 million in incremental Maine Yankee
replacement power costs, as compared to $2.1 million in the third quarter of
1995. Also in the third quarter of 1996, the Company incurred approximately
$427,000 in costs related to the previously discussed Maine Yankee
investigation and plant restart costs after the most recent voluntary outage.
Further impacting fuel for generation expense in the third quarter of
1996 was an increase in the cost of fuel oil, which was minimized by entering
into hedging transactions with three financial institutions (see more
complete discussion of the hedging transactions in the 1995 Form 10-K). The
Company reduced its fuel expense by approximately $614,000 in the third
quarter of 1996 through entering into the fuel hedging agreements.
Additionally, impacting purchased power expense in the third quarter of 1995
was the Company not recording any amortization of Maine Yankee refueling
costs. The Company in a prior rate case was allowed to normalize the cost of
the Maine Yankee refueling over a 19 month period, to match the refueling
cycle. This refueling cycle began when the plant became operational in mid-
January, 1996, at which point, the Company began amortizing the deferred
refueling costs.
The $3.2 million decrease in other operation and maintenance (O&M)
expense in the third quarter of 1996 was due mainly to the previously
discussed early retirement and severance program implemented in the 1995
quarter, which resulted in approximately $3.9 million in additional O&M
expense. Also impacting the lower O&M expense in the 1996 quarter was a
$201,000 decrease in O&M payroll expense. The decreased labor costs are
attributable to lower employee levels in 1996 due to the early retirement and
severance program in the third quarter of 1995, which is offset to some
extent by the 2% wage rate increase for both union and nonunion employees
effective November 1, 1995. These decreases in other O&M expense were
offset by an approximately $406,000 increase in medical expenses in the third
quarter of 1996 as compared to the 1995 quarter.
The increase in depreciation and amortization expense was due
principally to anticipated property additions for 1996 and recording a full
year's depreciation on 1995 additions to electric plant in service.
The increase in property and other taxes in the second quarter of 1996
was due principally to greater property taxes, which was a result of
increased property levels and property tax rates.
The increase in income taxes was primarily a function of higher
earnings in the third quarter of 1996 as compared to the 1995 quarter.
Long-term debt interest expense decreased $352,000 in the third
quarter of 1996 as compared to 1995 due to $12 million in principal
repayments on the Company's $60 million medium term notes on June 30, 1996,
as well as sinking fund payments on the Company's 12.25% first mortgage
bonds.
Other interest expense, which is composed principally of interest
expense on short term borrowings, decreased due to a $4.3 million decrease in
weighted average short-term borrowings outstanding in the 1996 quarter as
compared to 1995 and a reduction in average short-term interest rates in
1996.
NINE MONTHS OF 1996 VERSUS NINE MONTHS OF 1995
EARNINGS
Earnings for the nine months ended September 30, 1996 were $1.09 per
common share as compared to $.16 per common share in the corresponding 1995
period. The significant increase in earnings is due principally to three
factors. Contributing to the earnings improvement in 1996 was the decrease
in Maine Yankee replacement power costs in 1996 ($2.3 million reduction after
income taxes) and the cost of the steam tube resleeving project in 1995 ($1.3
million after income taxes), which resulted in a $.49 increase in earnings
per common share in 1996 as compared to 1995. Also positively impacting
earnings in 1996 was the previously discussed 1995 buyout of two high cost
power purchase contracts from non-utility generating plants. That
transaction has resulted in incremental savings of approximately $2.2 million
or $.30 per common share after income taxes in 1996 as compared to 1995.
Thirdly, 1996 earnings were enhanced as compared to 1995 by expenses incurred
in the third quarter of 1995 in connection with an early retirement and
severance program. This program resulted in a charge to operations of $2.3
million or $.32 per common share (net of income taxes).
REVENUES
The $2.9 million increase in electric operating revenues is due
principally to a $4.7 million increase in off-system sales. This increase
was offset to some extent by a 1.1% decrease in KWH sales (excluding off-
system sales) in the 1996 period, while related revenues decreased by 1.6%.
The causes for the revenue decreases were related to the previously discussed
need to adjust prices downward for some customers, as well as the elimination
of seasonal rates for certain customers effective in March 1995. The KWH
sales decrease is principally attributable to sales to the Company's
previously mentioned large special contract customer. Without the impact of
the reduced KWH sales to this customer, total KWH sales increased by 2.1% in
1996 as compared to 1995.
The significant decrease in fuel for generation and purchased power
expense is related to the buyback of the high cost non-utility generator
purchased power contracts on June 30, 1995 and the previously mentioned
return of Maine Yankee to operation in January 1996. Fuel expense related to
the purchased power contracts buyback were $18.1 million lower in 1996 as
compared to 1995. The Company incurred approximately $2.7 million in Maine
Yankee incremental replacement power costs in 1996. In the 1995 period
Company incurred approximately $8.7 million in incremental replacement power
costs and costs associated with the Company's estimated total share of the
steam tube resleeving project These decreases were offset somewhat by an
increase in the cost of fuel oil in 1996, which was minimized by entering
into the previously discussed hedging transactions. The Company reduced its
fuel expense by approximately $2.2 million in 1996 through entering into the
fuel hedging agreements. Also increasing fuel for generation and purchased
power expense in 1996 was a $4.7 million increase in off-system sales as
compared to 1995.
The $3.1 million decrease in Other O&M expense was due principally to
the 1995 early retirement and severance program. Also impacting the decrease
in Other O&M was a $404,000 reduction in O&M payroll expense, attributable to
lower employee levels in the 1996 period as compared to 1995, offset by the
2% wage rate increase previously discussed. These decreases were offset to
some extent by a $383,000 increase in postretirement pension, medical and
life insurance benefit costs in 1996 as compared to 1995.
The increase in depreciation and amortization expense was due to the
same reasons discussed under the quarters ended September 30, 1996 and 1995.
The increase in amortization of costs to terminate purchased power
contracts was a result of the Company amortizing over a ten year period,
starting in July 1995, the costs to terminate the purchased power contracts
in June 1995, amounting to monthly amortization of $1.4
million.
The reason for the increase in property and payroll taxes for the 1996
period as compared to 1995 is consistent with that previously discussed.
Federal and state income taxes increased in the 1996 period
principally due to higher earnings in 1996. Reducing this expense, to some
extent, was $506,000 in investment tax credits utilized by the Company's
unregulated wholly-owned subsidiary, Penobscot Hydro Co. These investment
tax credits, which were utilized to reduce income taxes payable upon an
Internal Revenue Service (IRS) examination (See Form 10-Q for the second
quarter of 1996 for more detailed discussion of this examination), and to
reduce estimated 1996 federal alternative minimum income taxes, were flowed-
through for financial reporting purposes as a reduction of income tax
expense.
Allowance for funds used during construction (AFDC) decreased in the
1996 period primarily due to ceasing accrual of AFDC on certain FERC hydro
relicensing projects effective March 31, 1995.
Other income, net, increased in the 1996 period due principally to
$1.0 million of interest income earned on the $21 million capital reserve
fund set aside in connection with the June 30, 1995 purchased power contracts
buyback financing with the Finance Authority of Maine. Interest earned in
1995 (July through September) was only $349,000. Also, in 1995 the Company
wrote-off approximately $460,000 in preliminary survey and investigation
costs related to a proposed new facility which was indefinitely
delayed.
Long-term debt interest expense increased by $6.4 million in the 1996
period as compared to 1995 due to $186 million of borrowings on June 30, 1995
to finance the purchased power contracts buyback. The increase was offset by
the impact of $12 million in debt repayments on the Company's medium term
notes in June 1996 and sinking fund payments on the Company's 12.25% first
mortgage bonds.
Other interest expense increased due to higher average interest rates
and higher levels of weighted average borrowings outstanding in 1996. Also
included in other interest expense is the amortization of issuance costs of
various debt instruments. Due to the issuance costs incurred in connection
with financing the 1995 purchased power contracts buyback, debt issuance cost
amortization expense was approximately $212,000 higher in the 1996 period as
compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect events in the 1996
and 1995 periods as they affect the Company's liquidity. Net cash provided
by operations was $32.0 million for the nine months ended September 30, 1996,
as compared to net cash used in operations of $173.5 million for the
comparable 1995 period. Without the impact of the $196.7 million in costs to
terminate the purchased power contracts in June of 1995, which were financed
entirely by the issuance of new debt, net cash provided by operations was
$23.2 million for the 1995 period. With the elimination of the previously
discussed purchased power contracts in June 1995, the Company's net cash
provided by operations for the 1996 period, as compared to 1995, was
positively impacted by approximately $11.1 million. Also positively
impacting cash flows from operations were the incremental costs incurred to
replace the Company's share of Maine Yankee's output, the cost of refueling
the Maine Yankee plant in 1995 and the Company's share of the resleeving
project costs recorded in the second quarter of 1995. These additional costs
related to the Maine Yankee shutdown in 1995 amounted to $11.1 million, while
the cost of the additional replacement fuel in 1996 was only $2.7 million.
Offsetting these cash flow benefits in the 1996 period was the $1.7
million in costs incurred to terminate the previously discussed demand-side
management contract, as well as $2.3 million paid for additional income taxes
resulting from the previously discussed IRS examination and 1996 estimated
federal and state income tax payments. Also reducing cash flow from
operations was a $1.0 million increase in receivables, net and unbilled
revenue in the 1996 period, as compared to a $2.0 million reduction in 1995,
resulting in a $3.0 decrease in cash flows in 1996 vs. 1995.
As discussed in the Form 10-Q for the second quarter of 1995, the
Company reduced its quarterly dividend on common stock by $.15 from the prior
quarterly level of $.33 per share, effective for the quarter ending June 30,
1995. This reduction has improved cash flows through a $2.2 million decrease
in common dividend payments for the 1996 period. In June 1996 the Company
repaid $12 million of principal on its medium term notes, and also, in each
period, made sinking fund payments on its 12.25% first mortgage bonds. In
the first quarter of 1996 the Company made a sinking fund payment of $1.5
million on its 8.76% mandatory redeemable preferred stock. The Company has
also filed a notice of intent with its 8.76% mandatory redeemable preferred
stockholder to make an optional $1.5 million sinking fund payment in the
fourth quarter of 1996. As discussed in more detail in the footnotes to the
consolidated financial statements contained in the 1995 Form 10-K, the
Company, in the first quarter of 1996 made a $115,000 payment to this
preferred stockholder related to a "make whole provision" under the preferred
stock agreement.
Under the Company's Dividend Reinvestment and Common Stock Purchase
Plan the Company realized a common stock investment of $504,000 through the
issuance of 45,593 new common shares in 1996 as compared to $1.0 million in
the comparable 1995 period through the issue of 99,760 shares.
In June 1995 the Company financed the cost of the purchased power
contract buyback through the issuance of $186 million in long-term debt (see
more complete discussion of the transaction in the 1995 Form 10-K).
With the completion of the purchased contract buyback in the second
quarter of 1995, the Company expects minimal external financing needs for the
foreseeable future, absent any financing which may be necessary to mitigate
the high costs of the PERC contract.
NEW ACCOUNTING STANDARD
In March 1995 the Financial Accounting Standards Board issued
Statement No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Asset to be Disposed Of", effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
implemented this standard in the first quarter of 1996. With the cost of the
Company's long-lived assets and intangibles currently being recovered through
its electric rates, the effect of FAS 121 on the Company's results of
operations and financial position in the first nine months of 1996 was not
significant. Management cannot predict the outcome of further competition
and deregulation of the electric utility industry on the application of this
standard.
OTHER
The Company occasionally makes forward-looking statements such as forecasts
and projections of expected future performance or statements of the Company's
plans and objectives. These forward-looking statements may be contained in
filings with the Securities and Exchange Commission, press releases, and oral
statements. Actual results could potentially differ materially from these
statements. Therefore, no assurances can be given that such forward-looking
statements and estimates will be achieved.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
ASSETS Sept. 30, Dec. 31,
1996 1995
--------- ---------
INVESTMENT IN UTILITY PLANT:
Electric plant in service, at original cost $ 314,166 $ 300,374
Less - Accumulated depreciation and amortization 86,756 81,934
- --------- - ---------
$ 227,410 $ 218,440
Construction work in progress 17,159 18,151
- --------- - ---------
$ 244,569 $ 236,591
Investments in corporate joint ventures:
Maine Yankee Atomic Power Company $ 5,014 $ 5,014
Maine Electric Power Company, Inc. 125 125
- --------- - ---------
$ 249,708 $ 241,730
- --------- - ---------
OTHER INVESTMENTS, principally at cost $ 4,722 $ 4,185
- --------- - ---------
FUNDS HELD BY TRUSTEE, at cost $ 21,548 $ 21,192
- --------- - ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,510 $ 1,424
Accounts receivable, net of reserve 20,747 18,226
Unbilled revenue receivable 7,336 8,821
Inventories, at average cost:
Material and supplies 2,924 3,029
Fuel oil 470 106
Prepaid expenses 1,351 1,738
Deferred Maine Yankee refueling costs 1,277 2,419
- --------- - ---------
Total current assets $ 35,615 $ 35,763
- --------- - ---------
DEFERRED CHARGES:
Investment in Seabrook Nuclear Project, net of
accumulated amortization of $26,350 in 1996
and $25,076 in 1995 $ 32,492 $ 33,766
Costs to terminate purchased power contracts, net of
accumulated amortization of $31,169 in 1996
and $15,561 in 1995 176,932 192,140
Deferred regulatory assets 30,781 30,328
Demand-side management costs 3,142 1,946
Other 4,213 5,026
- ----------- ---------
Total deferred charges $ 247,560 $ 263,206
- ----------- ---------
Total assets $ 559,153 $ 566,076
= ========= = =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
Sept. 30, Dec. 31,
STOCKHOLDERS' INVESTMENT AND LIABILITIES 1996 1995
--------- ---------
CAPITALIZATION:
Common stock investment $ 107,724 $ 103,192
Preferred stock 4,734 4,734
Preferred stock subject to mandatory redemption,
exclusive of current sinking fund requirements 12,207 12,070
Long-term debt, net of current portion 274,221 288,075
-- ----------- ---------
Total capitalization $ 398,886 $ 408,071
-- ----------- ---------
CURRENT LIABILITIES:
Notes payable - banks $ 36,500 $ 35,000
-- ----------- ---------
Other current liabilities -
Current portion of long-term debt and sinking fund
requirements on preferred stock $ 15,469 $ 16,939
Accounts payable 9,791 10,526
Dividends payable 1,685 1,709
Accrued interest 5,069 4,908
Customers' deposits 342 349
Deferred fuel revenue 1,261 2,017
-- ----------- ---------
Total other current liabilities $ 33,617 $ 36,448
-- ----------- ---------
Total current liabilities $ 70,117 $ 71,448
-- ----------- ---------
DEFERRED CREDITS AND RESERVES:
Deferred income taxes - Seabrook $ 16,873 $ 17,546
Other accumulated deferred income taxes 54,836 50,775
Deferred regulatory liability 8,098 8,568
Unamortized investment tax credits 2,222 2,354
Accrued pension 640 626
Other 7,481 6,688
-- ----------- ---------
Total deferred credits and reserves $ 90,150 $ 86,557
-- ----------- ---------
Total Stockholders' Investment and Liabilities $ 559,153 $ 566,076
= ========= = =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
000's Omitted
(UNAUDITED)
Sept. 30, Dec. 31,
1996 1995
---------------------
COMMON STOCK INVESTMENT
Common stock, par value $5 per share- $ 36,736 $ 36,508
Authorized -- 10,000,000 shares
Outstanding -- 7,347,150 shares in 1996 and
7,301,557 in 1995
Amounts paid in excess of par value 56,886 56,611
Retained earnings 14,102 10,073
-- ----------- ---------
Total common stock investment $ 107,724 $ 103,192
-- ----------- ---------
PREFERRED STOCK-Non participating, cumulative-
Par value $100 per share, authorized 600,000 shares
Not redeemable or redeemable soley at the option
of the issuer -
7%, Noncallable, 25,000 shares, authorized
and outstanding $ 2,500 $ 2,500
4.25%, Callable at $100, 4,840 shares,
authorized and outstanding 484 484
4%, Series A, Callable at $110, 17,500 shares,
authorized and outstanding 1,750 1,750
-- ----------- ---------
$ 4,734 $ 4,734
-- ----------- ---------
8.76%, Subject to mandatory redemption requirements-
Callable at 105.01% if called on or prior to
December 27, 1996, 150,000 shares authorized
and 135,000 shares outstanding in 1996 and
150,000 shares outstanding in 1995 $ 13,822 $ 15,363
Less: Sinking fund requirements 1,615 3,293
-- ----------- ---------
$ 12,207 $ 12,070
-- ----------- ---------
LONG-TERM DEBT
First Mortgage Bonds-
6.75% Series due 1998 $ 2,500 $ 2,500
10.25% Series due 2019 15,000 15,000
10.25% Series due 2020 30,000 30,000
8.98% Series due 2022 20,000 20,000
7.38% Series due 2002 20,000 20,000
7.30% Series due 2003 15,000 15,000
12.25% Series due 2001 7,375 9,021
-- ----------- ---------
$ 109,875 $ 111,521
Less: Sinking fund requirements 1,854 1,646
-- ----------- ---------
Total first mortgage bonds $ 108,021 $ 109,875
-- ----------- ---------
Variable rate demand pollution control revenue bonds
Series 1983 due 2009 $ 4,200 $ 4,200
-- ----------- ---------
Other Long-Term Debt-
Finance Authority of Maine - Taxable Electric Rate
Stabilization Revenue Notes, 7.03% Series 1995A,
due 2005 $ 126,000 $ 126,000
-- ----------- ---------
Medium Term Notes, Variable interest rate- LIBO
Rate plus 2%, due 2000 $ 48,000 $ 60,000
Less: Current portion of long-term debt 12,000 12,000
-- ----------- ---------
$ 36,000 $ 48,000
-- ----------- ---------
Total long-term debt $ 274,221 $ 288,075
-- ----------- ---------
Total Capitalization $ 398,886 $ 408,071
== =========== =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPT. 30, 1996 AND 1995
000's Omitted
(Unaudited)
1996 1995
-------- ---------
CASH FLOWS FROM OPERATIONS:
NET INCOME $ 9,148 $ 2,425
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Depreciation and amortization 5,603 5,164
Amortization of Seabrook Nuclear Project 1,274 1,274
Costs to terminate purchased power contract - (196,698)
Amortization of contract buyouts 15,608 7,133
Payment received related to purchased power
contract termination 1,000 1,000
Cost of early retirement and involuntary
severance plans - 3,836
Base rate case amortizations included in
operation and maintenance 802 864
Allowance for equity funds used during
construction (270) (462)
Cost to terminate demand-side management
contract (1,703) -
Deferred income tax provision 3,439 1,304
Deferred investment tax credits (132) (133)
Changes in assets and liabilities:
Deferred fuel revenue and Maine Yankee
refueling costs 386 (2,940)
Receivables, net and unbilled revenue (1,036) 1,960
Materials, supplies and fuel oil (259) 24
Accounts payable (735) (5,011)
Accrued interest 161 2,508
Current and deferred income taxes (1,026) (220)
Other current assets and liabilities, net 380 542
Other, net (612) 3,943
---------- -----------
Net Cash Provided By (Used In) Operations $ 32,028 $ (173,487)
---------- -----------
CASH FLOWS FROM INVESTING:
Construction expenditures $ (13,054) $ (12,997)
Allowance for borrowed funds used during
construction (562) (521)
---------- -----------
Net Cash (Used In) Investing $ (13,616) $ (13,518)
---------- -----------
CASH FLOWS FROM FINANCING:
Dividends on preferred stock $ (1,119) $ (1,185)
Dividends on common stock (3,950) (6,065)
Repayments on long-term debt (13,646) (2,107)
Sinking fund and make whole provision payments
on mandatory redeemable preferred stock (1,615) -
Issuances of common stock
Dividend reinvestment plan (45,593 shares in
1996 and 99,760 in 1995) 504 1,011
Issuance of long-term debt - 186,000
Short-term debt, net 1,500 11,000
---------- -----------
Net Cash (Used In) Provided By Financing $ (18,326) $ 188,654
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS $ 86 $ 1,649
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,424 1,956
---------- -----------
CASH AND CASH EQUIVALENTS - END OF NINE MONTHS $ 1,510 $ 3,605
= ======== = =========
CASH PAID DURING THE NINE MONTHS FOR:
INTEREST (Net of Amount Capitalized) $ 19,112 $ 10,000
INCOME TAXES 2,348 277
= ======== = =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
000's Omitted
(Unaudited)
1996 1995
---------- -----------
BALANCE AT JANUARY 1 $ 10,073 $ 13,758
ADD - NET INCOME 9,148 2,425
----------- -----------
$ 19,221 $ 16,183
----------- -----------
DEDUCT:
Dividends -
Preferred stock $ 1,086 $ 1,185
Common stock 3,959 5,005
Other 74 92
----------- -----------
$ 5,119 $ 6,282
----------- -----------
BALANCE AT SEPTEMBER 30 $ 14,102 $ 9,901
=========== ===========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES:
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted in this Form 10-Q
pursuant to the Rules and Regulations of the Securities and Exchange
Commission. However, in the opinion of Bangor Hydro-Electric Company, the
disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading. The year end condensed balance sheet data was
derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and the notes thereto and all other information included in the
1995 Form 10-K.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments, including normal recurring
accruals, necessary to present fairly the financial position as of September
30, 1996 and the results of operations and cash flows for the periods ended
September 30, 1996 and 1995.
The Company's significant accounting policies are described in the Notes
to the Consolidated Financial Statements included in its 1995 Form 10-K filed
with the Securities and Exchange Commission. For interim reporting purposes,
the Company follows these same basic accounting policies but considers each
interim period as an integral part of an annual period. Accordingly, certain
expenses are allocated to interim periods based upon estimates of such
expenses for the year.
(2) INCOME TAXES:
The following table reconciles a provision calculated by multiplying
income before federal income taxes by the statutory federal income tax rate
to the above provisions for federal income taxes:
Nine Months Ended Sept.30,
--------------------------
1996 1995
---- ----
Amount % Amount %
--------- -- -------- --
(Dollars in Thousands)
Federal income tax provision
at statutory rate $4,695 34% $1,268 34%
(Less)Plus permanent reductions
in tax expense resulting
from statutory exclusions
from taxable income (6) - 14 -
------ --- ------ ---
Federal income tax provision
before effect of temporary
differences and investment
tax credits $4,689 34% $1,282 34%
(Less)Plus temporary differences
that are flowed through for
ratemaking and accounting
purposes (234) (2) 233 6
Less utilization and amortization
of investment tax credits (637) (5) (134) (3)
------ --- ------ ---
Federal income tax provision $3,818 27% $1,381 37%
====== === ====== ===
The Company utilized approximately $506,000 in investment tax credits of
the Company's unregulated wholly-owned subsidiary, Penobscot Hydro Co. These
investment tax credits, which were utilized principally to reduce income
taxes payable upon an Internal Revenue Service (IRS) examination of the years
1993 and 1994, were flowed-through for financial reporting purposes as a
reduction of income tax expense.
3) INVESTMENT IN JOINTLY OWNED FACILITIES:
Condensed financial information for Maine Yankee Atomic Power Company
("Maine Yankee"), Maine Electric Power Company, Inc. ("MEPCO"), Bangor-
Pacific Hydro Associates ("BPHA") and Chester SVC Partnership ("Chester") is
as follows:
MAINE YANKEE MEPCO
---------------- ----------------
(Dollars in Thousands)
(Unaudited)
Operations for Nine Months Ended
-------------------------------------
Sept.30, Sept.30, Sept.30, Sept.30,
1996 1995 1996 1995
-------- -------- -------- --------
OPERATIONS:
As reported by investee-
Operating revenues $132,412 $156,722 $ 44,752 $ 41,650
======== ======== ======== ========
Earnings applicable to
common stock $ 4,986 $ 5,254 $ 165 $ 79
======== ======== ======== ========
Company's reported equity-
Equity in net income $ 349 $ 368 $ 23 $ 11
(Deduct)-Effect of
adjusting Company's
estimate to actual (2) - (12) -
-------- -------- -------- --------
Amounts reported by
Company $ 347 $ 368 $ 11 $ 11
======== ======== ======== ========
MAINE YANKEE MEPCO
---------------- -----------------
(Dollars in Thousands)
(Unaudited)
Financial Position at
Sept.30, Dec. 31, Sept.30, Dec. 31,
1996 1995 1996 1995
-------- -------- -------- --------
FINANCIAL POSITION:
As reported by investee-
Total assets $580,088 $580,958 $ 5,236 $ 5,919
Less-
Preferred stock 18,000 18,600 - -
Long-term debt 93,332 109,999 - 870
Other liabilities and
deferred credits 397,570 381,158 4,270 4,171
-------- -------- -------- -------
Net assets $ 71,186 $ 71,201 $ 966 $ 878
======== ======== ======== =======
Company's reported equity-
Equity in net assets $ 4,983 $ 4,984 $ 137 $ 125
Add (deduct) - Effect
of adjusting Company's
estimate to actual 31 30 (12) -
-------- -------- -------- -------
Amounts reported by
Company $ 5,014 $ 5,014 $ 125 $ 125
======== ======== ======== ========
BPHA Chester
----------------- -----------------
(Dollars in Thousands)
(Unaudited)
Operations for Nine Months Ended
-------------------------------------
Sept.30, Sept.30, Sept.30, Sept.30,
1996 1995 1996 1995
-------- -------- -------- --------
OPERATIONS:
As reported by investee-
Operating revenues $ 6,289 $ 5,453 $ 3,595 $ 3,729
======= ======== ======= =======
Net Income $ 2,368 $ 1,520 $ - $ -
======= ======== ======= =======
Company's reported equity
in net income $ 1,184 $ 760 $ - $ -
======= ======== ======= =======
Financial Position at
Sept. 30, Dec. 31, Sept. 30, Dec. 31,
1996 1995 1996 1995
-------- -------- -------- --------
FINANCIAL POSITION:
As reported by investee-
Total assets $ 40,317 $ 41,007 $ 29,157 $ 30,048
Less-
Long-term debt 31,100 32,600 27,316 28,204
Other liabilities 2,296 2,255 1,841 1,844
-------- -------- -------- --------
Net assets $ 6,921 $ 6,152 $ - $ -
======== ======== ======== ========
Company's reported equity
in net assets $ 3,460 $ 3,076 $ - $ -
======== ======== ======== ========
4. NEW ACCOUNTING PRONOUNCEMENT:
In March 1995 the Financial Accounting Standards Board issued
Statement No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Asset to be Disposed Of", effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
implemented this standard in the first quarter of 1995. With the cost of the
Company's long-lived assets and intangibles currently being recovered through
its electric rates, the effect of FAS 121 on the Company's results of
operations and financial position in 1996 were not significant. Management
cannot predict the outcome of further competition and deregulation of the
electric utility industry on the application of this standard.
5. DEMAND-SIDE MANAGEMENT CONTRACT BUYOUT:
In the second quarter of 1996 the Company incurred approximately
$1.7 million in costs to terminate a demand-side management contract. These
costs have been deferred, and the Company is in the process of seeking an
accounting order from the Maine Public Utilities Commission (MPUC) to defer
and amortize these costs over a six year period. It is management's belief
that the accounting order will be issued, since there is historical
precedence by the MPUC for deferral of prudently incurred demand-side
management costs.
6. RECLASSIFICATIONS:
Certain 1995 amounts have been reclassified to conform with the
presentation used in Form 10-Q for the quarter ended September 30, 1996.
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 1996
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
EXHIBITS - None.
--------
REPORTS ON FORM 8-K
-------------------
Two Current Reports on Form 8-K, one dated August 21, 1996 and one dated
September 6, 1996, were filed in the third quarter of 1996 regarding the
operations of the Maine Yankee nuclear generating facility.
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1996
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to a fair statement of the
results for the interim period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANGOR HYDRO-ELECTRIC COMPANY
-----------------------------
(Registrant)
Dated: November 13, 1996 /s/ David R. Black
------------------------
David R. Black
Controller
(Chief Accounting Officer)