UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5139
CENTRAL MAINE POWER COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Maine 01-0042740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
83 Edison Drive, Augusta, Maine 04336
(Address of principal executive offices) (Zip Code)
207-623-3521
(Registrant's telephone number including area code)
(Former name, former address and former
fiscal year, if changed since
last report.)
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 the
filing requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Shares Outstanding
Class as of August 13, 1998
Common Stock, $5 Par Value 32,442,752
Central Maine Power Company
INDEX
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Statement of Earnings for the Three Months
Ended June 30, 1998 and 1997 1
Consolidated Statement of Earnings for the Six Months
Ended June 30, 1998 and 1997 2
Consolidated Balance Sheet - June 30, 1998 and December 31, 1997:
Assets 3
Stockholders' Investment and Liabilities 4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information 32
Signatures 34
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Three Months
Ended June 30,
1998 1997
Electric Operating Revenues $208,216 $210,074
------- -------
Operating Expenses
Fuel used for company generation 7,909 6,921
Purchased power - energy 85,469 94,837
Purchased power - capacity 21,086 26,804
Other operation 49,687 49,518
Maintenance 8,563 8,306
Depreciation and amortization 13,808 13,520
Federal and state income taxes 1,477 (3,677)
Taxes other than income taxes 5,987 7,108
Total Operating Expenses 193,986 203,337
Equity In Earnings Of Associated Companies 157 2,144
Operating Income 14,387 8,881
Other Income (Expense)
Allowance for equity funds used during construction 115 256
Other, net (460) 824
Income taxes 532 (323)
Total Other Income 187 757
Income Before Interest Charges 14,574 9,638
Interest Charges
Long-term debt 10,649 11,128
Other interest 2,351 1,233
Allowance for borrowed funds used during construction (72) (184)
Total Interest Charges 12,928 12,177
Net Income (Loss) 1,646 (2,539)
Dividends On Preferred Stock 1,074 2,207
Earnings (Loss) Applicable To Common Stock $ 572 $(4,746)
Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,752 32,442,752
Earnings (Loss) Per Share Of Common Stock (Basic and Diluted) $0.02 $(0.15)
Dividends Declared Per Share Of Common Stock $0.225 $0.225
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Six Months
Ended June 30,
1998 1997
Electric Operating Revenues $456,961 $478,441
Operating Expenses
Fuel used for company generation 11,981 12,526
Purchased power - energy 189,764 218,774
Purchased power - capacity 45,462 59,944
Other operation 93,460 93,267
Maintenance 18,654 14,623
Depreciation and amortization 27,630 26,994
Federal and state income taxes 13,443 5,877
Taxes other than income taxes 13,041 14,086
Total Operating Expenses 413,435 446,091
Equity In Earnings Of Associated Companies 1,748 4,044
Operating Income 45,274 36,394
Other Income (Expense)
Allowance for equity funds used during construction 289 502
Other, net (1,201) 1,444
Income taxes 906 (571)
Total Other Income (Expense) (6) 1,375
Income Before Interest Charges 45,268 37,769
Interest Charges
Long-term debt 21,499 22,342
Other interest 4,027 2,301
Allowance for borrowed funds used during construction (199) (362)
Total Interest Charges 25,327 24,281
Net Income 19,941 13,488
Dividends On Preferred Stock 2,971 4,415
Earnings Applicable To Common Stock $ 16,970 $ 9,073
Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,752 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) $0.52 $0.28
Dividends Declared Per Share Of Common Stock $0.45 $0.45
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
Electric Property, at original cost $1,691,271 $1,674,876
Less: Accumulated Depreciation 654,574 634,384
Net electric property in service 1,036,697 1,040,492
Construction work in progress 13,673 15,105
Net nuclear fuel 1,157 1,157
Net electric property and nuclear fuel 1,051,527 1,056,754
Investments In and Loans to Associated Companies, at equity 94,684 76,509
Total Net Electric Property and Investments in Associated Companies
1,146,211 1,133,263
Current Assets
Cash and cash equivalents 2,927 20,841
Accounts receivable, less allowances
for uncollectible accounts of $2,812 in
1998 and $2,400 in 1997:
Service - billed 68,368 84,323
Service - unbilled 40,108 46,807
Other accounts receivable 10,639 15,247
Prepaid income taxes 8,829 -
Fuel oil inventory, at average cost 7,066 5,390
Materials and supplies, at average cost 12,626 11,779
Funds on deposit with trustee - 61,694
Prepayments and other current assets 6,283 9,110
Total Current Assets 156,846 255,191
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net 81,283 84,026
Yankee Atomic purchased-power contract 10,726 13,056
Connecticut Yankee purchased-power contract 34,229 36,877
Maine Yankee purchased-power contract 307,500 329,206
Regulatory assets - deferred taxes 237,554 236,632
Deferred charges and other assets 269,405 210,715
Total Deferred Charges and Other Assets 940,697 910,512
TOTAL ASSETS $2,243,754 $2,298,966
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
June 30, December 31,
1998 1997
(Unaudited)
STOCKHOLDERS' INVESTMENTS AND LIABILITIES
Capitalization
Common-stock investment $ 488,181 $ 487,594
Preferred stock 35,571 65,571
Redeemable preferred stock 27,910 39,528
Long-term obligations 313,581 400,923
------- -------
Total Capitalization 865,243 993,616
------- -------
Current Liabilities and Interim Financing
Interim financing 325,000 238,000
Sinking-fund requirements 16,850 9,411
Accounts payable 69,566 97,080
Dividends payable 8,379 9,202
Accrued interest 10,503 11,201
Accrued income taxes - 3,001
Miscellaneous current liabilities 23,529 15,762
------ ------
Total Current Liabilities and Interim Financing 453,827 383,657
------- -------
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes 376,492 350,912
Unamortized investment tax credits 29,799 30,533
Yankee Atomic purchased-power contract 10,726 13,056
Connecticut Yankee purchased-power contract 34,229 36,877
Maine Yankee purchased-power contract 307,500 329,206
Regulatory liabilities - deferred taxes 56,628 56,852
Other reserves and deferred credits 109,310 104,257
------- -------
Total Reserves and Deferred Credits 924,684 921,693
------- -------
Total Stockholders' Investment and Liabilities $2,243,754 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
For the Six Months
Ended June 30,
1998 1997
Operating Activities
Net income $ 19,941 $13,488
Items not requiring (providing) cash:
Depreciation 22,566 22,033
Amortization 19,062 16,992
Deferred income taxes and investment tax credit 24,676 1,752
Allowance for equity funds used during construc (289) (502)
Changes in certain assets and liabilities:
Accounts receivable 27,262 25,676
Inventories (2,523) 4,619
Other current assets 2,827 3,532
Accounts payable (25,424) (12,151)
Accrued/prepaid taxes and interest (12,528) (243)
Miscellaneous current liabilities 7,767 (5,617)
Deferred energy-management costs (1,428) (267)
Maine Yankee outage accrual - (10,350)
Deferred ice storm costs (51,323) -
Restructuring of purchased power contracts (22,500) -
Other, net 5,954 5,019
-------- -------
Net Cash Provided by Operating Activities 14,040 63,981
------- ------
Investing Activities
Construction expenditures (21,059) (18,028)
Investments in and loans to associated companies (18,120) (5,205)
Changes in accounts payable - investing activities (2,090) (2,176)
--------- -------
Net Cash Used by Investing Activities (41,269) (25,409)
------- ------
Financing Activities
Issuances:
Revolving credit agreement 18,500 12,500
Medium-term notes 117,000 (10,000)
Redemptions:
Preferred stock (41,618) -
Medium-term notes (10,000) -
Mortgage bonds (117,283) -
Other long-term obligations (575) (545)
Funds on deposit with trustee 61,694 (2,182)
Dividends:
Common stock (14,609) (14,609)
Preferred stock (3,794) (4,415)
-------- -------
Net Cash Used by Financing Activities 9,315 (19,251)
------- ------
Net Decrease (Increase) in Cash (17,914) 19,321
Cash and cash equivalents, beginning of period 20,841 8,307
------ -------
Cash and cash equivalents, end of period $ 2,927 $27,628
======== ======
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However,
the disclosures herein should be read with the Annual Report on Form 10-K
for the year ended December 31, 1997 ("Form 10-K"), and are adequate to
make the information presented herein not misleading.
The consolidated financial statements include the accounts of Central Maine
Power Company (the "Company") and its 78 percent-owned subsidiary, Maine
Electric Power Company, Inc. ("MEPCO"). The Company accounts for its
investments in associated companies not subject to consolidation using the
equity method.
The Company's significant accounting policies are contained in Note 1 of
Notes to Consolidated Financial Statements in the Company's Form 10-K. For
interim accounting periods the policies are the same. The interim financial
statements reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of results for the interim periods
presented. All such adjustments are of a normal recurring nature.
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased having maturities of three months or
less to be cash equivalents.
Supplemental Cash Flow Disclosure - Cash paid for the six months ended June
30, 1998 and 1997 for interest, net of amounts capitalized, amounted to
$24.0 million and $22.7 million, respectively. Income taxes paid amounted
to $2.6 million and $7.2 million for the six months ended June 30, 1998 and
1997. The Company incurred no new capital lease obligations in either
period.
Stock-Based Compensation - The Company accounts for employee stock-based
compensation in accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation". This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans, such as stock purchase plans, stock options,
restricted stock, and stock appreciation rights. The statement defines the
methods of determining the fair value of stock-based compensation and
recommends the recognition of compensation expense for book purposes.
However, the statement allows entities to continue to measure compensation
expense in accordance with the prior authoritative literature, APB No. 25,
"Accounting for Stock Issued to Employees", but requires that pro forma net
income and earnings per share be disclosed for each year for which an
income statement is presented as if SFAS No. 123 had been applied. The
Company has not elected to adopt the expense recognition provisions of SFAS
No. 123. Under the Company's Long-Term Incentive Plan, stock options were
granted in the second quarter of 1998 with an exercise price equal to the
fair market value on the date of the grant; therefore, no expense
recognition is required. Contingently issuable performance shares were
granted in 1997 and 1998. Both have a three-year cycle and are being
accrued accordingly.
1977 1998
Options granted - 253,925
Performance Shares* 64,762 70,204
*Accrue over a 3-year cycle.
Earnings per Share - In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share". This statement, which is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, establishes simplified standards for computing
and presenting earnings per share ("EPS"). It requires dual presentation of
basic and diluted EPS on the face of the income statement for entities with
complex capital structures and disclosure of the calculation of each EPS
amount.
Stock options and performance shares granted to date under the Company's
long-term incentive plan resulted in potential incremental shares of common
stock outstanding for purposes of computing both basic and diluted earnings
per share for the three and six months ended June 30, 1998 and 1997. These
incremental shares were not material in the periods presented and did not
cause diluted earnings per share to differ from basic earnings per share.
Impact of New Accounting Standards - In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." This statement, which is effective
for fiscal years beginning after December 15, 1997, establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities. The new standard applies
to all entities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, with earlier adoption encouraged. It
requires companies to record derivatives on the balance sheet at their fair
value depending on the intended use of the derivative. The Company
anticipates that adoption of these standards will not have a significant
impact on its financial statements.
2. Commitments and Contingencies
Maine Yankee Atomic Power Company - On August 6, 1997, the Board of
Directors of Maine Yankee voted to permanently cease power operations at
its nuclear generating plant at Wiscasset, Maine (the "Plant") and to begin
decommissioning the Plant. The Plant experienced a number of operational
and regulatory problems, including being included on the Nuclear Regulatory
Commission's ("NRC") Watch List, and had been shut down since December 6,
1996. The decision to close the Plant permanently 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 it.
The Plant's operating license from the NRC was scheduled to expire on
October 21, 2008. For a detailed discussion of the background of the
permanent shutdown, see the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $31.4 million as of June 30, 1998, and under its Power Contract
and Additional Power Contract with Maine Yankee the Company is responsible
for 38 percent of the costs of decommissioning the Plant. Maine Yankee's
most recent estimate of the cost of decommissioning is $380.6 million,
based on a 1997 study by an independent engineering consultant, plus
estimated costs of interim spent-fuel storage of $127.6 million, for a
total estimated cost of $508.2 million (in 1997 dollars). The previous
estimate for decommissioning, by the same consultant, was $316.6 million
(in 1993 dollars), which resulted in approximately $14.9 million being
collected annually from Maine Yankee's sponsors pursuant to a 1994 FERC
rate order. Through June 30, 1998, Maine Yankee had collected approximately
$214.1 million for its decommissioning obligations.
On November 6, 1997, Maine Yankee submitted its new estimate to the FERC as
part of a rate proceeding reflecting the fact that the Plant is no longer
operating and has entered the decommissioning phase. Under the new
estimate, the amount of Maine Yankee's collections for decommissioning
would rise from the $14.9 million previously allowed by the FERC to
approximately $36 million per year. Overall operations and maintenance
expenses have been reduced, however, due to workforce reductions and other
results of the permanent shutdown. On January 14, 1998, the FERC issued an
order accepting for filing the rates associated with the amended Power
Contracts, made them effective January 15, 1998, subject to refund, and
ordered that a public hearing be held on the prudence of the Plant
shut-down decision and on the proposed rate amendments. The prudence issue
is being contested vigorously by several intervenors, including the MPUC
and the Maine Office of the Public Advocate. The hearing in the FERC rate
proceeding is currently scheduled to begin in the first quarter of 1999.
The Company cannot predict the outcome of the proceeding.
On September 1, 1997, Maine Yankee estimated the sum of the future payments
for the closing, decommissioning and recovery of the remaining investment
in Maine Yankee to be approximately $930 million, of which the Company's
38-percent share would be approximately $353 million. Legislation enacted
in Maine in 1997 calling for restructuring the electric utility industry
provides for recovery of decommissioning costs, to the extent allowed by
federal regulation, through the rates charged by the
transmission-and-distribution companies. Based on the legislation and
regulatory precedent established by the FERC in its opinion relating to the
decommissioning of the Yankee Atomic Electric Company ("Yankee Atomic")
nuclear plant, the Company believes that it is entitled to recover
substantially all of its share of such costs from its customers and as of
June 30, 1998, is carrying on its consolidated balance sheet a regulatory
asset and corresponding liability in the amount of $307.5 million, which is
the $353 million discussed above net of the Company's post-September 1,
1997 cost-of-service payments to Maine Yankee.
The MPUC released the report of a consultant it had retained to perform a
management audit of Maine Yankee for the period January 1, 1994, to June
30, 1997. Among the report's conclusions were that Maine Yankee's decision
in December 1996 to proceed with the steps necessary to restart the Plant
was "imprudent" and that Maine Yankee's May 27, 1997 decision to reduce
restart expenses while exploring a possible sale of the Plant was
"inappropriate", and that the decisions resulted in Maine Yankee incurring
$95.9 million in "unreasonable" costs. On October 24, 1997, the MPUC issued
a Notice of Investigation initiating an investigation of the shutdown
decision and of the operation of the Plant prior to shutdown, and announced
that it had directed its consultant to extend its review to include those
areas. Based on preliminary indications, the Company expects the second
phase of the report would recommend additional disallowances. The Company
does not know how the MPUC plans to use the consultant's report, but
believes the report's negative conclusions are unfounded and may be
contradictory.
On April 7, 1998, Maine Yankee refunded all of its mortgage bonds and bank
debt by means of a three-year revolving credit facility and a term loan due
in 2006. The new debt obligations are secured by a security interest in
Maine Yankee's rights in its Power Contracts, Additional Power Contracts
and Capital Funds Agreements with its Sponsors (the "Assigned Agreements")
and its rights to certain expected third-party payments, and contain
restrictions on the payment of common-stock dividends based on Maine
Yankee's cash position and a debt-service coverage test. In addition, in
connection with the refinancing each of the Sponsors, including the
Company, affirmed its obligations under the Assigned Agreements and agreed
not to take the position that the permanent shutdown of the Plant gave rise
to any right to terminate or reduce payments under the Assigned Agreements.
Connecticut Yankee - On December 4, 1996, the Board of Directors of
Connecticut Yankee Atomic Power Company voted to permanently shut down the
Connecticut Yankee plant for economic reasons, and to decommission the
plant. The Company has a 6-percent equity interest in Connecticut Yankee,
totaling approximately $6.0 million at June 30, 1998. Based on cost
estimates provided by Connecticut Yankee, the Company determined its share
of the cost of Connecticut Yankee's continued compliance with regulatory
requirements, recovery of its plant investments, decommissioning and
closing the plant to be approximately $34.2 million and has recorded a
regulatory asset and corresponding liability in that amount on its
consolidated balance sheet. The Company is currently recovering through
rates an amount adequate to recover these expenses.
Yankee Atomic. In 1993 the FERC approved a settlement agreement regarding
recovery of decommissioning costs and plant investment, and all issues with
respect to the prudence of the decision to discontinue operation of the
Yankee Atomic plant. The Company estimates its remaining share of the cost
of Yankee Atomic's continued compliance with regulatory requirements,
recovery of its plant investment, decommissioning and closing the plant, to
be approximately $10.7 million. This estimate has been recorded by the
Company as a regulatory asset and a liability on the Company's balance
sheet. As part of the MPUC's decision in the Company's 1993 base-rate case,
the Company's current share of costs related to the deactivation of Yankee
Atomic is being recovered through rates.
Millstone Unit No. 3 - The Company has a 2.5 percent direct ownership
interest in Millstone Unit No. 3, which is operated by Northeast Utilities.
This facility was off-line from April 1996 to July 1998 due to NRC concerns
regarding license requirements. For a discussion of a lawsuit and
arbitration claim filed by the Company and other minority owners of
Millstone Unit No. 3 against the operators of the unit, see "Millstone Unit
No. 3 Litigation," below.
Legal and Environmental Matters - The Company is subject to regulation by
federal and state authorities with respect to air and water quality, the
handling and disposal of toxic substances and hazardous and solid wastes,
and the handling and use of chemical products. Electric utility companies
generally use or generate in their operations a range of potentially
hazardous products and by-products that are the focus of such regulation.
The Company believes that its current practices and operations are in
compliance with all existing environmental laws except for such
non-compliance as would not have a material adverse effect on the Company's
financial position. The Company reviews its overall compliance and measures
the liability quarterly by assessing a range of reasonably likely costs for
each identified site using currently available information, including
existing technology, presently enacted laws and regulations, experience
gained at similar sites, and the probable level of involvement and
financial condition of other potentially responsible parties. These
estimates include costs for site investigations, remediation, operation and
maintenance, monitoring and site closure.
New and changing environmental requirements could hinder the construction
and/or modification of generating units, transmission and distribution
lines, substations and other facilities, and could raise operating costs
significantly. As a result, the Company may incur significant additional
environmental costs, greater than amounts reserved, in connection with the
generation and transmission of electricity and the storage, transportation
and disposal of by-products and wastes. The Company may also encounter
significantly increased costs to remedy the environmental effects of prior
waste handling activities. The cumulative long-term cost impact of
increasingly stringent environmental requirements cannot accurately be
estimated.
The Company has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental
remediation costs that the Company expects to incur for identified waste
disposal sites. In most cases, additional future environmental cleanup
costs are not reasonably estimatable due to a number of factors, including
the unknown magnitude of possible contamination, the appropriate
remediation methods, the possible effects of future legislation or
regulation and the possible effects of technological changes. The Company
cannot predict the schedule or scope of remediation due to the regulatory
process and involvement of non-governmental parties. At June 30, 1998, the
liability recorded by the Company for its estimated environmental
remediation costs amounted to $2.6 million, which management has determined
to be the most probable amount within the range of $2.6 million to $8.0
million. Such costs may be higher if the Company is found to be responsible
for cleanup costs at additional sites or identifiable possible outcomes
change.
Millstone Unit No. 3 Litigation - On August 7, 1997, the Company and other
minority owners of Millstone Unit No. 3 filed suit in Massachusetts
Superior Court against Northeast Utilities and its trustees, and initiated
an arbitration claim against two of its subsidiaries, alleging
mismanagement of the unit by the defendants. The minority owners are
seeking to recover their additional costs resulting from such
mismanagement, including their replacement power costs. The Company cannot
predict the outcome of the litigation and arbitration.
Proposed Federal Income Tax Adjustments - On September 3, 1997, the Company
received from the Internal Revenue Service ("IRS") a Revenue Agent's Report
summarizing all adjustments proposed by the IRS as a result of its audit of
the Company's federal income tax returns for the years 1992 through 1994,
and on September 12, 1997, the Company received a notice of deficiency
relating to the proposed disallowances. There are two significant
disallowances among those proposed by the IRS. The first is a disallowance
of the Company's write-off of the under-collected balance of fuel and
purchased-power costs and the unrecovered balance of its unbilled Electric
Revenue Adjustment Mechanism ("ERAM") revenues, both as of December 31,
1994, which were charged to income in 1994 in connection with the adoption
of the Alternative Rate Plan ("ARP") effective January 1, 1995. The second
major adjustment would disallow the Company's 1994 deduction of the cost of
the buyout of the Fairfield Energy Venture purchased-power contract by the
Company in 1994. The aggregate tax impact, including both federal and state
taxes, of the unresolved issues amounts to approximately $39.0 million,
over 90 percent of which is associated with the two major disallowances.
The two major disallowances relate largely to the timing of the deductions
and would not affect income except for the cumulative interest impact
which, through June 30, 1998, amounted to $16.0 million, or a decrease in
net income of $9.5 million, and which could increase interest expense
approximately $453,000 thousand per month until either the tax deficiency
is paid or the issues are resolved in favor of the Company, in which case
no interest would be due. If the IRS were to prevail, the Company believes
the deductions would be amortized over periods of up to twenty, post-1994,
tax years. The Company believes its tax treatment of the unresolved issues
was proper and as a result the potential interest has not been accrued. On
December 10, 1997, the Company filed a petition in the United States Tax
Court contesting the entire amount of the deficiencies. The Company plans
to seek review of the asserted deficiencies by an IRS Appeals Officer to
determine whether all or part of the dispute can be resolved in advance of
a court determination. Absent such a resolution, the Company plans to
pursue vigorously the Tax Court litigation, but cannot predict the result.
Joint Venture - The Company and New York State Electric & Gas Corp.
("NYSEG") have entered into a joint-venture agreement to distribute natural
gas to many Maine communities that are not now served with that fuel. On
July 24, 1998, the MPUC authorized the provision of such service by the
joint venture. If a further Securities and Exchange Commission approval is
obtained and sufficient customer interest is expressed to make it
economically feasible, a new company owned equally by the Company and NYSEG
would be in a position to offer gas in the Augusta and Bangor areas, and in
other communities including Bath, Bethel, Brunswick, Windham, Rumford, and
Waterville
3. Regulatory and Legislative Matters
Alternative Rate Plan - On January 1, 1995, the Company's ARP was put into
effect. Instead of rate changes based on the level of costs incurred and
capital investments, the ARP provides for one annual adjustment of an
inflation-based cap on each of the Company's rates, with no separate
reconciliation and recovery of fuel and purchased-power costs. Under the
ARP, the MPUC is continuing to regulate the Company's operations and
prices, provide for continued recovery of deferred costs, and specify a
range for its rate of return. The MPUC confirmed in its order approving the
ARP that the ARP is intended to comply with the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result, the Company will continue to
apply the provisions of SFAS No. 71 to its accounting transactions and its
future financial statements. See "Meeting the Requirements of SFAS No. 71,"
below.
The ARP contains a mechanism that provides price-caps on the Company's
retail rates to increase annually on July 1, commencing July 1, 1995, by a
percentage combining (1) a price index, (2) a productivity offset, (3) a
sharing mechanism, and (4) flow-through items and mandated costs. The price
cap applies to all of the Company's retail rates, and includes fuel and
purchased power cost that previously had been treated separately. Under the
ARP, fuel expense is no longer subject to reconciliation or specific rate
recovery, but is subject to the annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity
factors, a general productivity offset of 1.0% (0.5% for 1995), and a
second formula-based offset that started in 1996 intended to reflect the
limited effect of inflation on the Company's purchased-power costs during
the proposed five-year initial term of the ARP.
The sharing mechanism may adjust the subsequent year's July price-cap
change in the event the Company's earnings are outside a range of 350 basis
points above or below the Company's allowed return on equity (starting at
the 10.55% allowed return in 1995) and indexed annually for changes in
capital costs. Outside that range, profits and losses could be shared
equally by the Company and its customers in computing the price-cap
adjustment. This feature commenced with the price-cap change of July 1,
1996. The ROE used for earnings sharing was increased to 11.5% effective
with the July 1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost
savings from non-utility generator contract buy-outs and restructuring,
recovery of energy-management costs, and penalties for failure to attain
customer-service and energy-efficiency targets. The ARP also generally
defines mandated costs that would be recoverable by the Company
notwithstanding the index-based price cap. To receive such treatment, the
annual revenue requirement related to a mandated cost must exceed $3
million and have a disproportionate effect on the Company or the
electric-power industry.
On May 13, 1998, the Company submitted its final 1998 ARP compliance filing
to the MPUC. In keeping with its pledge of limiting increases to the
inflation index, the Company voluntarily limited its request to 1.78%,
which was the inflation rate for 1997 under the ARP. The Company also
proposed a rate reduction of ten percent contingent on the consummation of
the Company's planned sale of generating assets late in the year. The
filing also contained information on the costs of restoring service to the
Company's customers after the January ice storm, as required by an earlier
MPUC order allowing the Company to defer those costs. Subsequent to the May
13 filing, the Company stipulated, and the MPUC subsequently approved,
effective July 11, 1998, a 1.33% increase. The amount of the increase could
change, based on the outcome of the pending FERC proceeding related to the
permanent shutdown of the Maine Yankee plant. Depending on FERC's decision,
the price increase could increase or decrease, ranging from a ceiling of
1.78% to a floor of 0.22%.
The components of the last three ARP price increase approved by the MPUC
are as follows:
1998 1997 1996
---- ---- ----
Inflation Index 1.78% 2.12% 2.55%
Productivity Offset (1.00) (1.00) (1.00)
Qualifying Facility Offset (.29) (.42) -
Earnings Sharing 1.12 - .32
Flowthrough and Mandated Items (.28) .40 (.61)
---- ----- -----
1.33% 1.10% 1.26%
==== ==== ====
Industry Restructuring and Strandable Costs - Legislation that will
restructure the electric-utility industry in Maine by March 1, 2000, was
enacted by the Maine Legislature in May 1997. A departure from traditional
regulation, however, could have a substantial impact on the value of
utility assets and on the ability of electric utilities to recover their
costs through rates. In the absence of full recovery, utilities would find
their above-market costs to be "stranded", or unrecoverable, in the new
competitive setting.
The Company has substantial exposure to cost stranding relative to its
size. The major portion of the Company's strandable costs is related to
above-market costs of purchased-power obligations arising from the
Company's long-term, noncancelable contracts for the purchase of capacity
and energy from non-utility generators ("NUGs"), and deferred regulatory
assets. There is a high degree of uncertainty that surrounds stranded-cost
estimates, resulting from having to rely on projections and assumptions
about future conditions, including, among others, estimates of the future
market for power.
Restructuring Legislation and MPUC Proceeding - The 1997 Maine
restructuring legislation requires the MPUC, when retail access begins, to
provide a "reasonable opportunity" to recover stranded costs through the
rates of the transmission-and-distribution company, comparable to the
utility's opportunity to recover stranded costs before the implementation
of retail access under the legislation. The principal restructuring
provisions of the legislation provide for customers to have direct retail
access to generation services and for deregulation of competitive
electricity providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the
MPUC. The MPUC is conducting the proceeding that will determine the
Company's stranded costs and corresponding revenue requirements and has
scheduled completion of the proceeding for the first quarter of 1999. On
December 5, 1997, the Company filed direct testimony in the proceeding
estimating its future revenue requirements as a
transmission-and-distribution utility and providing an estimate of its
strandable costs. The Company estimated its strandable costs at
approximately $1.3 billion. On February 10, 1998, the Company reduced its
estimate of strandable costs to $0.8 billion to reflect the anticipated
sale of its generating assets later in the year. The Company cannot predict
the results of the MPUC proceeding.
Recovery of nuclear-plant decommissioning costs as required by federal law,
rule or order, will be funded through transmission-and-distribution utility
rates and charges. In addition, the legislation requires utilities to use
all reasonable means to reduce their potential stranded costs and to
maximize the value from generation assets and contracts. The MPUC must
consider a utility's efforts to mitigate its stranded costs in determining
the amount of the utility's stranded costs. Stranded costs and the related
rates charged to customers will be prospectively adjusted as necessary to
correct any substantial inaccuracies in the year 2003 and at least every
three years thereafter.
Upon the commencement of retail access on March 1, 2000, the Company, as a
transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider
that is affiliated with the Company would be allowed to sell electricity
outside the Company's service territory without limitation as to amount,
but within the Company's service territory the affiliate would be limited
to providing not more than 33 percent of the total kilowatt-hours sold
within the Company's service territory, as determined by the MPUC. On June
30, 1998, the MPUC approved the creation of such an affiliated energy
provider, subject to certain conditions designed to eliminate any market
advantage the new company might gain through its affiliation with the
Company
Agreement for Sale of Company's Generation Assets - On January 6, 1998, the
Company announced that it had reached agreement to sell all of its
hydro-fossil and biomass power plants with a combined generating capacity
of 1,185 megawatts for $846 million in cash to Florida-based FPL Group. The
related book value for these assets is approximately $221 million at
December 31, 1997. In addition, as part of its agreement with FPL Group,
the Company entered into energy buy-back agreements to assist in fulfilling
its obligation to supply its customers with power until March 1, 2000.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing
approximately 488 megawatts, its 2.5-percent interest in the Millstone 3
nuclear generating unit in Waterford, Connecticut, its 3.59-percent
interest in the output of the Vermont Yankee nuclear generating plant in
Vernon, Vermont, and its entitlement in the NEPOOL Phase II interconnection
with Hydro-Quebec all attracted insufficient interest to be included in the
present sale. The Company will continue to seek buyers for those assets.
The Company did not offer for sale its interests in the Maine Yankee
(Wiscasset, Maine), Connecticut Yankee, (Haddam, Connecticut) and Yankee
Atomic (Rowe, Massachusetts) nuclear generating plants, all of which are in
the process of being decommissioned.
Substantially all of the generating assets included in the sale are subject
to the lien of the Company's General and Refunding Mortgage Indenture dated
as of April 15, 1976 (the "Indenture"). Therefore, substantially all of the
proceeds from sale must be deposited with the trustee under the Indenture
at the closing of the sale to free the generating assets from the lien of
the Indenture. Proceeds on deposit with the trustee may be used by the
Company to redeem or repurchase bonds under the terms of the Indenture,
including the possible discharge of the Indenture. In addition, the
proceeds could provide the flexibility to redeem or repurchase outstanding
equity securities. The Company must also provide for payment of applicable
taxes resulting from the sale. The manner and timing of the ultimate
application of the sale proceeds after closing are in any event subject to
various factors, including Indenture provisions, market conditions and
terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants
will reduce the Company's stranded costs and other costs, which could lower
the amount that would otherwise be collected from customers by nearly half
a billion dollars. However, the Company will incur incremental costs as a
result of the power buy-back arrangements in excess of the pre-sale costs
of capacity and energy from the plants being sold, which will effectively
lower the amount of sale proceeds available to reduce stranded and other
costs.
The sale is subject to various closing conditions, including the approval
of state and federal regulatory agencies, which the Company expects to
extend into the last quarter of 1998, and is subject to consents or
covenant waivers from certain of the Company's lenders. The Company is
pursuing the necessary regulatory approvals, consents and waivers, but
cannot predict whether or in what form they will be obtained.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice
storm of unprecedented breadth and severity struck the Company's service
territory, causing power outages for approximately 280,000 of the Company's
528,000 customers, and substantial widespread damage to the Company's
transmission and distribution system. To restore its electrical system, the
Company supplemented its own crews with utility and tree-service crews from
throughout the northeastern United States and the Canadian maritime
provinces, with assistance from the Maine national guard. The incremental
costs of the repair effort totaled approximately $51 million, most of which
is labor-related.
On January 15, 1998, the MPUC issued an Order (the "Order") allowing the
Company to defer on its books the incremental non-capital costs associated
with the Company's efforts to restore service in response to the damage
resulting from the storm. The Order requires the Company, as part of its
annual filing under its ARP, to file information on the amounts deferred
under the Order and to submit a proposal as to how the costs associated
with the Order should be recovered under the ARP. In the ARP filing the
Company stated that once the final cost of the storm was determined and the
status of federal assistance was finalized the Company would propose a plan
for recovery of its costs. Based on the MPUC order, potential federal
assistance and/or collection in rates, the Company has deferred
approximately $51 million in storm-related costs as of June 30, 1998. On
May 1, 1998, President Clinton signed a Congressional appropriation bill
that included $130 million in storm-damage cost reimbursement for electric
utilities The Company cannot predict what portion of its ice storm-related
costs it will recover from the Congressional appropriation or from its
customers.
Meeting the Requirements of SFAS No. 71 - The Company continues to meet the
requirements of SFAS No. 71. The standard provides specialized accounting
for regulated enterprises, which requires recognition of "regulatory"
assets and liabilities that enterprises in general could not record.
Examples of regulatory assets include deferred income taxes associated with
previously flowed through items, NUG buyout costs, losses on abandoned
plants, deferral of postemployment benefit costs, and losses on debt
refinancing. If an entity no longer meets the requirements of SFAS No. 71,
then regulatory assets and liabilities must be written off.
The ARP provides incentive-based rates intended to recover the cost of
service plus a rate of return on the Company's investment together with a
sharing of the costs or earnings between ratepayers and the shareholders
should the earnings be less than or exceed a target rate of return. The
Company has received recognition from the MPUC that the rates implemented
as a result of the ARP continue to provide specific recovery of costs
deferred in prior periods.
The 1997 legislation enacted in Maine providing for industry restructuring
specifically addressed the issue of cost recovery of regulatory assets
stranded as a result of industry restructuring. Specifically, the
legislation requires the MPUC, when retail access begins, to provide a
"reasonable opportunity" for the recovery of stranded costs through the
rates of the transmission-and-distribution company, comparable to the
utility's opportunity to recover stranded costs before the implementation
of retail access under the legislation. As provided for in EITF 97-4,
"Deregulation of the Pricing of Electricity," the Company will continue to
record regulatory assets in a manner consistent with SFAS No. 71 as long as
future recovery is probable since the Maine legislation provides the
opportunity to recover regulatory assets including stranded costs through
the rates of the transmission-and-distribution company. The Company
anticipates that once a detailed plan for deregulation of generation is
known, the application of SFAS No. 71 to the unregulated generation segment
will no longer apply and the Company will be required to discontinue SFAS
No. 71 for any remaining generation segment of its business. The Company
further anticipates, based on current generally accepted accounting
principles, that SFAS No. 71 will continue to apply to the regulated
distribution and transmission segments of its business. Future regulatory
rules or other circumstances could cause the application of FAS 71 to be
discontinued, which could result in a non-cash write-off of previously
established regulatory assets.
4. Financing
At the annual meeting of the stockholders of the Company on May 15, 1997,
the holders of the Company's outstanding preferred stock consented to the
issuance of $350 million in principal amount of the Company's medium-term
notes in addition to the $150 million in principal amount to which they had
previously consented. This expansion of the medium-term note program is
being implemented to increase the Company's financing flexibility in
anticipation of restructuring and increased competition. During the second
quarter, the Company issued variable rate medium-term notes totaling $57
million in principal amount. Notes in the amount of $10 million matured
during the quarter. As of June 30, 1998, $150 million of medium-term notes
were outstanding.
On April 1, 1998, the Company redeemed all of the outstanding 300,000
shares of its Preferred Stock 7-7/8% Series at a redemption price of $100
per share. No accrued dividends were paid on the preferred stock since the
redemption date was a regular dividend payment date. On April 15, 1998, the
Company paid at maturity its $25 million principal amount of Series U 7.54%
Bonds.
On April 30, 1998, the Company deposited $30.6 million with the trustee
under the provisions of the Company's General and Refunding Mortgage
Indenture making a total of $31.3 million then on deposit. Utilizing these
funds on June 15, 1998, the Company redeemed $31.3 million, of the
outstanding $75 million principal amount of its Series P 7.66% Bonds due
2000, at a redemption price of par value plus accrued interest. On June 8,
1998, the Company repurchased through a tender offer 116,175 shares of its
7.99% Preferred Stock ($100 par value) for a purchase price of $108 per
share.
5. Purchase Power Contract
On April 3, 1998, the Company agreed to buy out a power-purchase contract
with the owner of a non-utility generator who had operated a 20-megawatt
wood-fired generator associated with a paper mill that was being closed.
The Company paid the owner approximately $22.5 million on May 1, 1998, and
expects to save approximately $3.5 million per year to the end of the
contract's term in mid-2004.
6. Fiber Optic Network
The Company, largely through its wholly-owned subsidiary MaineCom Services,
owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), the successor of FiveCom, Inc., and is a facilities-based
provider of technologically advanced, high-bandwidth, fiber optic
transmission capacity for communications carriers on local loop, inter-city
and interstate facilities. NEON is currently expanding its fiber optic
network to encompass over 900 route miles, or more than 60,000 fiber miles,
in New England and New York, utilizing primarily electric-utility
rights-of-way, including some of the Company's in Maine and some owned by
Northeast Utilities, another substantial minority stockholder, in
Connecticut, Massachusetts and New Hampshire. As of June 30, 1998, NEON had
completed construction of approximately 295 route miles, or 19,500 fiber
miles, of its planned system and is currently engineering, constructing, or
acquiring additional routes with a goal of creating a continuous fiber
optic link between New York City and Portland, Maine, with access into and
around Boston and numerous other major service areas in the Northeast.
On August 5, 1998, NEON completed initial public offerings of $54.0 million
of common stock and $180.0 million of senior notes, and the Company, as
part of the common-stock offering, sold some of its shares in NEON for
proceeds of approximately $3.4 million. In addition, with some of the
proceeds of the offering NEON repaid approximately $18 million the Company
had advanced under an earlier construction loan agreement. The Company
believes there is a growing need for such a fiber optic network in the
Northeast and that NEON's outside financing will provide substantial
assistance in completing construction of the network, but cannot predict
the results of this venture.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note RE Forward-Looking Statement
This Report on Form 10-Q contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to advise
interested parties of the facts which affect the Company's business.
Factors that could cause actual results to differ materially include, among
other matters, the permanent closure and decommissioning of the Maine Yankee
nuclear generating plant and resulting regulatory proceedings; the actual costs
of decommissioning the Maine Yankee plant; outages at the other generating units
in which the Company holds interests; electric utility industry restructuring,
including the ongoing state and federal activities; the results of the Company's
planned sale of its generating assets; the Company's ability to recover its
costs resulting from the January 1998 ice storms; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which the Company
operates, including regulatory treatment of stranded costs; the Company's
investment in unregulated businesses; and other circumstances that could affect
anticipated revenues and costs, such as unscheduled maintenance or repair
requirements at nuclear plants and other facilities, and compliance with laws
and regulations.
Operating Results
Net income was $1.6 million for the second quarter of 1998 compared to a loss of
$2.5 million for the corresponding period in 1997. Year-to-date net income was
$19.9 million versus $13.5 million for the 1997 period. The 1998 results have
benefited from reduced operating costs for the Company's 38-percent share of the
Maine Yankee Plant and lower fuel costs due to the expiration of a high-cost
contract for non-utility energy. Earnings applicable to common stock were $0.6
million or $0.02 per share for the second quarter of 1998 compared to a loss of
$4.7 million or $0.15 per share for the comparable period in 1997. Year-to-date
earnings applicable to common stock were $17.0 million or $0.52 per share in
1998 and $9.1 million or $0.28 per share in 1997.
Service-area sales of electricity totaled approximately 2.19 billion
kilowatt-hours in the second quarter of 1998, down slightly from the 2.23
billion kilowatt-hour level of a year ago.
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended June 30,
Three Six
Months Months
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Residential 648.1 657.1 (1.4)% 1,391.3 1,465.0 (5.0)%
Commercial 615.5 585.2 5.2 1,236.5 1,236.9 0.0
Industrial 868.2 931.6 (6.8) 1,714.2 1,857.2 (7.7)
Other 57.2 52.4 9.1 117.8 111.8 5.3
--------- --------- -------- --------
2,189.0 2,226.3 (1.7)% 4,459.8 4,670.9 (4.5)%
======= ======= ======= =======
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers decreased by 1.4 percent in
the second quarter and decreased by 5.0 percent for the six-month period
compared to 1997. The decrease in residential sales was due primarily to
mild temperatures during the first six months of 1998, largely in the first
quarter, and the loss of sales due to the January 1998 ice storm. Usage per
customer was down 5.9 percent for the six months ended June 30, 1998.
Commercial kilowatt-hour sales increased by 5.2 percent in the second
quarter, bringing the year-to-date June 30, 1998 sales in line with the
June 30, 1997 sales. The increase was due primarily to increased demand in
the retail and service sectors.
Industrial kilowatt-hour sales decreased by 6.8 percent in the second
quarter and by 7.7 percent for the six months ended June 30, 1998, compared
to 1997. This was due primarily to the closing of two pulp and paper mills
and the expiration of a buy/sell contract with a third paper mill. The
pulp-and-paper sector accounts for approximately 56 percent of the
industrial sales category.
MEPCO's electric sales and transmission revenues from New England utilities
other than the Company amounted to $0.6 million and $4.3 million in the second
quarters of 1998 and 1997, respectively. In the earlier period MEPCO recorded
revenue and expense for power sales and purchases on behalf of other utilities,
as well as the related transmission revenues, whereas in 1998 it started
recording only the transmission revenues. Under new transmission rules in effect
the sellers and purchasers of the power transmitted by MEPCO deal directly with
each other and MEPCO provides only the transmission service.
Purchased power-energy expense decreased by $9.4 million and $29.0 million in
the first three and six months, respectively, of 1998 compared to 1997. The
decrease is due primarily to the expiration of a contract with a major
non-utility generator in October of 1997.
Purchased power-capacity expense decreased $5.7 million and $14.5 million in the
first three and six months, respectively, of 1998 compared to 1997, due to the
permanent shutdown of the Maine Yankee plant in August 1997.
Maintenance expense increased $4.0 million for the six months ended June 30,
1998 compared to 1997. This increase was due primarily to the first quarter, in
which operations personnel worked in a maintenance capacity during the ice
storm. The corresponding decrease to operations expense was offset by increases
in pension and benefits, general expense and outside services, and transmission
expense in the first quarter of 1998.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense increased by $5.2
million and $7.6 million for the three and six-month period ended June 30, 1998
compared to 1997, as a result of higher pre-tax earnings for the six months
ended June 30, 1998, when compared to 1997.
Property taxes decreased by $1.1 million in the second quarter of 1998 compared
to 1997 due to a refund from the town of Yarmouth based on previous over
assessments of property values.
Equity in Earnings of Associated Companies decreased by $2.3 million in the
first half of 1998 compared to 1997, primarily due to losses recognized due to
start-up costs of Northeast Optic Network, Inc., a telecommunications
subsidiary. See "Expansion of Lines of Business" below for further discussion.
Other Income decreased by $2.6 million in the first half of 1998 as compared to
1997, primarily due to excess expenses over revenues associated with a
non-regulated division of the Company. As a result there was a decrease in
income tax expense on other income.
Other interest expense increased by $1.7 million during the first half of 1998
compared to 1997. The increase was due primarily to higher levels of borrowing
on the bank revolving credit facility to meet working capital needs.
In July 1997, the Company redeemed $14 million of its 8 7/8% Series Preferred
Stock at par, under the mandatory and optional sinking-fund provisions of that
series. This reduced dividends by approximately $621 thousand in the first half
of 1998 compared to 1997. On April 1, 1998 the Company redeemed all of its 7
7/8% Preferred Stock ($30 million), reducing dividends by approximately $591
thousand in the second quarter of 1998 compared to 1997. On June 8, 1998, $11.6
million par value of the outstanding 7.99% Preferred Stock was redeemed,
reducing dividends by approximately $232 thousand in the second quarter of 1998
compared to 1997. On July 1, 1998, the Company redeemed the final $7 million of
its 8 7/8 Preferred Stock under the mandatory sinking-fund provision.
"Year 2000" Computer Issues
As the year 2000 approaches, most large companies are facing a potentially
serious information systems (computer) problem because most software application
and operational programs written in the past will not properly recognize
calendar dates beginning in the year 2000. This could force computers to either
shut down or lead to incorrect calculations. The Company began the process of
identifying the changes required to their computer programs and hardware during
the year 1996. The majority of the necessary modifications to the Company's
centralized financial, customer, and operational information systems are
expected to be completed by the end of 1998. The review and assessment of
non-centralized systems and equipment should be completed during third quarter
of 1998. Some additional remediation work has been identified in the
non-centralized areas. The Company believes it will incur approximately $3.4
million of costs associated with making the necessary modifications identified
to date to both the centralized and non-centralized systems. As of June 30,
1998, approximately $2.0 million of costs have been incurred. Although the
Company has requested compliance information from all vendors and suppliers, it
cannot predict the extent of its vulnerability to third parties' noncompliance
and their failure to remediate year 2000 issues.
Liquidity and Capital Resources
Increases in the Company's retail rates are limited by the Company's ARP. For a
discussion of the ARP, including a 1.33-percent rate increase effective July 11,
1998, and the possibility of a ten-percent rate reduction contingent on the
consummation of the Company's planned sale of generating assets later in the
year, see Note 3, "Regulatory and Legislative Matters" - "Alternative Rate
Plan."
Approximately $86.0 million of cash was provided during the first half of 1998
from net income before non-cash items, primarily depreciation, amortization and
deferred income taxes. During that period approximately $71.9 million of cash
was used for fluctuations in certain assets and liabilities and from other
operating activities.
Investing activities, primarily construction expenditures, utilized $23.2
million in cash during the first half of 1998 for generation, transmission,
distribution, and general construction expenditures in addition to $18.1 million
the Company invested primarily in its associated companies. In order to
accommodate existing and future loads on its electric system the Company is
engaged in a continuing construction program. The Company's plans for
improvements and expansions, its load forecast and its power-supply sources are
under a process of continuing review. Actual construction expenditures depend
upon the availability of capital and other resources, load forecasts, the timing
of its divestiture of its generating assets, customer growth and general
business conditions. The ultimate nature, timing and amount of financing for the
Company's total construction programs, refinancing and energy-management capital
requirements will be determined in light of market conditions, earnings and
other relevant factors.
During the first half of 1998, dividends paid on common stock were $14.6
million, while preferred-stock dividends utilized $3.8 million of cash.
On April 30, 1998, the Company deposited $30.6 million with the trustee under
the provisions of its General and Refunding Mortgage Indenture, making a total
of $31.3 million on deposit. Under the Indenture such cash may be applied, at
any time at the direction of the Company, to the redemption of bonds outstanding
under the Indenture at a price equal to the principal amount of the bonds being
redeemed, without premium, plus accrued interest to the date fixed for
redemption on the principal amount of the bonds being redeemed. On June 15,
1998, the Company redeemed $31.3 million of the outstanding $75 million
principal amount of its Series P 7.66% Bonds due 2000, at a redemption price
equal to their principal amount plus accrued interest. Such cash may also be
withdrawn by the Company by substitution of allocated property additions or
available bonds.
On April 1, 1998, the Company redeemed all of the outstanding 300,000 shares of
its Preferred Stock 7 7/8% Series at a redemption price of $100 per share. No
accrued dividends were paid on the preferred stock since the redemption date was
a regular dividend payment date. On April 15, 1998 the Company paid at maturity
its $25 million principal amount of Series U 7.54% Bonds. On June 8, 1998 the
Company repurchased through a tender offer 116,175 shares of its 7.99% Preferred
Stock ($100 par value) for a purchase price of $108 per share and on July 1 the
Company redeemed the last $7 million of its 8 7/8% Preferred Stock through the
mandatory sinking fund. On August 15, 1998, the Company's Series S 6.03% Bonds
($60 million principal amount) will mature.
At the annual meeting of the stockholders of the Company on May 15, 1997, the
holders of the Company's outstanding preferred stock consented to the issuance
of $350 million in principal amount of the Company's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program was implemented to
increase the Company's financing flexibility in anticipation of restructuring
and increased competition. During the second quarter, the Company on May 1
issued a one-year medium-term note in the principal amount of $47 million, on
June 18 a one-year medium-term note in the principal amount of $10 million, on
July 28 a one-year medium-term note in the principal amount of $10 million and
on August 12, a one-year medium-term note in the principal amount of $10
million. This, after reflecting maturities of $10 million, raises the total
outstanding to $170 million as of August 13, 1998, which would permit the
issuance of an additional $330 million of such notes under the program.
To support its short-term capital requirements, on October 23, 1996, the Company
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement has two credit facilities: a $75 million, 364-day revolving credit
facility that currently matures on October 21, 1998, and a $50-million, 3-year
revolving credit facility that matures on October 22, 1999. Both credit
facilities require annual fees on the total credit lines. The fees are based on
the Company's credit ratings and allow for various borrowing options including
LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to
commercial paper markets has been substantially precluded based upon of the
Company's past credit ratings. The amount of outstanding short-term borrowing
will fluctuate with day-to-day operational needs, the timing of long-term
financing, and market conditions. The Company had $78.5 million in outstanding
notes as of June 30, 1998 under the credit facilities.
On August 5, 1998, the MPUC approved the Company's application to purchase up to
11 million shares of its outstanding common stock over a three-year period, with
a limitation of three million shares that may be repurchased prior to the
closing of the sale of the Company's generating assets. The amount of any stock
purchases and their timing will depend on the need for equity in the Company's
capital structure, investment opportunities and other considerations. The
Company has not yet adopted a formal stock-purchase plan.
On April 3, 1998, the Company agreed to buy out a power-purchase contract with
the owner of a non-utility generator who had operated a 20-megawatt wood-fired
generator associated with a paper mill that was being closed. The Company paid
the owner approximately $22.5 million on May 1, 1998, and expects to save
approximately $3.5 million per year to the end of the contract's term in
mid-2004.
Effective July 28, 1998, the Company replaced a purchased power contract for
energy from a wood-fired plant in Stratton, Maine. The old contract was
terminated and a new agreement for 45 megawatts at lower rates was entered into,
which is estimated to save the Company over $28 million in net present value
over the contract's term through August 2009.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice storm of
unprecedented breadth and severity struck the Company's service territory,
causing power outages for approximately 280,000 of the Company's 528,000
customers, and substantial widespread damage to the Company's transmission and
distribution system. To restore its electrical system, the Company supplemented
its own crews with utility and tree-service crews from throughout the
northeastern United States and the Canadian maritime provinces, with assistance
from the Maine national guard. The Company's incremental costs of the repair
effort totaled approximately $51 million, most of which is labor-related.
On January 15, 1998, the MPUC issued an Order (the "Order") allowing the Company
to defer on its books the incremental non-capital costs associated with the
Company's efforts to restore service in response to the damage resulting from
the storm. The Order requires the Company, as part of its annual filing under
the ARP, to file information on the amounts deferred under the Order and to
submit a proposal as to how the costs associated with the Order should be
recovered under the ARP. In the ARP filing the Company stated that once the
final cost of the storm was determined and the status of federal assistance was
finalized the Company would propose a plan for recovery of its costs. Based on
the MPUC order, potential federal assistance and/or collection in rates, the
Company has deferred approximately $51 million in storm related costs as of June
30, 1998. On May 1, 1998, President Clinton signed a Congressional appropriation
bill that included $130 million in storm-damage cost reimbursement for electric
utilities. The Company cannot predict what portion of its ice storm-related
costs it will recover from the Congressional appropriation or from its
customers.
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, the
Plant had experienced a number of operational and regulatory problems and has
been shut down since December 6, 1996. The decision to close the Plant
permanently 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 it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.
Recent Operating History - The Plant provided reliable and low-cost power from
the time it commenced operations in late 1972 to 1995. Beginning in early 1995,
however, Maine Yankee encountered various operational and regulatory
difficulties with the Plant. In 1995, the Plant was shut down for almost the
entire year to repair a large number of steam generator tubes that were
exhibiting defects. Shortly before the Plant was to go back on-line in December
1995, a group with a history of opposing nuclear power released an undated,
unsigned, anonymous letter alleging that in 1988 Yankee Atomic (then an
affiliated consultant of Maine Yankee) and Maine Yankee had used the results of
a faulty computer code as a basis to apply to the NRC for an increase in the
Plant's power output. In response to the allegation, on January 3, 1996, the NRC
issued a Confirmatory Order that restricted the Plant to 90 percent of its
licensed thermal operation level, which restriction was still in effect when the
Plant was permanently shut down.
As a result of the controversy associated with the allegations, the NRC, at the
request of the Governor of Maine, conducted an intensive Independent Safety
Assessment ("ISA") of the Plant in the summer and fall of 1996. On October 7,
1996, the NRC issued its ISA report, which found that while the Plant had been
operated safely and could continue to operate, there were weaknesses that needed
to be addressed, which would require substantial additional spending by Maine
Yankee. On December 10, 1996, Maine Yankee responded to the ISA report,
acknowledged many of the weaknesses, and committed to revising its operations
and procedures to address the NRC's criticisms.
Another result of the controversy associated with the allegations was an
investigation of Maine Yankee initiated by the NRC's Office of Investigations
("OI"), which, in turn, referred certain issues to the United States Department
of Justice ("DOJ") for possible criminal prosecution. Subsequently, on September
27, 1997, the DOJ, through the United States Attorney for Maine, announced that
its review had revealed insufficient grounds for criminal prosecution. The
Company believes that the OI investigation, however, could ultimately result in
the imposition of civil penalties, including fines, on Maine Yankee and expects
resolution of outstanding NRC enforcement action in 1998.
In 1996 the Plant was generally in operation at the 90-percent level from late
January to early December, except for a two-month outage from mid-July to
mid-September. The Plant was shut down again on December 6, 1996, to address
several concerns, and has not operated since then. The precipitating event
causing the shutdown was the need to evaluate and resolve cable-separation
compliance issues, and on December 18, 1996, the NRC issued a Confirmatory
Action Letter requiring the Plant to remain shut down until Maine Yankee's plan
for resolving the cable-separation issues was accepted by the NRC. Subsequently,
Maine Yankee uncovered additional issues, including among others the possibility
of having to replace defective fuel assemblies, address additional
cable-separation issues, and determine the condition of the Plant's steam
generators, which contributed to further operational uncertainty. On January 29,
1997, the Plant was placed on the NRC's Watch List, and on January 30, 1997, the
NRC issued a supplemental Confirmatory Action Letter requiring the resolution of
additional concerns before the Plant could be restarted.
In December 1996 Maine Yankee requested proposals from several utilities with
large and successful nuclear programs to provide a management team, and
ultimately contracted with Entergy Nuclear, Inc., effective February 13, 1997,
for management services that included providing a new president and regulatory
compliance officer. The Entergy-provided management team made progress in
addressing technical issues, but a number of operational and regulatory
uncertainties remained. On May 27, 1997, the Board of Directors of Maine Yankee
voted to minimize spending while preserving the options of restarting the Plant
or conveying ownership interests to a third party. After unsuccessful
negotiations with one prospective purchaser, Maine Yankee found no other
interest in purchasing the Plant and, based on its economic analysis, closed the
Plant permanently.
As required by the NRC, on August 7, 1997, Maine Yankee certified to the NRC
that the Plant had permanently ceased operations and that all fuel assemblies
had been permanently removed from the Plant's reactor vessel. On August 27,
1997, Maine Yankee filed the required Post-Shutdown Activities Report with the
NRC, describing its planned post-shutdown activities and a proposed schedule.
Costs - The Company has incurred substantial costs in connection with its
38-percent share of Maine Yankee costs. In 1997 such costs amounted to
approximately $132.3 million for the Company: $72.8 million due to basic
operations and maintenance costs, $54.0 million due to replacement power costs
and $5.5 million associated with incremental costs of operations and
maintenance. The Maine Yankee Board's decision to close the Plant mitigated the
costs the Company would otherwise have incurred through a phasing down of Maine
Yankee's operations and maintenance costs, with substantial reductions in Maine
Yankee's workforce having been implemented and further reductions planned, but
did not reduce the need to buy replacement energy and capacity. The Company
expects its share of Maine Yankee operations and maintenance costs to be
approximately $48 million in 1998, based on information provided by Maine
Yankee. The amount of costs for replacement energy and capacity varies based on
the Company's power requirements and market conditions. The impact of the
nuclear-related costs on the Company was the major obstacle to achieving
satisfactory results in 1997, despite the approximately $75 million in annual
Maine Yankee-related costs embedded in the determination of the Company's
required revenues for ratemaking purposes and despite success in controlling
other operating costs.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $31.4 million as of June 30, 1998, and under Maine Yankee's Power
Contracts and Additional Power Contracts, the Company is responsible for 38
percent of the costs of decommissioning the Plant. Maine Yankee's most recent
estimate of the cost of decommissioning is $380.6 million, based on a 1997 study
by an independent engineering consultant, plus estimated costs of interim
spent-fuel storage of $127.6 million, for an estimated total cost of $508.2
million (in 1997 dollars). The previous estimate for decommissioning, by the
same consultant, was $316.6 million (in 1993 dollars), which resulted in
approximately $14.9 million being collected annually from Maine Yankee's
sponsors pursuant to a 1994 FERC rate order. On June 30, 1998, the balance in
the Maine Yankee decommissioning fund was $214.1 million. On November 6, 1997,
Maine Yankee submitted the new estimate (adjusted to $507.2 million) to the FERC
as part of its rate case reflecting the fact that the Plant was no longer
operating and had entered the decommission-ing phase. If the FERC finally
accepts the new estimate as filed, the amount of Maine Yankee's collections for
decommissioning would rise from the $14.9 million previously allowed by the FERC
to approximately $36.4 million per year.
On September 1, 1997, Maine Yankee estimated the sum of the future payments for
the closing, decommissioning and recovery of the remaining investment in Maine
Yankee to be approximately $930 million, of which the Company's 38-percent share
would be approximately $353 million. The legislation enacted in Maine in 1997
calling for restructuring the electric utility industry provides for recovery of
decommissioning costs, to the extent allowed by federal regulation, through the
rates charged by the transmission-and-distribution companies. Based on the
legislation and regulatory precedent established by the FERC in its opinion
relating to the decommissioning of the Yankee Atomic nuclear plant, the Company
believes that it is entitled to recover substantially all of its share of such
costs from its customers and as of June 30, 1998, is carrying on its
consolidated balance sheet a regulatory asset and a corresponding liability in
the amount of $307.5 million, which is the $353 million discussed above net of
the Company's post-September 1, 1997 cost-of-service payments to Maine Yankee.
Management Audit - On September 2, 1997, the MPUC released the report of a
consultant it had retained to perform a management audit of Maine Yankee for the
period January 1, 1994, to June 30, 1997. The report contained both positive and
negative conclusions, the latter including that Maine Yankee's decision in
December 1996 to proceed with the steps necessary to restart the Plant was
"imprudent", that Maine Yankee's May 27, 1997 decision to reduce restart
expenses while exploring a possible sale of the Plant was "inappropriate", based
on the consultant's finding that a more objective and comprehensive competitive
analysis at that time "might have indicated a benefit for restarting" the Plant,
and that those decisions resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of
Investigation initiating an investigation of the shutdown decision and of the
operation of the Plant prior to shutdown, and announced that it had directed its
consultant to extend its review to include those areas. The Company believes the
report's negative conclusions are unfounded and may be contradictory. The
Company has been charging its share of the Maine Yankee expenses to income, and
under the ARP has requested only price increases that were below the applicable
rate of inflation. The Company believes it would have substantial constitutional
and jurisdictional grounds to challenge any effort in an MPUC proceeding to
alter wholesale Maine Yankee rates made effective by the FERC. The MPUC
subsequently stayed its investigation pending the outcome of Maine Yankee's FERC
rate case, in which the MPUC and the Maine Office of the Public Advocate ("OPA")
are actively participating, while indicating that the MPUC's consultant would
continue its extended review. Based on preliminary indications, the Company
expects the consultant's recommendations resulting from its extended review
would call for additional disallowances, which Maine Yankee has said it would
expect to contest vigorously.
Maine Yankee Debt Restructuring and FERC Rate Proceeding - Maine Yankee entered
into agreements in August 1997 with the holders of its outstanding First
Mortgage Bonds and its lender banks (the "Standstill Agreements") under which
the bondholders and banks agreed that they would not assert that the August 1997
voluntary permanent shutdown of the Plant constituted a covenant violation under
Maine Yankee's First Mortgage Indenture or its two bank credit agreements. Maine
Yankee's rate filing with the FERC requested an effective date of January 15,
1998, for the amendments to Maine Yankee's Power Contracts and Additional Power
Contracts, which revise Maine Yankee's wholesale rates and clarify and confirm
the obligations of Maine Yankee's sponsors to continue to pay their shares of
Maine Yankee's costs during the decommissioning period.
On January 14, 1998, the FERC issued an "Order Accepting for Filing and
Suspending Power Sales Contract Amendment, and Establishing Hearing Procedures"
(the "FERC Order") in which the FERC accepted for filing the rates associated
with the amended Power Contracts and made them effective January 15, 1998,
subject to refund. The FERC also granted intervention requests, denied the
request of an intervenor group to summarily dismiss part of the filing, and
ordered that a public hearing be held concerning the prudence of Maine Yankee's
decision to shut down the Plant and on the justness and reasonableness of Maine
Yankee's proposed rate amendments. The prudence issue is being pursued
vigorously by several intervenors, including the MPUC and the OPA. The hearing
in the FERC rate proceeding is currently scheduled to begin in the first quarter
of 1999. The Company cannot predict the outcome of the FERC proceeding.
On January 15, 1998, Maine Yankee, its bondholders and lender banks revised the
Standstill Agreements and extended their term to April 15, 1998. On April 7,
1998, Maine Yankee refunded all of its mortgage bonds and bank debt by means of
a three-year revolving credit facility with two major banks, which may be
extended by agreement of the parties, and a $48 million term loan due in 2006
from a major institutional investor, and discharged its First Mortgage
Indenture. The banks' revolving credit commitments are scheduled to be reduced
through planned prepayments, structured to conform to Maine Yankee's projected
cash flows, in two decrements from their initial level of $80 million to a
working-capital level of $20 million on March 31, 2000. The new debt obligations
are secured by a security interest in Maine Yankee's rights in its Power
Contracts, Additional Power Contracts and Capital Funds Agreements with its
Sponsors (the "Assigned Agreements") and its rights to certain expected
third-party payments, and contain restrictions on the payment of common-stock
dividends, based on Maine Yankee's cash position and a debt-service coverage
test. In addition, in connection with the refinancing each of the Sponsors,
including the Company, affirmed its obligations under the Assigned Agreements
and agreed not to take the position that the permanent shutdown of the Plant
gave rise to any right to terminate or reduce payments under the Assigned
Agreements.
Other Maine Yankee Shareholders - Higher nuclear-related costs are also
affecting the financial condition of other stockholders of Maine Yankee in
varying degrees. A default by a Maine Yankee stockholder in making payments
under its Power Contract or Capital Funds Agreement could have a material
adverse effect on Maine Yankee, depending on the magnitude of the default. The
Company cannot predict, however, what effect, if any, the financial and
regulatory difficulties being experienced by some Maine Yankee stockholders will
have on Maine Yankee or the Company.
Rating Agency Actions
On February 20, 1998, Duff & Phelps Credit Rating Co. ("D&P") reaffirmed and
placed on Rating Watch - Up the debt ratings of the Company. On January 6, 1998,
Standard & Poor's Corp. ("S&P") placed the Company's credit ratings on Credit
Watch with positive implications. Also on January 6, 1998, Moody's Investors
Service ("Moody's") confirmed the Company's senior secured debt rating, while
also revising the rating outlook to stable from negative. The credit rating
agencies' actions were in response to the Company's announcement of its
agreement to sell its generation assets to FPL Group, Inc. and its plan for
divestiture. On May 26, 1998, S&P upgraded its rating, citing improvements in
the Company's business risk profile, and expectations of financial
strengthening. The current ratings assigned the Company's securities by the
three major securities-rating agencies are shown below:
Mortgage Unsecured Commercial Preferred
Bonds Notes Paper Stock
S&P BBB+ BB+ A3 BB+
Moody's Baa3 Ba1 P3 ba1
D&P BBB- BB+ D3 BB
Restructuring Legislation and MPUC Proceeding
The 1997 Maine restructuring legislation requires the MPUC, when retail access
begins, to provide a "reasonable opportunity" to recover stranded costs through
the rates of the transmission-and-distribution company, comparable to the
utility's opportunity to recover stranded costs before the implementation of
retail access under the legislation. The principal restructuring provisions of
the legislation provide for customers to have direct retail access to generation
services and for deregulation of competitive electricity providers, commencing
March 1, 2000, with transmission and distribution companies continuing to be
regulated by the MPUC. The MPUC is conducting the proceeding that will determine
the Company's stranded costs and corresponding revenue requirements, and has
scheduled completion of the proceeding for the first quarter of 1999. On
December 5, 1997, the Company filed direct testimony in the proceeding
estimating its future revenue requirements as a transmission-and-distribution
utility and providing an estimate of its strandable costs, which are to be
defined by the MPUC later in the proceeding. The Company estimated its
strandable costs at approximately $1.3 billion and explained the assumptions
underlying the estimate. On February 10, 1998, the Company reduced its estimate
of strandable costs to $0.8 billion to reflect the anticipated sale of its
generating assets later in the year. The Company cannot predict the results of
the MPUC proceeding.
Recovery of nuclear-plant decommissioning costs as required by federal law, rule
or order, will be funded through transmission-and-distribution utility rates and
charges. In addition, the legislation requires utilities to use all reasonable
means to reduce their potential stranded costs and to maximize the value from
generation assets and contracts. The MPUC must consider a utility's efforts to
mitigate its stranded costs in determining the amount of the utility's stranded
costs. Stranded costs and the related rates charged to customers will be
prospectively adjusted as necessary to correct any substantial inaccuracies in
the year 2003 and at least every three years thereafter.
Upon the commencement of retail access on March 1, 2000, the Company, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with the Company would be allowed to sell electricity outside the
Company's service territory without limitation as to amount, but within the
Company's service territory the affiliate would be limited to providing not more
than 33 percent of the total kilowatt-hours sold within the Company's service
territory, as determined by the MPUC. On June 30, 1998, the MPUC approved the
creation of such an affiliated energy provider, subject to certain conditions
designed to eliminate any market advantage the new company might gain through
its affiliation with the Company
Agreement for Sale of Company's Generation Assets
On January 6, 1998, the Company announced that it had reached agreement to sell
all of its hydro-fossil and biomass power plants with a combined generating
capacity of 1,185 megawatts for $846 million in cash to Florida-based FPL Group.
The related book value for these assets is approximately $221 million at
December 31, 1997. In addition, as part of its agreement with FPL Group, the
Company entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone Unit No. 3 nuclear
generating unit in Waterford, Connecticut, its 3.59-percent interest in the
output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and
its entitlement in the NEPOOL Phase II interconnection with Hydro-Quebec all
attracted insufficient interest to be included in the present sale. The Company
will continue to seek buyers for those assets. The Company did not offer for
sale its interests in the Maine Yankee (Wiscasset, Maine), Connecticut Yankee
(Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear generating
plants, all of which are in the process of being decommissioned. In addition, as
part of its agreement with FPL Group, the Company entered into energy buy-back
agreements to assist in fulfilling its obligation to supply its customers with
power until March 1, 2000.
Substantially all of the generating assets included in the sale are subject to
the lien of the Company's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited with the trustee under the Indenture at the closing
of the sale to free the generating assets from the lien of the Indenture.
Proceeds on deposit with the trustee may be used by the Company to redeem or
repurchase bonds under the terms of the Indenture, including the possible
discharge of the Indenture. In addition, the proceeds could provide the
flexibility to redeem or repurchase outstanding equity securities. The Company
must also provide for payment of applicable taxes resulting from the sale. The
manner and timing of the ultimate application of the sale proceeds after closing
are in any event subject to various factors, including Indenture provisions,
market conditions and terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants will
reduce the Company's stranded costs and other costs, which could lower the
amount that would otherwise be collected from customers by nearly half a billion
dollars. However, the Company will incur incremental costs as a result of the
power buy-back arrangements in excess of the pre-sale costs of capacity and
energy from the plants being sold, which will effectively lower the amount of
sale proceeds available to reduce stranded and other costs. The Company believes
that the reduction in stranded and other costs could permit a reduction in rates
for the Company's customers.
The sale is subject to various closing conditions, including the approval of
state and federal regulatory agencies, which the Company expects to extend into
the last quarter of 1998, and is subject to consents or covenant waivers from
certain of the Company's lenders. The Company is pursuing the necessary
regulatory approvals, consents and waivers, but cannot predict whether or in
what form they will be obtained.
The Company believes that consummation of the asset sale described above would
constitute significant progress in resolving some of the uncertainties regarding
the effects of electric-utility industry restructuring on the Company's
investors; however, significant risks and uncertainties would remain. These
include, in addition to those enumerated above under "Note Re Forward-Looking
Statements," but are not limited to: (1) the possibility that a state or federal
regulatory agency will impose adverse conditions on its approval of the asset
sale; (2) the possibility that new state or federal legislation will be
implemented that will increase the risks to such investors from those
contemplated by current legislation; and (3) the possibility of legislative,
regulatory or judicial decisions that would reduce the ability of the Company to
recover its stranded costs from that contemplated by existing law.
Proposed Formation of Holding Company
To prepare further for the restructured electric utility industry contemplated
by the legislation, on December 8, 1997, the Company filed an application with
the MPUC for authorization to create a holding company that would have as
subsidiaries the Company (ultimately as a transmission and distribution
utility), the Company's existing non-utility subsidiaries and other entities.
The Company believes that a holding company structure will facilitate the
Company's transition to a partially deregulated electricity market that is
scheduled to open access to electricity for Maine consumers beginning on March
1, 2000. Since competing as an electric energy provider in that market as of
that date will require the creation of an energy company that is legally
separate from the Company, the Company also proposed the creation of such an
energy marketing affiliate in the MPUC filing.
On May 1, 1998, the MPUC approved the creation of the holding company (to be
called "CMP Group, Inc."), the conversion and exchange of all the outstanding
shares of the Company's common stock into an equal number of shares of the
holding company's common stock, the transfer of the stock of certain
wholly-owned non-utility subsidiaries of the Company to the holding company, and
other related requests of the Company necessary to carry out the reorganization.
The MPUC granted the approvals subject to several conditions that the Company
believes are reasonable. The Company's shareholders approved the reorganization
on May 21, 1998. On June 30, 1998 the MPUC approved the creation of the energy
marketing affiliate of the Company and resolved related issues that had been
deferred earlier in the proceeding. The FERC approved the reorganization on July
16, 1998, the Connecticut Department of Public Utility Control on August 5,
1998, and the SEC on August 12, 1998, which was the last regulatory approval
required prior to implementation of the reorganization by the Company.
The Company's application to the MPUC also requested approval of the creation of
a limited liability company in which a proposed new subsidiary of the holding
company would hold a fifty percent membership interest to participate in the
natural gas distribution business in Maine, with the remaining fifty percent
interest being held by New York State Electric & Gas Corporation ("NYSEG") or
its affiliate. For further discussion of the NYSEG joint venture, see "Expansion
of Lines of Business," below.
Expansion of Lines of Business
General - The Company is preparing for competition by expanding its business
opportunities through subsidiaries that capitalize on core competencies. One
subsidiary, MaineCom Services, arranges fiber-optic data service for bulk
carriers, offering support for cable television or "super-cellular" personal
communication vendors, and providing other telecommunications consulting
services. TeleSmart is a wholly-owned accounts receivable management subsidiary.
Another wholly-owned subsidiary, CMP International Consultants, provides utility
consulting (domestic and international) and research, and engineering and
environmental services. The 100-percent owned Union Water Power Company provides
management of rivers and recreational facilities, locating of underground
utility facilities and infrared photography, real estate brokerage and
management, modular housing, and utility construction services. These
subsidiaries, which the Company plans to transfer to the proposed holding
company, often utilize skills of former Company employees and regularly compete
for business with other companies. In addition, a division of the Company is
focusing on retail competition by developing effective marketing techniques and
energy-efficient services and products.
Natural Gas Distribution - The Company and NYSEG have entered into a
joint-venture agreement to distribute natural gas at retail in many Maine
communities that are not currently served with that fuel. The Company and NYSEG
propose to offer natural-gas service in several areas of Maine, primarily the
Augusta, Bangor, Bath-Brunswick, Bethel, Windham and Waterville areas. None of
the 60 towns in those areas currently has a natural-gas distribution system in
place. The gas would be drawn from two new gas-pipeline projects now under
development by unrelated parties that would carry Canadian gas through Maine and
into the regional energy market using substantial portions of electric
transmission-line corridors owned by the Company and MEPCO under agreements
entered into on March 16, 1998. On July 24, 1998, the MPUC authorized the joint
venture to serve the areas it had applied to serve. The new company would face
competition from a new gas utility affiliated with Bangor Hydro-Electric Company
in the Bangor area and in the Bath-Brunswick area, from an existing gas utility,
Northern Utilities, Inc., which has been serving other areas of Maine, including
the Portland and Lewiston-Auburn areas. The Company is evaluating the
opportunity to be a provider of natural gas to Maine customers, and the
economics thereof, including monitoring progress of the planned pipelines and
competitive considerations.
Fiber Optic Network - The Company, largely through its wholly-owned subsidiary
MaineCom Services, owns 38.5 percent of the common stock of Northeast Optic
Network, Inc. ("NEON"), the successor of FiveCom, Inc., and is a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic transmission capacity for communications carriers on local loop,
inter-city and interstate facilities. NEON is currently expanding its fiber
optic network to encompass over 900 route miles, or more than 60,000 fiber
miles, in New England and New York, utilizing primarily electric-utility
rights-of-way, including some of the Company's in Maine and some owned by
Northeast Utilities, another substantial minority stockholder, in Connecticut,
Massachusetts and New Hampshire. As of June 30, 1998, NEON had completed
construction of approximately 295 route miles, or 19,500 fiber miles, of its
planned system and is currently engineering, constructing, or acquiring
additional routes with a goal of creating a continuous fiber optic link between
New York City and Portland, Maine, with access into and around Boston and
numerous other major service areas in the Northeast.
On August 5, 1998, NEON completed initial public offerings of $54.0 million of
common stock and $180.0 million of senior notes, and the Company, as part of the
common-stock offering, sold some of its shares in NEON for proceeds of
approximately $3.4 million. In addition, with some of the proceeds of the
offering NEON repaid approximately $18 million the Company had advanced under an
earlier construction loan agreement. The Company believes there is a growing
need for such a fiber optic network in the Northeast and that NEON's outside
financing will provide substantial assistance in completing construction of the
network, but cannot predict the results of this venture.
Environmental Matters
The Company assesses compliance with laws and regulations related to hazardous
substance remediation on an ongoing basis. At June 30, 1998, the Company had an
accrued liability of $2.6 million for remediation costs at various sites. The
costs at identified sites may be significantly higher if, among other things,
other potentially responsible parties are not financially able to contribute to
these costs or identified possible outcomes change. See Note 2, "Commitments and
Contingencies." - "Legal and Environmental Matters" for further discussion of
this matter.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk through the use of fixed rate and
variable rate debt and preferred securities as sources of capital.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder Suit - On September 25, 1997, a lawsuit was filed in the United
States District Court for the Southern District of New York by a New Jersey
resident claiming to be a shareholder of the Company against the current members
of the Company's board of directors, including the President and Chief Executive
Officer of the Company, and three former directors. The complaint contains a
derivative claim that the defendants recklessly mismanaged the oversight and
operation of the Maine Yankee Plant and an individual claim that the defendants
failed to make timely and adequate disclosures of information in connection with
issues surrounding the Plant. The complaint does not seek damages against the
Company, but requests that the defendants disgorge the compensation they
received during the period of alleged mismanagement, pay to the Company costs
incurred allegedly as a result of the claimed actions, and cause the Company to
take steps to prevent such actions.
The defendants moved to dismiss the suit for failure of the plaintiff to make a
pre-suit demand on the Company's board of directors, as required by Maine law,
and on February 18, 1998, the suit was dismissed. On April 2, 1998, the Company
received such a demand from the plaintiff, which is under consideration by the
board. The Company believes the plaintiff's claim is without merit.
Regulatory Matters - For a discussion of certain significant regulatory matters
affecting the Company, including those related to the permanent shutdown of the
Maine Yankee Plant, as well as electric-utility restructuring, an MPUC
proceeding that will determine the Company's stranded costs and related matters,
and the proposed reorganization of the Company into a holding-company structure,
see Item 2 of Part I, "Management's Discussion and Analysis of Financial
Condition and Results of Operation" - "Permanent Shutdown of Maine Yankee
Plant", "Restructuring Legislation and MPUC Proceeding," and "Proposed Formation
of Holding Company," which are incorporated herein by reference.
Tax Appeal - For a discussion of the Company's appeal of two significant federal
income tax adjustments proposed by the Internal Revenue Service see Note 2,
"Commitments and Contingencies" - "Proposed Federal Income Tax Adjustments."
Environmental Matters - For a discussion of administrative and judicial
proceedings concerning cleanup of hazardous waste sites see Note 2, "Commitments
and Contingencies," "Legal and Environmental Matters," which is incorporated
herein by reference.
Item 2. Through Item 3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May 21, 1998.
Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934. There was no solicitation in opposition to the
management's nominees as listed in the proxy statement, and all of such nominees
were elected.
Three matters were voted on at the meeting. One was the election of two
directors to Class II of the Company's Board of Directors for a three-year term.
Both nominees were elected, with the following vote tabulations:
Duane D. Fitzgerald
Votes for - 2,661,833
Votes withheld 79,321
David M. Jagger
Votes for - 2,663,269
Votes withheld 77,885
The two other matters voted on at the meeting were:
1. Approval of the appointment of Coopers & Lybrand L.L.P., Boston,
Massachusetts (now PricewaterhouseCoopers LLP), as the Company's auditors for
the year 1998. The appointment was approved, with the following vote
tabulations:
Votes for - 2,712,519
Against - 9,415
Abstentions - 19,160
2. A Company proposal to approve an Agreement and Plan of Merger reorganizing
the Company into a holding company structure. The proposal was approved, with
the following vote tabulations:
Votes for - 2,238,529
Against - 41,747
Abstentions - 32,125
Broker nonvotes - 428,693
Item 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b)Reports on Form 8-K. The Company filed no reports on Form 8-K during
the second quarter of 1998 and thereafter to date.
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.
CENTRAL MAINE POWER COMPANY
(Registrant)
Date: August 13, 1998 By
/s/Michael W. Caron
------------------------------------------
Michael W. Caron, Comptroller (Chief
Accounting Officer)
By
/s/David E. Marsh
------------------------------------------
David E. Marsh, Chief Financial Officer
(Principal Financial Officer and duly
authorized officer)