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 June 30, 1997 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 - 7,363,424 Shares
June 30, 1997
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 JUNE 30, 1997
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 - June 30, 1997 and
December 31, 1996 26
Consolidated Statements of Capitalization 28
Consolidated Statements of Cash Flows 29
Consolidated Statements of Retained Earnings 30
Notes to the Consolidated Financial Statements 31
PART II - OTHER INFORMATION 40
Item 6 - Exhibits and Reports on Form 8-K 41
Signature Page 42
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
000's Omitted Except Per Share Amounts
(UNAUDITED)
Three Months Ended Six Months Ended
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
1997 1996 1997 1996
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ELECTRIC OPERATING REVENUES $ 42,236 $ 43,152 $ 90,412 $ 91,313
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OPERATING EXPENSES:
Fuel for generation and purchased power $ 21,006 $ 17,192 $ 45,288 $ 35,945
Other operation and maintenance 7,935 7,759 15,697 15,496
Depreciation and amortization 2,414 1,775 5,166 3,735
Amortization of Seabrook Nuclear Unit 425 425 850 850
Amortization of contract buyouts 5,229 5,189 10,457 10,379
Taxes -
Property and payroll 1,411 1,293 2,823 2,583
State income (282) 102 (562) 530
Federal income (798) 381 (860) 2,305
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$ 37,340 $ 34,116 $ 78,859 $ 71,823
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OPERATING INCOME $ 4,896 $ 9,036 $ 11,553 $ 19,490
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OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used
during construction $ 88 $ 86 $ 183 $ 185
Other, net of applicable income taxes 246 292 543 590
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$ 334 $ 378 $ 726 $ 775
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INCOME BEFORE INTEREST EXPENSE $ 5,230 $ 9,414 $ 12,279 $ 20,265
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INTEREST EXPENSE:
Long-term debt $ 5,722 $ 5,985 $ 11,477 $ 12,042
Other 717 849 1,483 1,760
Allowance for borrowed funds used
during construction (172) (178) (360) (390)
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$ 6,267 $ 6,656 $ 12,600 $ 13,412
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NET INCOME (LOSS) $ (1,037) $ 2,758 $ (321) $ 6,853
DIVIDENDS ON PREFERRED STOCK 344 383 689 776
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EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (1,381) $ 2,375 $ (1,010) $ 6,077
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WEIGHTED AVERAGE NUMBER OF SHARES 7,363 7,328 7,363 7,320
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EARNINGS (LOSS) PER COMMON SHARE, based on
the weighted average number of
shares outstanding during the period $ (.19) $ .32 $ (.14) $ .83
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DIVIDENDS DECLARED PER COMMON SHARE $ .00 $ .18 $ .00 $ .36
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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, 1996
(1996 Form 10-K) should be read in conjunction with the comments below.
EARNINGS
The quarter ended June 30, 1997 resulted in a loss of $.19 per common
share, compared to earnings of $.32 per common share for the quarter ended
June 30, 1996. The decline in second quarter earnings compared to 1996 is
attributable largely to the fact that the Maine Yankee nuclear power plant,
in which the Company has a 7% interest, has been shut down since early
December 1996 (See Maine Yankee below). While the plant remains shut down,
the Company incurs approximately $1 million per month in replacement power
costs. Maine Yankee's operating costs were significantly higher in the 1997
quarter, and these costs are being borne by its owners. The Company also
incurred greater purchased power costs in the 1997 quarter due to the
shutdown of various power plants in the Northeast.
IMPORTANT CURRENT ACTIVITIES
INDUSTRY RESTRUCTURING - In the Company's 1996 Form 10-K, the Company
described electric utility restructuring efforts in Maine, including the
Maine Public Utilities Commission's (MPUC) recommendation to the legislature.
After months of hearings and deliberations, the Maine legislature passed L.D.
1804, "An Act to Restructure the State's Electric Industry", which the
Governor signed into law on May 29, 1997. The principal provisions of the
new law are as follows:
(1) Beginning on March 1, 2000, all consumers of electricity have the right
to purchase generation services directly from competitive electricity
suppliers who will not be subject to rate regulation.
2) By March 1, 2000, the Company must divest of all generation related
assets and business functions except for:
(a) contracts with qualifying facilities and conservation providers;
(b) nuclear assets, namely, the Company's investment in Maine
Yankee, however, the MPUC may require divestiture on or after
January 1, 2009;
(c) assets that the MPUC determines necessary for the operation of
the transmission and distribution services.
The MPUC may grant an extension of the divestiture deadline if the extension
will improve the selling price. For assets not divested, the utilities are
required to sell the rights to the energy and capacity from these assets.
The Company shall submit to the MPUC its divestiture plan no later than
January 1, 1999.
3) Billing and metering services will be subject to competition beginning
March 1, 2002, but the legislation permits the MPUC to establish an earlier
date, no sooner than March 1, 2000.
4) The Company, through an unregulated affiliate, may market and sell
electricity both within and outside its current service territory, limited to
33% of the load within the Company's service territory and unlimited outside
the Company's service territory.
5) The Company will continue to provide transmission and distribution
services which will be subject to continued regulation by the MPUC.
6) If after March 1, 2000, 10% or more of the stock of a regulated
distribution utility is purchased by an entity, the purchasing entity and any
related entity may not sell or offer for sale generation service to any
retail customer of electric energy in the State of Maine.
7) Maine electric utilities will be permitted a reasonable opportunity to
recover legitimate, verifiable and unmitigable costs that are otherwise
unrecoverable as a result of retail competition in the electric utility
industry. The MPUC shall determine these stranded costs by considering:
a) the utility's regulatory assets related to generation,
b) the difference between net plant investment in generation assets
compared to the market value for those assets; and
c) the difference between future contract payments and the market
value of the purchased power contracts.
The Company shall pursue all reasonable means to reduce its potential
stranded costs and to receive the highest possible value for generation
assets and contracts, including the exploration of all reasonable and lawful
opportunities to reduce the cost to ratepayers of contracts with qualifying
facilities. By July 1, 1999, the MPUC will have estimated the stranded costs
for the Company and the manner for the collection of these costs by the
transmission and distribution company. Customers reducing or eliminating
their consumption of electricity by switching to self-generation, conversion
to alternative fuels or utilizing demand-side management measures cannot be
assessed exit or entry fees. The MPUC shall include in the rates charged by
the transmission and distribution utility decommissioning expenses for Maine
Yankee. In 2003 and every three years thereafter until the stranded costs
are recovered, the MPUC shall review and revaluate the stranded cost
recovery.
8) All competitive providers of retail electricity must be licensed and
registered with the MPUC and meet certain financial standards, comply with
customer notification requirements, adhere to customer solicitation
requirements and are subject to unfair trade practice laws. Competitive
electricity providers must have at least 30% renewable resources (which
include hydroelectric generation) in their energy portfolios.
9) A standard-offer service will be available for all customers. An
unregulated affiliate of the Company providing retail electric power are
prohibited from providing more than 20% of the load within the Company's
service territory under the standard offer service.
10) An unregulated affiliate of the Company marketing and selling retail
electric power must adhere to specific codes of conduct, including, among
others:
a) employees of the unregulated affiliate providing retail electric
power must be physically separated from the regulated distribution
affiliate and cannot be shared;
b) the regulated distribution affiliate must provide equal access
to customer information;
c) the regulated distribution company cannot participate in joint
advertising or marketing programs with the unregulated affiliate
providing retail electric power;
d) the distribution company and its unregulated affiliated provider
of retail electric power must keep separate books of accounts and
records; and
e) the distribution company cannot condition or tie the provision
of any regulated service to the provision of any service provided by
the unregulated affiliated provider of electricity.
11) Employees, other than officers, displaced as a result of retail
competition will be entitled to certain severance benefits and retraining
programs. These costs will be recovered through charges collected by the
regulated distribution company.
12) Other provisions of the new law include provisions for:
a) consumer education;
b) continuation of low-income programs and demand-side management
activities;
c) consumer protection provisions;
d) new enforcement authority for the MPUC to protect consumers.
The MPUC will conduct several rulemaking proceedings associated with the new
restructuring law. The Company is presently reviewing its business
operations and the opportunities that the new restructuring law presents.
The Company cannot predict the value of its stranded investment that the MPUC
will determine, but feels the law provides reasonable assurance as to the
recovery of its stranded costs.
MAINE YANKEE - As previously reported, Maine Yankee has been shut down since
December 6, 1996, and was expected to remain off-line at least until August
1997. Also as previously reported, on May 27, 1997, the Board of Directors
of Maine Yankee voted to reduce maintenance-and-repair spending at the Plant
and announced that Maine Yankee was considering permanent closure based on
economic concerns and uncertainty about operation of the Plant; and on the
same day the Maine Yankee Board indicated that it had also been exploring a
sale of the Plant to PECO Energy Company ("PECO"). For a detailed discussion
of the background of the current shutdown, including events leading to the
Plant's being placed on the "watch list" by the Nuclear Regulatory Commission
("NRC") and other significant regulatory and operational issues, management
changes, and investigations of Maine Yankee by the NRC and the United States
Department of Justice, see the Company's 1996 Form 10-K, its Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1997, and its Current
Report on Form 8-K dated May 27, 1997.
On August 6, 1997, the Board of Directors of Maine Yankee voted to
permanently cease power operations at the Plant and begin the process of
decommissioning the Plant. The formal vote followed an announcement by the
Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO, after two
months of intensive negotiations, had been unable to arrive at "a mutually
beneficial framework for agreement" on a sale of the Plant to PECO. The
decision to shut down the Plant was based on an economic analysis of the
costs, risks and uncertainties associated with operating the Plant compared
to those associated with closing and decommissioning the Plant.
Prior to the shutdown vote the Company had been incurring substantial
costs to support Maine Yankee's efforts to return the Plant to service as
well as additional costs for replacement power. The Maine Yankee Board's
decision to close the Plant should mitigate the costs the Company would
otherwise incur in 1997 through a phasing down of Maine Yankee's operations
and maintenance costs. The need to purchase replacement power will continue.
Maine Yankee's most recent estimate of the total costs of
decommissioning was $369.4 million (in 1996 dollars), of which approximately
$183 million had been collected as of June 30, 1997. Maine Yankee is in the
process of developing an updated decommissioning cost estimate, which the
Company anticipates will be higher than the 1993 estimate, and expects to
file the revised decommissioning cost study with the FERC in the fall of 1997
as part of a rate filing reflecting the permanent shutdown of the Plant.
With the decision to permanently cease power operations at the Plant and
begin the process of decommissioning the Plant, the Company, in the third
quarter of 1997, will be recording a liability for its share of the estimated
cost of decommissioning the Plant. A regulatory asset will also be
established for this estimated amount, since the Company believes the cost of
decommissioning will be recoverable from customers in rates. As discussed
above, the electric utility restructuring legislation provides for the
transmission and distribution company to include Maine Yankee decommissioning
costs in its rates.
RATE RELIEF - As previously reported, on April 1, 1997, the Company filed
with the MPUC a Petition for Temporary Rates to increase its rates to allow
for a $10 million increase in annual revenues, and requested that the change
take effect on June 1, 1997. The Company asked that the temporary rate
change be allowed to remain in effect until final disposition of the
Company's pending request for permanent rate changes expected in early 1998.
On June 26, 1997, the MPUC issued an order authorizing the Company to
change rates to increase its annual revenues by approximately $5.1 million
effective July 1, 1997. In doing so, however, the MPUC also required the
Company to accelerate the amortization of the deferred regulatory asset
associated with the 1993 buyout of one of its high-priced non-utility
generator contracts. As a result, the rate increase is not expected to have
any net impact on earnings but will result in increased cash flow. The MPUC
authorized the Company to apply the rate increase only to "core" customers
and not to those customers who purchase pursuant to special rate contracts or
under rates designed to be competitive with energy alternatives.
As reported previously, the Company filed a request with the MPUC on May
9, 1997 for permanent base rate relief. The original request called for two
step increase in rates designed to increase revenues on an annual basis by
$5.0 million upon completion of the case and by $4.5 million effective
January 1, 1999. The Company also proposed a Maine Yankee Adjustment
Mechanism whereby the Company would be allowed to defer costs related to the
Maine Yankee nuclear power plant for future collection in rates. By letter
dated July 2, 1997, the Company informed the MPUC of its intent to revise its
request to eliminate the two step nature of the proposal, to eliminate the
proposed Maine Yankee adjustment mechanism and to revise its overall request
upward to a one-time change in rates designed to increase revenues on an
annual basis by $20.6 million upon completion of the case. This request, if
granted by the MPUC, would increase rates to most customers by approximately
15.6% over 1996 levels. Customers receiving reduced rates for competitive
reasons would not be affected by the proposed increase. In response to this
notification, the Commission required the Company to file supplemental
testimony in support of its revised request, to provide additional customer
notice, and to provide additional procedural opportunities to review and
respond to the request to parties participating in the administrative review
of the request. The Company has complied with or is in the process of
complying with all of these additional requirements. Management cannot
predict the level of base rate increase which will be obtained in these
proceedings.
BANK CREDIT AGREEMENT COVENANT COMPLIANCE - The Company's credit agreement
with its lending banks contains a number of covenants keyed to the Company's
financial condition and performance. One such covenant, contained in its
Credit Agreement dated June 30, 1995 with a group of seven banks, required
the Company maintain a consolidated fixed charge ratio of 1.5 to 1.0
(defined as the ratio of the sum of the Company s net income, income tax
expense and interest expense to the Company s interest expense, subject to a
few minor adjustments) on a rolling four quarter basis. After the first
quarter 1997 financial results, the Company was not in compliance with this
covenant. The Company obtained a temporary waiver of the noncompliance
effective through May 15, 1997 and a second waiver effective through June 6,
1997.
On June 6, 1997 the Company and the lending banks amended the credit
agreement. Under the amendment, compliance with the covenant related to the
fixed charge ratio was permanently waived for the four quarters ending March
31, 1997 and June 30, 1997. This financial covenant will be in effect again
for the four quarters ending September 30, 1997. The Company projects that
at the end of the third quarter in 1997 it will likely not maintain
compliance with this financial covenant. Failure to comply with this
financial covenant, absent a waiver or further amendment, is an Event of
Default under the Credit Agreement that may result in restrictions on the
Company s continuing access to adequate borrowing capacity for working
capital purposes, including mandatory debt repayments. The Company is will
be negotiating with the lenders to amend the credit agreement and remove the
likely event of noncompliance with the financial covenant. Management cannot
predict the outcome of these negotiations.
The amendment also changed the terms of another financial covenant, the
Consolidated Total Debt Ratio, for the second quarter of 1997, to ensure
compliance by the Company. The Company was in compliance with all financial
covenants as of June 30, 1997.
The amended credit agreement changed the repayment terms of the
Company's medium term notes. Twelve million dollars in principal was repaid
on June 9, 1997, and principal payments are now payable on a quarterly basis
(as compared to the original schedule of $12 million in payments each June
30), beginning September 30, 1997 at a rate of $1 million each for the
quarters ending September 30, 1997 and December 31, 1997, $4 million for the
quarter ending March 31, 1998, and $6 million for the quarter ending June 30,
1998. This quarterly schedule will also be in effect for each quarter in the
period from September 30, 1998 through June 30, 2000.
Also included in the amended credit agreement were requirements for the
disposition of proceeds from the Company's potential sale/assignment to a
third party of its power sale contract with another utility (See
Sale/Assignment of Power Sale Contract below) and the terms under which the
Company may raise funds to restructure its power purchase contract with the
Penobscot Energy Recovery Company (PERC).
SALE/ASSIGNMENT OF POWER SALE CONTRACT - The Company is currently negotiating
with interested parties the sale/assignment of a power sale contract with
another electric utility. The Company currently provides power to the
utility at significantly above-market rates, with the contract term ending in
the year 2003. The Company recognizes there is value in selling or assigning
the contract, and the cash flows from such a transaction, ranging from $27 to
$45 million, could be utilized to reduce outstanding high rate debt
obligations, cure potential debt covenant violations, and provide funding for
the potential restructuring of the purchased power contract with PERC (See
discussion on PERC below). The Company cannot predict whether a sale or
assignment of the contract will occur.
PENOBSCOT ENERGY RECOVERY COMPANY - As previously reported, the Company has
been working to restructure a power purchase contract with PERC, its last
remaining high-priced non-utility generator contract that offers a potential
for substantial savings. PERC owns a waste-to-energy facility in Orrington,
Maine that provides solid waste disposal services to many communities in
central, eastern and northern Maine. The contract requires the Company to
purchase the electricity output of the plant until 2018 at a price that is
presently above the cost of alternative sources of power, and, in the
Company's opinion, is likely to remain so. The Company has been working with
PERC and the affected municipalities at a restructuring of the power contract
that would result in substantial savings for the Company and would continue
to allow PERC to meet the solid waste disposal needs of Maine communities.
In the 1996 Form 10-K, the Company discussed what appeared at that time to be
the outline of a satisfactory arrangement to all interested parties for the
restructuring of the PERC contract. Since that time, the Company has
continued to negotiate with PERC and the affected municipalities and has
modified and refined the terms previously discussed somewhat to take into
account further concerns raised by the municipalities. The Company has now
reached an agreement with PERC and a committee representing the
municipalities that includes the following major components:
1. The Company would make an initial payment to PERC of $8 million and
installment payments through 2002 totalling an additional $2 million. These
funds would be retained by PERC to meet operation and debt reserve
requirements of the PERC plant.
2. As of May 31, 1997, the PERC plant was financed in part by tax
exempt municipal revenue bonds in the principal amount of $50.3 million
payable pursuant to a sinking fund schedule and finally maturing in 2004.
Sinking fund payments of $1.2 million are required on August 1 and November 1
of 1997. The credit on those bonds is enhanced by letters of credit issued
by a group of banks. Those bonds would be restructured to extend the
maturity date to 20 years from the date of closing. The bonds would continue
to be tax exempt and their credit would be enhanced by the moral obligation
of the State of Maine under the auspices of the Finance Authority of Maine
("FAME") pursuant to the State of Maine's Electric Rate Stabilization
Program. The extended maturity of low cost bonds would, therefore, provide
savings to be shared by the parties.
3. The Company would continue to purchase power at the rates
established under the existing PERC contract. Payments would be made to a
trust from which disbursements would be made according to the following
priorities:
a. debt service and expense, including all principal and interest;
b. trustee and bond related fees and expenses;
c. all operating and maintenance expenses of the PERC plant;
d. operating and management fees paid to the PERC partners pursuant to
a partnership operating agreement;
e. payment to the PERC owners of any savings in interest expense
resulting from the prepayment of bonds; and
f. except for cash reserve requirements, all remaining cash would be
distributed 1/3 to the Company, 1/3 to the PERC owners and 1/3 to the
participating municipalities.
4. The Company would issue warrants for the purchase of two million
shares of its common stock, one million each to the PERC owners and the
participating municipalities. The warrants would be exercisable within ten
years of their issuance and would entitle the holder to purchase common stock
for $7 per share (subject to adjustment under certain circumstances). No
warrants may be exercised within the first nine months after their issuance,
and they would become exercisable in 500,000 share blocks following the
expiration of nine months, 21 months, 33 months and 45 months from the
closing date. Upon exercise, the Company would have the option, instead of
providing common stock, to pay cash equal to the difference between the then
market price of the stock and the exercise price of $7 per share times the
number of shares as to which exercise is made. The Company's obligation
under the letter of intent would be specifically conditioned upon receipt of
authorization from the MPUC to recover in rates the difference between the
market value of stock issued and the $7 per share exercise price or,
alternatively, any payment of cash under the Company's option.
5. The municipalities would extend their waste disposal contracts
through 2017 and waive their existing rights to an early termination or the
buyout of PERC.
There are a number of events upon which the proposed transaction is
contingent, including the approval of the MPUC, approval by the affected
municipalities, the rendering of an opinion by bond counsel that the PERC
bonds will remain tax-exempt, the approval of the new financing arrangement
by FAME and its Board of Directors, and the financing of necessary cash
payments by the Company.
Depending in part on the ultimate cost of the warrants to the Company,
it is projected that the restructured PERC contract will result in net cost
savings with a present value of $30-40 million over the remaining life of the
contract. That projection is based upon a number of assumptions about future
events and the markets for electricity.
SUSPENSION OF COMMON DIVIDEND PAYMENT - In March 1997, the Company's Board of
Directors decided not to declare its regular quarterly dividend on the
Company's common stock because of current financial pressures, primarily
caused by the ongoing difficulties at the Maine Yankee nuclear generating
plant. The suspension of the common dividend also remained in effect for the
second quarter of 1997.
SPECIAL CONTRACTS WITH LARGE INDUSTRIAL CUSTOMERS - Effective January 1, 1997
the Company renegotiated the revenue sharing portion of a special rate
contract with its largest industrial customer. The rate for this customer is
based in part on a revenue sharing arrangement whereby the revenues for
service vary depending on the price and volume of product sold by the
industrial customer to its customers. Under the revised revenue sharing
formula, the Company estimates that annual revenues from the revenue sharing
could be reduced by approximately $2.6 million. The Company also entered
into a special rate contract with a large pulp and paper manufacturer,
effective April 1, 1997. Annual revenues for this customer are estimated to
be reduced by approximately $1.5 million due to the reduced rate. It was
necessary to reduce rates to this pulp and paper manufacturer in order to
retain the customer, since the customer was exploring self-generation for its
energy needs.
EMPLOYEES - On February 26, 1997, the employees of the Company's customer
service center, approximately 50 employees, voted to join the International
Brotherhood of Electrical Workers (AFL-CIO). To date no contract has been
negotiated between the Company and the union with respect to these new
members.
REVENUES
The $916,000 reduction in electric operating revenue is due principally
to a $1.3 million reduction in off-system sales in the second quarter of 1997
as compared to the second quarter of 1996, as well as an $867,000 reduction
in revenue in the 1997 quarter related to the previously discussed revenue
sharing arrangement with the Company's largest industrial customer. While
there was an overall 4.1% increase in total kilowatt hour (KWH) sales
(excluding off-system sales) in the second quarter of 1997 over second
quarter 1996 sales, associated revenues increased by only 2.9%, or $1.1
million, due to the effect of adjusting prices downward to some customers in
order to retain sales that would otherwise be lost to competitive pressures.
The increased sales in the 1997 quarter can also be attributed somewhat to
weather conditions more favorable for electricity sales as compared to 1996.
EXPENSES
Fuel for generation and purchased power expense increased principally
due to the previously mentioned shutdown of Maine Yankee during the entire
second quarter of 1997 and the increase in its operating and maintenance
expenditures. In the second quarter of 1997 the Company incurred
approximately $2.8 million in incremental Maine Yankee replacement power
costs, as compared to $272,000 in the second quarter of 1996. Maine Yankee
was operational at 90% capacity for the entire second quarter of 1996. The
Company has also borne a greater level of Maine Yankee operating costs, which
increased by approximately $442,000 in 1997, as compared to the 1996 quarter.
Increased fuel and purchased power expense was also affected by various
electric power plants (excluding Maine Yankee) in the Northeast being
nonoperational in the second quarter of 1997, causing the Company's power
purchases on the open market to be at higher than normal prices. Also
affecting the increased expense in the 1997 quarter was the fact the Company
had a 16.8 million, or 4.1%, increase in KWH sales.
Other operation and maintenance (O&M) expense increased by $176,000 in
the second quarter of 1997, due principally to recording a $216,000
adjustment for obligations due under a demand-side management contract. O&M
payroll expense increased by $54,000 due to a greater number of employees, a
2.5% union wage rate increase effective January 1, 1997 and various wage rate
increases to nonunion personnel. These increases were offset by higher level
of payroll being charged to the Company's capital program and a $100,000
decrease in postretirement medical and pension costs in the 1997 quarter as
compared to 1996.
The $639,000 increase in depreciation and amortization expense was due
principally to the ending of the amortization of the overaccumulated
depreciation reserve in 1996 (See the 1996 Form 10-K for a more complete
discussion). This amortization resulted in a $438,000 reduction in
depreciation expense in the second quarter of 1996. Also increasing
depreciation and amortization expense in the 1997 quarter were anticipated
1997 property additions, including the effect of the implementation of three
large information system projects.
The increase in property and other taxes in the second quarter of 1997
was due principally to greater property taxes, which was a result of
increased property levels and property tax rates.
The decrease in income taxes was primarily a function of an operating
loss in the second quarter of 1997 as compared to earnings in the 1996
quarter. Income tax expense in the 1996 quarter was reduced by $431,000 in
investment tax credits recorded in connection with an Internal Revenue
Service (IRS) examination of the 1993 and 1994 tax years.
Long-term debt interest expense decreased $263,000 in the second quarter
of 1997 as compared to 1996 due to two $12 million principal repayments on
the Company's $60 million medium term notes in June 1996 and 1997, 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 reduction in weighted
average short-term borrowings outstanding in the 1997 quarter as compared to
1996, as well as $130,000 in interest paid to the IRS related to amended
income tax returns in the 1996 quarter. This was offset by a slightly higher
weighted average short-term debt interest rate in 1997.
SIX MONTHS OF 1997 AS COMPARED TO THE SIX MONTHS OF 1996
EARNINGS
The six months ended June 30, 1997 resulted in a loss of $.14 per common
share, compared to earnings of $.83 per common share for the 1996 period. As
discussed previously, the decline in 1997 earnings compared to 1996 is
attributable largely to Maine Yankee. In the 1997 period the Company
incurred approximately $6.3 million in incremental Maine Yankee replacement
power costs, as compared to $1.2 million in 1996. The Company's share of
Maine Yankee operating costs increased by approximately $2.0 million in 1997,
as compared to 1996. The decrease in earnings in 1997 as compared to 1996
has also been impacted by the ending of the amortization of the
overaccumulated depreciation reserve in 1996, which was an $876,000 benefit
in the 1996 period.
Earnings in the 1997 period were positively affected by three
transactions that were nonrecurring in nature. The Company recorded $335,000
in revenues from the sale of air emission allowances to a coal fired
generating facility, and $350,000 in revenue was recognized under a shared
savings distribution agreement with another utility. Also, the Company
recorded a $204,000 state income tax benefit as the result of an IRS
examination of the Company's 1994 federal income tax return. Without the
impact of these one-time events benefitting earnings, the Company would have
incurred a $.22 loss per common share in the 1997 period.
REVENUES
The reasons for the $901,000 decrease in electric operating revenue in
the 1997 period as compared 1996 are consistent with those previously
mentioned. There was a $1.2 million decrease in off-system sales in 1997,
revenue sharing from the Company's largest industrial customer decreased by
$1.9 million in 1997, and while there was an overall 3.0% increase in total
KWH sales (excluding off-system sales) in 1997 over 1996, associated revenues
increased by only 1.4%, or $1.1 million. Positively impacting revenues in
1997 were the previously discussed sale of air emission allowances and
revenue associated with the shared distribution savings with another utility.
EXPENSES
The increase in fuel and purchased power expense in 1997, as compared to
1996, is due principally to reasons previously discussed in this document.
Also, the Company realized greater benefits under its fuel hedge program in
1996 as compared to 1997, due principally to actual fuel and purchased power
costs in 1997 not tracking favorably against the index utilized to derive the
fuel hedge results. In 1996 the Company achieved more favorable results under
the fuel hedge program.
The increases in other O&M, depreciation and amortization, and property
and other taxes in the 1997 period as compared to 1996 were due to the
previously mentioned reasons. The decreases in income tax expense and long-
term debt and other interest expense in 1997 were also due principally to
reasons previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect events in the first
six months of 1997 and 1996 as they affect the Company's liquidity. Net cash
provided by operations increased by $241,000 in the 1997 period as compared
to 1996. Positively impacting cash flows in 1997 was the payment of $91,000
in income taxes, as compared to $1.7 million in income tax payments in 1996.
Also, in the 1996 period, the Company expended $1.7 million to terminate a
demand-side management contract. Also enhancing cash flows from operations
in 1997 was an improvement in accounts receivable collections. Negatively
impacting cash flows from operations in 1997 were the incremental costs
incurred to replace the Company's share of Maine Yankee's output, additional
Maine Yankee operating costs, costs associated with the current refueling at
the Plant, and the Company's share of the cable separation repair (see the
1996 Form 10-K for a more complete discussion).
Due to efforts by the Company to control costs and conserve cash in
1997, construction expenditures were reduced by $860,000 in the 1997 period
as compared to 1996.
Dividends paid on common stock were lower in 1997 due to the suspension
of the common dividend at the end of the first quarter of 1997. The
reduction in preferred dividends paid resulted from $3 million in sinking
fund payments made on the Company's 8.76% mandatory redeemable preferred
stock in 1996.
The Company, in each period, made sinking fund payments on its 12.25%
first mortgage bonds, as well as making $12 million in principal payments on
its Medium Term Notes. As discussed in more detail in the footnotes to the
consolidated financial statements contained in the 1996 Form 10-K, the
Company in the first quarter of 1996 made a $115,000 payment to the 8.76%
preferred stockholder related to a "make whole provision" under the preferred
stock agreement.
In 1997 the Company amended its Dividend Reinvestment and Common Stock
Purchase Plan (the Plan) to allow for the option of purchasing shares either
in the open market or from newly issued shares sold by the Company. The
Company anticipates that for the foreseeable future common stock will be
purchased in the open market. In 1996, under the Plan, the Company realized
a common stock investment of $338,000 through the issuance of 29,953 new
common shares.
As discussed previously, the Company's revolving credit agreement was
amended in June 1997.
The Company's cash flows will be improved with the $5.1 million
temporary rate increase effective July 1, 1997, and further enhancements are
anticipated with the results of the Company's general rate increase
proceedings with the MPUC. For additional discussion of liquidity and
capital resources, see the Company's 1996 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings per Share", which establishes standards for
computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It also requires dual presentation of basic and
diluted EPS on the face of the statement of income for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 31, 1997, including
interim periods; earlier application is not permitted. The application of
this Statement currently does not impact the Company's EPS calculations.
In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe the implementation of
this Statement will have any significant effect on the Company's financial
statements.
In June 1997 the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for the way public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments, which are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement is effective for financial statements
for periods beginning after December 15, 1997. Management is evaluating this
Statement to determine what information will be required to be disclosed.
OTHER
This Form 10-Q contains forward-looking statements. These statements
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those anticipated in the forward looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the following risk factors:
Future economic conditions, relationship with lenders, earnings
retention and dividend payout policies, electric utility restructuring,
developments in the legislative, regulatory and competitive environments in
which the Company operates, and other circumstances that could affect
revenues and costs.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect subsequent events or circumstances.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
ASSETS June 30, Dec. 31,
1997 1996
--------- ---------
INVESTMENT IN UTILITY PLANT:
Electric plant in service, at original cost $ 330,664 $ 317,833
Less - Accumulated depreciation and
amortization 92,155 87,736
--------- ---------
$ 238,509 $ 230,097
Construction work in progress 12,659 18,554
--------- ---------
$ 251,168 $ 248,651
Investments in corporate joint ventures:
Maine Yankee Atomic Power Company $ 5,256 $ 5,014
Maine Electric Power Company, Inc. 236 125
--------- ---------
$ 256,660 $ 253,790
--------- ---------
OTHER INVESTMENTS, principally at cost $ 4,854 $ 4,813
--------- ---------
FUNDS HELD BY TRUSTEE, at cost $ 21,192 $ 21,199
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 366 $ 1,274
Accounts receivable, net of reserve 16,402 20,691
Unbilled revenue receivable 7,781 9,230
Inventories, at average cost:
Material and supplies 3,009 2,994
Fuel oil 358 303
Prepaid expenses 648 1,672
Deferred Maine Yankee refueling costs 2,660 896
--------- ---------
Total current assets $ 31,224 $ 37,060
--------- ---------
DEFERRED CHARGES:
Investment in Seabrook Nuclear Project, net of
accumulated amortization of $27,625 in 1997
and $26,775 in 1996 $ 31,217 $ 32,067
Costs to terminate purchased power contracts,
net of accumulated amortization of $46,855
in 1997 and $36,398 in 1996 161,246 171,703
Deferred regulatory assets 30,050 29,498
Demand-side management costs 2,169 2,632
Other 4,259 3,867
--------- ---------
Total deferred charges $ 228,941 $ 239,767
--------- ---------
Total assets $ 542,871 $ 556,629
========= =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
June 30, Dec. 31,
STOCKHOLDERS' INVESTMENT AND LIABILITIES 1997 1996
--------- ---------
CAPITALIZATION:
Common stock investment $ 107,311 $ 108,321
Preferred stock 4,734 4,734
Preferred stock subject to mandatory
redemption exclusive of current sinking
fund requirements 10,701 10,671
Long-term debt, net of current portion 258,709 274,221
--------- ---------
Total capitalization $ 381,455 $ 397,947
--------- ---------
CURRENT LIABILITIES:
Notes payable - banks $ 33,000 $ 32,500
--------- ---------
Other current liabilities -
Current portion of long-term debt and
sinking fund requirements on pre-
ferred stock $ 18,061 $ 15,447
Accounts payable 15,089 13,433
Dividends payable 329 1,687
Accrued interest 3,796 3,719
Customers' deposits 326 360
Deferred fuel revenue 504 1,008
--------- ---------
Total other current liabilities $ 38,105 $ 35,654
--------- ---------
Total current liabilities $ 71,105 $ 68,154
--------- ---------
DEFERRED CREDITS AND RESERVES:
Deferred income taxes - Seabrook $ 16,213 $ 16,651
Other accumulated deferred income taxes 55,349 54,806
Deferred regulatory liability 7,948 8,446
Unamortized investment tax credits 2,074 2,179
Accrued pension 617 640
Other 8,110 7,806
--------- ---------
Total deferred credits and reserves $ 90,311 $ 90,528
--------- ---------
Total Stockholders' Investment and
Liabilities $ 542,871 $ 556,629
========= =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
000's Omitted
(Unaudited)
Jun. 30, Dec. 31,
1997 1996
---------- ----------
COMMON STOCK INVESTMENT
Common stock, par value $5 per share- $ 36,817 $ 36,817
Authorized -- 10,000,000 shares
Outstanding -- 7,363,424 shares in 1997 and 1996
Amounts paid in excess of par value 56,969 56,969
Retained earnings 13,525 14,535
---------- ----------
Total common stock investment $ 107,311 $ 108,321
---------- ----------
PREFERRED STOCK-Non participating, cumulative-
Par value $100 per share, authorized 600,000 shares
Not redeemable or redeemable solely 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,
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 104.38% if called on or prior to
December 27, 1997, 150,000 shares authorized
and 120,000 shares outstanding in 1997 and 1996 $ 12,295 $ 12,265
Less: Sinking fund requirements 1,594 1,594
---------- ----------
$ 10,701 $ 10,671
---------- ----------
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 6,476 7,375
---------- ----------
$ 108,976 $ 109,875
Less: Current maturity and sinking fund requirements 4,467 1,854
---------- ----------
Total first mortgage bonds $ 104,509 $ 108,021
---------- ----------
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 $ 36,000 $ 48,000
Less: Current portion of long-term debt 12,000 12,000
---------- ----------
$ 24,000 $ 36,000
---------- ----------
Total long-term debt $ 258,709 $ 274,221
---------- ----------
Total Capitalization $ 381,455 $ 397,947
========== ==========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
000's Omitted
(Unaudited)
1997 1996
--------- ---------
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ (321)$ 6,853
Adjustments to reconcile net income (loss) to
net cash provided by(used in) operations:
Depreciation and amortization 5,166 3,735
Amortization of Seabrook Nuclear Project 850 850
Amortization of contract buyouts 10,457 10,379
Other amortizations 860 535
Allowance for equity funds used during
construction (183) (185)
Cost to terminate demand-side management
contract - (1,703)
Deferred income tax provision (1,181) 2,027
Deferred investment tax credits (105) (88)
Changes in assets and liabilities:
Deferred fuel revenue and Maine Yankee (2,268) 235
refueling costs
Accounts receivable, net and unbilled
revenue 5,738 331
Accounts payable 1,656 (1,027)
Accrued interest 77 (1,138)
Current and deferred income taxes 201 (371)
Accrued postretirement benefit costs 201 681
Other current assets and liabilities, net 920 92
Other, net (1,035) (414)
--------- ---------
Net Cash Provided By Operations $ 21,033 $ 20,792
--------- ---------
CASH FLOWS FROM INVESTING:
Construction expenditures $ (7,167)$ (8,027)
Allowance for borrowed funds used during
construction (360) (390)
--------- ---------
Net Cash Used In Investing $ (7,527)$ (8,417)
--------- ---------
CASH FLOWS FROM FINANCING:
Dividends on preferred stock $ (691)$ (757)
Dividends on common stock (1,325) (2,630)
Payments on long-term debt (12,898) (12,798)
Payments on mandatory redeemable preferred stock - (1,615)
Issuances:
Common stock
Dividend reinvestment plan (29,953 shares - 338
in 1996)
Short-term debt, net 500 5,000
--------- ---------
Net Cash Used In Financing $ (14,414)$ (12,462)
--------- ---------
Net Change in Cash and Cash Equivalents $ (908)$ (87)
Cash and Cash Equivalents at Beginning of Period 1,274 1,424
--------- ---------
Cash and Cash Equivalents at End of Period $ 366 $ 1,337
========= =========
Cash Paid During the Six Months For:
Interest (Net of Amount Capitalized) $ 12,049 $ 14,066
Income Taxes 91 1,703
========= =========
See notes to consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
000's Omitted
(Unaudited)
1997 1996
---------- ----------
BALANCE AT JANUARY 1 $ 14,535 $ 10,073
ADD - NET INCOME (LOSS) (321) 6,853
---------- ----------
$ 14,214 $ 16,926
---------- ----------
DEDUCT:
Dividends -
Preferred stock $ 658 $ 724
Common stock - 2,636
Other 31 52
---------- ----------
$ 689 $ 3,412
---------- ----------
BALANCE AT JUNE 30 $ 13,525 $ 13,514
========== ==========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
-------------
(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
1996 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 June 30,
1997 and the results of operations and cash flows for the periods ended June
30, 1997 and 1996.
The Company's significant accounting policies are described in the Notes
to the Consolidated Financial Statements included in its 1996 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:
SIX MONTHS ENDED JUNE 30,
------------------------
1997 1996
---- ----
AMOUNT % AMOUNT %
(Dollars in Thousands)
Federal income tax provision
at statutory rate $ (461) (34) $3,450 34
Plus (Less)permanent reductions
in tax expense resulting
from statutory exclusions
from taxable income 52 4 (2) -
----- --- ------ ---
Federal income tax provision before
effect of temporary differences
and investment tax credits $ (409) (30) $3,448 34
Plus (Less) temporary differences that
that are flowed through for rate-
making and accounting purposes 21 1 (195) (2)
(Less) utilization and amortization
of investment tax credits (171) (12) (593) (6)
----- --- ------ ---
Federal income tax provision $(559) (41) $2,660 26
===== === ====== ===
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 Six Months Ended
----------------------------------
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
1997 1996 1997 1996
OPERATIONS: ------- ------- ------- -------
As reported by investee-
Operating revenues $145,733 $84,880 $21,568 $29,559
======== ======= ======= =======
Earnings applicable to
common stock $ 3,624 $ 3,546 $ 545 $ 111
======== ======= ======= =======
Company's reported equity-
Equity in net income $ 254 $ 248 $ 77 $ 16
(Deduct)-Effect of
adjusting Company's
estimate to actual (5) 1 41 (9)
-------- ------- ------- -------
Amounts reported by Company $ 249 $ 249 $ 118 $ 7
======== ======= ======= =======
MAINE YANKEE MEPCO
------------ -----
(Dollars in Thousands)
(Unaudited)
Financial Position at
-----------------------------------
Jun. 30, Dec. 31, Jun. 30, Dec. 31,
1997 1996 1997 1996
FINANCIAL POSITION: -------- -------- ------- -------
As reported by investee-
Total assets $686,536 $602,061 $ 5,068 $10,727
Less-
Preferred stock 17,400 18,000 - -
Long-term debt 148,665 103,332 520 620
Other liabilities and
deferred credits 445,510 409,392 2,663 9,110
-------- -------- ------- -------
Net assets $ 74,961 $ 71,337 $ 1,885 $ 997
======== ======== ======= =======
Company's reported equity-
Equity in net assets $ 5,247 $ 4,994 $ 268 $ 142
(Deduct) Add - Effect
of adjusting Company's
estimate to actual 9 20 (32) (17)
-------- -------- ------- -------
Amounts reported by Company $ 5,256 $ 5,014 $ 236 $ 125
======== ======== ======= =======
BPHA Chester
----------------- -----------------
(Dollars in Thousands)
(Unaudited)
Operations for Six Months Ended
-------------------------------------
Jun. 30, Jun. 30, Jun. 30, Jun. 30,
1997 1996 1997 1996
------- ------- -------- -------
OPERATIONS:
As reported by investee-
Operating revenues $ 3,906 $ 4,330 $ 2,255 $ 2,386
======= ======= ======= =======
Net Income $ 1,346 $ 1,705 $ - $ -
======= ======= ======= =======
Company's reported equity
in net income $ 673 $ 853 $ - $ -
======= ======= ======= =======
Financial Position at
--------------------------------------
Jun. 30, Dec. 31, Jun. 30, Dec. 31,
1997 1996 1997 1996
-------- -------- -------- --------
FINANCIAL POSITION:
As reported by investee-
Total assets $39,827 $39,864 $28,238 $28,898
Less-
Long-term debt 29,550 30,600 26,429 27,021
Other liabilities 2,376 2,359 1,809 1,877
------- ------- ------- -------
Net assets $ 7,901 $ 6,905 $ - $ -
======= ======= ======= =======
Company's reported equity
in net assets $ 3,951 $ 3,453 $ - $ -
======= ======= ======= =======
4. BANK CREDIT AGREEMENT COVENANT COMPLIANCE:
-----------------------------------------
The Company's credit agreement with its lending banks contains a
number of covenants keyed to the Company's financial condition and
performance. One such covenant, contained in its Credit Agreement dated
June 30, 1995 with a group of seven banks, required the Company maintain a
consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the
sum of the Company s net income, income tax expense and interest expense to
the Company s interest expense, subject to a few minor adjustments) on a
rolling four quarter basis. After the first quarter 1997 financial
results, the Company was not in compliance with this covenant. The Company
obtained a temporary waiver of the noncompliance effective through May 15,
1997 and a second waiver effective through June 6, 1997.
On June 6, 1997 the Company and the lending banks amended the
credit agreement. Under the amendment, compliance with the covenant
related to the fixed charge ratio was permanently waived for the four
quarters ending March 31, 1997 and June 30, 1997. This financial covenant
will be in effect again for the four quarters ending September 30, 1997.
The Company projects that at the end of the third quarter in 1997 it will
likely not maintain compliance with this financial covenant.
Failure to comply with this financial covenant, absent a waiver or
further amendment, is an Event of Default under the Credit Agreement that may
result in restrictions on the Company s continuing access to adequate borrowing
capacity for working capital purposes, including mandatory debt repayments.
The Company will be negotiating with the lenders to amend the credit
agreement and remove the likely event of noncompliance with the financial
covenant. Management cannot predict the outcome of these negotiations.
The Medium Term Note has continued to be presented as long-term in the
consolidated balance sheet as management feels this is the most appropriate
presentation.
The amendment also changed the terms of another financial
covenant, the Consolidated Total Debt Ratio, for the second quarter of
1997, to ensure compliance by the Company. The Company was in compliance
with all financial covenants as of June 30, 1997.
The amended credit agreement changed the repayment terms of the
Company's medium term notes. $12 million in principal was repaid on June
9, 1997, and principal payments are now payable on a quarterly basis (as
opposed to the original schedule of $12 million in payments each June 30),
beginning September 30, 1997 at a rate of $1 million each for the quarters
ending September 30, 1997 and December 31, 1997, $4 million for the quarter
ending March 31, 1998, and $6 million for the quarter ending June 30, 1998.
This quarterly schedule will also be in effect for each quarter in the
period from September 30, 1998 through June 30, 2000.
Also included in the amended credit agreement were requirements
for the disposition of proceeds from the Company's sale/assignment to a
third party of its power sale contract with another utility (See
Sale/Assignment of Power Sale Contract below) and the terms under which the
Company may raise funds to restructure its power purchase contract with the
Penobscot Energy Recovery Company.
5. MAINE YANKEE:
------------
As previously reported, Maine Yankee has been shut down since
December 6, 1996, and was expected to remain off-line at least until August
1997. Also as previously reported, on May 27, 1997, the Board of Directors
of Maine Yankee voted to reduce maintenance-and-repair spending at the
Plant and announced that Maine Yankee was considering permanent closure
based on economic concerns and uncertainty about operation of the Plant;
and on the same day the Maine Yankee Board indicated that it had also been
exploring a sale of the Plant to PECO Energy Company ("PECO"). For a
detailed discussion of the background of the current shutdown, including
events leading to the Plant's being placed on the "watch list" by the
Nuclear Regulatory Commission ("NRC") and other significant regulatory and
operational issues, management changes, and investigations of Maine Yankee
by the NRC and the United States Department of Justice, see the Company's
1996 Form 10-K, its Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997, and its Current Report on Form 8-K dated May 27,
1997.
On August 6, 1997, the Board of Directors of Maine Yankee voted
to permanently cease power operations at the Plant and begin the process of
decommissioning the Plant. The formal vote followed an announcement by the
Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO, after two
months of intensive negotiations, had been unable to arrive at "a mutually
beneficial framework for agreement" on a sale of the Plant to PECO. The
decision to shut down the Plant was based on an economic analysis of the
costs, risks and uncertainties associated with operating the Plant compared
to those associated with closing and decommissioning the Plant.
Prior to the shutdown vote the Company had been incurring
substantial costs to support Maine Yankee's efforts to return the Plant to
service as well as additional costs for replacement power. The Maine Yankee
Board's decision to close the Plant should mitigate the costs the Company
would otherwise incur in 1997 through a phasing down of Maine Yankee's
operations and maintenance costs. The need to purchase replacement power
will continue.
Maine Yankee's most recent estimate of the total costs of
decommissioning was $369.4 million (in 1996 dollars), of which
approximately $183 million had been collected as of June 30, 1997. Maine
Yankee is in the process of developing an updated decommissioning cost
estimate, which the Company anticipates will be higher than the 1993
estimate, and expects to file the revised decommissioning cost study with
the FERC in the fall of 1997 as part of a rate filing reflecting the
permanent shutdown of the Plant.
The decision to permanently cease power operations at the Plant
and begin the process of decommissioning the Plant, the Company, in the
third quarter of 1997, will be recording a liability for its share of the
estimated cost of decommissioning the Plant. A regulatory asset will also
be established for this estimated amount, since the Company believes the
cost of decommissioning will be recoverable from customers in rates. As
discussed above, the electric utility restructuring legislation provides
for the transmission and distribution company to include Maine Yankee
decommissioning costs in its rates.
6. RECLASSIFICATIONS:
-----------------
Certain 1996 amounts have been reclassified to conform with the
presentation used in Form 10-Q for the quarter ended June 30, 1997.
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDING JUNE 30, 1997
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 13, 1997.
The only matter submitted to a vote was the election of three Class II
Directors for terms ending in 2000. The following persons were elected to
fill those positions pursuant to the corresponding tabulations of votes:
TOTAL VOTE FOR TOTAL VOTE AGAINST
-------------- ------------------
Robert S. Briggs 742,973 51,181
William C. Bullock, Jr. 744,962 49,192
G. Clifton Eames 742,414 51,740
The terms of the following Directors, members of Class I and Class III,
continued after the annual meeting:
Jane J. Bush
David M. Carlisle
Alton E. Cianchette
Marion M. Kane
Norman A. Ledwin
Carroll R. Lee
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS - None
REPORTS ON FORM 8-K - Two Current Reports on Form 8-K dated May 28, 1997
and June 27, 1997 were filed during the second quarter of 1996, regarding the
decision by Maine Yankee Atomic Power Company s Board of Directors to
consider permanent closure of the plant (8-K dated May 28, 1997) and Bangor
Hydro-Electric Company s agreement to restructure its power purchase
agreement with the Penobscot Energy Recovery Company suspension and the
allowance of a temporary rate increase by the Maine Public Utilities
Commission designed to increase revenues by $5.1 million on an annual basis
(8-K dated June 27, 1997).
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997
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)
/s/ Frederick S. Samp
-----------------------------
Dated: August 13, 1997
Frederick S. Samp
Vice President - Finance & Law
(Chief Financial Officer)