UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CMP GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
[LOGO] CMP GROUP CMP GROUP, INC. [LOGO]
AND
CENTRAL MAINE POWER COMPANY
---------------------------
GENERAL OFFICES: 83 EDISON DRIVE, AUGUSTA, MAINE 04336
April 20, 1999
TO THE SHAREHOLDERS OF CMP GROUP, INC.
AND THE HOLDERS OF COMMON STOCK AND
6% PREFERRED STOCK OF CENTRAL MAINE
POWER COMPANY:
The first Annual Meeting of the Shareholders of CMP Group, Inc. and the
100th Annual Meeting of the Shareholders of Central Maine Power Company will
be held concurrently on Thursday, May 20, 1999, at 10:00 a.m., at the Augusta
Civic Center, North Wing, Augusta, Maine.
CMP Group, Inc. ("CMP Group") is a Maine-based holding company. Its
principal subsidiary is Central Maine Power Company ("Central Maine Power"),
an electric utility serving customers in southern and central Maine. CMP Group
also holds interests in several non-utility businesses.
The accompanying Joint Proxy Statement contains information about matters to
be considered by shareholders at the CMP Group and Central Maine Power joint
Annual Meetings. At the Annual Meetings, CMP Group and Central Maine Power
shareholders will be asked to vote on the election of directors for their
respective companies for three-year terms. CMP Group shareholders will also be
asked to approve the appointment of independent auditors for 1999.
Your vote on the business at the Annual Meetings is important. Whether or
not you plan to attend, please mark, sign, date and return the enclosed proxy
as soon as possible in the enclosed self-addressed envelope so that your
shares can be represented at the Annual Meetings. No postage is necessary. Of
course, if you attend the joint meetings, you will be able to vote your shares
in person.
A copy of portions of CMP Group's and Central Maine Power's joint Annual
Report for 1998, including audited financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations, is
attached as an appendix to this Joint Proxy Statement.
Cordially yours,
/s/ David T. Flanagan
David T. Flanagan
President and Chief Executive Officer
CMP Group, Inc.
/s/ Sara J. Burns
Sara J. Burns
President
Central Maine Power Company
URGENT. PLEASE SIGN, DATE AND RETURN ENCLOSED PROXY IMMEDIATELY.
[LOGO] CMP GROUP CMP GROUP, INC. [LOGO]
AND
CENTRAL MAINE POWER COMPANY
JOINT NOTICE OF ANNUAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1999
AT 10:00 A.M.
TO THE SHAREHOLDERS OF CMP GROUP, INC. AND THE HOLDERS OF COMMON STOCK AND 6%
PREFERRED STOCK OF CENTRAL MAINE POWER COMPANY
The Annual Meetings of the Shareholders of CMP Group, Inc. and Central Maine
Power Company will be held concurrently at the Augusta Civic Center, North
Wing, Augusta, Maine, on May 20, 1999, at 10:00 A.M., Eastern Daylight Time,
to hear reports on CMP Group and Central Maine Power affairs and to consider
and act upon the following matters:
1. For CMP Group shareholders to elect four directors (Charleen M.
Chase, David T. Flanagan, Robert H. Gardiner and Peter J. Moynihan)
to CMP Group's Board of Directors for a three-year term;
2. For Central Maine Power shareholders to elect four directors
(Charleen M. Chase, David T. Flanagan, Robert H. Gardiner, and Peter
J. Moynihan) to Central Maine Power's Board of Directors for a three-
year term;
3. For CMP Group shareholders to approve the appointment by the CMP
Group Board of Directors of PricewaterhouseCoopers LLP as auditors
for 1999.
4. To consider and act upon any other matters that may properly come
before the meetings.
The close of business on March 22, 1999 has been fixed as the record date
for determination of CMP Group and Central Maine Power shareholders entitled
to notice of, and to vote at, the respective Annual Meetings or any
adjournment thereof.
By Order of the Board of Directors
/s/ Anne M. Pare
Anne M. Pare
Secretary and Clerk
CMP Group, Inc. and Central Maine Power
Company
Augusta, Maine
April 20, 1999
April 20, 1999
[LOGO] CMP GROUP [LOGO]
CMP GROUP, INC.
AND
CENTRAL MAINE POWER COMPANY
83 EDISON DRIVE
AUGUSTA, MAINE 04336
----------------
JOINT PROXY STATEMENT
GENERAL INFORMATION
This Joint Proxy Statement is provided to the shareholders of CMP Group and
Central Maine Power in connection with the solicitation of proxies by the
Boards of Directors of CMP Group and Central Maine Power for use at their
respective Annual Meetings of Shareholders and any adjournments. The Annual
Meetings will be held concurrently on May 20, 1999, at 10:00 A.M. at the
Augusta Civic Center, North Wing, Augusta, Maine. This Joint Proxy Statement
and the accompanying proxy are being mailed to shareholders on April 20, 1999.
Portions of the joint Annual Report of CMP Group and Central Maine Power for
the year ended December 31, 1998, including audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are attached as an appendix to this Joint Proxy Statement.
At the 1998 Annual Meeting, Central Maine Power's shareholders approved the
formation of a holding company over Central Maine Power. On September 1, 1998,
CMP Group became the new holding company for Central Maine Power. On that
date, each outstanding share of Central Maine Power common stock was converted
into one share of CMP Group common stock, and each holder of Central Maine
Power common stock who had not filed a dissent to the transaction became a
shareholder of CMP Group without the need to exchange stock certificates. As a
result of the holding company transaction, CMP Group now holds 100 percent of
the issued and outstanding common stock of Central Maine Power and over 99
percent of Central Maine Power's total outstanding voting stock. Holders of
shares of 6% Preferred Stock, 533 shares of which are held by CMP Group, hold
the remaining voting stock of Central Maine Power.
VOTING RIGHTS
The Boards of Directors of CMP Group and Central Maine Power established the
close of business on March 22, 1999 as the record date for the determination
of shareholders of CMP Group and Central Maine Power entitled to receive
notice of and vote at their respective Annual Meetings.
Votes and Shares--CMP Group. As of the close of business on March 22, 1999,
there were 32,442,552 shares outstanding of CMP Group common stock, with each
share entitled to one vote, for a total of 32,442,552 votes entitled to be
cast by CMP Group shareholders on each matter at the CMP Group Annual Meeting.
Votes and Shares--Central Maine Power. As of the close of business on March
22, 1999, there were 31,211,471 shares outstanding of Central Maine Power
common stock, all of which were held by CMP Group, with each share entitled to
one-tenth vote, for a total of 3,121,147 votes entitled to be cast on each
matter at the Central Maine Power Annual Meeting. In addition, as of the
record date, there were 5,713 shares outstanding of Central Maine Power 6%
Preferred Stock, with each share entitled to one vote, for a total of 5,713
votes entitled
to be cast by the holders of 6% Preferred Stock on each matter at that
meeting. At the Central Maine Power Annual Meeting of Shareholders to be held
in 1999, the shares of Central Maine Power common stock and 6% Preferred Stock
will vote together as a single class on all matters at that meeting.
Quorums for Annual Meetings. A majority of the total votes entitled to be
cast on each matter at the respective Annual Meetings will constitute a quorum
for purposes of action on that matter. Abstentions, votes withheld from
nominees for director, and any broker non-votes will be counted in determining
whether a quorum exists.
Required Votes. The shareholders of CMP Group and the Central Maine Power
shareholders (common and 6% Preferred voting together as a single class) will
be asked to elect four directors to the respective Boards of Directors of CMP
Group and Central Maine Power at their respective Annual Meetings. Director
nominees who receive the greatest number of votes cast at each Annual Meeting
will be elected, even though any such nominee may not receive a majority of
the votes cast. Votes withheld from nominees for director will be counted in
determining the total number of votes cast on the matter and will have the
same effect as a vote against the matter. An affirmative vote of a majority of
the votes cast at the CMP Group meeting is required for approval of Proposal 2
(independent auditors). Abstentions with respect to Proposal 2 will be counted
in determining the total number of votes cast on the matter, but will have no
effect on that matter. Broker non-votes, if any, will not be included in
determining the total number of votes cast on Proposal 2 and will have no
effect on that matter.
Cumulative Voting for Directors. Under the By-Laws of CMP Group and Central
Maine Power, the election of directors at each Annual Meeting shall at the
option of any shareholder be by cumulative voting. Accordingly, each
shareholder having the right to vote for directors shall be entitled to as
many votes as pertain to the shares of stock owned by that shareholder
multiplied by the number of directors to be elected, and may cast all such
votes for a single director or may distribute them among the number to be
voted for, or any two or three of them, as that shareholder sees fit. If any
shareholder entitled to vote for directors at the meeting either gives written
notice to the President or the Secretary of CMP Group or Central Maine Power,
as appropriate, before the time fixed for the meeting of his or her intention
to vote cumulatively or states his or her intention to vote cumulatively at
the meeting before the voting for directors commences, all shareholders
entitled to vote for directors at such meeting shall be entitled to cumulate
their votes. Any shareholder who wishes to vote cumulatively but who will not
be present at the meeting should give written notice to the President or the
Secretary of CMP Group or Central Maine Power, as appropriate, of such
intention before the meeting and should clearly indicate in writing on the
accompanying proxy the director or directors for whom he or she wishes to vote
and the number of votes he or she wishes to distribute to each such director.
If no written indication is made on the proxy, the votes will be evenly
distributed among all the nominees. If any shareholder has indicated his or
her intention to vote cumulatively (either by written notice or by a statement
made at the meeting), each shareholder present at the meeting who has not
given his or her proxy or has revoked his or her proxy in the manner described
in the following paragraph may vote cumulatively at the meeting by means of a
written ballot distributed at the meeting.
Revocability of Proxy. Shareholders may vote at the meeting either in person
or by duly authorized proxy. The giving of a proxy by a shareholder will not
affect the shareholder's right to vote his or her shares if he or she attends
the meeting and wishes to vote in person. A proxy may be revoked or withdrawn
by the person giving it, at any time prior to the voting thereof, at the
registration desk for the meeting or by advising the corporate Secretary. In
addition, the proper execution of a new proxy will operate to revoke a prior
proxy. All shares represented by effective proxies on the enclosed form,
received by CMP Group or Central Maine Power, will be voted at the meeting or
any adjourned session thereof, all in accordance with the terms of such
proxies.
Voting of Proxies. By returning your signed proxy, you authorize the person
or persons named as proxyholders on the proxy to vote your shares at the
meeting or any adjournment as you indicate on the proxy
2
and to vote your shares in accordance with their best judgment on any other
matters, proposals, resolutions or motions that may properly be presented at
the meeting. If a shareholder of CMP Group does not indicate on the proxy how
that shareholder's shares should be voted, the proxyholders will vote FOR the
election of the four nominees to the CMP Group Board of Directors and FOR
approval of the appointment of the independent auditors. If a Central Maine
Power shareholder does not give voting instructions on the proxy, the
proxyholders will vote FOR the election of the four nominees to the Central
Maine Power Board of Directors.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of CMP Group has twelve members, and the Central
Maine Power Board has thirteen members. All Central Maine Power Board members
also serve on the Board of Directors of CMP Group, other than Sara J. Burns,
the President of Central Maine Power, who serves only on the Central Maine
Power Board. The Boards of Directors of CMP Group and Central Maine Power are
each divided into three classes, with one class of CMP Group and Central Maine
Power directors being elected at the respective Annual Meetings for a three-
year term. At the respective Annual Meetings, the CMP Group shareholders and
the common and 6% Preferred shareholders of Central Maine Power will be asked
to elect the first four persons listed below to the respective Boards of
Directors.
It is intended that the persons named in the accompanying proxy as
proxyholders will vote to elect Charleen M. Chase, David T. Flanagan, Robert
H. Gardiner and Peter J. Moynihan (the first four persons listed below and on
the proxy), to serve as directors for a three-year term expiring at the Annual
Meeting of the Shareholders in the year 2002. If voting is cumulative,
however, the proxyholders may cumulate the total number of votes to which the
shareholder executing the proxy is entitled in favor of one or more of the
nominees in the manner that the proxyholders in their discretion determine,
unless other instructions are given in the proxy by the shareholder executing
it. Nominees for election to the CMP Group Board of Directors who receive the
greatest number of votes cast by the CMP Group shareholders will be elected,
even though any such nominee may not receive a majority of the votes cast.
Nominees for election as Central Maine Power directors who receive the
greatest number of votes cast by the holders of Central Maine Power common and
6% Preferred Stock, voting together as a single class, will be elected, even
though any such nominee may not receive a majority of the votes cast. The
remaining persons listed below as directors will continue in office for terms
which expire at the Annual Meetings of the Shareholders in 2000 and 2001, as
indicated below, or, in each case, until their respective successors are duly
elected and qualified. Each of the nominees listed below has indicated his or
her willingness to serve as a director if elected. Should any such nominee
become unable to serve as a director, the proxyholders intend to vote for such
other person as management may recommend, or the respective Boards of
Directors may exercise their exclusive power to fix the number of directors at
fewer than twelve in the case of CMP Group and at fewer than thirteen in the
case of Central Maine Power.
At their meetings on March 18, 1999, the Boards of Directors of CMP Group
and Central Maine Power fixed the number of directors at twelve and thirteen,
respectively, and elected Lawrence A. Bennigson of Boston, Massachusetts, and
Lee M. Schepps of Dallas, Texas, as directors for terms expiring in 2001.
After consideration, the CMP Group and Central Maine Power Boards have
determined that they should not establish specific term limits for directors.
In light of the regulatory and market changes affecting Central Maine Power's
business during the transition to competition that are expected to continue
influencing the conduct of business, and the importance of Central Maine
Power's business to CMP Group, the two Boards believe that CMP Group and
Central Maine Power will benefit from the contributions of directors who have
gained
3
knowledge and insight about Central Maine Power and its business through their
continued service on the Board. Both Boards believe that existing policies
requiring retirement from service as a director at age 70 and the performance
evaluation of directors at the completion of each term of office provide
appropriate means of gaining fresh ideas and perspectives and of addressing
any performance issues.
Set forth below is information about each nominee and continuing director.
Each person listed has been serving as a director of CMP Group and Central
Maine Power, other than Sara J. Burns who serves only on the Board of
Directors of Central Maine Power. In addition, David T. Flanagan is President
and Chief Executive Officer of CMP Group, Ms. Burns is President of Central
Maine Power, and David M. Jagger serves as Chairman and Charles H. Abbott as
Vice Chairman of the Boards of Directors of CMP Group and Central Maine Power.
The class designations listed are for CMP Group and Central Maine Power,
respectively.
Principal Occupations
and Business Experience
During Past Five
Years and Current First
Directorships of Became a Term
Name and Age Public Companies Director Expires
------------ ----------------------- -------- -------
Class I/III:
Charleen M. Chase (50)...... Executive Director, 1985 1999
Community Concepts, Inc.,
South Paris, Maine
(Community action agency)
David T. Flanagan (51)...... President and Chief 1994 1999
Executive Officer of CMP
Group, from September 1,
1998; President and Chief
Executive Officer of
Central Maine Power, from
January 1, 1994
Robert H. Gardiner (54)..... President, Maine Public 1992 1999
Broadcasting Corporation,
Lewiston, Maine (Public
television)
Peter J. Moynihan (55)...... Senior Vice President and 1995 1999
Chief Investment Officer,
UNUM Corporation,
Portland, Maine
(Insurance)
Class II/I:
Charles H. Abbott (63)...... Skelton, Taintor & Abbott, 1988 2000
P.A., Auburn, Maine
(Attorneys); Vice
Chairman of the Boards of
CMP Group and Central
Maine Power
William J. Ryan (55)........ Chairman, President and 1996 2000
Chief Executive Officer,
Peoples Heritage
Financial Group, Inc.,
Portland, Maine;
Director, Blue Cross and
Blue Shield of Maine,
Federal Home Loan Bank of
Boston, Student Loan
Association of New
England
Kathryn M. Weare (50)....... Owner and Manager, The 1992 2000
Cliff House, Ogunquit,
Maine (Resort and
conference center)
Lyndel J. Wishcamper (56)... President, Wishcamper 1996 2000
Properties, Inc.,
Portland, Maine (Real
estate)
Class III/II:
Lawrence A. Bennigson (61).. Executive Director, 1999 2001
Toffler Associates,
Boston, Massachusetts
(strategic management
advising) (1998); Senior
Fellow, Harvard Business
School Executive
Development Center
(executive education)
(1998); independent
management consultant
(1994 through 1997);
Director, SBS
Technologies, Inc.
4
Principal Occupations
and Business Experience
During Past Five
Years and Current First
Directorships of Became a Term
Name and Age Public Companies Director Expires
------------ ----------------------- -------- -------
Sara J. Burns (43).......... President (from September 1998 2001
1, 1998) and Chief
Operating Officer,
Distribution Services
(from April 17, 1997) of
Central Maine Power;
prior thereto, held
various non-executive
positions with Central
Maine Power, including
Managing Director, Human
Resources
Duane D. Fitzgerald (59).... Non-executive Chairman of 1996 2001
the Board, Bath Iron
Works Corporation, Bath,
Maine (Shipbuilding)
(from March 1, 1996);
Corporate Vice
President, General
Dynamics Corporation
(September 1995 to
March 1, 1996);
President and Chief
Executive Officer, Bath
Iron Works Corporation
(September 1991 to March
1, 1996); Director, UAL
Corporation, Blue Cross
and Blue Shield of Maine
David M. Jagger (57)........ President and Treasurer, 1988 2001
Jagger Brothers, Inc.,
Springvale, Maine
(Textiles); Chairman of
the Boards of CMP Group
and Central Maine Power
Lee M. Schepps (58)......... Retired (1998) President 1999 2001
(since 1979), The Julius
Schepps Co., Dallas,
Texas (Wholesale
beverage distribution
and real estate
management)
BOARD COMMITTEES, MEETINGS AND COMPENSATION
Certain Committees of the Boards of CMP Group and Central Maine Power
The CMP Group Board of Directors has Audit, Governance, and Compensation and
Benefits Committees and also has other committees. The Central Maine Power
Board currently has Governance and Compensation and Benefits Committees in
addition to other committees; prior to the September 1, 1998 holding company
reorganization of Central Maine Power, its Board also had an Audit Committee.
The CMP Group Audit Committee has assumed responsibility for overseeing the
financial reporting process for CMP Group and its business units, including
Central Maine Power, on a consolidated basis.
Until September 1, 1998, Kathryn M. Weare (Chair), Duane D. Fitzgerald and
Lyndel J. Wishcamper served on the Central Maine Power Audit Committee, which
held two meetings in 1998. Since September 1, 1998, these individuals have
served on the CMP Group Audit Committee, which met one time in the last four
months of 1998. The Audit Committee recommends to the Board the independent
auditors to be selected and reviews the plan and scope of the audit as well as
the results and costs of the audit. The Committee also reviews with the
independent auditors and management financial disclosure matters, internal
accounting procedures and controls, and the adequacy of the audit services
provided by employees and monitors the Corporate Compliance Program.
The Governance Committee of CMP Group and of Central Maine Power, now
composed of David M. Jagger (Chair), Charles H. Abbott, Robert H. Gardiner and
William J. Ryan, has among its concerns the selection, performance and
evaluation of directors. The Governance Committee of CMP Group or Central
Maine Power (as appropriate) will consider for nomination to the Board
individuals whose names have been submitted
5
by shareholders in writing. Supporting information should accompany any
submission. The Governance Committee also oversees long-range corporate
planning and succession planning. The Central Maine Power Governance Committee
held two meetings in 1998, and the CMP Group Governance Committee, which has
existed since September 1, 1998, did not hold any meetings in 1998.
The Central Maine Power Compensation and Benefits Committee, whose members
are Charles H. Abbott (Chair), Duane D. Fitzgerald and Peter J. Moynihan, held
three meetings in 1998. The CMP Group Compensation and Benefits Committee,
which has been in existence since September 1, 1998, and is composed of the
same members, held one meeting in 1998. This committee reviews and makes
recommendations to the respective Boards concerning compensation and benefit
programs for executive officers and compensation for directors. The
Compensation and Benefits Committee of CMP Group also administers the Annual
Incentive Plan and the Long-Term Incentive Plan and evaluates the performance
of the President and Chief Executive Officer.
Meetings of the Board
The Central Maine Power Board held 16 meetings (including regularly
scheduled and special meetings) in 1998, and the CMP Group Board held five
meetings. Each director listed above attended more than 75 percent of the
aggregate of the total number of Board meetings and the total number of
meetings of all committees on which that director served that were held during
periods he or she served as a director of CMP Group and Central Maine Power,
respectively, other than Mr. Fitzgerald, who attended two-thirds of such
Central Maine Power meetings, but more than 75 percent of such CMP Group
meetings.
Compensation of Directors
In accordance with the established guidelines for the Board of Directors of
CMP Group, the Chairman of the Board receives an annual retainer of $25,200,
the Vice Chairman of the Board receives an annual retainer of $10,300, and
each director (other than the Chairman or Vice Chairman) who is the Chair of a
committee of the Board and not an executive officer of CMP Group receives an
annual retainer of $8,400. Each other outside director receives an annual
retainer of $6,800. All retainers are payable quarterly. In addition to
ordinary travel expenses, all outside directors receive $600 for each meeting
of the Board attended, and all outside directors serving on a committee of the
Board receive $300 for each committee meeting attended on a day on which they
have also attended a meeting of the full Board or another committee and $600
for any other committee meeting attended. A fee of $150 is paid to outside
directors for participating in a meeting of the Board or one of its committees
by telephone if, in the opinion of the person presiding at the meeting,
substantial action is taken or matters of importance are resolved.
Since each outside director serves on both the CMP Group and Central Maine
Power Boards and on the same committees of each Board, the annual retainer
applies to service on both Boards and separate meeting fees for Central Maine
Power are paid only if a meeting of that Board or one of its committees is
held on a day when no CMP Group meeting is held. The usual practice is to hold
meetings of the CMP Group and Central Maine Power Boards, or their committees,
on the same day so that meeting fees are limited.
Outside directors may participate in a voluntary deferred compensation plan
under which a director may elect to have all or part of his or her retainer
(but not meeting fees) credited to a deferred compensation account, maintained
at the election of the director either as a cash account or an account in
units based on the value of CMP Group common stock ("Compensation Units"). The
number of Compensation Units credited to a director's account is equal to the
number of shares of CMP Group common stock that could have been purchased as
of the middle of a calendar quarter with the amount of the retainer deferred
for that quarter. CMP Group matches Compensation Units in a director's account
with one-half the number of Compensation Units in the account. Whenever
dividends are paid on CMP Group's common stock, each account maintained in
Compensation Units is credited with additional Compensation Units equal to the
number of shares that could have been purchased if a cash dividend had been
paid on the Compensation Units in the account.
6
Effective January 1, 1998, the Central Maine Power Board terminated the
retirement plan for outside directors that had been effective since September
1991. With the assistance of an independent compensation consultant, the Board
adopted amendments to its deferred compensation plan that aligns the interests
of the directors more closely with the interests of shareholders by tying the
Board's compensation to the value of CMP Group common stock. Accrued benefits
under the former retirement plan were converted for all directors serving on
the Board as of January 1, 1998, to Compensation Units under the deferred
compensation plan. In addition, at the beginning of each year, each outside
director will receive a fixed grant of 500 Compensation Units. Dividend
equivalents will be added to Compensation Units on dividend payment dates for
CMP Group common stock. There is no company match for Compensation Units other
than those representing deferred retainers.
All deferred compensation is paid solely in cash following retirement from
the Board. The value of the Compensation Units in a director's account at the
time a payment is made will be equal to the market value of the same number of
shares of CMP Group common stock on the payment date. The number of
Compensation Units in the accounts of directors under the deferred
compensation plan as of March 31, 1999 is shown in the table that appears
under the caption "SECURITY OWNERSHIP."
SECURITY OWNERSHIP
The following table sets forth information concerning the beneficial
ownership of CMP Group common stock as of April 5, 1999 by each director of
CMP Group and Central Maine Power and each of the executive officers named in
the Summary Compensation Table contained in this Joint Proxy Statement. The
total number of shares beneficially owned as of April 5, 1999 by all directors
and executive officers as a group is also listed. Shares listed as
beneficially owned include shares as to which the directors and executive
officers have or share the power to vote or the power to dispose.
The table also lists the number of Compensation Units as of March 31, 1999
in the accounts of the outside directors under the deferred compensation plan
described above. The value of the Compensation Units at the time they are paid
out will be equal to the market value of the same number of shares of CMP
Group Common Stock on the payment date, but the deferred amounts will be paid
only in cash. Compensation Units will not be distributed in the form of common
stock.
Number of Shares
Shares Beneficially Owned
Compensation Beneficially Subject to Options Total Shares
Directors and Named Units (as of Owned (as of Exercisable as of Beneficially
Executive Officers March 31, 1999) April 5, 1999) April 10, 1999 Owned
- ------------------- --------------- -------------- ------------------ ------------
Charles H. Abbott....... 18,078 3,265 -- 3,265
Lawrence A. Bennigson... -- 300 -- 300
Sara J. Burns........... -- 4,820 4,904 9,724
Charleen M. Chase....... 10,335 1,381 -- 1,381
Duane D. Fitzgerald..... 4,611 500 -- 500
David T. Flanagan....... -- 15,087 26,328 41,415
Robert H. Gardiner...... 10,451 1,000 -- 1,000
David M. Jagger......... 21,907 1,000 -- 1,000
Peter J. Moynihan....... 5,918 1,340 -- 1,340
William J. Ryan......... 1,827 1,000 -- 1,000
Lee M. Schepps.......... -- 1,500 -- 1,500
Kathryn M. Weare........ 9,641 1,246 -- 1,246
Lyndel J. Wishcamper.... 4,633 3,324 -- 3,324
Arthur W. Adelberg...... -- 6,614 5,996 12,610
David E. Marsh.......... -- 7,877 5,996 13,873
Gerald C. Poulin........ -- 8,350 4,921 13,271
F. Michael McClain...... -- 637 4,903 5,540
Michael R. Cutter....... -- 5,216 3,923 9,139
Curtis I. Call.......... -- 3,259 2,627 5,888
Anne M. Pare............ -- 1,036 2,726 3,762
All directors and
executive officers as a
group ................. 87,401 68,752 62,323 131,076
7
The number of shares of CMP Group common stock beneficially owned as of
April 5, 1999 by each of the directors and named executive officers, and the
aggregate number of such shares beneficially owned as of that date by all of
the directors and executive officers of CMP Group and Central Maine Power, as
a group, constituted less than one percent of the total shares of that class
then outstanding. As of April 5, 1999, Mr. Abbott's spouse held sole voting
and investment power over 800 shares of the total number of shares listed for
Mr. Abbott, and all shares listed for Ms. Chase were held jointly. Of the
shares listed for Mr. Poulin, 201 shares were held jointly as of that date.
The total number of shares held jointly for all directors and executive
officers as a group as of April 5, 1999, was 1,582 shares. No director or
officer owned as of April 5, 1999 any shares of 6% Preferred Stock.
The following table sets forth the name and address of each shareholder
believed to be the beneficial owner of 5 percent or more of the outstanding
shares of CMP Group common stock, the number of shares beneficially owned, and
the percentage of shares owned as of March 22, 1999.
Shares of Common Stock Percentage
Name and Address Beneficially Owned of Class
- ---------------- ---------------------- ----------
FMR Corp. .................................. 2,257,500(1) 6.958%(1)
82 Devonshire Street
Boston, MA 02109
In addition, CMP Group is the beneficial owner of outstanding shares of
Central Maine Power 6% Preferred Stock as follows. CMP Group has sole power to
vote and dispose of these shares.
Shares of 6% Preferred Stock Percentage
Name and Address Beneficially Owned of Class
- ---------------- ---------------------------- ----------
CMP Group, Inc. ....................... 533 9.3%(2)
83 Edison Drive
Augusta, ME 04336
- --------
(1) Based solely on a Schedule 13G dated February 1, 1999, this amount
represents beneficial ownership of (a) 1,889,300 shares or 5.823 percent
of CMP Group common stock by Fidelity Management & Research Company, an
investment adviser, and (b) 368,200 shares or 1.134 percent of CMP Group
common stock by Fidelity Management Trust Company, a bank. In its Schedule
13G, FMR Corp. indicated that it or its affiliates had sole power to
dispose of all of these shares and sole power to vote 340,500 of these
shares.
(2) Shares held by CMP Group represent 9.3 percent of the voting power of the
6% Preferred Stock. As a result of its ownership, as of the record date
for the Annual Meeting, of all 31,211,471 issued and outstanding shares of
Central Maine Power common stock, representing 3,121,147 votes, and its
533 shares of Central Maine Power 6% Preferred Stock, representing 533
votes, CMP Group held 99.8 percent of the combined voting power of the
Central Maine Power common stock and 6% Preferred Stock.
The following table sets forth information concerning the beneficial
ownership of the common stock of NorthEast Optic Network, Inc. ("NEON") by
Messrs. Marsh and McClain in connection with their service as members of the
Board of Directors of NEON. CMP Group, through its wholly-owned subsidiary
MaineCom Services, hold 38.5 percent of NEON's common stock.
Number of Shares
Shares Beneficially Owned Total
Beneficially Subject to Options Shares
Owned (as of Exercisable as of Beneficially
Named Executive Officers April 5, 1999) September 25, 1998 Owned
- ------------------------ -------------- ------------------ ------------
David E. Marsh.................. 4,060 4,060 4,060
F. Michael McClain.............. 4,060 4,060 4,060
The number of NEON shares beneficially owned by Messrs. Marsh and McClain
constitute less than one-half percent of the outstanding and issued shares of
NEON's common stock.
Section 16(a) Beneficial Reporting Compliance
After review, CMP Group and Central Maine Power (for the period prior to the
September 1, 1998 holding company reorganization) believe that during 1998 all
filing requirements under Section 16(a) of the Securities Exchange Act were
satisfied.
8
EXECUTIVE COMPENSATION
The following Summary Compensation Table presents information on
compensation to executive officers of CMP Group and Central Maine Power.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------ ---------------------
Name Restricted Securities
and Stock Underlying All Other
Principal Award(s) Options/ Compensation
Position Year Salary ($) Bonus ($)(10) ($)(11) SARs (#) ($)(12)
--------- ---- ---------- ------------- ---------- ---------- ------------
David T. Flanagan....... 1998 335,571 70,195 31,648 78,983 2,720
President and Chief Ex-
ecutive Officer 1997 315,000 218,531 97,125 0 2,603
CMP Group, Inc.(1) 1996 265,000 62,606 0 0 5,018
Arthur W. Adelberg...... 1998 213,993 31,654 14,271 17,988 5,121
Executive Vice Presi-
dent 1997 189,818 79,125 35,167 0 5,037
CMP Group, Inc.(2) 1996 166,334 28,263 0 0 4,768
David E. Marsh.......... 1998 213,993 31,654 14,271 17,988 12,589
Chief Financial Officer 1997 189,818 79,125 35,167 0 4,387
CMP Group, Inc.(3) 1996 166,123 25,769 0 0 4,834
Gerald C. Poulin........ 1998 175,610 25,976 11,697 14,762 3,861
Vice President, Genera-
tion 1997 158,200 61,935 27,527 0 3,571
CMP Group, Inc.(4) 1996 137,294 23,362 0 0 4,511
F. Michael McClain...... 1998 150,527 25,102 11,306 14,711 9,765
Vice President, Corpo-
rate Development
CMP Group, Inc.(5)
Sara J. Burns........... 1998 175,000 28,239 12,727 14,711 3,063
President 1997 139,000 56,250 25,000 0 2,601
Central Maine Power
Company(6)
Michael R. Cutter....... 1998 140,000 16,735 22,649 11,769 3,025
Vice President 1997 120,820 25,000 33,352 0 2,869
Central Maine Power
Company(7)
Curtis I. Call.......... 1998 112,515 9,527 12,904 7,882 3,376
Treasurer 1997 104,000 22,000 29,341 0 3,120
Central Maine Power
Company(8)
Anne M. Pare............ 1998 116,730 17,441 7,863 8,177 0
Secretary and Clerk 1997 109,000 22,500 10,029 0 0
Central Maine Power
Company and 1996 77,667 5,950 0 0 0
Treasurer, Corporate
Counsel and Secretary
CMP Group, Inc.(9)
- --------
(1) Prior to September 1, 1998, Mr. Flanagan was President and Chief
Executive Officer of Central Maine Power.
(2) Prior to September 1, 1998, Mr. Adelberg was Executive Vice President
of Central Maine Power.
(3) Prior to September 1, 1998, Mr. Marsh was Chief Financial Officer of
Central Maine Power.
9
(4) Prior to September 1, 1998, Mr. Poulin was Chief Operating Officer,
Energy Services, of Central Maine Power. From September 1 through December 31,
1998, Mr. Poulin served as President of an energy marketing subsidiary of CMP
Group that ceased business operations as of year-end 1998.
(5) Prior to September 1, 1998, Mr. McClain was Vice President, Corporate
Development, of Central Maine Power. His employment with Central Maine Power
began on February 23, 1998.
(6) Ms. Burns has served as President of Central Maine Power since
September 1, 1998; prior thereto, she had been its Chief Operating Officer,
Distribution Services, since May 1, 1997. Ms. Burns held other non-executive
positions with Central Maine Power prior to that date.
(7) Mr. Cutter was elected Vice President of Central Maine Power effective
May 1, 1997.
(8) Mr. Call was elected Treasurer of Central Maine Power effective May 1,
1997.
(9) Ms. Pare has served as Secretary and Clerk of Central Maine Power since
May 22, 1996, and as Treasurer, Corporate Counsel and Secretary of CMP Group
since September 1, 1998.
(10) Amounts are performance-based cash awards under the Annual Incentive
Plan.
(11) Amounts are performance-based awards in the form of CMP Group common
stock under the Annual Incentive Plan. At December 31, 1998, the number of
shares and value of the aggregate restricted stock holdings of each of the
named executive officers were as follows: Mr. Flanagan, 5,744 shares and
$108,418; Mr. Adelberg, 2,080 shares and $39,260; Mr. Marsh, 2,080 shares and
$39,260; Mr. Poulin, 1,628 shares and $30,729; Ms. Burns, 2,351 shares and
$44,375; Mr. Cutter, 3,093 shares and $58,380; Mr. Call, 1,734 shares and
$32,729; and Ms. Pare, 593 shares and $11,193. Mr. McClain held no shares of
CMP Group common stock as of December 31, 1998. Dividends on shares of
restricted stock are earned at the same rate as dividends on unrestricted
shares of CMP Group common stock and are reinvested in additional shares of
common stock that are subject to the same restrictions as the shares on which
dividends are earned.
(12) For 1998, amounts of All Other Compensation include (i) matching
contributions to the Employee Savings and Investment Plan for Non-Union
Employees (401(k) Plan) in the amount of $2,063 for Mr. Flanagan, $4,800 for
Mr. Adelberg, $4,280 for Mr. Marsh, $3,366 for Mr. Poulin, $3,063 for Ms.
Burns, $3,025 for Mr. Cutter and $3,376 for Mr. Call; and (ii) the value of
term life insurance premiums paid under universal life insurance policies in
the amount of $658 for Mr. Flanagan, $321 for Mr. Adelberg, $394 for Mr.
Marsh, and $495 for Mr. Poulin. CMP Group, through Central Maine Power, has
purchased universal life insurance policies for Mr. Flanagan, Mr. Adelberg,
Mr. Marsh, and Mr. Poulin, who have no immediate right to receive the cash
surrender value of the policies and may never have any right to receive the
cash surrender value. The respective interests of these four executive
officers in the cash surrender value of the policies will vest only if certain
conditions are first satisfied. If an executive officer's interest in the cash
surrender value vests, the retirement benefits payable to the executive
officer under the Supplemental Executive Retirement Plan (the "SERP"), a
defined benefit retirement income plan, will be reduced dollar for dollar by
the amount of the cash surrender value of the policy at the time it vests. The
premium paid on each of these policies is designed to produce a cash surrender
value which is equal to, but which may be less than, the benefits payable
under the SERP. In addition, Mr. Marsh earned $7,915 and Mr. McClain earned
$9,765 as a retainer and meeting fees for their service as members of the
Board of Directors of NorthEast Optic Network, Inc., in which CMP Group,
through its wholly-owned subsidiary MaineCom Services, holds a 38.5 interest.
10
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term (2)
- ---------------------------------------------------------------------- -----------------
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/SARs Granted to or Base
Granted (1) Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- ------- ---------
David T. Flanagan....... 78,983 31.1% 17.375 4/10/05 558,676 1,301,953
Arthur W. Adelberg...... 17,988 7.08% 17.375 4/10/05 127,236 296,513
David E. Marsh.......... 17,988 7.08% 17.375 4/10/05 127,236 296,513
16,241(3) 0.7% 12.00 9/25/08 122,566 310,608
Gerald C. Poulin........ 14,762 5.81% 17.375 4/10/05 104,417 243,336
F. Michael McClain...... 14,711 5.79% 17.375 4/10/05 104,056 242,496
16,241(3) 0.7% 12.00 9/25/08 122,566 310,608
Sara J. Burns........... 14,711 5.79% 17.375 4/10/05 104,056 242,496
Michael R. Cutter....... 11,769 4.63% 17.375 4/10/05 83,246 194,000
Curtis I. Call.......... 7,882 3.10% 17.375 4/10/05 55,752 129,927
Anne M. Pare............ 8,177 3.22% 17.375 4/10/05 57,839 134,789
- --------
(1) Options vest in one-third increments on the first, second and third
anniversaries of the April 10, 1998 grant date.
(2) Potential realizable value at expiration is based on an assumption that
the stock price appreciates at the annual rates shown (compounded annually)
from the date of the grant until the end of the option term. These numbers are
calculated in accordance with rules of the Securities and Exchange Commission
and do not reflect any estimate by CMP Group of future stock price
appreciation.
(3) This amount represents a grant of options to purchase the common stock
of NorthEast Optic Network, Inc. ("NEON") in connection with service as a
member of the Board of Directors of NEON. CMP Group, through its wholly-owned
subsidiary MaineCom Services, owns 38.5 percent of the common stock of NEON.
11
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options/SARs at Fiscal the-Money Options/SARs at
Acquired on Value Year-End (#) Fiscal Year-End ($)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
David T. Flanagan....... 0 0 0/78,983 0/118,475
Arthur W. Adelberg...... 0 0 0/17,988 0/26,982
David E. Marsh.......... 0 0 0/17,988 0/26,982
0 0 4,060/12,181 (1)
Gerald C. Poulin........ 0 0 0/14,762 0/22,143
F. Michael McClain...... 0 0 0/14,711 0/22,067
0 0 4,060/12,181 (1)
Sara J. Burns........... 0 0 0/14,711 0/22,067
Michael R. Cutter....... 0 0 0/11,769 0/17,654
Curtis I. Call.......... 0 0 0/7,882 0/11,823
Anne M. Pare............ 0 0 0/8,177 0/12,266
- --------
(1) Options to purchase the common stock of NEON granted to Messrs. Marsh
and McClain were not in the money as of December 31, 1998. Options are "in the
money" if the market value of the underlying stock exceeds the exercise or
base price of the option.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
Estimated Future Payouts
under Non-Stock Price-
Based Plans (1)
------------------------
(a) (b) (c) (d) (e) (f)
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation or Threshold Target Maximum
Name Rights (#) Payout (#) (#) (#)
- ---- ------------- ------------- --------- ------ -------
David T. Flanagan.......... 21,837 1998-2000 10,919 21,837 32,756
Arthur W. Adelberg......... 4,973 1998-2000 2,487 4,973 7,460
David E. Marsh............. 4,973 1998-2000 2,487 4,973 7,460
Gerald C. Poulin........... 4,081 1998-2000 2,041 4,081 6,122
F. Michael McClain......... 4,067 1998-2000 2,034 4,067 6,101
Sara J. Burns.............. 4,067 1998-2000 2,034 4,067 6,101
Michael R. Cutter.......... 3,254 1998-2000 1,627 3,254 4,881
Curtis I. Call............. 2,179 1998-2000 1,090 2,179 3,269
Anne M. Pare............... 2,261 1998-2000 1,131 2,261 3,392
- --------
(1) Performance shares are granted at the beginning of a three-year
performance period and are paid out in the form of CMP Group common stock if
performance goals established for that three-year period are attained. For the
performance period from January 1, 1998 through December 31, 2000, performance
is measured by reference to total shareholder return and by the ranking of
Central Maine Power compared to other electric utilities represented in the
EEI Index.
12
PENSION PLAN TABLES AND EMPLOYMENT ARRANGEMENTS
Basic Pension Plan
CMP Group and Central Maine Power make payments to the Retirement Income
Plan for Non-Union Employees (the "Basic Pension Plan") for full-time non-
union employees, including the executive officers. Estimated annual retirement
benefits payable under the Basic Pension Plan, assuming retirement on December
31, 1998 at age 65, for average salary levels and credited years of service
specified in the following Basic Pension Plan Table are as set forth in the
Table.
Average Annual Salary for Years of Service
5 Highest Consecutive Years ---------------------------------------
Preceding Retirement 15 20 25 30 35
--------------------------- ------- ------- ------- ------- -------
$125,000............................... $28,422 $37,896 $47,370 $56,844 $58,818
150,000............................... 34,797 46,396 57,995 69,594 72,193
175,000............................... 37,347 49,796 62,245 74,694 77,543
200,000............................... 37,347 49,796 62,245 74,694 77,543
225,000............................... 37,347 49,796 62,245 74,694 77,543
250,000............................... 37,347 49,796 62,245 74,694 77,543
275,000............................... 37,347 49,796 62,245 74,694 77,543
300,000............................... 37,347 49,796 62,245 74,694 77,543
325,000............................... 37,347 49,796 62,245 74,694 77,543
350,000............................... 37,347 49,796 62,245 74,694 77,543
375,000............................... 37,347 49,796 62,245 74,694 77,543
400,000............................... 37,347 49,796 62,245 74,694 77,543
425,000............................... 37,347 49,796 62,245 74,694 77,543
450,000............................... 37,347 49,796 62,245 74,694 77,543
475,000............................... 37,347 49,796 62,245 74,694 77,543
500,000............................... 37,347 49,796 62,245 74,694 77,543
525,000............................... 37,347 49,796 62,245 74,694 77,543
550,000............................... 37,347 49,796 62,245 74,694 77,543
For Messrs. McClain, Cutter and Call and Ms. Pare, compensation covered by
the Basic Pension Plan consists of base salary, including base salary shown in
the Salary column of the Summary Compensation Table. Because the amount of
compensation that could be taken into account in determining retirement
benefits under the Basic Pension Plan was limited by federal tax law to
$160,000 in 1998, the 1998 covered compensation under the Basic Pension Plan
for Messrs. Flanagan, Adelberg, Marsh and Poulin and Ms. Burns was limited to
that amount of their respective base salaries. Years of service for purposes
of the Basic Pension Plan are as follows: Mr. Flanagan, 14 years; Mr.
Adelberg, 13 years; Mr. Marsh, 25 years; Mr. Poulin, 28 years; Ms. Burns, 11
years; Mr. Cutter, 22 years; Mr. Call, 12 years; and Ms. Pare, 11 years.
Benefits listed in the Basic Pension Plan Table are payable as a single life
annuity and reflect an offset for estimated Social Security benefits payable
upon attainment of age 65.
13
Supplemental Executive Retirement Plan
A Supplemental Executive Retirement Plan (the "SERP") provides supplemental
retirement income to selected executive officers. Estimated annual retirement
benefits payable under the SERP, assuming retirement on December 31, 1998 at
age 65, for average compensation levels and credited years of service
specified in the following SERP Table are as set forth in the Table.
Average Annual Years of Service
Compensation --------------------------------------------
for 3 Highest Years 15 20 25 30 35
------------------- -------- -------- -------- -------- --------
$125,000........................... $ 20,328 $ 27,104 $ 33,880 $ 24,406 $ 22,432
150,000........................... 23,703 31,604 39,505 27,906 25,307
175,000........................... 30,903 41,204 51,505 39,056 36,207
200,000........................... 40,653 54,204 67,755 55,306 52,457
225,000........................... 50,403 67,204 84,005 71,556 68,707
250,000........................... 60,153 80,204 100,255 87,806 84,957
275,000........................... 69,903 93,204 116,505 104,056 101,207
300,000........................... 79,653 106,204 132,755 120,306 117,457
325,000........................... 89,403 119,204 149,005 136,556 133,707
350,000........................... 99,153 132,204 165,255 152,806 149,957
375,000........................... 108,903 145,204 181,505 169,056 166,207
400,000........................... 118,653 158,204 197,755 185,306 182,457
425,000........................... 128,403 171,204 214,005 201,556 198,707
450,000........................... 138,153 184,204 230,255 217,806 214,957
475,000........................... 147,903 197,204 246,505 234,056 231,207
500,000........................... 157,653 210,204 262,755 250,306 247,457
525,000........................... 167,403 223,204 279,005 266,556 263,707
550,000........................... 177,153 236,204 295,255 282,806 279,957
Compensation covered by the SERP consists of base salary shown in the Salary
column of the Summary Compensation Table, and incentive awards under the
Annual Incentive Plan. Years of service for purposes of the SERP, in which
only Messrs. Flanagan, Adelberg, Marsh and Poulin participate, are as follows:
Mr. Flanagan, 14 years; Mr. Adelberg, 13 years; Mr. Marsh, 25 years; and Mr.
Poulin, 28 years. Years of credited service up to 25 years are taken into
account in computing retirement benefits under the SERP. Benefits listed in
the SERP Table reflect the deduction of benefits payable under the Basic
Pension Plan upon attainment of age 65, as shown in the Basic Pension Plan
Table. SERP benefits payable to Messrs. Flanagan, Adelberg, Marsh, and Poulin
will be further reduced, dollar for dollar, by the amount of the cash
surrender value of universal life insurance policies, which have been
purchased for these four executive officers, at such time as their respective
interests in the cash surrender value may vest. The Board of Directors has the
right to terminate the SERP at any time in its discretion.
Under an employment agreement with CMP Group, which is described below, Mr.
Flanagan is entitled to an incremental retirement benefit, beginning at age
55, that, when added to benefits payable to him under the Basic Pension Plan
and the SERP, provides an aggregate annual retirement benefit of 65 percent of
base salary earned during the 12 months preceding termination of his
employment for reasons other than death or cause plus the three-year average
of incentive compensation earned under the Annual Incentive Plan, not to
exceed $200,000 per year.
Employment agreements with Messrs. Adelberg, Marsh and Poulin, respectively,
also provide certain retirement benefits for these executive officers. These
provisions are described below.
Employment and Termination of Employment Arrangements
Effective June 1, 1997, Central Maine Power entered into employment
agreements with Ms. Burns, Mr. Cutter, Mr. Call and Ms. Pare and, effective
January 1, 1998, also entered into employment agreements with
14
Messrs. Flanagan, Adelberg, Marsh and Poulin. In addition, effective August
26, 1998, Central Maine Power entered into an employment agreement with Mr.
McClain. The agreements with Messrs. Flanagan, Adelberg, Marsh, Poulin and
McClain and Ms. Pare were subsequently assumed by CMP Group. The agreements
with the executive officers of CMP Group and Central Maine Power are intended
to encourage these executive officers to continue their employment so that CMP
Group and Central Maine Power will have the continuing benefit of their
services during a period of transition in their business due to regulatory and
competitive market changes and in the event of a change of control.
The agreements provide for a specified minimum base salary and for
participation in compensation and benefit plans in accordance with the
provisions of those plans. In addition, the agreements for Messrs. Flanagan,
Adelberg, Marsh and Poulin provide for retirement benefits that are
incremental to those provided in the Basic Pension Plan and the SERP. As
described above, Mr. Flanagan is entitled to a retirement benefit not
exceeding $200,000 per year, beginning at age 55, including amounts payable
under pension plans. CMP Group is required to maintain a policy of insurance
on Mr. Flanagan's life, providing that premium payments do not exceed a
specified amount, with proceeds payable to Mr. Flanagan's spouse in the event
of his death prior to any payment of retirement benefits under the agreement.
The agreement requires that retirement benefits payable to Mr. Flanagan
thereunder be funded through a rabbi trust over a five-year period in the
event of a change of control.
The retirement benefit for Mr. Adelberg vests if he continues his employment
until June 30, 2000. In that case, the benefit paid to Mr. Adelberg, beginning
at the later of age 55 or certain termination events, will be the greater of
(i) 2.6 percent of his average base salary over a three-year period times his
years of service, offset by benefits payable under the Basic Pension Plan, or
(ii) the benefits he would have received under the SERP. Mr. Marsh's
employment agreement provides that his incremental retirement benefit will
vest if he remains employed by CMP Group until June 30, 2000. In that case,
Mr. Marsh will receive, beginning at age 55, a benefit equal to the greater of
(i) 50 percent of the average of three years of base salary, offset by
benefits payable under the Basic Pension Plan, or (ii) intended SERP benefits.
Mr. Marsh is also entitled to retiree medical benefits equal to those
available under Central Maine Power's retiree medical benefits plan. Mr.
Poulin is entitled to an incremental retirement benefit under his employment
agreement that will vest if he is actively employed on December 31, 1999. The
amount of this benefit will be based on the formulae in the Basic Pension Plan
and the SERP, but will be calculated by adding five years of age and service
credit. The portion of Mr. Poulin's total retirement benefit not paid under
the Basic Pension Plan or the SERP will be paid under his employment
agreement. In addition, he is entitled to retiree medical benefits. In the
event the SERP is terminated by the Board of Directors, CMP Group will
continue to make premium payments under replacement life insurance policies
with face amounts equal to the face amounts of the policies currently in place
for Messrs. Flanagan, Adelberg, Marsh and Poulin in connection with the SERP
until the later of their termination of employment, or for three years
thereafter in the event of a change of control.
For all executive officers, the agreements provide for severance benefits
for certain terminations of employment. If within periods of either 12 months,
or 36 months in the case of Messrs. Flanagan, Adelberg, Marsh, Poulin and
McClain, following the consummation of a change of control of CMP Group,
employment is terminated without cause or due to constructive discharge,
Messrs. Flanagan, Adelberg, Marsh, Poulin and McClain will be entitled to (i)
1.99 times base salary and 2.99 times the three-year average of annual
incentive compensation, and Ms. Burns will be entitled to 1.99 times base
salary. In such events, the other executive officers will be entitled to one
times base salary. In addition, in either of these circumstances, executive
officers will be entitled to the continuation of medical and other benefits
available under group benefit plans and limited outplacement services. If
change of control severance payments are triggered under the agreements,
executive officers will also receive an amount equal to one times their
respective base salaries, paid over 12 months, in consideration of non-
competition agreements. Severance benefits payable in connection with a change
of control will be reduced in the event such payments constitute "excess
parachute payments," as defined in federal tax law, but only if the amount of
the reduction is less than the federal excise tax that the executive officer
would be obligated to pay.
15
In the event of a termination without cause or constructive discharge when
no change of control has occurred, the executive officer will be entitled to
receive severance benefits equal to one times his or her annual base salary.
The agreements for Ms. Burns, Mr. Cutter, Mr. Call and Ms. Pare provide for
retention payments equal to one-half times their respective base salaries if
they continue their employment until the earlier of May 31, 2000 or a
specified change of control event.
All of the agreements are automatically extended for successive one-year
periods from their initial expiration dates unless the employer or the
executive officer gives notice of non-renewal. The agreements for Messrs.
Flanagan, Adelberg, Marsh, Poulin and McClain provide for one final three-year
extension after a change of control. The agreements for the other executive
officers will remain in effect for one year after the consummation of a change
of control.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Overview. The objectives of the Compensation and Benefits Committee in
administering executive compensation programs for CMP Group and Central Maine
Power executives are to assure that total compensation opportunities are
competitive with those available in the utility industry and general industry
and contain significant pay-for-performance elements to align more closely the
interests of the executive officers and shareholders by supporting and
increasing shareholder value.
The Committee believes that the three existing components of total direct
compensation for executive officers, namely, base salary, annual incentives
and long-term incentives, are appropriate means of achieving these objectives.
These items of compensation are designed to be leveraged for performance and
shareholder value enhancement and to be more competitive in a changing
business environment. This performance-oriented compensation approach is
designed to support the attainment of CMP Group's strategic goals and to
balance the focus on short and long-term performance goals.
On an overall basis, the Committee has aligned the elements of direct
compensation with a competitive market that includes electric utilities in the
Edison Electric Institute ("EEI") Index of Investor-Owned Electrics used in
the performance graph below and companies from general industry that are
selected from a published survey compiled by the Committee's independent
compensation consultant based on business diversity and complexity,
competitive similarities, revenue size and geography. This blended market
takes into account that Central Maine Power's electric utility business is the
principal business of its holding company parent CMP Group and also reflects
the formation of the holding company to facilitate the pursuit of appropriate
non-utility business ventures. The Committee believes that this expanded
market will better enable CMP Group and Central Maine Power to attract and
retain executive talent that is essential in aggressively managing changing
business requirements in an increasingly competitive climate.
Total compensation opportunities provided by base salary and annual and
long-term incentives are designed to reflect median compensation levels for
positions with comparable responsibilities in the targeted blended market. The
median represents a fifty/fifty blend of the median pay of electric utilities
and companies from general industry. The mix of these compensation elements is
performance leveraged to support and enhance shareholder value by tying
earnings opportunities to performance results.
Base Salary. Base salaries of the executive officers are measured against
median base salary levels for positions with comparable functional
responsibilities in the identified market, adjusted to take into account
individual abilities and skills in light of the business challenges requiring
those attributes. In setting 1998 base salaries for the executive officers,
the Committee aged the extensive information provided by its independent
compensation consultant for 1997 by 6.7 percent, the average increase for
utility executives as reported by EEI in 1998. Based on this process and after
taking into account individual factors, the Committee adjusted the base
salaries of the executive officers other than Mr. Flanagan an average 11
percent to bring their salaries within 90 to 95 percent of the market for
their positions. The Committee adjusted Mr. Flanagan's base salary by
approximately six percent, which maintained the average 20 percent variance
between the salary for his position and the higher salary level for the
blended utility and general industry market.
16
Annual Incentives. In 1998, the annual incentive compensation program for
executive officers, including the President and Chief Executive Officer,
reflected several important strategic corporate objectives focused on the
transition to competition resulting from federal and state regulatory and
legislative initiatives that have opened the generation and transmission
markets to competition and on improvement in financial performance. These
objectives and their weighting were as follows: forming a holding company
structure, 5%; obtaining Maine Public Utilities Commission ("MPUC") approval
for the sale of Central Maine Power's generating assets, 15%; obtaining Board
approval of a subsidiary governance plan, 10%; securing a favorable MPUC
decision on stranded cost recovery and revenue requirements for Central Maine
Power, 15%; attaining a specified return on equity and increase in the market
price of CMP Group's common stock, 15% each; securing favorable ratemaking
treatment of the generation sale proceeds, 10%; developing a financial plan
for the asset sale proceeds, 5%; and securing improved ratings on Central
Maine Power's senior debt securities from two credit rating agencies, 10%. In
addition to these corporate goals, a combination of return on equity and share
price was used to determine the percentage of the target award pool available
for awards. The Committee also adopted individual performance goals that were
key components of corporate strategy.
Based on return on equity and share price levels previously approved by the
Committee, the Committee determined that 93.75 percent of the target pool
would be available for awards. This amount was further reduced by taking into
account the 85 percent level of performance under the corporate goals. The
result of these performance levels was that a maximum of 79.7 percent of
targeted short-term incentive compensation was earned under the plan. This
level was adjusted to take into account the results of performance by the
executive officers under their individual performance goals. Actual awards,
other than the award to Mr. Flanagan, ranged from 60 to 79.7 percent of target
compensation, which is 25 to 30 percent of base salary. The award to Mr.
Flanagan after applying this formula and determining that he had achieved his
individual goals at a level of 70 percent was $93,593, representing 55 percent
of his targeted short-term incentive compensation of one-half of base salary.
Awards under the Annual Incentive Plan are paid in cash for 75 percent of the
total award, and 25 percent in the form of CMP Group common stock purchased at
a 25 percent discount for the remaining portion. Plan participants may also
elect to take up to an additional 25 percent of the total award in stock,
which is also purchased at a 25 percent discount.
Long-Term Incentive Compensation. The Long-Term Incentive Plan, in which the
executive officers participate, is intended to focus attention more sharply on
shareholder value enhancement. Target long-term compensation opportunities
range from 168 percent of base salary for Mr. Flanagan and from 50 to 60
percent of base salary for the other executive officers.
In 1998, performance shares for a three-year performance period running
until the end of the year 2000, representing 68 percent of the targeted
compensation value, and stock options, representing the remaining 32 percent,
were granted. These proportions reflect the limit on the number of available
shares for awards under the Long-Term Incentive Plan approved by the
shareholders.
Performance shares were granted at the beginning of the three-year
performance period and will be paid out in the form of CMP Group common stock
if performance goals are attained. For the performance period from 1998 to the
end of the year 2000, performance will be measured by reference to total
shareholder return and by the ranking of Central Maine Power compared to other
electric utilities represented in the EEI Index for threshold, target and
maximum levels of performance. The Committee granted Mr. Flanagan 21,837
performance shares for the three-year performance period beginning in 1998;
grants of performance shares to the other executive officers for the period
ranged from approximately 2,200 to 5,000 performance shares. Performance
shares were granted at the market price of the common stock.
Options to purchase shares of CMP Group common stock were also granted in
1998 as shown on the Options/SAR grants table in this Joint Proxy Statement.
Each option represents the right to purchase one share of common stock at the
price of $17.375 per share, the market value of the common stock on the date
of the grant. The options vest in one-third increments on the first, second
and third anniversaries of the grant. In 1998, options were granted based on
an estimated Black-Scholes option modeling value of 13 percent of the market
17
price, reflecting the then-current market valuation for Central Maine Power.
The Committee believes that the 13 percent valuation model resulted in an
appropriate number of options to provide intended target long-term incentive
opportunities.
Other policies. Effective January 1, 1997, the executive officers and other
members of management are required to increase their holdings of common stock
so that within four years, the President and Chief Executive Officer owns
stock with a value no less than three times his base salary, with lesser
multiples of base salary for other positions.
A provision of federal tax law denies a tax deduction to any publicly-held
company for compensation paid to any named executive officer that exceeds one
million dollars in a taxable year, except for certain performance-based
compensation. The Committee has not adopted a policy with respect to these
compensation limits.
Compensation and Benefits Committee
Charles H. Abbott (Chair)
Duane D. Fitzgerald
Peter J. Moynihan
18
SHAREHOLDER RETURN COMPARISON
The graph below compares the cumulative total shareholder return on the
common stock of CMP Group with the cumulative total return on the S&P 500 Index
and the Edison Electric Institute Index of Investor-owned Electrics ("EEI
Index") at December 31 for each of the last five fiscal years (assuming the
investment of $100 in CMP Group's common stock, the S&P 500 Index and the EEI
Index on December 31, 1993, and the reinvestment of all dividends).
(LINE GRAPH APPEARS HERE)
December 31
-----------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
CMP Group......................................... $100 $ 97 $111 $ 96 $135 $175
S&P 500 Index..................................... $100 $101 $139 $171 $229 $294
EEI Index......................................... $100 $ 88 $116 $117 $149 $170
19
PROPOSAL 2
APPROVAL OF
INDEPENDENT PUBLIC ACCOUNTANTS
At a meeting held on February 17, 1999, the Board of Directors of CMP Group
acted to appoint PricewaterhouseCoopers LLP, Portland, Maine, as auditors for
CMP Group for 1999. At the Annual Meeting of the Shareholders of CMP Group, it
is the intention of the persons named as proxyholders in the proxy enclosed
herewith to vote in favor of the approval of that action by the Board of
Directors. A representative of PricewaterhouseCoopers LLP will attend the
meeting and, if he or she so desires, make a statement; he or she will also
respond to appropriate questions.
The appointment of PricewaterhouseCoopers LLP by the Board of Directors is
based on the recommendation of the Audit Committee, which historically has
reviewed both the audit scope and the estimated audit fees and related
services for the coming year. The affirmative vote of a majority of the votes
cast by the holders of CMP Group's common stock entitled to vote at the CMP
Group Annual Meeting is sought for approval of the appointment.
The Board of Directors of CMP Group recommends a vote FOR Proposal 2.
DEADLINES FOR SHAREHOLDER PROPOSALS
For a shareholder proposal to be considered for inclusion in the Proxy
Statement and form of proxy for the 2000 Annual Meeting of Shareholders of CMP
Group or Central Maine Power, as appropriate, it must be received by Anne M.
Pare, Secretary, CMP Group, Inc./Central Maine Power Company, 83 Edison Drive,
Augusta, Maine 04336 on or before December 22, 1999.
Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows a
company to use discretionary voting authority to vote on matters coming before
an annual meeting of shareholders if the company does not have notice of the
matter (i) at least 45 days before the date corresponding to the date on which
the company first mailed its proxy materials for the prior year's annual
meeting of shareholders or (ii) before the date specified by an advance notice
provision.
CMP Group's Charter contains such an advance notice provision. Under the
Charter, a shareholder who wishes to nominate a candidate for election to the
Board of Directors of CMP Group at the 2000 Annual Meeting of Shareholders of
CMP Group or bring any matter before that meeting (other than matters included
in CMP Group's proxy materials) must submit the nomination or the matter to
the Secretary of CMP Group no earlier than February 21, 2000 and no later than
March 21, 2000. The notice must also meet other requirements set forth in the
Charter.
Central Maine Power does not have a similar Charter provision. For the 2000
Annual Meeting of Shareholders of Central Maine Power, shareholders must
submit matters they intend to bring before the 2000 Annual Meeting to the
Secretary of Central Maine Power no later than March 6, 2000.
20
OTHER MATTERS
The accompanying proxy is solicited by and on behalf of the Board of
Directors of CMP Group or Central Maine Power, as appropriate, for use at the
respective Annual Meetings of the Shareholders of CMP Group and Central Maine
Power to be held on May 20, 1999 or any adjournments thereof. The costs of
solicitation will be paid by the respective companies in the proportion in
which they incur such costs. No solicitation is to be made by specially
engaged employees or other paid solicitors except that Corporate Investor
Communications, Inc. will solicit shareholders of record and broker nominees
on behalf of CMP Group and Central Maine Power, for which it will receive a
fee of approximately $4,500, plus reasonable expenses. Banks, brokerage firms
and other custodians, nominees and fiduciaries will be reimbursed for
reasonable expenses incurred in sending proxy materials to beneficial owners
of CMP Group's common stock and Central Maine Power's 6% Preferred Stock. In
addition, directors, officers or employees of the respective companies may
solicit proxies by telephone or in person, the costs of which will be nominal.
The Boards of Directors of CMP Group and Central Maine Power do not know of
any matter, other than the matters set forth in this Joint Proxy Statement, to
be acted upon at these Annual Meetings. If a shareholder proposal for CMP
Group that was excluded from this Joint Proxy Statement in accordance with
Rule 14a-8 of the Securities and Exchange Commission's proxy rules is properly
brought before the CMP Group 1999 Annual Meeting, it is intended that the
proxyholders will use their discretionary authority to vote the CMP Group
proxies against such proposal. If any other matter shall be properly brought
before a meeting, the proxies will be voted in respect thereof in accordance
with the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
/s/ David T. Flanagan
David T. Flanagan
President and Chief Executive
Officer
CMP Group, Inc.
/s/ Sara J. Burns
Sara J. Burns
President
Central Maine Power Company
Augusta, Maine
April 20, 1999
Again, we call your attention to the enclosed Proxy. We would appreciate
it very much if you would VOTE, DATE, SIGN and RETURN IT PROMPTLY,
regardless of whether you plan to attend the meeting.
21
APPENDIX
SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of CMP
Group and Central Maine for the five years ended December 31, 1994 through
1998. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto included in
Items 7 and 8 hereof. The selected consolidated financial data for the years
ended December 31, 1994 through 1998 are derived from the audited consolidated
financial statements of Central Maine.
Selected Consolidated Financial Data
Central Maine
CMP Group -------------------------------------------------------
1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
Electric operating
revenue................ $ 938,739 $ 938,561 $ 954,176 $ 967,046 $ 916,016 $ 904,883
Net income (loss)....... 52,910 54,823 13,422 60,229 37,980 (23,265)
Long-term obligations... 346,281 343,834 400,923 587,987 622,251 638,841
Redeemable preferred
stock.................. 18,910 18,910 39,528 53,528 67,528 80,000
Total assets............ 2,262,884 2,223,480 2,298,966 2,010,914 1,992,919 2,046,007
Earnings (loss) per
common share........... $ 1.63 $ 1.56 $ 0.16 $ 1.57 $ 0.86 $ (1.04)
Dividends declared per
common share........... $ 0.90 $ 0.675* $ 0.90 $ 0.90 $ 0.90 $ 0.90
- --------
* 1998 fourth quarter dividend of $0.225 per share was declared and paid in
January 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CMP GROUP AND CENTRAL MAINE POWER COMPANY
This is a combined Report on Form 10-K of CMP Group and Central Maine.
Therefore, our Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) applies to both CMP Group and Central Maine. CMP
Group's consolidated financial statements include the accounts of CMP Group
and its wholly owned and controlled subsidiaries, including Central Maine
(collectively, the CMP Group System). Central Maine's consolidated financial
statements include its accounts as well as those of its wholly owned and
controlled subsidiaries. The MD&A should be read in conjunction with the
consolidated financial statements included herein.
Note re Forward-Looking Statements
This Report on Form 10-K 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. CMP Group and
Central Maine undertake 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 urged to carefully
review and consider the factors in the succeeding paragraph.
Factors that could cause actual results to differ materially include, among
other matters, the outcome of the FERC proceeding involving Maine Yankee's
rates, decommissioning costs and issues related to the closing of the Maine
Yankee nuclear generating plant; the actual costs of decommissioning the Maine
Yankee plant; failure to resolve any significant aspect of the "Year 2000
problem"; electric utility industry restructuring, including
A-1
the ongoing state and federal activities that will determine Central Maine's
ability to recover its stranded costs and establish its revenue requirements
and rate design as a transmission-and-distribution utility commencing March 1,
2000; the results of Central Maine's planned sale of its generating assets;
Central Maine's ability to recover its costs resulting from the January 1998
ice storms that damaged its transmission and distribution system; future
economic conditions; earnings-retention and dividend-payout policies;
developments in the legislative, regulatory, and competitive environments in
which CMP Group and Central Maine operate; CMP Group'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.
Formation of Holding Company
General. CMP Group is a holding company organized effective September 1,
1998, which owns all of the common stock of Central Maine and the former non-
utility subsidiaries of Central Maine. As part of the reorganization, all of
the shares of Central Maine's common stock were converted into an equal number
of shares of CMP Group common stock, which are listed on the New York Stock
Exchange under the symbol CTP. The reorganization was approved by Central
Maine's shareholders on May 21, 1998, and on various dates in 1998 by the
appropriate state and federal regulatory agencies.
Results of Operations
CMP
Group Central Maine
----- -------------
(dollars in millions)
Net income (loss)
Twelve months ended:
December 31, 1998............... $52.9 $1.63/share $54.8
December 31, 1997............... 5.2 $0.16/share 13.4
----- -----
Increase........................ $47.7 $41.4
Earnings (loss) applicable to
common stock
Twelve months ended:
December 31, 1998............... N/A $50.0 $1.56/share
December 31, 1997............... N/A 5.2 $0.16/share
-----
Increase........................ $44.8
The 1998 results benefited significantly from a net benefit of $25 million
related to the expiration of a high-cost non-utility power contract; a $27.5
million decrease in purchased power capacity costs, chiefly due to the closing
of the Maine Yankee nuclear plant and a $4 million decrease in fuel cost for
Central Maine generation reflecting lower oil prices. In addition, the
following major, non-operating, non-recurring events had a significant impact
on earnings: 1) MaineCom, a subsidiary of CMP Group, sold its 40-percent
interest in New England Fibre Communications. The sale resulted in a net
after-tax gain of approximately $5.7 million or $0.18 per share. 2) Central
Maine sold shares then owned directly in NEON, now a 38.5-percent-owned equity
investment of MaineCom, as part of the initial public offering of NEON common
stock. The net after-tax gain was approximately $1.9 million, or $0.06 per
share. 3) Central Maine finalized the sale of transmission-line easements and
land. The net after-tax gain of approximately $5.6 million resulted in
increased earnings of approximately $0.17 per share.
CMP Group electric operating revenue decreased by $15.4 million or 1.6
percent to $938.7 million in 1998, and decreased by $12.9 million or 1.3
percent in 1997 to $954.2. Lower sales volume due to the January ice storm,
warmer weather, weaker sales to the pulp and paper industry, and the impact of
the Asian economic crisis,
A-2
were the major reasons for the decreased revenue in 1998. The major components
of the change in electric operating revenue are as follows:
1998 1997
------ ------
Revenue from Central Maine service-area kwh sales........... $(20.2) $ 17.9
Revenues from non-territorial sales......................... 6.2 (27.1)
Other operating revenue..................................... 4.5 (1.5)
MEPCO fuel cost recovery.................................... (5.9) (2.2)
------ ------
$(15.4) $(12.9)
====== ======
Service Area Kwh Sales. Central Maine's service area sales of electricity
totaled approximately 9.05 billion kilowatt-hours for the year ended December
31, 1998, down slightly from the 9.4 billion kilowatt-hour level of a year
ago.
Central Maine's service-area sales for the years 1998, 1997 and 1996 are
shown in the following table:
1998 1997 1996
------------ ------------ ------------
% % %
KWH change KWH change KWH change
----- ------ ----- ------ ----- ------
(Kilowatt-hours in millions)
Residential......................... 2,761 (2.0)% 2,817 (0.4)% 2,829 1.0%
Commercial.......................... 2,563 1.3 2,529 1.6 2,489 0.5
Industrial.......................... 3,487 (7.8) 3,784 2.6 3,689 4.0
Wholesale and lighting.............. 242 6.1 228 5.3 217 58.9
----- ----- -----
Total Service-Area Sales............ 9,053 (3.2)% 9,358 1.5% 9,224 2.9%
===== ===== =====
The primary factors in the service-area kilowatt-hour sales overall decrease
in 1998 were the reduction in residential sales due to warm winter
temperatures, customer outages resulting from the January 1998 ice storm and
lost sales in the paper industry within the industrial sector.
The primary factors in the service-area kilowatt-hour sales increases in
1997 were the growth experienced by the paper mills and strong sales to other
industrial sectors. Nearly half of that growth directly related to an
expansion by a large industrial customer. The increase in 1996 was residential
customers' taking advantage of Central Maine's water-heating programs,
increased sales in the pulp and paper industry, and the addition of a
wholesale customer.
The average number of residential customers increased by 4,607 in 1998,
4,822 in 1997 and 5,157 in 1996, while average usage per residential customer
declined 3.0 percent in 1998, 1.5 percent in 1997 and 0.15 percent in 1996.
The 1998 increase in commercial sales reflects increased sales in the retail
and service sectors, which rebounded strongly after the warm winter
temperatures and the ice storm experienced early in 1998, due to the
relatively healthy economy and a strong tourist season in Central Maine's
service territory.
Industrial sales levels are significantly affected by sales to the pulp-and-
paper industry, which accounts for approximately 56 percent of industrial
sales and approximately 22 percent of total service-area sales. Sales to the
pulp-and-paper sector decreased by 14.4 percent in 1998, 0.8 percent in 1997
and increased by 3.7 percent in 1996. The decrease in 1998 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. In addition, the weakness in Asian economies
progressively impacted Maine's manufacturing sector in 1998, resulting in
lower than expected kwh sales in the industrial sector. The decrease in 1997
was due primarily to the permanent shutdown of one of the paper mills in 1997.
The increase in 1996 reflects special arrangements Central Maine has made with
several paper companies to back down some
A-3
of their self-generation and buy electricity from Central Maine at a
discounted rate. Refer to "Alternative Rate Plan" and "Competition and
Economic Development," below, and Note 4 to Consolidated Financial Statements,
"Commitments and Contingencies--Competition," for additional information
regarding Central Maine's actions to preserve its remaining large-industrial-
customer base and other customer groups. Sales to all other industrial
customers as a group increased 2.2 percent in 1998, 8.2 percent in 1997 and
4.5 percent in 1996.
Operating Expenses
Central Maine's purchased power-energy expense decreased by $50 million in
1998. The decrease is due primarily to the buyout, restructuring, and
expiration of contracts with non-utility generators. Central Maine's purchased
power-capacity expense decreased $27.5 million in 1998 due primarily to the
permanent shutdown of the Maine Yankee Plant in August 1997.
Central Maine incurred additional expenses of $46.0 million in 1997 over
1996 to replace Maine Yankee energy and pay its share of capacity charges at
the plant. In addition, shutdowns at Millstone Unit No. 3 and Connecticut
Yankee Plants increased 1997 replacement-power cost by $5.0 million.
CMP Group maintenance expense increased $7.1 million for the year ended
December 31, 1998 compared to 1997. This increase was due primarily to Central
Maine's operations personnel working in maintenance capacities as a result of
the ice storm in the first quarter, and to subsequent cleanup efforts.
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
$33.5 million in 1998 as compared to 1997, as a result of higher pre-tax
earnings for the year ended December 31, 1998. The decrease of $23.9 million
in 1997 from 1996 is a reflection of lower pre-tax earnings for the year ended
December 31, 1997.
Other Income and Expense
Equity in Earnings of Associated Companies for CMP Group decreased by $6.3
million for the year ended December 31, 1998, compared to 1997. The decrease
is due primarily to losses recognized due to start-up costs of NEON. See
"Expansion of Lines of Business" below for further discussion.
CMP Group's gain on sale of investments and properties increased in 1998 by
$22.5 million and by $12.9 million for Central Maine. The increase is due
primarily to the following:
CMP Group Central Maine
--------- -------------
Sale of New England Fibre by MaineCom................ $ 9.5 $ --
Sale of stock in NEON................................ 3.1 3.1
Gas pipeline easement sales.......................... 6.4 6.4
Sale of land......................................... 3.6 3.6
Other--miscellaneous................................. (.1) (.2)
----- -----
$22.5 $12.9
===== =====
CMP Group Other Interest Expense increased by $0.7 million for the year 1998
as compared to 1997. The increase was due primarily to higher levels of
borrowing on Central Maine's revolving credit facility to meet working capital
needs.
Other interest expense increased in 1997 over 1996 primarily due to
additional interest incurred for tax audit settlements and amended returns
interest.
In July 1997, Central Maine redeemed $14 million of its 8 7/8% Series
Preferred Stock at par, under the mandatory and optional sinking-fund
provisions of that series. On July 1, 1998, Central Maine redeemed the final
$7 million of its 8 7/8% Preferred Stock under the mandatory sinking-fund
provision, reducing dividends in total by approximately $932 thousand for 1998
compared to 1997. On April 1, 1998 Central Maine redeemed all
A-4
of its 7 7/8% Preferred Stock ($30 million), reducing dividends by
approximately $1.8 million for the year ended December 31, 1998, compared to
1997. On June 8, 1998, $11.6 million of the outstanding 7.99% Preferred Stock
was repurchased, further reducing dividends by approximately $697 thousand for
the year ended December 31, 1998, compared to 1997.
Alternative Rate Plan
On January 1, 1995, Central Maine'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
Central Maine's rates, with no separate reconciliation and recovery of fuel
and purchased-power costs. Under the ARP, the MPUC is continuing to regulate
Central Maine'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, Central Maine
will continue to apply the provisions of SFAS No. 71 to its accounting
transactions and its future financial statements. See Note 3, "Regulatory
matters," of Notes to Consolidated Financial Statements--"Meeting the
Requirements of SFAS No. 71," below.
The ARP contains a mechanism that provides price-caps on Central Maine's
retail rates to be adjusted annually on each July 1, commencing in 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 Central Maine's retail rates, and includes fuel and
purchased power costs 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%, and a second formula-based offset that
started in 1996 and was intended to reflect the limited effect of inflation on
Central Maine'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 Central Maine's earnings are outside a range of 350 basis points
above or below Central Maine'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
Central Maine and its customers in computing the price-cap adjustment. The ROE
used for earnings sharing is scheduled to be 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 Central Maine 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 Central Maine or the electric-power industry.
On May 13, 1998, Central Maine submitted its 1998 ARP compliance filing to
the MPUC. In keeping with its pledge of limiting increases to the inflation
index, Central Maine voluntarily limited its request to 1.78%, which was the
inflation rate for 1997 under the ARP. Central Maine also proposed a rate
reduction of approximately ten percent contingent on the consummation of, and
ratemaking associated with, Central Maine's planned sale of generating assets.
The filing also reported information on the costs of restoring service to
Central Maine's customers after the January 1998 ice storm, as required by the
earlier MPUC order allowing Central Maine to defer those costs. Effective July
11, 1998, the MPUC approved a stipulated 1.33% increase. The amount of the
increase remains subject to 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
A-5
increase or decrease, ranging from a ceiling of 1.78% to a floor of 0.22%.
However, the Offer of Settlement pending before the FERC in Maine Yankee's
rate case, which has been approved by the MPUC, provides that the 1998 ARP
increase will not be adjusted.
The components of the last three ARP price increases 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%
===== ===== =====
Electric-Utility Industry Restructuring
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry by March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such 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.
Central Maine has substantial exposure to cost stranding relative to its
size. In general, its stranded costs reflect the excess costs of Central
Maine's purchased-power obligations over the market value of the power, and
the costs of deferred charges and other regulatory assets. The major portion
of Central Maine's stranded costs is related to above-market costs of
purchased-power obligations arising from Central Maine's long-term,
noncancelable contracts for the purchase of capacity and energy from NUGs,
with lesser estimated amounts related to Central Maine's 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. Higher market rates lower stranded-cost exposure, while lower market
rates increase it. In addition to market-related impacts, any estimate of the
ultimate level of stranded costs depends on such factors as state and federal
regulations, the extent, timing and form that competition for electric service
will take, the ongoing level of Central Maine's costs of operations, regional
and national economic conditions, growth of Central Maine's sales, the timing
of any changes that may occur from state and federal initiatives on
restructuring, and the extent to which regulatory policies and decisions
address recovery of stranded costs, including the application of value from
the sale of Central Maine's generating assets.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and Central Maine's generating costs reflects the
underlying costs of those sources of generation in place today, with
reductions for contract expirations and continuing depreciation. Deferred
regulatory-asset totals include the current uncollected balances and existing
amortization schedules for purchased-power contract restructuring and buyouts
negotiated by Central Maine to lessen the impact of these obligations, along
with energy management costs, financing costs, and other regulatory
commitments.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000,
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. Stranded costs are defined
A-6
as the legitimate, verifiable and unmitigable costs made unrecoverable as a
result of the restructuring required by the legislation and will be determined
by the MPUC as provided in the legislation. The MPUC has been conducting
separate adjudicatory proceedings to determine the stranded costs for each
Maine utility, along with the corresponding revenue requirements and stranded-
cost charges to be charged by each transmission-and-distribution utility. The
first phase of the Central Maine proceeding was completed in early 1999 and is
discussed under the heading "MPUC Proceeding on Stranded Costs, Revenue
Requirements, and Rate Design," below.
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 substantial inaccuracies in
the year 2003 and at least every three years thereafter.
The principal restructuring provisions of the legislation provide for
customers to have direct retail access to generation services and for
deregulation of competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the
MPUC. By that date, subject to possible extensions of time granted by the MPUC
to improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts
with qualifying facilities and contracts with demand-side management or
conservation providers, brokers or hosts, and (2) ownership interests in
nuclear power plants. However, the MPUC can require Central Maine to divest
its interest in Maine Yankee Atomic Power Company on or after January 1, 2009.
As discussed below under "Agreement for Sale of Generating Assets," Central
Maine has contracted to sell its non-nuclear generating assets and, after a
favorable court decision, is proceeding toward completing the sale by April 7,
1999. The legislation also requires investor-owned utilities, after February
29, 2000, to sell their rights to the capacity and energy from all generation
assets, including the purchased-power contracts that had not previously been
divested pursuant to the legislation, with certain immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider that
is affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central
Maine's service territory, as determined by the MPUC. CMP Group does not now
intend to engage in the sale of electric energy after March 1, 2000.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases
10 percent or more of the stock of a distribution utility, including
Central Maine, the purchasing entity and any related entity would be
prohibited from selling generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider
affiliated with Central Maine would be limited to providing such service
for only up to 20 percent of the electric load in Central Maine's service
territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to
competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in
any form for such reduction or elimination of consumption or for the re-
establishment of service with a transmission-and-distribution utility.
A-7
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation research and development on renewable
resources, assistance for utility employees laid off as a result of the
legislation, and recovery of nuclear-plant decommissioning costs "[a]s
required by federal law, rule or order", all funded through transmission-
and-distribution utility rates and charges.
Legislative bills that would amend certain provisions of the 1997
legislation have been submitted to the 1999 session of the Maine Legislature.
CMP Group and Central Maine cannot predict whether any changes to the 1997
legislation will be enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate
Design. The MPUC has completed the first phase of the proceeding contemplated
by Maine's restructuring legislation that will ultimately determine the
recovery of Central Maine's stranded costs, its revenue requirements, and the
design of its rates to be effective when Central Maine becomes a transmission-
and-distribution utility at the time retail access to generation begins in
Maine on March 1, 2000. On December 23, 1998, the MPUC Hearing Examiners in
the proceeding issued their report, in the form of a recommended decision.
Central Maine disagreed with a number of the individual recommendations in the
stranded-costs and revenue-requirements areas and filed exceptions to those
recommendations. The MPUC deliberated the recommendations on February 10 and
11, 1999, indicated disagreement with some of the recommendations, and issued
its written order on March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by
which it would set Central Maine's transmission-and-distribution rates,
effective March 1, 2000, but was not calculating the rates themselves because
such calculations at that time would rely excessively on estimates. The MPUC
pointed out that it would hold a "Phase II" hearing to set the actual rates
and determine the recoverable stranded costs after processing information
expected to become available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the
amount of recoverable stranded costs for Central Maine later in the proceeding
pursuant to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover
such costs that is equivalent to the utility's opportunity to recover these
costs prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded
costs, including among other factors the application of excess value from
divested generation assets to offset stranded costs. At the beginning of the
proceeding Central Maine had estimated its total stranded costs to be
approximately $1.3 billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the
appropriate cost of common equity for Central Maine as a transmission-and-
distribution company beginning March 1, 2000. Central Maine had recommended a
12-percent cost of common equity with a 55-percent common equity component in
the capital structure. The MPUC, after weighing conflicting recommendations,
decided on a common-equity cost of 10.50 percent with a common-equity
component of 47 percent, and an overall weighted-average cost of capital of
8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of
the proceeding primarily to establishing principles that would guide it in
designing Central Maine's rates to be effective March 1, 2000. The MPUC
indicated that it would focus on (1) facilitating the transition to a
competitive market for generation, and (2) implementing a "no-losers" policy,
i.e., that the new rate design would cause no Central Maine customer's bill to
increase on March 1, 2000. Applying the latter principle, the MPUC rejected a
newly designed standby rate for self-generators proposed by Central Maine in
favor of a design generally similar to Central Maine's current rate for the
class. The MPUC stated that it planned to undertake a comprehensive rate
design and alternative rate plan proceeding for Central Maine prior to March
1, 2002, when it could consider experience gained with the cost structures of
other transmission-and-distribution utilities after the commencement of retail
access to generation.
The Phase I order resulted from an extended proceeding with many points of
view represented and covers a wide variety of rate-related subjects.
Definitive findings by the MPUC in a number of the subject areas await the
A-8
second phase of the proceeding, which must be completed before March 1, 2000.
CMP Group and Central Maine cannot predict the definitive amount of stranded
costs the MPUC will determine that Central Maine will be entitled to recover
pursuant to the mandate of the restructuring statute, or the revenue
requirements and rate design that will result from Phase II of the MPUC
proceeding.
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine 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, including
approximately $18 million for assets of Union Water, to Florida-based FPL
Group. The related book value for these assets was approximately $218.9
million at December 31, 1998. In addition, as part of its agreement with FPL
Group, Central Maine entered into energy buy-back agreements to assist in
fulfilling its obligation to supply its customers with power until March 1,
2000. Subsequently, an agreement was reached to sell related storage
facilities to FPL Group for an additional $3.6 million ($1.5 million for the
assets and $2.1 million for lease revenue associated with the properties that
CMP will retain), including $1.15 million for Union Water assets. The related
book value of these assets was approximately $11.9 million at December 31,
1998.
Central Maine'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
pending sale. Central Maine will continue to seek buyers for those assets.
Central Maine 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 Central Maine'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 initially with the trustee under the
Indenture at the closing of the sale to free the generating assets from the
lien of the Indenture. Central Maine plans to use some of the proceeds on
deposit with the trustee to redeem or repurchase bonds under the terms of the
Indenture, and may discharge the Indenture. In addition, the proceeds could
provide the flexibility to redeem or repurchase outstanding equity securities.
Central Maine 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, regulatory requirements, market conditions and terms of
outstanding securities.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy
Maine, Inc. ("FPL Energy") had filed a civil action in the United States
District Court for the Southern District of New York requesting a declaratory
judgment that Central Maine could not meet essential terms of the January
agreement. FPL Group asserted that based on October 1998 FERC rulings on
transmission access, as well as other issues, it believed that Central Maine
could not comply with the conditions in the purchase contract and that FPL
Energy should not be bound to complete the transaction.
FPL Energy contended in its complaint that the FERC rulings (1) constituted
a material adverse effect under the purchase agreement and substantially
lessened the value of Central Maine's generating assets, and (2) precluded
Central Maine from obtaining all federal, state and local consents and
approvals required for the ownership, operation and maintenance of the
generating assets in a manner substantially consistent with Central Maine's
historical ownership, operation, and maintenance thereof, as required by the
purchase agreement. In addition, FPL Energy asserted that the FERC rulings
limited the ability of the prospective buyer to get power from the Central
Maine generating assets to market unconstrained by transmission limitations
resulting from new generators being added to the NEPOOL system, and therefore,
based on the doctrine of frustration of purpose, FPL Energy should be "excused
without further obligation or liability from effecting the purchase of
[Central
A-9
Maine's] generating assets." Central Maine, FPL Energy, NEPOOL, and other
parties interested in New England transmission-access issues requested
rehearing of the FERC rulings.
On November 23, 1998, the MPUC granted its approval of the sale to FPL
Energy of the generating assets contemplated by the purchase agreement,
finding the sale to be in the public interest. The MPUC also made the findings
required as a prerequisite to a FERC designation of the generating facilities
as "exempt wholesale generators," which had been requested by FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine
generating assets to FPL Energy, after making the required finding that the
sale was consistent with the public interest, and accepted certain
implementing agreements for filing. In discussing an issue raised by an
intervenor the FERC stated that by purchasing the generating assets FPL Energy
would be "stepping into the shoes of Central Maine" with respect to access to
the Central Maine and NEPOOL transmission system, but did not disturb the
earlier transmission-access rulings. The FERC granted its approval of the
transfer of hydroelectric and water storage licenses on December 28, 1998, and
the approval by FERC of exempt-wholesale-generator status for the generating
facilities, was granted on February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern
District of New York. On the same day the presiding judge ruled that FPL
Energy was not entitled to the declaratory judgment and entered judgment for
Central Maine and its affiliated defendants on all counts of the complaint.
Thereafter on that day FPL Energy announced that it would not appeal the
decision, but would proceed to a closing of the sale on or before April 7,
1999, as required by the sale agreement, and the parties are preparing for the
closing.
Expansion of Lines of Business
General. CMP Group is also preparing for competition by expanding its
business opportunities through investments that capitalize on core
competencies. MaineCom Services is a subsidiary that arranges, through other
investments 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, CNEX, formerly CMP International Consultants, provides utility
consulting (domestic and international) and research. The wholly-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, engineering and
environmental services, integrated energy solutions, and utility construction
services. Union Water's operating divisions include On Target Utility
Services, UnionLand Services, Maine HomeCrafters, E/PRO, and Combined
Energies(TM). These subsidiaries often utilize skills of former Central Maine
employees and regularly compete for business with other companies.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries,
have entered into a joint-venture agreement to pursue opportunities to
distribute natural gas at retail in many Maine communities that are not
currently served with that fuel. They would offer natural-gas service in
several areas of Maine, primarily the Augusta, Bangor, Bath-Brunswick, Bethel,
Windham and Waterville areas, none of which 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 Central Maine and
MEPCO. On July 24, 1998, the MPUC authorized the joint venture to serve the
areas it had applied to serve. The new company (now "CMP Natural Gas, L.L.C.",
equally owned by subsidiaries of CMP Group and Energy East) 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. CMP Group's level of
investment is dependent on the overall economic feasibility of natural gas as
a competitive energy option in Maine, a sufficient
A-10
expression of customer interest in gas service from CMP Natural Gas, and the
prospects for achieving an acceptable return on investment.
Fiber Optic Network. CMP Group, through its wholly-owned subsidiary MaineCom
Services, owns 38.5 percent of the common stock of Northeast Optic Network,
Inc. ("NEON"), which 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 1,000 fiber
optic cable route miles, or more than 65,000 fiber strand miles, in New
England and New York, utilizing primarily electric-utility rights-of-way,
including some of Central Maine's in Maine and some owned by other electric
utilities including Northeast Utilities, another substantial minority
stockholder, in Connecticut, Massachusetts and New Hampshire. As of December
31, 1998, NEON had completed construction of approximately 600 route miles, or
49,000 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 $48.0 million
of common stock and $180.0 million of senior notes, and Central Maine, as part
of the common-stock offering, sold some of the shares in NEON it then owned
for proceeds of approximately $3.1 million. In addition, with some of the
proceeds of the offering NEON repaid approximately $18 million Central Maine
had advanced under an earlier construction loan agreement. CMP Group 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. The common stock of NEON is listed on the Nasdaq Stock Market's
National Market under the symbol "NOPT".
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 Central Maine'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 did not operate after 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.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for
filing certain amendments to the Power Contracts (the "Amendatory Agreements")
and revised rates to reflect the decision to shut down the Plant and to
request approval of an increase in the decommissioning component of its
formula rates. Maine Yankee's submittal also requested certain other rate
changes, including recovery of unamortized investment (including fuel) and
certain changes to its billing formula, consistent with the non-operating
status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine
Yankee's new rates for filing, subject to refund after a minimum suspension
period, and set Maine Yankee's Amendatory Agreements, rates and issues
concerning the prudence of the Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
A-11
In support of its request for an increase in decommissioning collections,
Maine Yankee submitted with its initial FERC filing a 1997 decommissioning
cost study performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee
engaged in an extensive competitive bid process to engage a Decommissioning
Operations Contractor ("DOC") to perform certain major decontamination and
dismantlement activities at the Plant on a fixed-price, turnkey basis. As a
result of that process, a consortium headed by Stone & Webster Engineering
Corporation ("Stone & Webster") was selected to perform such activities under
a fixed-price contract. The contract provides for, among other undertakings,
construction of an independent spent fuel storage installation ("ISFSI") and
completion of major decommissioning activities and site restoration by the end
of 2004. The DOC process resulted in fixing certain costs that had been
estimated in the earlier decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active
intervenors, including among others the MPUC Staff, the OPA, Central Maine and
other owners, the Secondary Purchasers, and a Maine environmental group (the
"Settling Parties"), engaged in extensive discovery and negotiations. Those
parties participated in settlement discussions that resulted in an Offer of
Settlement filed by those parties with the FERC on January 19, 1999. On
February 8, 1999, the FERC Trial Staff recommended that the presiding judge
certify the settlement to the FERC and that the FERC approve it. Upon approval
by the FERC, the settlement would constitute a full settlement of all issues
raised in the consolidated FERC proceeding, including decommissioning-cost
issues and issues pertaining to the prudence of the management, operation, and
decision to permanently cease operation of the Plant. A separately negotiated
settlement filed with the FERC on February 5, 1999, would resolve the issues
raised by the Secondary Purchasers by limiting the amounts they will pay for
decommissioning the Plant and by settling other points of contention affecting
individual Secondary Purchasers. On February 24, 1999, the FERC Trial Staff
recommended certification and approval of the settlement with the Secondary
Purchasers. On March 10, 1999, the presiding judge certified to the FERC that
both Offers of Settlement were uncontested and joined in the Trial Staff's
comments that both were "fair, reasonable and in the public interest."
The Offer of Settlement provides for Maine Yankee to collect $33.6 million
in the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for ISFSI-
related costs. The original filing with FERC on November 6, 1997, called for
an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount
collected annually could be reduced to approximately $26 million if Maine
Yankee is able to (1) use for construction of the ISFSI funds held in trust
under Maine law for spent-fuel disposal, and (2) access approximately $6.8
million being held by the State of Maine for eventual payment to the State of
Texas pursuant to a compact for low-level nuclear waste disposal, the future
of which is now in question after rejection of the selected disposal site in
west Texas by a Texas regulatory agency. Both would require authorizing
legislation in Maine, which Maine Yankee is committed to use its best efforts
to obtain.
The Offer of Settlement also provides for recovery of all unamortized
investment (including fuel) in the Plant, together with a return on equity of
6.50 percent, effective January 15, 1998, on equity balances up to maximum
allowed equity amounts. The Settling Parties also agreed in the proposed
settlement not to contest the effectiveness of the Amendatory Agreements
submitted to FERC as part of the original filing, subject to certain
limitations including the right to challenge any accelerated recovery of
unamortized investment under the terms of the Amendatory Agreements after a
required informational filing with the FERC by Maine Yankee. In addition, the
settlement contains incentives for Maine Yankee to achieve further savings in
its decommissioning and ISFSI-related costs and resolves issues concerning
restoration and future use of the Plant site and environmental matters of
concern to certain of the intervenors in the proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the
OPA entered into a further agreement resolving retail rate issues and other
issues specific to the Maine parties, including those that had been raised
concerning the prudence of the operation and shutdown of the Plant (the "Maine
Agreement"). Under the Maine Agreement Central Maine would continue to recover
its Maine Yankee costs in accordance with its most recent ARP order from the
MPUC without any adjustment reflecting the outcome of the FERC proceeding. To
the extent that Central Maine
A-12
has collected from its retail customers a return on equity in excess of the
6.50 percent contemplated by the Offer of Settlement, no refunds would be
required, but such excess amounts would be credited to the customers to the
extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners,
for the period from March 1, 2000, through December 1, 2004, to hold their
Maine retail ratepayers harmless from the amounts by which the replacement
power costs for Maine Yankee exceed the replacement power costs assumed in the
report to the Maine Yankee Board of Directors that served as a basis for the
Plant shutdown decision, up to a maximum cumulative amount of $41 million.
Central Maine's share of that amount would be $31.16 million for the period.
The Maine Agreement, which was approved by the MPUC on December 22, 1998, also
sets forth the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including
the Maine Agreement, constitutes a reasonable resolution of the issues raised
in the Maine Yankee FERC proceeding, and that approval of the Offer of
Settlement by the FERC would eliminate significant uncertainties concerning
CMP Group's and Central Maine's future financial performance. Although all of
the active parties to the proceeding, including the FERC Trial Staff, support
or, with respect to certain individual provisions, do not oppose, the Offer of
Settlement, CMP Group and Central Maine cannot predict with certainty whether
or in what form it will be approved by the FERC.
Other Maine Yankee Shareholders. Periodically-higher nuclear-related costs
have affected 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. CMP
Group and Central Maine cannot predict, however, what effect, if any, the
financial and regulatory difficulties experienced by some Maine Yankee
stockholders might have on Maine Yankee or Central Maine.
Interests in Other Nuclear Plants
In December 1996, the Board of Directors of Connecticut Yankee Atomic Power
Company voted to permanently shut down and decommission the Connecticut Yankee
plant for economic reasons. The plant did not operate after July 22, 1996.
Central Maine estimates its share of the cost of Connecticut Yankee's
continued compliance with regulatory requirements, recovery of its plant
investment, decommissioning and closing the plant to be approximately $29.9
million and has recorded a corresponding regulatory asset and liability on the
consolidated balance sheet. Central Maine is currently recovering through
rates an amount adequate to recover these expenses. Issues relating to
Connecticut Yankee's decommissioning rates, as well as the prudence of
operating that plant and the decision to cease operations, remain pending
before the FERC.
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.
Central Maine 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 $7.8
million. This estimate has been recorded by Central Maine as a corresponding
regulatory asset and liability on Central Maine's balance sheet. Central
Maine's current share of costs related to the shutdown of Yankee Atomic is
being recovered through rates.
The Vermont Yankee plant is an operating unit. Its NRC operating license is
scheduled to expire in the year 2012.
Pursuant to a joint ownership agreement, Central Maine has a 2.5 percent
direct ownership interest in the Millstone 3 nuclear unit in Waterford,
Connecticut, which is operated by Northeast Utilities. This facility was off-
line from March 31, 1996, to July 1998, due to NRC concerns regarding license
requirements.
A-13
On August 7, 1997, Central Maine 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. Since August 1997
the parties have been engaged in resolving preliminary issues and in extensive
pre-hearing discovery on a schedule calling for an arbitration hearing in the
fall of 1999. Central Maine cannot predict the outcome of the litigation and
arbitration or whether the current schedule will be maintained.
Central Maine is obligated to pay its proportionate share of the operating
expenses, including depreciation and a return on invested capital, of each of
the Yankee Companies referred to above for periods expiring at various dates
to 2012. Pursuant to the joint ownership agreement for Millstone 3, Central
Maine is similarly obligated to pay its proportionate share of the operating
costs of Millstone 3. Central Maine is also required to pay its share of the
estimated decommissioning costs of each of the Yankee Companies and Millstone
3. The estimated decommissioning costs are paid as a cost of energy in the
amounts allowed in rates by the FERC.
Non-Utility Generators
In accordance with prior MPUC policy and the ARP, $99 million of power-
purchase contract buy-out or restructuring costs incurred since January 1992
are included in Deferred Charges and Other Assets on Central Maine's balance
sheet and will be amortized over their respective fuel savings periods.
Central Maine has restructured 43 contracts representing 389 megawatts of
capacity that should result in approximately $231 million in fuel savings over
the next five years.
During 1998 Central Maine purchased or restructured two power-purchase
contracts which it expects will result in savings to its customers the
equivalent of approximately $40.5 million in net present value.
On February 12, 1999, Central Maine restructured a power-purchase contract
with a NUG in Livermore, Maine, which it expects will save its customers the
equivalent of $20.4 million in net present value.
On December 31, 1998, two contracts with NUGs from which Central Maine was
obligated to purchase electricity at substantially above-market prices
expired. As a result, Central Maine expects to reduce power purchases by
approximately $2.7 million.
Open-Access Transmission Service Ruling
On April 24, 1996, the FERC issued Order No. 888, which requires all public
utilities that own, control or operate facilities used for transmitting
electric energy in interstate commerce to file open access non-discriminatory
transmission tariffs that offer both load-based, network and contract-based,
point-to-point service, including ancillary service to eligible customers
containing minimum terms and conditions of non-discriminatory service. This
service must be comparable to the service they provide themselves at the
wholesale level; in fact, these utilities must themselves take the wholesale
transmission service they provide under the filed tariffs. The order also
permits public utilities and transmitting utilities the opportunity to recover
legitimate, prudent and verifiable wholesale stranded costs associated with
providing open access and certain other transmission services. It further
requires public utilities to functionally separate transmission from
generation marketing functions and communications. The intent of this order is
to promote the transition of the electric utility industry to open
competition. Order No. 888 also clarifies federal and state jurisdiction over
transmission in interstate commerce and local distribution and provides for
deference of certain issues to state recommendations. The FERC subsequently
issued Orders No. 888-A and 888-B which generally reaffirm Order No. 888 and
clarify certain terms.
On July 9, 1996, Central Maine and MEPCO submitted compliance filings to
meet the new pro-forma tariff non-price minimum terms and conditions of non-
discriminatory transmission service and since then have made additional
filings revising their tariffs in response to subsequent FERC and NEPOOL
Orders. Central Maine and MEPCO have been transmitting energy pursuant to
their filed tariffs, subject to refund.
A-14
On April 24, 1996, the FERC also issued Order No. 889, which requires public
utilities to functionally separate their wholesale power marketing and
transmission operation functions and to obtain information about their
transmission system for their own wholesale power transactions in the same way
their competitors do through the Open Access Same-time Information System
("OASIS"). The rule also prescribed standards of conduct and protocols for
obtaining the information. The standards of conduct are designed to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential information. In 1998, both Central Maine and MEPCO submitted
standards of conduct filings that further clarified the separation of the
wholesale power marketing and transmission operations functions. The NEPOOL
Agreement and open-access transmission tariff have been revised to reflect the
new regulatory requirements and are pending FERC approval.
Competition and Economic Development
Central Maine faces competition in several aspects of its traditional
business and anticipates that competition will continue to put pressure on
both sales and the prices Central Maine can charge for its product.
Alternative fuels and modifications to regulations that in the past had
restricted competition from suppliers outside of Central Maine's service
territory have expanded customers' energy options, even before the
commencement of retail competition on March 1, 2000. As a result, Central
Maine continues to pursue retention of its customer base. This increasingly
competitive environment has resulted in Central Maine's entering into
arrangements with its wholesale customers, as well as with certain industrial,
commercial, and residential customers, to provide their energy needs at prices
and margins lower than the current averages.
Pursuant to the pricing-flexibility provisions of the ARP, Central Maine
offers special prices for high-use residential customers and for industrial
and commercial customers with the capacity to change fuel sources. Economic-
Development price contracts and the Maine-Made Incentive Program support
Central Maine's business-development initiatives. In 1994, the Company lowered
tariffs for its large general-service customers and executed separate five-
year definitive agreements with 18 individual customers providing additional
reductions. Approximately 44 percent of annual service area kilowatt-hour
sales and 31 percent of annual revenues are covered under special tariffs
allowed under the pricing flexibility provisions of the ARP. These reductions
in rates were offered to customers after consideration of associated NUG cost
reductions, savings from further NUG consolidations and other general cost
reductions.
"Year 2000" Computer Issues
The "Year 2000 problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore those computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail or create
erroneous results, with potentially serious and widespread adverse
consequences.
CMP Group, through Central Maine, began its Year 2000 problem remediation
efforts in 1996, and since that time has developed a broad-based and
comprehensive project plan for addressing Year 2000 issues. The plan includes
both Information Technology ("IT") and non-IT systems, addresses both
centralized and distributed systems, and encompasses systems critical to the
generation, transmission, and distribution of electric energy as well as the
traditional business systems necessary to the CMP Group System.
As planned, by the end of 1998 CMP Group had completed much of the work
associated with Year 2000 readiness for IT infrastructure and centralized
business systems. The remaining work in those areas is scheduled to be
completed during the first six months of 1999. All vendors associated with
this remaining work have indicated availability of products and services that
CMP Group believes should permit CMP Group to be Year 2000 ready by June 1999.
CMP Group's target completion date for Year 2000 power generation and
delivery systems is also June 1999, consistent with the DOE's published
request in May 1998 and the overall electric-utility industry guidelines
prepared by the North American Electric Reliability Council ("NERC"). CMP
Group has contracted
A-15
with the appropriate vendors to complete critical generation control system
remediation work by June 1999, and believes it is on schedule to meet this
target.
In addition to the internal Year 2000 readiness activities discussed above,
CMP Group is actively participating in a joint ISO/NEPOOL initiative designed
to assess, and assure, power reliability within the NEPOOL area. This
initiative encompasses all participants, including Central Maine, within the
New England area.
CMP Group also has an active program in place to identify and address issues
associated with third-party providers. The program addresses business
relationships with all third-party providers, but focuses on those suppliers
deemed critical to CMP Group's business. At this time CMP Group has no
indication that any third-party with which CMP Group has a material
relationship is expecting a Year 2000-related business interruption. CMP Group
will continue to monitor and assess its third-party relationships.
CMP Group estimates it will incur approximately $4.0 million of costs
associated with making the necessary modifications identified to date to both
the centralized and non-centralized systems. As of December 31, 1998,
approximately $3.4 million of such costs has been incurred.
CMP Group recognizes that failure to correct problems associated with Year
2000 issues has the potential to result in material operational and financial
risks if the affected systems either cease to function or produce erroneous
results. Such risks could include inability to operate fossil and/or hydro
generating facilities, disruptions in the operation of Central Maine's
transmission and distribution systems, an inability to access interconnections
with other utilities, and disruptions to Central Maine's major business
systems (customer information and service, administrative, financial).
Central Maine believes, however, that the most likely worst case scenario
resulting from these risks would be a temporary, and short-term, disruption of
electric service. This could occur either as a failure on the part of Central
Maine to successfully address all critical Year 2000 issues, as a failure on
the part of a critical third-party provider, or as a failure on the part of
other entities, including ISO-New England, to successfully maintain the short-
term reliability of power supply and delivery on a regional basis. Central
Maine does not expect that any such short-term service disruption would have a
material impact on its operations, liquidity, or financial condition.
In order to minimize these risks, and the potential recovery time, from Year
2000 problems, CMP Group is actively involved in contingency planning.
Although CMP Group has extensive knowledge and specific experience in
disaster/recovery planning and execution, CMP Group recognizes the importance
of Year 2000 specific contingency planning. Accordingly, Central Maine is
participating in the integrated contingency planning effort headed by the
North American Electric Reliability Council, and the Northeast Power
Coordinating Council. Further, Central Maine will be developing comprehensive
Year 2000 specific contingency plans for its own independent operations.
CMP Group believes its plans are adequate to attain Year 2000 readiness, and
that the contingency plans currently under development both internally and at
a regional level should substantially mitigate the risks discussed above.
Liquidity and Capital Resources
Increases in Central Maine's retail rates are limited by Central Maine's
ARP. For a discussion of the ARP, including a 1.33-percent rate increase
effective July 11, 1998, and a proposed rate reduction contingent on the
consummation of Central Maine's planned sale of generating assets in 1999, see
Note 3, "Regulatory Matters"--"Alternative Rate Plan."
Approximately $158.3 million and $159.8 million of cash was provided during
the year ended December 31, 1998 for CMP Group and Central Maine,
respectively, from net income before non-cash items, primarily
A-16
depreciation, amortization and deferred income taxes. During that period
approximately $66.8 million and $73.5 million of cash was used for
fluctuations in certain assets and liabilities and from other operating
activities for CMP Group and Central Maine, respectively.
Included in net income is $19.1 million for CMP Group and $9.5 million for
Central Maine representing gains associated with the sale of investments and
properties.
Investing activities, primarily construction expenditures, utilized $17.4
million in cash during 1998 for generation, transmission, distribution, and
general construction expenditures for CMP Group and $9.1 for Central Maine. In
order to accommodate existing and future loads on its electric system Central
Maine, CMP Group's major subsidiary, is engaged in a continuing construction
program. Central Maine'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 Central Maine's total
construction programs, refinancing and energy-management capital requirements
will be determined in light of market conditions, earnings and other relevant
factors.
CMP Group received proceeds of approximately $21.3 million from the sale of
investments and properties. In addition, Central Maine received approximately
$20.1 million resulting from the sale of four subsidiaries to CMP Group.
During 1998 CMP Group paid dividends on common stock of $28.9 million, while
preferred-stock dividends, paid by Central Maine, utilized $6.7 million of
cash. In addition, Central Maine reacquired 1.2 million shares of stock from
CMP Group for $19 million following the holding company formation.
Central Maine's Articles of Incorporation limit certain unsecured
indebtedness that may be outstanding to 20% of capitalization, as defined
without the consent of the holders of Central Maine's preferred stock; 20% of
defined capitalization amounted to $143 million as of December 31, 1998.
Unsecured indebtedness, as defined, amounted to $131 million as of December
31, 1998. Central Maine's $500 million medium-term note program, having
received the consent of Central Maine's preferred stockholders in May 1997, is
not included in "unsecured indebtedness" for purposes of the 20-percent
limitation.
At the annual meeting of the stockholders of Central Maine on May 15, 1997,
the holders of Central Maine's outstanding preferred stock consented to the
issuance of $350 million in principal amount of Central Maine'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 Central Maine's financing flexibility in anticipation
of restructuring and increased competition.
During 1998 Central Maine issued $312 million principal amount of its
medium-term notes and paid $18 million at maturity, making a total of $337 of
medium-term notes outstanding at December 31, 1998 of which $10 million was
short-term. During the year Central Maine redeemed, repurchased or paid at
maturity the following General and Refunding Mortgage Bonds (stated in
principal amounts) and Dividend Series Preferred Stock (in par value), a total
of $351 million:
March 30 Series R Bonds, 7 7/8% ($50 million)
March 30 Series N Bonds, 8.50% ($11 million)
April 1 Preferred Stock, 7 7/8% Series ($30 million)
April 15 Series U Bonds, 7.54% ($25 million)
June 8 Preferred Stock, 7.99% Series ($11.6 million)
June 15 Series P Bonds, 7.66% ($31.3 million)
A-17
July 1 Preferred Stock, 8 7/8% Series ($7 million)
August 15 Series S Bonds, 6.03% ($60 million)
November 1 Series T Bonds, 6.25% ($75 million)
December 31 Series O Bonds, 7 3/8% ($50 million)
For further details on the financing activities of Central Maine and CMP
Group during 1998, see Item 8, "Notes to Consolidated Financial Statements"--
Note 10, "Capitalization and Interim Financing," below.
To support its short-term capital requirements, in October 1996, Central
Maine 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 originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility.
Effective December 15, 1998, the banks' commitments under the 364-day facility
were reduced from $75 million to $25 million by agreement of the parties, and
other provisions were amended to reflect the reorganization of Central Maine
into a holding-company structure and recognize other changed circumstances.
Both credit facilities require annual fees on the total credit lines. The fees
are based on Central Maine'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 Central Maine'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. Central Maine had $55
million in outstanding notes as of December 31, 1998 under the credit
facilities.
On August 5, 1998, the MPUC approved Central Maine'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 Central Maine's generating assets. The
amount of any stock purchases and their timing by Central Maine or CMP Group
will depend on the need for equity in the respective Company's capital
structure, investment opportunities and other considerations. Neither Central
Maine nor CMP Group has adopted a formal stock-purchase plan.
Environmental Matters
CMP Group and its subsidiaries assess compliance with laws and regulations
related to hazardous substance remediation on an ongoing basis. At December
31, 1998, Central Maine had an accrued liability of $1.9 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 4, "Commitments and Contingencies."--"Legal
and Environmental Matters" for further discussion of this matter.
Storm Damage Central Maine's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and
severity struck Central Maine's service territory, causing power outages for
approximately 280,000 of Central Maine's 528,000 customers, and substantial
widespread damage to Central Maine's transmission and distribution system. To
restore its electrical system, Central Maine 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. Central Maine's incremental non-capital costs of the repair effort were
$50.7 million, most of which is labor-related. In addition, approximately $1.7
million of carrying costs have been deferred as of December 31, 1998.
On January 15, 1998, the MPUC issued an order allowing Central Maine to
defer on its books the incremental non-capital costs associated with Central
Maine's efforts to restore service in response to the damage resulting from
the storm. The order required Central Maine, 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
A-18
with the order should be recovered under the ARP. In the 1998 ARP filing
Central Maine stated that once the final cost of the storm was determined and
the status of federal assistance was finalized Central Maine would propose a
plan for recovery of its costs. Based on the MPUC order, Central Maine has
deferred $52.4 million in storm related costs as of December 31, 1998. In
October 1998, the MPUC staff issued its draft report of its summary
investigation of the Maine utilities' response to the January ice storm. This
report found no basis for formal adjudicatory investigation into the response
and supports the utilities' actions. On May 1, 1998, President Clinton signed
a Congressional appropriation bill that included $130 million for
Presidentially declared disasters in 1998, including storm-damage cost
reimbursement for electric utilities. On November 5, 1998 the United States
Department of Housing and Urban Development ("HUD") announced that of those
funds, $2.2 million had been awarded to Maine, with none designated for
utility infrastructure, which Central Maine and the Maine Congressional
delegation protested as inadequate and inconsistent with Congressional intent.
On March 10, 1999, HUD published a notice in the Federal Register inviting
parties to re-apply for storm-damage cost reimbursement. Central Maine cannot
predict what portion of its ice storm-related costs it will ultimately recover
through federal assistance, if any, or from its customers, or when any such
recovery will take place.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CMP Group is exposed to interest rate risk through the use of fixed-rate and
variable-rate debt and preferred stock as sources of capital. Its exposure to
changes in applicable interest rates has increased during 1998, due to its
issuance of $312 million of medium-term notes during the year, $227 million of
which bear floating, LIBOR-based, rates. Most of the floating-rate medium-term
notes issued during 1998 replaced fixed-rate mortgage bonds or other fixed-
rate securities.
Variable Fixed
Long Term Long Term
--------- ---------
Weighted Average Rates................................ 6.63% 7.46%
Balance at December 31, 1998.......................... $278,704 $321,476
Maturity Period....................................... 1999-2018 1999-2023
A-19
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules
Management report on responsibility for financial reporting................ A-21
Report of Independent Accountants.......................................... A-22
Consolidated Financial Statements.......................................... A-23
CMP Group, Inc.
Consolidated Statement of Earnings for the three years ended December 31,
1998, 1997 and 1996..................................................... A-23
Consolidated Balance Sheet as of December 31, 1998 and 1997.............. A-24
Consolidated Statement of Capitalization and Interim Financing as of
December 31, 1998 and 1997.............................................. A-26
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1998, 1997 and 1996............................ A-27
Consolidated Statement of Cash Flows for the three years ended December
31, 1998, 1997 and 1996................................................. A-28
Central Maine Power Company
Consolidated Statement of Earnings for the three years ended December 31,
1998, 1997 and 1996..................................................... A-29
Consolidated Balance Sheet as of December 31, 1998 and 1997.............. A-30
Consolidated Statement of Capitalization and Interim Financing as of
December 31, 1998 and 1997.............................................. A-32
Consolidated Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1998, 1997 and 1996............................ A-33
Consolidated Statement of Cash Flows for the three years ended December
31, 1998, 1997 and 1996................................................. A-34
Notes to Consolidated Financial Statements--CMP Group, Inc. and Central
Maine Power Company....................................................... A-35
A-20
Report of Management
The Managements of CMP Group and its subsidiaries ("CMP Group") and Central
Maine Power Company and its subsidiaries ("Central Maine") are responsible for
the consolidated financial statements and the related financial information
appearing in this annual report. The financial statements are prepared in
conformity with generally accepted accounting principles and include amounts
based on informed estimates and judgments of management. The financial
information included elsewhere in this report is consistent, where applicable,
with the financial statements.
CMP Group and Central Maine maintain a system of internal accounting
controls that are designed to provide reasonable assurance that the respective
assets are safeguarded, transactions are executed in accordance with
management's authorization, and the financial records are reliable for
preparing the financial statements. While no system of internal accounting
controls can prevent the occurrence of errors or irregularities with absolute
assurance, management's objective is to maintain a system of internal
accounting controls that meets their goals in a cost-effective manner.
CMP Group and Central Maine have policies and procedures in place to support
and document the internal accounting controls that are revised on a continuing
basis. Internal auditors conduct reviews, provide ongoing assessments of the
effectiveness of selective internal controls, and report their findings and
recommendations for improvement to management.
The Board of Directors of CMP Group have established an Audit Committee,
composed entirely of outside directors, which oversees the financial reporting
process on behalf of the Board of Directors. The Audit Committee meets
periodically with management, internal auditors, and the independent public
accountants to review accounting, auditing, internal accounting controls, and
financial reporting matters. The internal auditors and the independent public
accountants have full and free access to meet with the Audit Committee, with
or without management present, to discuss auditing or financial reporting
matters.
PricewaterhouseCoopers LLP, independent public accountants, has been
retained to audit CMP Group and Central Maine's consolidated financial
statements. The accompanying report of independent public accountants is based
on their audit, conducted in accordance with generally accepted auditing
standards, including a review of selected internal accounting controls and
tests of accounting procedures and records.
David T. Flanagan Sara J. Burns
CMP Group, Inc. Central Maine Power Company
President and Chief Executive Officer President
David E. Marsh Curtis I. Call
CMP Group, Inc. Central Maine Power Company
Chief Financial Officer Treasurer
A-21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
CMP Group, Inc. and the Shareholders and
Directors of Central Maine Power Company
In our opinion, the accompanying consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the
consolidated financial position of CMP Group, Inc. and its subsidiaries ("CMP
Group") at December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 and the consolidated financial position of Central
Maine Power Company and its subsidiaries ("Central Maine") at December 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of management of CMP Group and Central Maine; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Maine
January 26, 1999
A-22
CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands, except per-
share amounts)
Revenues (Notes 1 and 3)
Electric operating revenues............. $ 938,739 $ 954,176 $ 967,046
Other non-utility revenues.............. 11,588 2,070 859
----------- ----------- -----------
Total Revenues.......................... 950,327 956,246 967,905
----------- ----------- -----------
Operating Expenses
Fuel used for company generation (Notes
1 and 9)............................... 30,898 34,946 16,827
Purchased power
Energy (Notes 1 and 9).................. 369,411 419,144 407,926
Other (capacity) (Note 9)............... 85,321 112,810 108,720
Other operation......................... 213,489 210,513 183,688
Maintenance............................. 41,051 33,973 37,537
Depreciation and amortization (Note 1).. 56,493 54,132 53,694
Taxes other than income taxes........... 27,783 28,303 27,861
----------- ----------- -----------
Total Operating Expenses................ 824,446 893,821 836,253
----------- ----------- -----------
Operating Income........................ 125,881 62,425 131,652
----------- ----------- -----------
Other Income (Expense)
Equity in earnings of associated
companies (Note 9)..................... (60) 6,260 6,138
Allowance for equity funds used during
construction (Note 1).................. 653 642 851
Other, net.............................. 1,383 3,639 4,709
Minority interest in consolidated net
income................................. (205) (233) (48)
Gain on sale of investments and
properties............................. 22,912 418 601
----------- ----------- -----------
Total Other Income (Expense)............ 24,683 10,726 12,251
----------- ----------- -----------
Interest Charges
Long-term debt (Note 10)................ 43,276 44,346 47,966
Other interest (Note 10)................ 8,366 7,660 4,341
Allowance for borrowed funds used during
construction (Note 1).................. (495) (439) (655)
----------- ----------- -----------
Total Interest Charges.................. 51,147 51,567 51,652
----------- ----------- -----------
Income Before Income Taxes and Preferred
Dividends.............................. 99,417 21,584 92,251
Income taxes (Notes 2 and 3)............ 41,698 8,162 32,022
Dividends on Preferred Stock of
Subsidiary............................. 4,809 8,209 9,452
----------- ----------- -----------
Net Income.............................. $ 52,910 $ 5,213 $ 50,777
=========== =========== ===========
Weighted Average Number Of Shares Of
Common Stock Outstanding............... 32,442,685 32,442,752 32,442,752
Earnings Per Share Of Common Stock
(Basic and Diluted).................... $ 1.63 $ 0.16 $ 1.57
Dividends Declared Per Share Of Common
Stock.................................. $ 0.90 $ 0.90 $ 0.90
The accompanying notes are an integral part of these financial statements
A-23
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
1998 1997
---------- ----------
(Dollars in
thousands)
Assets
Current Assets
Cash and cash equivalents............................... $ 30,540 $ 20,841
Accounts receivable, less allowance for uncollectible
accounts of $3,136 in 1998 and $2,400 in 1997
Service--billed ...................................... 81,169 84,323
--unbilled (Notes 1 and 3)......................... 53,296 46,807
Other accounts receivable............................. 13,753 15,247
Inventories, at average cost
Fuel oil.............................................. 5,879 5,390
Materials and supplies................................ 13,126 11,779
Funds on deposit with trustee (Note 10)................. 1 61,694
Prepayments and other current assets.................... 10,268 9,110
---------- ----------
Total Current Assets................................ 208,032 255,191
---------- ----------
Electric Property, at original cost (Notes 9 and 10).... 1,750,837 1,674,876
Less: Accumulated depreciation (Notes 1 and 9).......... 694,410 634,384
---------- ----------
Net electric property in service...................... 1,056,427 1,040,492
---------- ----------
Construction work in progress (Note 4).................. 19,538 15,105
Nuclear fuel, less accumulated amortization of $9,316 in
1998 and $9,035 in 1997................................ 1,147 1,157
---------- ----------
Total net electric property........................... 1,077,112 1,056,754
Investments In Associated Companies, at equity (Notes 1
and 9)................................................. 71,880 76,509
---------- ----------
Total Net Electric Property and Investments in
Associated Companies .............................. 1,148,992 1,133,263
---------- ----------
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects,
net (Note 1)........................................... 78,539 84,026
Yankee Atomic purchased-power contract (Note 9)......... 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9).... 29,913 36,877
Maine Yankee purchased-power contract (Note 9).......... 273,895 329,206
Regulatory assets--deferred taxes (Note 2).............. 235,451 236,632
Other deferred charges and other assets (Notes 1 and 3). 280,301 210,715
---------- ----------
Deferred Charges and Other Assets, Net................ 905,860 910,512
---------- ----------
Total Assets........................................ $2,262,884 $2,298,966
========== ==========
The accompanying notes are an integral part of these financial statements.
A-24
Cmp Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
1998 1997
---------- ----------
(Dollars in
thousands)
Stockholders' Equity And Liabilities
Current Liabilities and Interim Financing
Interim financing (see separate statement) (Note 10).... $ 298,356 $ 238,000
Sinking-fund requirements (Note 10)..................... 11,455 9,411
Accounts payable........................................ 90,960 97,080
Dividends payable....................................... 7,304 9,202
Accrued interest........................................ 7,524 11,201
Accrued income taxes (Note 2)........................... 19,911 3,001
Miscellaneous current liabilities....................... 15,909 15,762
---------- ----------
Total Current Liabilities and Interim Financing......... 451,419 383,657
---------- ----------
Commitments and Contingencies (Notes 4 and 9)
Reserves and Deferred Credits
Accumulated deferred income taxes (Note 2).............. 376,043 350,912
Unamortized investment tax credits (Note 2)............. 29,064 30,533
Yankee Atomic purchased-power contract (Note 9)......... 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9).... 29,913 36,877
Maine Yankee purchased-power contract (Note 9).......... 273,895 329,206
Regulatory liabilities--deferred taxes (Note 2)......... 58,376 56,852
Other reserves and deferred credits (Note 5)............ 116,805 104,257
---------- ----------
Total Reserves and Deferred Credits..................... 891,857 921,693
---------- ----------
Long-Term Debt (see separate statement) (Note 10)
Mortgage debt........................................... 117,683 259,563
Other long-term obligations............................. 228,598 141,360
---------- ----------
Total Long-Term Obligations............................. 346,281 400,923
---------- ----------
Redeemable Preferred Stock.............................. 18,910 39,528
---------- ----------
Stockholders' Equity (see separate statement) (Note 10)
Common-stock............................................ 162,213 162,214
Other paid in capital................................... 285,835 277,168
Reacquired common stock................................. (827) --
Retained earnings....................................... 71,668 48,212
Preferred stock......................................... 35,528 65,571
---------- ----------
Total Stockholders' Equity.............................. 554,417 553,165
---------- ----------
Total Stockholders' Equity and Liabilities.............. $2,262,884 $2,298,966
========== ==========
The accompanying notes are an integral part of these financial statements.
A-25
CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Capitalization And Interim Financing
December 31
-----------------------------------
1998 1997
----------------- ----------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars in thousands)
Capitalization (Note 10)
Common-Stock Investment:
Common stock, par value $5 per share:
Authorized--80,000,000 shares
Outstanding--32,442,552 shares in 1998 and
32,442,752 in 1997....................... $ 162,213 $ 162,214
Other paid-in capital...................... 285,835 277,168
Reacquired common stock, at cost (55,510
shares)................................... (827) --
Retained earnings.......................... 71,668 48,212
---------- ----------
Total Common-Stock Investment.............. 518,889 42.6% 487,594 39.6
---------- ----- ---------- -----
Preferred Stock--not subject to mandatory
redemption................................ 35,528 2.9 65,571 5.3
---------- ----- ---------- -----
Redeemable Preferred Stock--subject to
mandatory redemption...................... 27,910 46,528
Less: current sinking fund requirements.... 9,000 7,000
---------- ----------
Redeemable Preferred Stock--subject to
mandatory redemption...................... 18,910 1.6 39,528 3.2
---------- ----- ---------- -----
Long-Term Obligations:
Mortgage bonds............................. 118,717 421,000
Less: unamortized debt discount............ 1,034 1,437
---------- ----------
Total Mortgage Bonds....................... 117,683 419,563
---------- ----------
Total Medium-Term Notes.................... 327,000 43,000
---------- ----------
Other Long-Term Obligations:
Lease obligations.......................... 32,773 34,517
Pollution-control facility and other notes. 153,280 84,254
---------- ----------
Total Other Long-Term Obligations.......... 186,053 118,771
---------- ----------
Less: Current Sinking Fund Requirements and
Current Maturities........................ 284,455 180,411
---------- ----------
Total Long-Term Obligations................ 346,281 28.4 400,923 32.6
---------- ----- ---------- -----
Total Capitalization....................... 919,608 75.5 993,616 80.7
---------- ----- ---------- -----
Interim Financing (Note 10):
Short-term obligations..................... 15,000 60,000
Current maturities of long-term obliga-
tions..................................... 283,356 178,000
---------- ----------
Total Interim Financing.................... 298,356 24.5 238,000 19.3
---------- ----- ---------- -----
Total Capitalization and Interim Financing. $1,217,964 100.0% $1,231,616 100.0%
========== ===== ========== =====
The accompanying notes are an integral part of these financial statements
A-26
CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Changes In Stockholders' Equity
For the three years ended December 31, 1998
Amount Other Reacquired
at par paid-in common Retained Preferred
Shares value capital stock earnings Shares Stock Total
---------- -------- -------- ---------- -------- -------- --------- --------
(Dollars in thousands)
Balance--December 31,
1995................... 32,442,752 $162,214 $276,287 $51,504 655,713 $65,571 $555,576
---------- -------- -------- ----- ------- -------- ------- --------
Net Income.............. 60,229 60,229
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (9,452) (9,452)
Reacquired preferred
stock.................. 536 (536) --
Capital stock expense... (5) (5)
---------- -------- -------- ----- ------- -------- ------- --------
Balance--December 31,
1996................... 32,422,752 162,214 276,818 -- 72,546 655,713 65,571 577,149
---------- -------- -------- ----- ------- -------- ------- --------
Net Income.............. 13,422 13,422
Dividends declared:
Common stock............ (29,199) (29,199)
Preferred stock......... (8,209) (8,209)
Reacquired preferred
stock.................. 348 (348) --
Capital stock expense... 2 2
---------- -------- -------- ----- ------- -------- ------- --------
Balance--December 31,
1997................... 32,422,752 162,214 277,168 -- 48,212 655,713 65,571 553,165
---------- -------- -------- ----- ------- -------- ------- --------
Net Income.............. 57,718 57,718
Dividends declared:
Common stock........... (29,198) (29,198)
Preferred stock........ (4,809) (4,809)
Common stock............ (200) (1) (2) (1) (4)
Reacquired common stock. (827) (827)
Increase in equity of
investee (Note 8)...... 9,413 9,413
Preferred stock......... (300,430) (30,043) (30,043)
Reacquired preferred
stock.................. (771) (254) (1,025)
Capital stock expense... 27 27
---------- -------- -------- ----- ------- -------- ------- --------
Balance--December 31,
1998................... 32,442,552 $162,213 $285,835 $(827) $71,668 355,283 $35,528 $554,417
========== ======== ======== ===== ======= ======== ======= ========
The accompanying notes are an integral part of these financial statements.
A-27
CMP Group, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31,
------------------------------
1998 1997 1996
--------- -------- ---------
(Dollars in thousands)
Cash From Operation
Net income..................................... $ 52,910 $ 5,213 $ 50,777
Items not requiring (not providing) cash:
Depreciation.................................. 47,130 44,170 44,104
Amortization.................................. 38,873 34,291 34,881
Deferred income taxes and investment tax
credits, net................................. 20,016 (2,204) 3,318
Allowance for equity funds used during
construction.................................. (653) (642) (851)
Preferred stock dividends of subsidiary........ 4,809 8,209 9,452
Gain on sale of investments and properties..... (19,108) -- --
Changes in certain assets and liabilities:
Accounts receivable........................... (2,999) 1,257 (3,565)
Other current assets.......................... (1,158) 390 (308)
Inventories................................... (1,836) 4,259 (4,884)
Accounts payable.............................. (9,785) 4,617 (16,862)
Accrued taxes and interest.................... 13,233 2,856 (4,970)
Miscellaneous current liabilities............. 147 (5,580) 7,472
Deferred ice storm cost........................ (52,433) -- --
Deferred energy-management costs............... (2,615) (1,940) (5,222)
Maine Yankee outage accrual.................... -- (10,350) 8,280
Purchased power contracts...................... (22,500) -- (75)
Other, net..................................... 13,194 7,664 3,961
--------- -------- ---------
Net Cash Provided by Operating Activities..... 77,225 92,210 125,508
--------- -------- ---------
Investing Activities
Construction expenditures...................... (42,405) (40,306) (46,922)
Investments in and loans to affiliates......... (17,800) (4,769) (12,059)
Repayment of loan by affiliates................ 17,800 -- --
Proceeds from sale of investments and
properties.................................... 21,347 -- --
Changes in accounts payable--investing
activities.................................... 3,665 (734) 1,889
--------- -------- ---------
Net Cash Used by Investing Activities......... (17,393) (45,809) (57,092)
--------- -------- ---------
Financing Activities
Issuances:
Revolving credit agreement.................... 50,000 52,500 7,500
Medium-term notes............................. 302,000 -- 10,000
Other long-term obligations................... -- -- 870
Short-term obligations, net................... 10,000 -- --
Redemptions:
Mortgage bonds................................ (302,283) -- (11,500)
Preferred stock............................... (48,618) (14,000) (14,000)
Medium-term notes............................. (18,000) (25,000) (34,000)
Finance Authority of Maine.................... (7,400) (6,800) (6,300)
Other long-term obligations................... (6,049) (645) (1,780)
Short-term obligations, net................... (55,000) -- --
Funds on deposit with trustee.................. 61,693 (2,182) (29,593)
Purchase of treasury stock..................... (827) -- --
Dividends:
Common stock.................................. (28,943) (29,220) (29,220)
Preferred stock of subsidiary................. (6,706) (8,520) (9,763)
--------- -------- ---------
Net Cash Used by Financing Activities......... (50,133) (33,867) (117,786)
--------- -------- ---------
Net Increase (Decrease) in Cash............... 9,699 12,534 (49,370)
Cash and Cash Equivalents, Beginning of Year... 20,841 8,307 57,677
--------- -------- ---------
Cash and Cash Equivalents, End of Year......... $ 30,540 $ 20,841 $ 8,307
========= ======== =========
Supplemental Cash-Flow Information:
Cash paid during the year for:
Interest (net of amounts capitalized)......... $ 50,256 $ 47,551 $ 47,835
Income taxes.................................. $ 6,581 $ 7,105 $ 32,632
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
A-28
Central Maine Power Company and Subsidiaries
Consolidated Statement of Earnings
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands, except per-
share amounts)
Revenues (Notes 1 and 3)
Electric operating revenues........... $ 938,561 $ 954,176 $ 967,046
Other non-utility revenues............ 2,969 2,070 859
----------- ----------- -----------
Total Revenues...................... 941,530 956,246 967,905
----------- ----------- -----------
Operating Expenses
Fuel used for company generation
(Notes 1 and 9)...................... 30,898 34,946 16,827
Purchased power
Energy (Notes 1 and 9).............. 369,411 419,144 407,926
Other (capacity) (Note 9)........... 85,321 112,810 108,720
Other operation....................... 204,286 210,513 183,688
Maintenance........................... 40,961 33,973 37,537
Depreciation and amortization (Note
1)................................... 56,257 54,132 53,694
Taxes other than income taxes......... 27,747 28,303 27,861
----------- ----------- -----------
Total Operating Expenses............ 814,881 893,821 836,253
----------- ----------- -----------
Operating Income........................ 126,649 62,425 131,652
----------- ----------- -----------
Other Income (Expense)
Equity in earnings of associated com-
panies (Note 9)...................... 1,762 6,260 6,138
Allowance for equity funds used during
construction (Note 1)................ 653 642 851
Other, net............................ 2,097 3,639 4,709
Minority interest in consolidated net
income............................... (205) (233) (48)
Gain on sale of investments and prop-
erties............................... 13,314 418 601
----------- ----------- -----------
Total Other Income (Expense)........ 17,621 10,726 12,251
----------- ----------- -----------
Interest Charges
Long-term debt (Note 10).............. 43,223 44,346 47,966
Other interest (Note 10).............. 8,286 7,660 4,341
Allowance for borrowed funds used
during construction (Note 1)......... (495) (439) (655)
----------- ----------- -----------
Total Interest Charges.............. 51,014 51,567 51,652
----------- ----------- -----------
Income Before Income Taxes.............. 93,256 21,584 92,251
Income taxes (Notes 2 and 3)............ 38,433 8,162 32,022
----------- ----------- -----------
Net Income.............................. 54,823 13,422 60,229
Dividends on Preferred Stock............ 4,809 8,209 9,452
----------- ----------- -----------
Earnings Applicable to Common Stock..... $ 50,014 $ 5,213 $ 50,777
=========== =========== ===========
Weighted Average Number Of Shares Of
Common Stock Outstanding............... 32,113,357 32,442,752 32,442,752
Earnings Per Share Of Common Stock (Ba-
sic and Diluted)....................... $ 1.56 $ 0.16 $ 1.57
Dividends Declared Per Share Of Common
Stock.................................. $ 0.675* $ 0.90 $ 0.90
- --------
* 1998 fourth quarter dividend of $0.225 per share was declared and paid in
January 1999.
The accompanying notes are an integral part of these financial statements.
A-29
Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
1998 1997
---------- ----------
(Dollars in
thousands)
Assets
Current Assets
Cash and cash equivalents............................... $ 22,628 $ 20,841
Accounts receivable, less allowance for uncollectible
accounts of $3,136 in 1998 and $2,400 in 1997
Service--billed....................................... 81,082 84,323
--unbilled (Notes 1 and 3)......................... 53,110 46,807
Other accounts receivable............................. 12,698 15,247
Inventories, at average cost
Fuel oil.............................................. 5,879 5,390
Materials and supplies................................ 12,755 11,779
Funds on deposit with trustee (Note 10)................. 1 61,694
Prepayments and other current assets.................... 10,161 9,110
---------- ----------
Total Current Assets................................ 198,314 255,191
---------- ----------
Electric Property, at original cost (Notes 9 and 10).... 1,750,777 1,674,876
Less: Accumulated depreciation (Notes 1 and 9).......... 694,463 634,384
---------- ----------
Net electric property in service...................... 1,056,314 1,040,492
---------- ----------
Construction work in progress (Note 4).................. 19,483 15,105
Nuclear fuel, less accumulated amortization of $9,316 in
1998 and $9,035 in 1997................................ 1,147 1,157
---------- ----------
Total net electric property........................... 1,076,944 1,056,754
Investments In Associated Companies, at equity (Notes 1
and 9)................................................. 48,406 76,509
---------- ----------
Total Net Electric Property and Investments in
Associated Companies............................... 1,125,350 1,133,263
---------- ----------
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects,
net (Note 1)........................................... 78,539 84,026
Yankee Atomic purchased-power contract (Note 9)......... 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9).... 29,913 36,877
Maine Yankee purchased-power contract (Note 9).......... 273,895 329,206
Regulatory assets--deferred taxes (Note 2).............. 235,451 236,632
Other deferred charges and other assets (Notes 1 and 3). 274,257 210,715
---------- ----------
Deferred Charges and Other Assets, Net................ 899,816 910,512
---------- ----------
Total Assets........................................ $2,223,480 $2,298,966
========== ==========
The accompanying notes are an integral part of these financial statements.
A-30
Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
1998 1997
---------- ----------
(Dollars in thousands)
Stockholders' Equity And Liabilities
Current Liabilities and Interim Financing
Interim financing (see separate statement) (Note
10)............................................... $ 298,183 $ 238,000
Sinking-fund requirements (Note 10)................ 11,455 9,411
Accounts payable................................... 93,012 97,080
Dividends payable.................................. 5 9,202
Accrued interest................................... 7,491 11,201
Income taxes payable to parent company (Note 2).... 20,822 3,001
Miscellaneous current liabilities.................. 15,455 15,762
---------- ----------
Total Current Liabilities and Interim Financing.... 446,423 383,657
---------- ----------
Commitments and Contingencies (Notes 4 and 9)
Reserves and Deferred Credits
Accumulated deferred income taxes (Note 2)......... 372,243 350,912
Unamortized investment tax credits (Note 2)........ 29,064 30,533
Yankee Atomic purchased-power contract (Note 9).... 7,761 13,056
Connecticut Yankee purchased-power contract (Note
9)................................................ 29,913 36,877
Maine Yankee purchased-power contract (Note 9)..... 273,895 329,206
Regulatory liabilities--deferred taxes (Note 2).... 58,376 56,852
Other reserves and deferred credits (Note 5)....... 111,506 104,257
---------- ----------
Total Reserves and Deferred Credits................ 882,758 921,693
---------- ----------
Long-Term Debt (see separate statement) (Note 10)
Mortgage debt...................................... 117,683 259,563
Other long-term obligations........................ 226,151 141,360
---------- ----------
Total Long-Term Obligations........................ 343,834 400,923
---------- ----------
Redeemable Preferred Stock......................... 18,910 39,528
---------- ----------
Stockholders' Equity (see separate statement) (Note
10)
Common-stock....................................... 162,213 162,214
Other paid in capital.............................. 276,422 277,168
Reacquired common stock............................ (19,000) --
Retained earnings.................................. 76,349 48,212
Preferred stock.................................... 35,571 65,571
---------- ----------
Total Stockholders' Equity......................... 531,555 553,165
---------- ----------
Total Stockholders' Equity and Liabilities......... $2,223,480 $2,298,966
========== ==========
The accompanying notes are an integral part of these financial statements.
A-31
Central Maine Power Company and Subsidiaries
Consolidated Statement Of Capitalization And Interim Financing
December 31
-----------------------------------
1998 1997
----------------- ----------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars in thousands)
Capitalization (Note 10)
Common-Stock Investment:
Common stock, par value $5 per share:
Authorized--80,000,000 shares
Outstanding--31,211,471 shares in 1998
and 32,442,752 in 1997.................. $ 162,213 $ 162,214
Other paid-in capital..................... 276,422 277,168
Reacquired common stock (1,231,081
shares).................................. (19,000) --
Retained earnings......................... 76,349 48,212
---------- ----------
Total Common-Stock Investment............. 495,984 41.6% 487,594 39.6
---------- ----- ---------- -----
Preferred Stock--not subject to mandatory
redemption............................... 35,571 3.0 65,571 5.3
---------- ----- ---------- -----
Redeemable Preferred Stock--subject to
mandatory redemption..................... 27,910 46,528
Less: current sinking fund requirements... 9,000 7,000
---------- ----------
Redeemable Preferred Stock--subject to
mandatory redemption..................... 18,910 1.6 39,528 3.2
---------- ----- ---------- -----
Long-Term Obligations:
Mortgage bonds............................ 118,717 421,000
Less: unamortized debt discount........... 1,034 1,437
---------- ----------
Total Mortgage Bonds...................... 117,683 419,563
---------- ----------
Total Medium-Term Notes................... 327,000 43,000
---------- ----------
Other Long-Term Obligations:
Lease obligations......................... 32,773 34,517
Pollution-control facility and other
notes.................................... 150,833 84,254
---------- ----------
Total Other Long-Term Obligations......... 183,606 118,771
---------- ----------
Less: Current Sinking Fund Requirements
and Current Maturities................... 284,455 180,411
---------- ----------
Total Long-Term Obligations............... 343,834 28.8 400,923 32.6
---------- ----- ---------- -----
Total Capitalization...................... 894,299 75.0 993,616 80.7
---------- ----- ---------- -----
Interim Financing (Note 10):
Short-term obligations.................... 15,000 60,000
Current maturities of long-term
obligations.............................. 283,183 178,000
---------- ----------
Total Interim Financing................... 298,183 25.0 238,000 19.3
---------- ----- ---------- -----
Total Capitalization and Interim
Financing................................ $1,192,482 100.0% $1,231,616 100.0%
========== ===== ========== =====
The accompanying notes are an integral part of these financial statements
A-32
Central Maine Power Company and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
For the three years ended December 31, 1998
Amount Other Reacquired
at par paid-in common Retained Preferred
Shares value capital stock earnings Shares Stock Total
---------- -------- -------- ---------- -------- -------- --------- --------
(Dollars in thousands)
Balance--December 31,
1995................... 32,442,752 $162,214 $276,287 $ $ 51,504 655,713 $65,571 $555,576
Net income.............. 60,229 60,229
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (9,452) (9,452)
Reacquired preferred
stock.................. 536 (536) --
Capital stock expense... (5) (5)
---------- -------- -------- -------- -------- -------- ------- --------
Balance--December 31,
1996................... 32,442,752 162,214 276,818 72,546 655,713 65,571 577,149
---------- -------- -------- -------- -------- -------- ------- --------
Net income.............. 13,422 13,422
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (8,209) (8,209)
Reacquired preferred
stock.................. 348 (348) --
Capital stock expense... 2 2
---------- -------- -------- -------- -------- -------- ------- --------
Balance--December 31,
1997................... 32,442,752 162,214 277,168 48,212 655,713 65,571 553,165
---------- -------- -------- -------- -------- -------- ------- --------
Net income.............. 54,823 54,823
Dividends declared:
Common stock........... (21,622) (21,622)
Preferred stock........ (4,809) (4,809)
Common stock--Retired... (200) (1) (2) (1) (4)
Reacquired common stock. (1,231,081) (19,000) (19,000)
Preferred stock......... (300,000) (30,000) (30,000)
Reacquired preferred
stock.................. (771) (254) (1,025)
Capital stock expense... 27 27
---------- -------- -------- -------- -------- -------- ------- --------
Balance--December 31,
1998................... 31,211,471 $162,213 $276,422 $(19,000) $ 76,349 355,713 $35,571 $531,555
========== ======== ======== ======== ======== ======== ======= ========
The accompanying notes are an integral part of these financial statements.
A-33
Central Maine Power Company and Subsidiaries
Consolidated Statement Of Cash Flows
Year ended December 31
-----------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in thousands)
Cash From Operation
Net income...................................... $ 54,823 $ 13,422 $ 60,229
Items not requiring (not providing) cash:
Depreciation.................................... 47,130 44,170 44,104
Amortization.................................... 38,868 34,291 34,881
Deferred income taxes and investment tax
credits, net................................... 19,653 (2,204) 3,318
Allowance for equity funds used during
construction................................... (653) (642) (851)
Gain on sale of investments and properties...... (9,545) -- --
Changes in certain assets and liabilities:
Accounts receivable............................. (513) 1,257 (3,565)
Other current assets............................ (1,051) 390 (308)
Inventories..................................... (1,465) 4,259 (4,884)
Accounts payable................................ (7,764) 4,617 (16,862)
Accrued taxes and interest...................... 14,111 2,856 (4,970)
Miscellaneous current liabilities............... (307) (5,580) 7,472
Deferred Ice storm costs........................ (52,433) -- --
Deferred energy-management costs................ (2,615) (1,940) (5,222)
Maine Yankee outage accrual..................... -- (10,350) 8,280
Purchased power contracts....................... (22,500) -- (75)
Other, net...................................... 1,016 7,664 3,961
-------- -------- ---------
Net Cash Provided by Operating Activities....... 76,755 92,210 125,508
-------- -------- ---------
Investing Activities
Construction expenditures....................... (42,384) (40,306) (46,922)
Investments in loans to affiliates.............. (18,661) (4,769) (12,059)
Repayment of loan by affiliates................. 17,800 -- --
Sale of subsidiaries to CMP Group, Inc.......... 20,093 -- --
Proceeds from sale of investments and
properties..................................... 10,347 -- --
Changes in accounts payable--investing
activities..................................... 3,696 (734) 1,889
-------- -------- ---------
Net Cash Used by Investing Activities........... (9,109) (45,809) (57,092)
-------- -------- ---------
Financing Activities
Issuances:
Revolving credit agreement...................... 50,000 52,500 7,500
Medium-term notes............................... 302,000 -- 10,000
Other long-term obligations..................... -- 870
Short-term obligations, net..................... 10,000 -- --
Redemptions:
Mortgage bonds.................................. (302,283) -- (11,500)
Preferred stock................................. (48,618) (14,000) (14,000)
Medium-term notes............................... (18,000) (25,000) (34,000)
Finance Authority of Maine...................... (7,400) (6,800) (6,300)
Other long-term obligations..................... (3,602) (645) (1,780)
Short-term obligations, net..................... (55,000) -- --
Funds on deposit with trustee................... 61,693 (2,182) (29,593)
Treasury stock.................................. (19,000) -- --
Dividends:
Common stock.................................... (28,943) (29,220) (29,220)
Preferred stock................................. (6,706) (8,520) (9,763)
-------- -------- ---------
Net Cash Used by Financing Activities........... (65,859) (33,867) (117,786)
-------- -------- ---------
Net Increase (Decrease) in Cash................. 1,787 12,534 (49,370)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.. 20,841 8,307 57,677
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $ 22,628 $ 20,841 $ 8,307
======== ======== =========
Supplemental Cash-Flow Information
Cash paid during the year for:
Interest (net of amounts capitalized)........... $ 50,251 $ 47,551 $ 47,835
Income taxes.................................... $ 6,563 $ 7,105 $ 32,632
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements
A-34
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
General Description
CMP Group was organized effective September 1, 1998, at which time all of
the shares of Central Maine were converted into an equal number of shares of
CMP Group. CMP Group owns all of the shares of Central Maine and the former
non-utility subsidiaries of Central Maine (TeleSmart, MaineCom, CNEX and Union
Water Power Company) in addition to New England Gas Development Corporation, a
newly formed subsidiary.
Central Maine is a public utility primarily engaged in the sale of electric
energy at the wholesale and retail levels to residential, commercial,
industrial, and other classes of customers in the State of Maine.
Financial Statements
The consolidated financial statements include CMP Group and Central Maine, a
regulated electric utility subsidiary of CMP Group. CMP Group's consolidated
financial statements include the accounts of CMP Group and its wholly owned
and controlled subsidiaries, including Central Maine. Central Maine's
consolidated financial statements include its accounts as well as those of its
wholly owned and controlled subsidiaries. Certain immaterial majority owned
subsidiaries, which were previously accounted for on the equity method, have
been consolidated for the year ended December 31, 1998. Central Maine's
financial position and results of operations account for substantially all of
CMP Group's consolidated financial position and results of operations. For all
periods prior to September 1, 1998, the historical financial position and
results of operations of CMP Group reflect the activity of Central Maine. All
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation
CMP Group accounts for employee stock-based compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation". This statement
encourages companies to adopt a fair value approach to valuing stock options
that would require compensation cost to be recognized based on the fair value
of stock options granted. CMP Group has elected, as permitted by the standard,
to continue to follow its intrinsic value based method of accounting for stock
options consistent with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic method, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the company's
stock at the measurement date over the exercise price.
Earnings per Share
Stock options and performance shares granted to date under CMP Group'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 twelve months ending December 31, 1998. 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.
Reclassification
Certain amounts from prior years financial statements have been reclassified
to conform to the current year presentation.
A-35
Impact of New Accounting Standards
FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" became effective for periods beginning after December 15, 1997.
This pronouncement provides disclosure requirements as well as guidance for
determining reportable segments. Based on the operating results regularly
reviewed by the entities' chief operating decision-makers, CMP Group and
Central Maine have determined that there are no material reportable segments.
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. Based on CMP Group and Central Maine's current business practices
the adoption of this standard is not anticipated to have a significant impact
on their financial statements.
Regulation
The rates, operations, accounting, and certain other practices of Central
Maine and MEPCO are subject to the regulatory authority of the MPUC and the
FERC.
Electric Operating Revenues
Electric operating revenues include amounts billed to customers and an
estimate of unbilled sales, for services rendered but not yet billed.
Utility Plant
Utility plant is stated at original cost of construction. The costs of
replacements of property units are capitalized. Maintenance and repairs and
replacements of minor items are expensed as incurred. The original cost of
property retired, net of salvage value, and the related costs of removal are
charged to accumulated depreciation.
Central Maine and its subsidiaries utility plant in service as of December
31 was comprised as follows:
Average
Average Remaining
Service Service Life
1998 1997 Life* 12/31/98
---------- ---------- ---------- ------------
Generation..................... $ 535,550 $ 514,815 37.6 years 20.0 years
Transmission................... 282,677 250,109 41.6 years 24.2 years
Distribution................... 724,224 704,345 37.7 years 28.5 years
General........................ 208,326 205,607 18.6 years 12.8 years
---------- ----------
$1,750,777 $1,674,876
========== ==========
- --------
* Based on Central Maine's last depreciation represcription study as of
December 31, 1992.
Depreciation
Depreciation of electric property is calculated using the straight-line
method. The weighted average composite rate was 3.1 percent in 1998 and 3.0
percent in 1997 and 1996.
Allowance for Funds Used During Construction (AFC)
Central Maine and its subsidiaries capitalize AFC as part of construction
costs. AFC represents the composite interest and equity costs of capital funds
used to finance that portion of construction costs not yet
A-36
eligible for inclusion in rate base. AFC is capitalized in "Utility plant"
with offsetting noncash credits to "Other income" and "Interest." The
composite AFC rates were 8.8 percent, 9.7 percent, and 8.7 percent in 1998,
1997, and 1996, respectively.
Deferred Charges and Other Assets
CMP Group defers and amortizes certain costs in a manner consistent with
authorized or probable ratemaking treatment. CMP Group capitalizes carrying
costs as a part of certain deferred charges, principally energy-management
costs, and classifies such carrying costs as other income. The following table
depicts the components of deferred charges and other assets at December 31,
1998, and 1997:
1998 1997
-------- --------
(Dollars in
thousands)
NUG contract buy-outs and restructuring (Note 9)....... $ 98,752 $ 92,946
1998 ice storm costs................................... 52,433 --
Energy-management costs................................ 28,418 31,995
Postretirement benefits (Note 5)....................... 19,604 20,900
Financing costs........................................ 17,121 18,560
Environmental site clean-up costs (Note 4)............. 8,766 7,891
Non-operating property, net............................ 7,427 7,624
Workers Compensation................................... 4,650 5,350
Other.................................................. 37,086 25,449
-------- --------
Sub-Total Central Maine.............................. 274,257 210,715
CMP Group--Other....................................... 6,044 --
-------- --------
Total--CMP Group..................................... $280,301 $210,715
======== ========
Certain costs are being amortized and recovered in rates over periods
ranging from three to 30 years. Amortization expense for the next five years
is shown below:
Amount
----------
(Dollars
in
thousands)
1999........................................................... $28,811
2000........................................................... 27,664
2001........................................................... 23,896
2002........................................................... 22,749
2003........................................................... 13,414
Recoverable Costs of Seabrook I and Abandoned Projects
The recoverable after-tax investments in Seabrook I and abandoned projects
are reported as assets, pursuant to May 1985 and February 1991 MPUC rate
orders. CMP Group is allowed a current return on these assets based on Central
Maine's authorized rate of return. In accordance with these rate orders, the
deferred taxes related to these recoverable costs are amortized over periods
of four to 10 years. As of December 31, 1998, substantially all deferred taxes
related to Seabrook I have been amortized. The recoverable investments as of
December 31, 1998, and 1997 are as follows:
A-37
December 31
-----------------
Recovery
periods
1998 1997 ending
-------- -------- --------
(Dollars in thousands)
Recoverable costs of:
Seabrook I...................................... $141,084 $141,084 2015
Other Projects.................................. 57,491 57,491 2001
-------- --------
198,575 198,575
-------- --------
Less: accumulated amortization.................... 119,861 114,035
Less: related income taxes........................ 175 514
-------- --------
Total Net Recoverable Investment................ $ 78,539 $ 84,026
======== ========
Note 2: Income Taxes
The components of federal and state income-tax provisions reflected in CMP
Group's Consolidated Statement of Earnings are as follow:
Year ended December 31
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Federal:
Current......................................... $17,640 $ 8,534 $21,682
Deferred........................................ 14,837 (5,922) 5,751
Investment tax credits, net..................... (1,469) (1,455) (464)
Regulatory deferred............................. 2,054 5,390 (623)
------- ------- -------
Total Federal Taxes........................... 33,062 6,547 26,346
------- ------- -------
State:
Current......................................... $ 4,052 $ 1,831 $ 7,022
Deferred........................................ 3,933 (1,720) (10)
Regulatory deferred............................. 651 1,504 (1,336)
------- ------- -------
Total State Taxes............................. 8,636 1,615 5,676
------- ------- -------
Total Federal and State Income Taxes.......... $41,698 $ 8,162 $32,022
======= ======= =======
Federal income tax, excluding federal regulatory deferred taxes, differs
from the amount of tax computed by multiplying income before federal tax by
the statutory federal rate. The following table reconciles the statutory
federal rate to a rate determined by dividing the total federal income-tax
expense by income before that expense:
A-38
Year ended December 31
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
(Dollars in thousands)
Income tax expense at statutory
federal rate.................... $30,090 35.0% $ 6,990 35.0% $30,301 35.0%
------- ---- ------- ---- ------- ----
Permanent differences:
Investment tax-credit
amortization.................... (1,469) (1.7) (1,469) (7.3) (1,482) (1.7)
Dividend-received deduction and
equity in earnings (losses) of
associated companies............ 2,077 2.5 (1,911) (9.6) (1,895) (2.2)
Other, net....................... 168 0.2 (80) (.4) (293) (0.3)
------- ---- ------- ---- ------- ----
30,866 36.0 3,530 17.7 26,631 30.8
======= ==== ======= ==== ======= ====
Effect of timing differences for
items which receive flow through
treatment:
Tax-basis repairs................ (559) (0.7) (1,020) (5.1) (1,229) (1.4)
Depreciation differences flowed
through in prior years.......... 3,127 3.6 2,923 14.6 2,327 2.7
Accelerated flowback of deferred
taxes on loss on abandoned
generating projects............. 1,700 2.0 1,700 8.5 1,708 1.9
Benefits related to Section 1245
Losses.......................... (1,210) (1.4) (1,818) (9.1) -- --
IRS audit resolution regarding
depreciation methods............ -- -- 852 4.3 (3,230) (3.7)
Loss on Reacquired Debt.......... 436 0.5 540 2.7 537 0.6
Flowback of Excess Federal
Deferred Taxes due to TRA86..... (1,129) (1.3) (1,005) (5.0) (520) (0.6)
Other, net....................... (169) (0.2) 845 4.2 122 0.1
------- ---- ------- ---- ------- ----
Federal Income Tax Expense and
Effective Rate.................. $33,062 38.5 $ 6,547 32.8% $26,346 30.4%
======= ==== ======= ==== ======= ====
CMP Group and Central Maine record deferred income-tax expense in accordance
with regulatory authority; it also defers investment and energy tax credits
and amortizes them over the estimated lives of the assets that generated the
credits.
A valuation allowance has not been recorded at December 31, 1998, and 1997,
as CMP Group expects that all deferred income tax assets will be realized in
the future.
Accumulated deferred income taxes consisted of the following in 1998 and
1997:
1998 1997
----------- -----------
(Dollars in thousands)
Deferred tax assets resulting from:
Investment tax credits, net.......................... $ 20,034 $ 21,047
Regulatory liabilities............................... 29,081 25,188
Alternative minimum tax.............................. 6,135 6,053
All other............................................ 35,073 27,072
----------- -----------
90,323 79,360
----------- -----------
Deferred tax liabilities resulting from:
Property............................................. 300,996 295,293
Abandoned plant...................................... 54,138 57,921
Regulatory assets.................................... 111,407 77,572
----------- -----------
466,541 430,786
=========== ===========
Accumulated deferred income taxes, end of year, net.. $ 376,218 $ 351,426
Accumulated deferred income taxes, recorded as:
Accumulated deferred income taxes.................... $ 376,043 $ 350,912
Recoverable costs of Seabrook 1 and abandoned
projects, net....................................... 175 514
----------- -----------
$ 376,218 $ 351,426
=========== ===========
A-39
Note 3: Regulatory Matters
Alternative Rate Plan
On January 1, 1995, Central Maine'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
Central Maine's rates, with no separate reconciliation and recovery of fuel
and purchased-power costs. Under the ARP, the MPUC is continuing to regulate
Central Maine'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, Central Maine
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 Central Maine's
retail rates to be adjusted annually on each July 1, commencing in 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 Central Maine's retail rates, and includes fuel and
purchased power costs 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%, and a second formula-based offset that
started in 1996 and was intended to reflect the limited effect of inflation on
Central Maine'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 Central Maine's earnings are outside a range of 350 basis points
above or below Central Maine'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
Central Maine and its customers in computing the price-cap adjustment. The ROE
used for earnings sharing is scheduled to be 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 Central Maine 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 Central Maine or the electric-power industry.
On May 13, 1998, Central Maine submitted its 1998 ARP compliance filing to
the MPUC. In keeping with its pledge of limiting increases to the inflation
index, Central Maine voluntarily limited its request to 1.78%, which was the
inflation rate for 1997 under the ARP. Central Maine also proposed a rate
reduction of approximately ten percent contingent on the consummation of, and
ratemaking associated with, Central Maine's planned sale of generating assets.
The filing also reported information on the costs of restoring service to
Central Maine's customers after the January 1998 ice storm, as required by the
earlier MPUC order allowing Central Maine to defer those costs. Effective July
11, 1998, the MPUC approved a stipulated 1.33% increase. The amount of the
increase remains subject to 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%. However, the Offer of
Settlement pending before the FERC in Maine Yankee's rate case, which has been
approved by the MPUC, provides that the 1998 ARP increase will not be
adjusted.
A-40
The components of the last three ARP price increases 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%
===== ===== =====
Electric-Utility Industry Restructuring
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry on March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such 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.
Central Maine has substantial exposure to cost stranding relative to its
size. In general, its stranded costs reflect the excess costs of Central
Maine's purchased-power obligations over the market value of the power, and
the costs of deferred charges and other regulatory assets. The major portion
of Central Maine's stranded costs is related to above-market costs of
purchased-power obligations arising from Central Maine's long-term,
noncancelable contracts for the purchase of capacity and energy from NUGs,
with lesser estimated amounts related to Central Maine's 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. Higher market rates lower stranded-cost exposure, while lower market
rates increase it. In addition to market-related impacts, any estimate of the
ultimate level of stranded costs depends on such factors as state and federal
regulations, the extent, timing and form that competition for electric service
will take, the ongoing level of Central Maine's costs of operations; regional
and national economic conditions, growth of Central Maine's sales, the timing
of any changes that may occur from state and federal initiatives on
restructuring; and the extent to which regulatory policies and decisions
ultimately address recovery of strandable costs including the application of
value from the sale of Central Maine's generating assets.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and Central Maine's generating costs reflects the
underlying costs of those sources of generation in place today, with
reductions for contract expirations and continuing depreciation. Deferred
regulatory-asset totals include the current uncollected balances and existing
amortization schedules for purchased-power contract restructuring and buyouts
negotiated by Central Maine to lessen the impact of these obligations, along
with energy management costs, financing costs, and other regulatory
commitments.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000,
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. Stranded costs are defined as the
legitimate, verifiable and unmitigable costs made unrecoverable as a result of
the restructuring required by the legislation and will be determined by the
MPUC as provided in the legislation. The MPUC has been conducting separate
adjudicatory proceedings to determine the stranded costs for each Maine
utility, along with
A-41
the corresponding revenue requirements and stranded-cost charges to be charged
by each transmission-and-distribution utility. The first phase of the Central
Maine proceeding was completed in early 1999 and is discussed in this note
under the heading "MPUC Proceeding on Stranded Costs, Revenue Requirements,
and Rate Design," below.
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 substantial inaccuracies in
the year 2003 and at least every three years thereafter.
The principal restructuring provisions of the legislation provide for
customers to have direct retail access to generation services and for
deregulation of competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the
MPUC. By that date, subject to possible extensions of time granted by the MPUC
to improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts
with qualifying facilities and contracts with demand-side management or
conservation providers, brokers or hosts, and (2) ownership interests in
nuclear power plants. However, the MPUC can require the Company to divest its
interest in Maine Yankee Atomic Power Company on or after January 1, 2009. As
discussed below under "Agreement for Sale of Generating Assets," Central Maine
has contracted to sell its non-nuclear generating assets and, after a
favorable court decision, is proceeding toward a completion of the sale by
April 7, 1999. The legislation also requires investor-owned utilities, after
February 29, 2000, to sell their rights to the capacity and energy from all
generation assets, including the purchased-power contracts that had not
previously been divested pursuant to the legislation, with certain immaterial
exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider that
is affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central
Maine's service territory, as determined by the MPUC. CMP Group does not now
intend to engage in the sale of electric energy after March 1, 2000.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases
10 percent or more of the stock of a distribution utility, including
Central Maine, the purchasing entity and any related entity would be
prohibited from selling generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider
affiliated with Central Maine would be limited to providing such service
for only up to 20 percent of the electric load in Central Maine's service
territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to
competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in
any form for such reduction or elimination of consumption or for the re-
establishment of service with a transmission-and-distribution utility.
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation research and development on renewable
resources, assistance for utility employees laid off as a result of the
A-42
legislation, and recovery of nuclear-plant decommissioning costs "[a]s
required by federal law, rule or order", all funded through transmission-
and-distribution utility rates and charges.
Legislative bills that would amend certain provisions of the 1997
legislation have been submitted to the 1999 legislative session of the Maine
Legislature. CMP Group and Central Maine cannot predict whether any changes to
the 1997 legislation will be enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. As
noted above, the MPUC has completed the first phase of the proceeding
contemplated by Maine's restructuring legislation that will ultimately
determine the recovery of Central Maine's stranded costs, its revenue
requirements, and the design of its rates to be effective when Central Maine
becomes a transmission-and-distribution utility at the time retail access to
generation begins in Maine on March 1, 2000. On December 23, 1998, the MPUC
Hearing Examiners in the proceeding issued their report, in the form of a
recommended decision. Central Maine disagreed with a number of the individual
recommendations in the stranded-costs and revenue-requirements areas and filed
exceptions to those recommendations. The MPUC deliberated the recommendations
on February 10 and 11, 1999, indicated disagreement with some of the
recommendations, and issued its written order on March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by
which it would set Central Maine's transmission-and-distribution rates,
effective March 1, 2000, but was not calculating the rates themselves because
such calculations at that time would rely excessively on estimates. The MPUC
pointed out that it would hold a "Phase II" hearing to set the actual rates
and determine the recoverable stranded costs after processing information
expected to become available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the
amount of recoverable stranded costs for Central Maine later in the proceeding
pursuant to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover
such costs that is equivalent to the utility's opportunity to recover these
costs prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded
costs, including among other factors the application of excess value from
divested generation assets to offset stranded costs. At the beginning of the
proceeding Central Maine had estimated its total stranded costs to be
approximately $1.3 billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the
appropriate cost of common equity for Central Maine as a transmission-and-
distribution company beginning March 1, 2000. Central Maine had recommended a
12-percent cost of common equity with a 55-percent common equity component in
the capital structure. The MPUC, after weighing conflicting recommendations,
decided on a common-equity cost of 10.50 percent with a common-equity
component of 47 percent, and an overall weighted-average cost of capital of
8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of
the proceeding primarily to establishing principles that would guide it in
designing Central Maine's rates to be effective March 1, 2000. The MPUC
indicated that it would focus on (1) facilitating the transition to a
competitive market for generation, and (2) implementing a "no-losers" policy,
i.e., that the new rate design would cause no Central Maine customer's bill to
increase on March 1, 2000. Applying the latter principle, the MPUC rejected a
newly designed standby rate for self-generators proposed by Central Maine in
favor of a design generally similar to Central Maine's current rate for the
class. The MPUC stated that it planned to undertake a comprehensive rate
design and alternative rate plan proceeding for Central Maine prior to March
1, 2002, when it could consider experience gained with the cost structures of
other transmission-and-distribution utilities after the commencement of retail
access to generation.
The Phase I order resulted from an extended proceeding with many points of
view represented and covers a wide variety of rate-related subjects.
Definitive findings by the MPUC in a number of the subject areas await the
second phase of the proceeding, which must be completed before March 1, 2000.
CMP Group and Central Maine cannot predict the definitive amount of stranded
costs the MPUC will determine that Central Maine will be entitled to recover
pursuant to the mandate of the restructuring statute, or the revenue
requirements and rate design that will result from Phase II of the MPUC
proceeding.
A-43
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine 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, including
approximately $18 million for assets of Union Water, to Florida-based FPL
Group. The related book value for these assets was approximately $ 218.9
million at December 31, 1998. In addition, as part of its agreement with FPL
Group, Central Maine entered into energy buy-back agreements to assist in
fulfilling its obligation to supply its customers with power until March 1,
2000. Subsequently, an agreement was reached to sell related storage
facilities to FPL Group for an additional $3.6 million ($1.5 million for the
assets and $2.1 million for lease revenue associated with the properties that
CMP will retain), including $1.15 million for Union Water assets. The related
book value of these assets was approximately $11.9 million at December 31,
1998.
Central Maine'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
pending sale. Central Maine will continue to seek buyers for those assets.
Central Maine 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 Central Maine'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 initially with the trustee under the
Indenture at the closing of the sale to free the generating assets from the
lien of the Indenture. Central Maine plans to use some of the proceeds on
deposit with the trustee to redeem or repurchase bonds under the terms of the
Indenture, and may discharge the Indenture. In addition, the proceeds could
provide the flexibility to redeem or repurchase outstanding equity securities.
Central Maine 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, regulatory requirements, market conditions and terms of
outstanding securities.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy
Maine, Inc. ("FPL Energy") had filed a civil action in the United States
District Court for the Southern District of New York requesting a declaratory
judgment that Central Maine could not meet essential terms of the January
agreement. FPL Group asserted that based on October 1998 FERC rulings on
transmission access, as well as other issues, it believed that Central Maine
could not comply with the conditions in the purchase contract and that FPL
Energy should not be bound to complete the transaction.
FPL Energy contended in its complaint that the FERC rulings (1) constituted
a material adverse effect under the purchase agreement and substantially
lessened the value of Central Maine's generating assets, and (2) precluded
Central Maine from obtaining all federal, state and local consents and
approvals required for the ownership, operation and maintenance of the
generating assets in a manner substantially consistent with Central Maine's
historical ownership, operation, and maintenance thereof, as required by the
purchase agreement. In addition, FPL Energy asserted that the FERC rulings
limited the ability of the prospective buyer to get power from the Central
Maine generating assets to market unconstrained by transmission limitations
resulting from new generators being added to the NEPOOL system, and therefore,
based on the doctrine of frustration of purpose, FPL Energy should be "excused
without further obligation or liability from effecting the purchase of
[Central Maine's] generating assets." Central Maine, FPL Energy, NEPOOL, and
other parties interested in New England transmission-access issues requested
rehearing of the FERC rulings.
On November 23, 1998, the MPUC granted its approval of the sale to FPL
Energy of the generating assets contemplated by the purchase agreement,
finding the sale to be in the public interest. The MPUC also made the
A-44
findings required as a prerequisite to a FERC designation of the generating
facilities as "exempt wholesale generators," which had been requested by FPL
Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine
generating assets to FPL Energy, after making the required finding that the
sale was consistent with the public interest, and accepted certain
implementing agreements for filing. In discussing an issue raised by an
intervenor the FERC stated that by purchasing the generating assets FPL Energy
would be "stepping into the shoes of Central Maine" with respect to access to
the Central Maine and NEPOOL transmission system, but did not disturb the
earlier transmission-access rulings. The FERC granted its approval of the
transfer of hydroelectric and water storage licenses on December 28, 1998, the
approval by FERC of exempt-wholesale-generator status for the generating
facilities, was granted on February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern
District of New York. On the same day the presiding judge ruled that FPL
Energy was not entitled to the declaratory judgment and entered judgment for
Central Maine and its affiliated defendants on all counts of the complaint.
Thereafter on that day FPL Energy announced that it would not appeal the
decision, but would proceed to a closing of the sale on or before April 7,
1999, as required by the sale agreement, and the parties are preparing for the
closing.
Storm Damage to Central Maine's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and
severity struck Central Maine's service territory, causing power outages for
approximately 280,000 of Central Maine's 528,000 customers, and substantial
widespread damage to Central Maine's transmission and distribution system. To
restore its electrical system, Central Maine 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. Central Maine's incremental non-capital costs of the repair effort were
$50.7 million, most of which is labor-related. In addition, approximately $1.7
million of carrying costs have been deferred as of December 31, 1998.
On January 15, 1998, the MPUC issued an order allowing Central Maine to
defer on its books the incremental non-capital costs associated with Central
Maine's efforts to restore service in response to the damage resulting from
the storm. The order required Central Maine, 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 1998 ARP filing Central Maine stated that once
the final cost of the storm was determined and the status of federal
assistance was finalized Central Maine would propose a plan for recovery of
its costs. Based on the MPUC order, Central Maine has deferred $52.4 million
in storm related costs as of December 31, 1998. In October 1998, the MPUC
staff issued its draft report of its summary investigation of the Maine
utilities' response to the January ice storm. This report found no basis for
formal adjudicatory investigation into the response and supports the
utilities' actions. On May 1, 1998, President Clinton signed a Congressional
appropriation bill that included $130 million for Presidentially declared
disasters in 1998, including storm-damage cost reimbursement for electric
utilities. On November 5, 1998 the United States Department of Housing and
Urban Development ("HUD") announced that of those funds, $2.2 million had been
awarded to Maine, with none designated for utility infrastructure, which
Central Maine and the Maine Congressional delegation protested as inadequate
and inconsistent with Congressional intent. On March 10, 1999, HUD published a
notice in the Federal Register inviting parties to re-apply for storm-damage
cost reimbursement. Central Maine cannot predict what portion of its ice
storm-related costs it will ultimately recover through federal assistance, if
any, or from its customers, or when any such recovery will take place.
Meeting the Requirements of SFAS No. 71
Central Maine 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
A-45
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 Central Maine'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. Central
Maine 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," Central Maine 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. Central Maine 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 Central Maine will be
required to discontinue SFAS No. 71 for any remaining generation segment of
its business. Central Maine 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 SFAS
No. 71 to be discontinued, which could result in a non-cash write-off of
previously established regulatory assets.
Note 4: Commitments and Contingencies
Construction Program
Central Maine's plans for improving and expanding generating, transmission,
distribution facilities, and power-supply sources are under continuing review.
Actual construction expenditures will depend upon the availability of capital
and other resources, load forecasts, customer growth, and general business
conditions. Central Maine's current forecast of capital expenditures, assuming
completion of the generation asset sale in the spring of 1999, for the five-
year period 1999 through 2003, is as follows:
2000-
1999 2003 Total
---- ----- -----
(Dollars in
millions)
Type of Facilities:
Generating projects............................................ $ 3 $-- $ 3
Transmission................................................... 3 22 25
Distribution................................................... 32 132 164
General facilities and other................................... 18 74 92
--- ---- ----
Total Estimated Capital Expenditures......................... $56 $228 $284
=== ==== ====
Customer Retention
Central Maine entered into five-year definitive agreements with 18 customers
that lock-in non-cumulative rate reductions of 15% for the three years 1995
through 1997, 16% for 1998, and 18% for 1999, below the December 1, 1994,
levels. These contracts also protect these customers from price increases that
might otherwise be allowed under the ARP. The participating customers agreed
to take electrical service from Central Maine for five years and not to switch
fuels, install new self-generation equipment, or seek another supplier of
electricity
A-46
for existing electrical load during that period. New electrical load in excess
of a stated minimum level could be served by other sources, but Central Maine
could compete for that load.
Central Maine believes that without offering the competitive pricing
provided in the agreements, a number of these customers would be likely to
install additional self-generation or take other steps to decrease their
electricity purchases from Central Maine. The revenue loss from such a usage
shift could have been substantial.
Central Maine estimates that based on the rate reductions provided in these
agreements, its gross revenues were approximately $45 million lower in 1996,
approximately $65 million lower in 1997 and approximately $62 million lower in
1998, than would have been the case if these customers continued to pay full
retail rates without reducing their purchases from the Company.
However, these rate reductions were negotiated giving consideration to
important related cost savings. Electricity price changes affect the cost of
some NUG power contracts. The reduction in rates to large customers reduced
purchased-power costs by approximately $22 million as a result of linkage
between retail tariffs and some contract prices.
Operating Lease Obligations
Central Maine has a number of operating-lease agreements primarily involving
computer and other office equipment, land, and telecommunications equipment.
These leases are noncancelable and expire on various dates through 2007.
Following is a schedule by year of future minimum rental payments required
under the operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 1998:
Amount
----------
(Dollars
in
thousands)
1999........................................................... $ 5,605
2000........................................................... 5,033
2001........................................................... 4,330
2002........................................................... 4,257
2003........................................................... 4,238
Thereafter..................................................... 1,070
-------
$24,533
=======
Rent expense under all operating leases was approximately $6.3 million, $6.1
million, and $5 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Legal and Environmental Matters
Central Maine and certain of its affiliates are 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. Central Maine
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 Central Maine's financial position. Central Maine
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.
A-47
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, Central Maine 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. Central Maine 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.
Central Maine has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that it expects to incur for identified waste disposal sites. In most
cases, additional future environmental cleanup costs are not reasonably
estimable 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. Central Maine cannot predict the schedule or scope of
remediation due to the regulatory process and involvement of non-governmental
parties. At December 31, 1998, the liability recorded by Central Maine for its
estimated environmental remediation costs amounted to $1.9 million, which
management has determined to be the most probable amount within the range of
$1.9 million to $8.6 million. Such costs may be higher if Central Maine is
found to be responsible for cleanup costs at additional sites or identifiable
possible outcomes change.
Proposed Federal Income Tax Adjustments. On September 3, 1997, Central Maine
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
Central Maine's federal income tax returns for the years 1992 through 1994,
and on September 12, 1997, Central Maine 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
Central Maine'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 Central Maine's 1994 deduction of the cost of the
buyout of the Fairfield Energy Venture purchased-power contract by Central
Maine 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
December 31, 1998, amounted to $18.8 million, or a decrease in net income of
$11.1 million, and which could increase interest expense by approximately
$500,000 per month until either the tax deficiency is paid or the issues are
resolved in favor of Central Maine, in which case no interest would be due. If
the IRS were to prevail, Central Maine believes the deductions would be
amortized over periods of up to twenty, post-1994, tax years. Central Maine
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, Central
Maine filed a petition in the United States Tax Court contesting the entire
amount of the deficiencies and sought review of the asserted deficiencies by
an IRS Appeals Officer to determine whether all or part of the dispute could
be resolved in advance of a court determination. As of March 17, 1999, four of
the seven issues in dispute had been resolved, but not the two major
disallowances. Central Maine will continue to work toward resolving the
remaining issues, but a trial may be necessary for one or more of those
issues. Absent such a resolution, Central Maine plans to pursue vigorously the
Tax Court litigation, but cannot predict the result.
Nuclear Insurance
The Price-Anderson Act is a federal statute providing, among other things, a
limit on the maximum liability for damages resulting from a nuclear incident.
Coverage for the liability is provided for by existing private insurance and
retrospective assessments for costs in excess of those covered by insurance,
up to $88.095 million for each reactor owned, with a maximum assessment of $10
million per reactor in any year. However, after appropriate exemptive action
by the NRC Maine Yankee, and therefore its sponsors, are not responsible for
retrospective assessments resulting from any event or incident occurring after
January 7, 1999. Based on Central
A-48
Maine's stock ownership in four nuclear generating facilities and its 2.5
percent direct ownership interest in the Millstone 3 nuclear unit, Central
Maine's retrospective premium for post-January 7, 1999, events or incidents
could be as high as $6 million in any year, for a cumulative total of $52.9
million.
In addition to the insurance required by the Price-Anderson Act, the nuclear
generating facilities mentioned above carry additional nuclear property-damage
insurance. This additional insurance is provided from commercial sources and
from the nuclear electric utility industry's insurance company through a
combination of current premiums and retrospective premium adjustments. In
recognition of the reduced risk posed by the shutdown of the Maine Yankee
Plant and its defueled reactor, Maine Yankee substantially reduced its
property-damage coverage effective January 19, 1999.
Joint Venture
CMP Group and Energy East, through subsidiaries, 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. CMP Group's level of
investment is dependent on the overall economic feasibility of natural gas as
a competitive energy option in Maine, a sufficient expression of customer
interest in gas service from CMP Natural Gas, and the prospects for achieving
an acceptable return on investment. CMP Natural Gas, L.L.C., which is owned
equally by subsidiaries of CMP Group and Energy East, is positioning itself to
offer gas in the Augusta and Bangor areas, and in other communities including
Bath, Bethel, Brunswick, Windham, Rumford, and Waterville.
Note 5: Pension and Other Benefits
Pension Benefits
CMP Group has two separate non-contributory, defined-benefit plans that
cover substantially all of its union and non-union employees. CMP Group
funding policy is to contribute amounts to the separate plans that are
sufficient to meet the funding requirements set forth in the Employee
Retirement Income Security Act (ERISA), plus such additional amounts as CMP
Group may determine to be appropriate. Plan benefits under the non-union
retirement plan are based on average final earnings, as defined within the
plan, and length of employee service; benefits under the union plan are based
on average career earnings and length of employee service.
A summary of the components of net periodic pension cost for the non-union
and union defined-benefit plans in 1998, 1997 and 1996 follows:
1998 1997 1996
---------------- ---------------- ----------------
Non- Non- Non-
union Union union Union union Union
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Service cost............. $ 2,791 $ 1,969 $ 2,375 $ 1,694 $ 2,334 $ 1,780
Interest cost............ 6,170 4,170 5,727 3,973 5,225 3,852
Expected return on plan
assets.................. (6,364) (3,987) (5,734) (3,519) (5,441) (3,359)
Amortization on
unrecognized transition
(asset)/obligation...... 29 (270) 29 (270) 29 (270)
Amortization of
unrecognized prior
service cost............ 155 129 155 129 155 129
Amortization of
unrecognized (gain)/
loss.................... -- -- (14) -- -- --
------- ------- ------- ------- ------- -------
Net periodic pension
cost.................... $ 2,781 $ 2,011 $ 2,538 $ 2,007 $ 2,302 $ 2,132
======= ======= ======= ======= ======= =======
Assumptions used in accounting for the non-union and union defined-benefit
plans in 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Weighted average discount rate............................. 6.50% 7.00% 7.50%
Rate of increase in future compensation levels............. 4.50% 4.50% 4.50%
Expected long-term return on assets........................ 8.75% 8.75% 8.50%
A-49
The following table sets forth the change in benefit obligations, the change
in plan assets, and the funded status on CMP Group balance sheet at December
31, 1998, and 1997:
Non-Union Union
-------------------------- -------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
Change in Benefit
Obligation
Projected Benefit
Obligation at Beginning
of Year................ $ 87,606,945 $ 75,569,512 $60,806,647 $ 55,687,980
Service Cost............ 2,790,886 2,375,101 1,969,293 1,693,530
Interest Cost........... 6,170,100 5,727,139 4,170,129 3,973,237
Actuarial (Gain)/Loss... 9,812,272 8,737,997 4,839,188 2,627,316
Benefits Paid........... (4,760,258) (4,802,804) (3,099,550) (3,175,416)
------------ ------------ ----------- ------------
Projected Benefit
Obligation at End of
Year................... $101,619,945 $ 87,606,945 $68,685,707 $ 60,806,647
Change in Plan Assets
Fair Value of Assets at
Beginning of Year...... $ 85,706,828 $ 77,996,183 $54,803,329 $ 48,090,441
Actual Return on Plan
Assets................. 15,698,483 10,682,687 10,249,172 7,285,549
Employer Contributions.. 2,967,216 1,830,762 4,006,793 2,602,755
Benefits Paid........... (4,760,258) (4,802,804) (3,099,550) (3,175,416)
------------ ------------ ----------- ------------
Fair Value of Assets at
End of Year............ $ 99,612,269 $ 85,706,828 $65,959,744 $ 54,803,329
Funded Status at
December 31............ $ (2,007,676) $ (1,900,117) $(2,725,963) $ (6,003,318)
Unrecognized Transition
(Asset)/Obligation..... 104,583 133,634 (1,134,557) (1,404,689)
Unrecognized Prior
Service Cost........... 1,473,873 1,629,207 1,223,028 1,352,027
Unrecognized
(Gain)/Loss............ (15,536,708) (16,014,958) (6,306,647) (4,883,992)
------------ ------------ ----------- ------------
Net Amount Recognized--
Accrued Benefit Cost... $(15,965,928) $(16,152,234) $(8,944,139) $(10,939,972)
Savings Plan
CMP Group offers an employee savings plan to all eligible employees. The
non-union plan allows participants to invest from 2% to 15% of their salaries
among several alternatives. The employer contribution equals 60% of the first
5% (total of 3%) of the employees' contribution.
As part of the collective bargaining agreement, effective in May 1997, the
union plan allows maximum deferrals of up to 16% of their salaries among
several alternatives. The employer contribution equals 60% of the first 5% and
50% of the next 2% invested, bringing the maximum employer contribution to 4%
if an employee defers 7% of compensation.
CMP Group's contributions to the savings plan trust were $1.9 million in
1998, $1.8 million in 1997 and $1.7 million in 1996.
Post-Retirement Benefits
In addition to pension and savings-plan benefits, CMP Group provides certain
health-care and life-insurance benefits for substantially all of its retired
employees.
The MPUC approved a rulemaking on SFAS No. 106, effective July 20, 1993,
that adopted the accrual method of accounting for the expected cost of such
benefits during the employees' years of service, and authorized the
establishment of a regulatory asset for the deferral of such costs until they
are "phased-in" for ratemaking purposes. The effect of the change can be
reflected in annual expenses over the active service life of employees or a
period of 20 years, rather than in the year of adoption.
The MPUC prescribes the maximum amortization period of the average remaining
service life of active employees or 20 years, whichever is longer, for the
transition obligation. CMP Group is utilizing a 20 year
A-50
amortization period. Segregation in an external fund is required for amounts
collected in rates. Central Maine (CMP Group was not formed until September
1998) funded $3 million in November 1997 and July 1998 and plans to monitor
and fund the same amount annually in order to meet its obligation.
As a result of the MPUC order, CMP Group records the cost of these benefits
by charging expense in the period recovered through rates. The annual post-
retirement benefit expense is currently included in rates as well as an amount
designed to recover the deferred balance over a period of 20 years. The
amounts included in rates in 1998, 1997 and 1996 were $10.8, $9.7 and $9.8
million, respectively. With the reduction in the deferred account of $1.5
million in 1998 and, $1.8 million in 1997. The total amount deferred as a
regulatory asset as of December 31, 1998 and 1997 was $19.6 million and $21
million, respectively. A summary of the components of net periodic
postretirement benefit cost for the plan in 1998, 1997 and 1996 follows:
1998 1997 1996
-------- ------- -------
(Dollars in thousands)
Service cost....................................... $ 1,867 $ 1,201 $ 1,347
Interest cost...................................... 5,438 4,702 5,720
Expected return on plan assets..................... (360) -- --
Amortization of unrecognized transition obligation. 3,704 3,704 4,080
Amortization of prior service cost................. -- -- 35
Amortization of unrecognized (gain)/loss........... (80) (1,029) (329)
-------- ------- -------
Postretirement benefits expense.................... 10,569 8,578 10,853
Deferred postretirement benefits expense........... -- -- (1,056)
-------- ------- -------
Postretirement Benefit Expense Recognized in the
Statement of Earnings............................. $ 10,569 $ 8,578 $ 9,797
======== ======= =======
The following table sets forth the change in benefit obligation, change in
plan assets and the funded status of the plan, and the liability recognized on
CMP Group's balance sheet at December 31, 1998 and 1997:
1998 1997
-------- --------
(Dollars in
thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year.................... $ 69,749 $ 73,903
Service cost............................................... 1,867 1,201
Interest cost.............................................. 5,438 4,702
Estimated benefits paid.................................... (6,334) (5,401)
Actuarial (gain)/loss...................................... 16,232 (4,656)
-------- --------
Benefit obligation at end of year.......................... 86,952 69,749
Change in Plan Assets
Fair value of plan assets at beginning of year............. 3,025 849
Actual return on plan assets............................... 711 66
Employer contribution...................................... 9,100 7,511
Estimated benefits paid.................................... (6,334) (5,401)
-------- --------
Fair value of plan assets at end of year................... 6,502 3,025
Funded Status.............................................. (80,450) (66,724)
Unrecognized transition (asset)/obligation................. 51,859 55,563
Unrecognized prior service cost............................ 4 5
Unrecognized actuarial (gain)/loss......................... (3,718) (19,680)
-------- --------
Accrued benefit cost....................................... $(32,305) $(30,836)
======== ========
The assumed health-care cost-trend rate was an average gross medical trend
of approximately 6% for 1998 reducing to 5% overall in the year 2020. Rates
range from 5.6% to 6.5% for 1997 reducing to 5.0% overall over
A-51
a period of 25 years. Rates range from 5.7% to 6.8% for 1996, reducing to 5.0%
overall, over a period of 10 years. The effect of a one-percentage-point
increase in the assumed health-care cost-trend rate for each future year would
increase the aggregate of the service and interest-cost components of the net
periodic postretirement benefit cost by $1.1 million and the accumulated
postretirement benefit obligation ("APBO") by $11.0 million. The effect of a
one-percentage-point decrease in the assumed healthcare cost-trend rate for
each future year would decrease the aggregate of the service and interest-cost
components of the net periodic postretirement benefit cost by $947 thousand
and the APBO by $9.3 million. Additional assumptions used in accounting for
the postretirement benefit plan in 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Weighted-average discount rate............................. 6.50% 7.00% 7.50%
Rate of increase in future compensation levels............. 4.50% 4.50% 4.50%
CMP Group is exploring alternatives for mitigating the cost of
postretirement benefits and for funding its obligations. These alternatives
include mechanisms to fund the obligation prior to actual payment of benefits,
plan-design changes to limit future expense increases, and additional cost-
control and cost-sharing programs.
Note 6: Incentive Compensation
Stock options granted are exerciseable at the market price of the common
stock on the date of the grant. They expire seven years from their grant date.
One third options vest annually, commencing on the first anniversary of the
option grant date. Upon vesting stock options are exerciseable during periods
of active employment or within thirty (30) days after termination of
employment, provided termination did not occur due to cause.
Stock options granted for the year 1998 are summarized as follows:
Weighted
Average
Shares Exercise Price
------- --------------
Outstanding at the beginning of 1997
Granted during the year............................... 253,925 $17.375
Expired/canceled during the year...................... 11,929 $17.375
Outstanding as of December 31, 1998................... 241,996 $17.375
The stock options were granted with a grant date fair value of $2.28. The
fair value was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
7 Years
-------
Expected option life................................................. 7 years
Risk free interest rate.............................................. 6.00%
Expected volatility.................................................. 0.154%
Dividend yield....................................................... 5.10%
CMP Group uses the intrinsic value based method to recognize compensation
expense related to stock options. No compensation expense was recognized in
1998 related to stock options granted, since they contained an exercise price
equal to the fair market value on the date of the grant. Had compensation
costs for stock options been determined based on the fair value at the grant
dates for awards under this plan consistent with the method of SFAS No. 123,
the CMP Group's net income and earnings per share would have been reduced to
the pro forma amounts indicated as follows:
1998
-------
Net Income:
As Reported.......................................................... $52,910
Pro Forma............................................................ $52,583
Earnings Per Share:
As Reported.......................................................... $ 1.63
Pro Forma............................................................ $ 1.62
A-52
Performance Shares. Performance shares are shares of CMP Group stock granted
at the end of a 3-year performance cycle, based on achievement of performance
goals that are directly linked to increasing shareholder value. If the goals
are not achieved at the end of the 3-year cycle, the performance shares are
forfeited. Contingently issuable performance shares for the three year period
beginning in 1997 and 1998, respectively totaled 61,437 and 66,906,
respectively.
CMP Group is accruing the compensation expense associated with these shares
over the applicable three year period. The total expense recognized in 1998
was approximately $743 thousand.
Note 7: Transactions with Affiliated Companies
Central Maine provides certain services to CMP Group and its subsidiaries,
including administrative support services and pension and employee benefit
arrangements. Charges related to those services have been determined based on
a combination of direct charges and allocations designed to recover Central
Maine's cost. These assessments are reflected as an offset to Central Maine's
expenses and totaled approximately $3 million for the year ended December 31,
1998.
CMP Group provides certain managerial services to its subsidiaries. Charges
related to those services have been determined based on a combination of
direct charges and allocation in order to recover the majority of their
expenses. These assessments are reflected as an offset to CMP Group's expenses
and totaled approximately $1.2 million for the year ended December 31, 1998.
In addition, a subsidiary of CMP Group provides certain real estate and
river management services charged to Central Maine at cost and environmental,
engineering, utility locator and construction services based on a contracted
rate. These expenses amounted to $2.7 million for the year ended December 31,
1998.
Accounts Accounts
Receivable Payable
---------- --------
(dollars in
thousands)
CMP Group................................................ $ 180 $1,590
MainePower............................................... 43 604
CNEX..................................................... 190 138
MaineCom................................................. 138 --
TeleSmart................................................ 78 36
Union Water.............................................. 950 1,386
------ ------
$1,579 $3,754
Note 8: Fiber Optic Network
In July 1998, MaineCom's equity investments, FiveCom, Inc., and FiveCom of
Maine, LLC reorganized along with other related companies to form a new
company, Northeast Optic Network, Inc. ("NEON"). MaineCom's ownership interest
of 53.5-percent in the new company was equal to its combined ownership
interest in FiveCom and FiveCom of Maine.
In August 1998 NEON issued 4 million new shares of common stock at $12.00
per share on the open market in an initial public offering ("IPO"). NEON's IPO
had the effect of decreasing MaineCom's ownership interest from 53.5-percent
to approximately 40-percent. The shares were issued at an amount greater than
MaineCom's per share investment, resulting in an increase in MaineCom's
investment in NEON of $15.9 million. In accordance with the SEC's Staff
Accounting Bulletins ("SAB") 51 and 84 MaineCom increased additional paid in
capital by $9.4 million and deferred tax reserve liability by $6.5 million.
CMP Group's accounting policy for such transactions is to recognize a gain in
income. However, the above transaction was reflected in additional paid in
capital as required by the SEC SAB's.
In conjunction with the IPO, Central Maine sold 282,023 NEON shares,
resulting in a net after tax gain of approximately $1.9 million and further
reducing its (now MaineCom's) ownership percentage to 38.5-percent of the
outstanding common shares.
A-53
NEON 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 1,000 fiber optic cable route miles,
or more than 65,000 fiber strand miles, in New England and New York, utilizing
primarily electric-utility rights-of-way, including some of Central Maine's in
Maine and some owned by other electric utilities including Northeast
Utilities, another substantial minority stockholder, in Connecticut,
Massachusetts and New Hampshire. As of December 31, 1998, NEON had completed
construction of approximately 600 route miles, or 49,000 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.
CMP Group 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.
Note 9: Capacity Arrangements
Power Agreements
Central Maine, through certain equity interests, is entitled to a portion of
the generating capacity and energy production of four nuclear generating
facilities (the Yankee companies), three of which have been permanently shut
down, and is obligated to pay its proportionate share of costs, which include
fuel, depreciation, operation-and-maintenance expenses, a return on invested
capital, and the estimated cost of decommissioning the nuclear plants.
Pertinent data related to these power agreements as of December 31, 1998,
are as follows:
Maine Vermont Connecticut Yankee
Yankee Yankee Yankee Atomic
----------- --------- ----------- ------------
(Dollars in thousands)
Ownership share............. 38% 4% 6% 9.5%
Operating Status............ Permanently Operating Permanently Permanently
shutdown shutdown shutdown
August 6, December 4, February 26,
1997 1996 1992
Contract expiration date.... 2008 2012 1998 2000
Capacity (MW)............... -- 531 -- --
Company's share of: Capacity
(MW)....................... -- 19 -- --
1998 energy and capacity
costs...................... $ 41,631 $ 7,012 $ 4,737 $ 4,513
Long-term obligations and
redeemable preferred stock. $ 75,461 $ 7,884 $ 8,894 --
Estimated decommissioning
obligation................. $ 273,895 $ 16,272 $ 29,913 $ 7,761
Accumulated decommissioning
fund....................... $ 80,812 $ 7,620 $ 14,992 $ 14,313
Under the terms of its agreements, Central Maine pays its ownership share
(or entitlement share) of estimated decommissioning expense to each of the
Yankee companies and records such payments as a cost of purchased power.
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. The
Plant experienced a number of operational and regulatory problems and did not
operate after December 6, 1996. The decision to close the Plant permanently
was based on an economic analysis of the costs, risks and
A-54
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.
Central Maine continues to incur costs, which are substantially less than in
1997, in connection with its 38% share of Maine Yankee as well as additional
costs for replacement power since the Plant has been shut down. For the twelve
months ended December 31, 1998, such costs amounted to approximately $41.6
million for Central Maine, $3.1 million related to energy costs and $38.5
million for capacity charges. The power formerly received from Maine Yankee
has been primarily replaced with two long-term purchased power arrangements
that Central Maine has made with Canadian sources through February 2000.
Central Maine's 38% ownership interest in Maine Yankee's common equity
amounted to $30 million as of December 31, 1998, and under Maine Yankee's
Power Contracts and Additional Power Contracts, Central Maine is responsible
for 38% 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). This would result in approximately $36.4
million being collected annually from Maine Yankee's sponsors. 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 Federal Energy
Regulatory Commission ("FERC") rate order. Through December 31, 1998, Maine
Yankee had collected approximately $212.7 million for its decommissioning
obligations.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for
filing certain amendments to the Power Contracts (the "Amendatory Agreements")
and revised rates to reflect the decision to shut down the Plant and to
request approval of an increase in the decommissioning component of its
formula rates. Maine Yankee's submittal also requested certain other rate
changes, including recovery of unamortized investment (including fuel) and
certain changes to its billing formula, consistent with the non-operating
status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine
Yankee's new rates for filing, subject to refund after a minimum suspension
period, and set Maine Yankee's Amendatory Agreements, rates and issues
concerning the prudence of the Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
In support of its request for an increase in decommissioning collections,
Maine Yankee submitted with its initial FERC filing a 1997 decommissioning
cost study performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee
engaged in an extensive competitive bid process to engage a Decommissioning
Operations Contractor ("DOC") to perform certain major decontamination and
dismantlement activities at the Plant on a fixed-price, turnkey basis. As a
result of that process, a consortium headed by Stone & Webster Engineering
Corporation ("Stone & Webster") was selected to perform such activities under
a fixed-price contract. The contract provides for, among other undertakings,
construction of an independent spent fuel storage installation ("ISFSI") and
completion of major decommissioning activities and site restoration by the end
of 2004. The DOC process resulted in fixing certain costs that had been
estimated in the earlier decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active
intervenors, including among others the MPUC Staff, the OPA, Central Maine and
other owners, the Secondary Purchasers, and a Maine environmental group (the
"Settling Parties"), engaged in extensive discovery and negotiations. Those
parties participated in
A-55
settlement discussions that resulted in an Offer of Settlement filed by those
parties with the FERC on January 19, 1999. On February 8, 1999, the FERC Trial
Staff recommended that the presiding judge certify the settlement to the FERC
and that the FERC approve it. Upon approval by the FERC, the settlement would
constitute a full settlement of all issues raised in the consolidated FERC
proceeding, including decommissioning-cost issues and issues pertaining to the
prudence of the management, operation, and decision to permanently cease
operation of the Plant. A separately negotiated settlement filed with the FERC
on February 5, 1999, would resolve the issues raised by the Secondary
Purchasers by limiting the amounts they will pay for decommissioning the Plant
and by settling other points of contention affecting individual Secondary
Purchasers. On February 24, 1999, the FERC Trial Staff recommended
certification and approval of the settlement with the Secondary Purchasers.
The Offer of Settlement provides for Maine Yankee to collect $33.6 million
in the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for ISFSI-
related costs. The original filing with FERC on November 6, 1997, called for
an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount
collected annually could be reduced to approximately $26 million if Maine
Yankee is able to (1) use for construction of the ISFSI funds held in trust
under Maine law for spent-fuel disposal, and (2) access approximately $6.8
million being held by the State of Maine for eventual payment to the State of
Texas pursuant to a compact for low-level nuclear waste disposal, the future
of which is now in question after rejection of the selected disposal site in
west Texas by a Texas regulatory agency. Both would require authorizing
legislation in Maine, which Maine Yankee is committed to use its best efforts
to obtain.
The Offer of Settlement also provides for recovery of all unamortized
investment (including fuel) in the Plant, together with a return on equity of
6.50 percent, effective January 15, 1998, on equity balances up to maximum
allowed equity amounts. The Settling Parties also agreed in the proposed
settlement not to contest the effectiveness of the Amendatory Agreements
submitted to FERC as part of the original filing, subject to certain
limitations including the right to challenge any accelerated recovery of
unamortized investment under the terms of the Amendatory Agreements after a
required informational filing with the FERC by Maine Yankee. In addition, the
settlement contains incentives for Maine Yankee to achieve further savings in
its decommissioning and ISFSI-related costs and resolves issues concerning
restoration and future use of the Plant site and environmental matters of
concern to certain of the intervenors in the proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the
OPA entered into a further agreement resolving retail rate issues and other
issues specific to the Maine parties, including those that had been raised
concerning the prudence of the operation and shutdown of the Plant (the "Maine
Agreement"). Under the Maine Agreement Central Maine would continue to recover
its Maine Yankee costs in accordance with its most recent ARP order from the
MPUC without any adjustment reflecting the outcome of the FERC proceeding. To
the extent that Central Maine has collected from its retail customers a return
on equity in excess of the 6.50 percent contemplated by the Offer of
Settlement, no refunds would be required, but such excess amounts would be
credited to the customers to the extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners,
for the period from March 1, 2000, through December 1,2004, to hold their
Maine retail ratepayers harmless from the amounts by which the replacement
power costs for Maine Yankee exceed the replacement power costs assumed in the
report to the Maine Yankee Board of Directors that served as a basis for the
Plant shutdown decision, up to a maximum cumulative amount of $41 million.
Central Maine's share of that amount would be $31.16 million for the period.
The Maine Agreement, which was approved by the MPUC on December 22, 1998, also
sets forth the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including
the Maine Agreement, constitutes a reasonable resolution of the issues raised
in the Maine Yankee FERC proceeding, and that approval of the Offer of
Settlement by the FERC would eliminate significant uncertainties concerning
CMP Group's and Central Maine's future financial performance. Although all of
the active parties to the proceeding, including the
A-56
FERC Trial Staff, support or, with respect to certain individual provisions,
do not oppose, the Offer of Settlement, CMP Group and Central Maine cannot
predict with certainty whether or in what form it will be approved by the
FERC.
Condensed financial information on Maine Yankee Atomic Power Company is as
follows:
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
Earnings:
Operating revenues................................. $ 110,608 $ 238,586 $185,661
Operating income................................... 13,430 18,170 17,150
Net income......................................... 6,295 9,037 8,106
Earnings applicable to common stock................ 4,916 7,613 6,637
Central Maine's Equity Share of Net Earnings....... $ 1,868 $ 2,893 $ 2,522
--------- --------- --------
Investment:
Net electric property and nuclear fuel............. $ 687 $ 17,938 $222,360
Current assets..................................... 20,896 71,098 44,979
Deferred charges and other assets.................. 1,161,715 1,279,107 334,722
--------- --------- --------
Total Assets....................................... 1,183,298 1,368,143 602,061
--------- --------- --------
Less:
Redeemable preferred stock......................... 16,800 17,400 18,000
Long-term obligations.............................. 201,614 270,299 223,572
Current liabilities................................ 15,122 35,518 34,265
Reserves and deferred credits...................... 870,856 966,561 255,472
--------- --------- --------
Net Assets......................................... $ 78,906 $ 78,365 $ 70,752
--------- --------- --------
Company's Equity in Net Assets..................... $ 29,984 $ 29,779 $ 26,886
========= ========= ========
Other Nuclear Investments
In December 1996, the Board of Directors of Connecticut Yankee Atomic Power
Company announced a permanent shutdown of the Connecticut Yankee plant in
Haddam, Connecticut, and decided to decommission the plant for economic
reasons. The Company has a 6% equity interest in Connecticut Yankee, totaling
approximately $6.3 million at December 31, 1998. Central Maine estimates 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 $29.9 million and has recorded a regulatory
asset and a liability on the consolidated balance sheet. Central Maine is
currently recovering through rates an amount adequate to recover these
expenses.
On February 26, 1992, the Board of Directors of Yankee Atomic Electric
Company (Yankee Atomic) decided to permanently discontinue power operation at
the Yankee Atomic Plant in Rowe, Massachusetts, and to decommission that
facility. Central Maine relied on Yankee Atomic for less than 1% of the
Company's system capacity. Its 9.5% equity investment in Yankee Atomic is
approximately $1.9 million. Central Maine has estimated its remaining share of
the cost of Yankee Atomic's continued compliance with regulatory requirements,
recovery of its plant investments, decommissioning and closing the plant, to
be approximately $7.8 million.
Central Maine has approximately a 60% ownership interest in the jointly
owned, Company-operated, 620-megawatt oil-fired W. F. Wyman Unit No. 4. See
Note 3, "Regulatory Matters"--"Agreement for Sale of Generation Assets."
Central Maine also has a 2.5% ownership interest in the Millstone Unit No. 3
nuclear plant operated by Northeast Utilities, and is entitled to
approximately a 29-megawatt share of that unit's capacity. Central Maine's
plant in service, nuclear fuel, decommissioning fund, and related accumulated
depreciation and amortization attributable to these units as of December 31,
1998, and 1997 were as follows:
A-57
Wyman 4 Millstone 3
----------------- -----------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in thousands)
Plant in service, nuclear fuel and
decommissioning fund...................... $116,075 $116,367 $112,907 $112,227
Accumulated depreciation and amortization.. 69,028 66,239 45,433 42,412
Power-Pool Agreements
The New England Power Pool, of which Central Maine is a member, has
contracted in its Hydro-Quebec Projects to purchase power from Hydro-Quebec.
The contracts entitle Central Maine to 44.5 megawatts of capacity credit in
the winter and 127.25 megawatts of capacity credit during the summer. Central
Maine has entered into facilities-support agreements for its share of the
related transmission facilities. Central Maine's share of the support
responsibility and of associated benefits is approximately 7%.
Central Maine is making facilities-support payments on approximately $25.4
million, its remaining share of the construction cost for these transmission
facilities incurred through December 31, 1998. These obligations are reflected
on the Company's consolidated balance sheet as lease obligations with a
corresponding charge to electric property.
Non-Utility Generators
Central Maine has entered into a number of long-term, non-cancelable
contracts for the purchase of capacity and energy from non-utility generators
(NUG). The agreements generally have terms of five to 30 years, with
expiration dates ranging from 1999 to 2023. They require Central Maine to
purchase the energy at specified prices per kilowatt-hour, which are often
above market prices. As of December 31, 1998, facilities having 508 megawatts
of capacity covered by these contracts were in-service. The costs of purchases
under all of these contracts amounted to $265 million in 1998, $306.4 million
in 1997, and $313.4 million in 1996.
Central Maine's estimated contractual obligations with NUGs as of December
31, 1998, are as follows:
Amount
-----------
(Dollars in
millions)
1999.......................................................... $ 280
2000.......................................................... 281
2001.......................................................... 260
2002.......................................................... 267
2003.......................................................... 271
2004--2023.................................................... 1,857
------
$3,216
======
Note 10: Capitalization and Interim Financing
Retained Earnings
Under terms of the most restrictive test in Central Maine's General and
Refunding Mortgage Indenture and Central Maine's Articles of Incorporation, no
dividend may be paid on the common stock of Central Maine if such dividend
would reduce retained earnings below $29.6 million. At December 31, 1998,
Central Maine's retained earnings were $76.3 million, of which $46.7 million
were not so restricted. There are no such restrictions on CMP Group. Future
dividend decisions will be subject to future earnings levels and the financial
condition of
A-58
CMP Group and Central Maine and will reflect the evaluation by their Board of
Directors of then existing circumstances.
Mortgage Bonds
Substantially all of Central Maine's electric-utility property and
franchises are subject to the lien of the General and Refunding Mortgage.
Central Maine's outstanding mortgage bonds may be redeemed at established
prices plus accrued interest to the date of redemption, subject to certain
refunding limitations. Bonds may also be redeemed under certain conditions at
their principal amount plus accrued interest by means of cash deposited with
the trustee under certain provisions of the mortgage indenture. Under the
Indenture such cash may be applied at any time, at the direction of Central
Maine, 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. Such cash may also be
withdrawn by Central Maine by substitution of allocated property additions or
available bonds. At December 31, 1998, there was approximately $1,000 of such
cash on deposit with the trustee.
Mortgage Bonds outstanding as of December 31, 1998, and 1997 were as
follows:
Central Maine Power Company
General and Refunding Mortgage Bonds:
Interest
Maturity rate 1998 1997
Series ----------------- -------- -------- --------
(Dollars in thousands)
U............................... 1998-April 15 7.54% $ -- $ 25,000
S............................... 1998-August 15 6.03 -- 60,000
T............................... 1998-November 1 6.25 -- 75,000
O............................... 1999-January 1 7 3/8 -- 50,000
P............................... 2000-January 15 7.66 43,717 75,000
N............................... 2001-September 15 8.50 -- 11,000
Q............................... 2008-March 1 7.05 75,000 75,000
R............................... 2023-June 1 7 7/8 -- 50,000
-------- --------
Total Mortgage Bonds............ $118,717 $421,000
======== ========
During 1998, Central Maine paid at maturity or redeemed the following
principal amounts of its General and Refunding Mortgage Bonds: on March 30,
$50 million of Series R 7-7/8%, Due 2023; on the same day $11 million of
Series N 8.50%, Due 2001; on April 15, $25 million of Series U 7.54%, Due
1998; on June 15, $31.3 million of Series P 7.66%, Due 2000; on August 15, $60
million principal amount of Series S 6.03%, Due 1998; on November 1, $75
million principal amount of Series T 6.25%, Due 1998; and on December 31, $50
million principal amount of Series O 7.375%, Due 1999. No premiums were paid
by Central Maine for the bonds.
Limitations on Unsecured Indebtedness
Central Maine's Articles of Incorporation limit certain unsecured
indebtedness that may be outstanding to 20 percent of capitalization, as
defined without the consent of the holders of Central Maine's preferred stock;
20 percent of defined capitalization amounted to $143 million as of December
31, 1998. Unsecured indebtedness, as defined, amounted to $131 million as of
December 31, 1998. Central Maine's $500 million medium-term note program,
having received the consent of Central Maine's preferred stockholders in May
1997, is not included in "unsecured indebtedness" for purposes of the 20-
percent limitation.
Medium-Term Notes
At the annual meeting of the stockholders of Central Maine on May 15, 1997,
the holders of Central Maine's outstanding preferred stock consented to the
issuance of $350 million in principal amount of Central
A-59
Maine's medium-term notes in addition to the $150 million in principal amount
to which they had previously consented in 1989. As of December 31, 1998, $337
million of medium-term notes were outstanding of which $10 million are
classified as short-term. Interest on fixed-rate notes is payable on March 1
and September 1, while interest on floating-rate notes is payable on the dates
indicated thereupon.
Medium-Term Notes outstanding as of December 31, 1998, and 1997 were as
follows:
Interest
rate 1998 1997
Maturity --------- -------- -------
(Dollars in thousands)
Series A:
2000............................................... 9.65% $ 5,000 $ 5,000
Series B:
1998............................................... 5.32 -- 8,000
Series C:
1999-2001.......................................... 5.67-7.81 127,000 30,000
Series D:
1999-2000.......................................... 5.52-7.04 205,000 --
-------- -------
Medium-Term Notes.................................. 337,000 43,000
Less: Amount Due Within One Year................... 10,000 --
-------- -------
Total Medium-Term Notes............................ $327,000 $43,000
======== =======
Pollution-Control Facility and Other Notes
Pollution-control facility and other notes outstanding as of December 31,
1998, and 1997 were as follows:
Series Interest rate Maturity 1998 1997
------ ------------- ---------------- -------- -------
(Dollars in thousands)
Central Maine Power Company:
Yarmouth Installment Notes..... 6 3/4% June 1, 2002 $ 9,330 $ 9,805
Yarmouth Installment Notes..... 6 3/44 December 1, 2003 1,000 1,000
Industrial Development
Authority of the State of New
Hampshire Notes............... 7 3/8 May 1, 2014 19,500 19,500
Finance Authority of Maine..... 8.16 January 1, 2005 45,929 53,329
Revolving Credit Agreement..... 6.1125 October 22, 1999 50,000 --
Maine Electric Power Company,
Inc.:
Promissory Notes............... Variable* November 1, 2000 420 620
NORVARCO: Promissory Note...... 10.48 November 1, 2020 24,090 --
NORVARCO: Senior Note.......... 7.05 November 1, 2020 1,747 --
Union Water Power Company-Bank
Notes......................... 7.99 December 2011 1,163 --
Union Water Power Company-Bank
Notes......................... Variable** October 2018 1,284 --
-------- -------
Pollution-Control Facility and
Other Notes................... 154,463 84,254
Less: Amount Due Within One
Year.......................... 1,183 --
-------- -------
$153,280 $84,254
- --------
* The average rate was 6.48% in 1998 and 6.5% in 1997.
** The average rate was 8.25% in 1998.
The bonds issued by the Industrial Development Authority of the State of New
Hampshire are supported by loan agreements between Central Maine and the
Authority. The bonds are subject to redemption at the option of Central Maine
at their principal amount plus accrued interest and premium, beginning in
2001.
On October 26, 1994, FAME issued $79.3 million of Taxable Electric Rate
Stabilization Revenue Notes Series 1994A (FAME notes). FAME and Central Maine
entered into a loan agreement under which Central
A-60
Maine issued FAME a note for approximately $66.4 million, evidencing a loan in
that amount. The remaining $12.9 million of FAME-notes proceeds over the $66.4
million was placed in a capital-reserve account. The amount in the capital-
reserve account is equal to the highest amount of principal and interest on
the FAME notes to accrue and come due in any year the FAME notes are
outstanding. The amounts invested in the capital reserve account are initially
invested in government securities designed to generate interest income at a
rate equal to the interest on the FAME notes. Under the terms of the loan
agreement, Central Maine is also responsible for or receives the benefit from
the interest rate differential and investment gains and losses on the capital
reserve account.
Capital Lease Obligations
CMP Group leases some of its buildings and equipment under lease
arrangements, and accounts for certain transmission agreements as capital
leases using periods expiring between 2006 and 2021. The net book value of
property under capital leases was $29.4 million and $31.2 million at December
31, 1998, and 1997, respectively. Assets acquired under capital leases are
recorded as electric property at the lower of fair-market value or the present
value of future lease payments, in accordance with practices allowed by the
MPUC, and are amortized over their contract terms. The related obligation is
classified as other long-term debt. Under the terms of the lease agreements,
executory costs are excluded from the minimum lease payments.
Estimated future minimum lease payments for the five years ending December
31, 2003, together with the present value of the minimum lease payments, are
as follows:
Amount
-----------
(Dollars in
thousands)
1999.......................................................... $ 5,257
2000.......................................................... 5,088
2001.......................................................... 4,919
2002.......................................................... 4,749
2003.......................................................... 4,580
Thereafter.................................................... 47,024
Total minimum lease payments.................................. 71,617
Less: amounts representing interest........................... 38,844
-------
Present Value of Net Minimum Lease Payments................... $32,773
=======
Sinking-Fund Requirements
Consolidated sinking-fund requirements for long-term obligations, including
capital lease payments and maturing debt issues, for the five years ending
December 31, 2003, are as follows:
Sinking Maturing
fund debt Total
------- -------- -------
(Dollars in thousands)
1999................................................... 2,455 282,000 284,455
2000................................................... 10,519 128,717 139,236
2001................................................... 10,949 10,000 20,949
2002................................................... 18,766 -- 18,766
2003................................................... 11,889 -- 11,889
Disclosure of Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class of
financial instruments for which it is practicable are discussed below. The
carrying amounts of cash and temporary investments approximate fair value
because of the short maturity of these investments. The fair value of
redeemable preferred stock and pollution-control facility and other notes is
based on quoted market prices as of December 31, 1998 and 1997.
A-61
The fair value of long-term obligations is based on quoted market prices for
the same or similar issues, or on the current rates offered to the particular
company based on the weighted average life of each class of instruments.
The estimated fair values of the CMP Group's financial instruments as of
December 31, 1998, and 1997 are as follows:
1998 1997
------------------- -------------------
Carrying Carrying
amount Fair value amount Fair value
-------- ---------- -------- ----------
(Dollars in thousands)
Redeemable preferred stock............. $ 27,910 $ 28,747 $ 46,528 $ 48,247
Mortgage bonds......................... 118,717 120,782 421,000 421,151
Medium-term notes...................... 327,000 326,226 43,000 43,378
Pollution-control facility and other
notes................................. 153,280 157,771 84,254 83,163
Cumulative Preferred Stock
Preferred-stock balances outstanding as of December 31, 1998 and 1997 were
as follows:
Current
shares
outstanding 1998 1997
----------- ------- -------
(Dollars in thousands,
except per-share amounts)
Preferred Stock--Not Subject to Mandatory
Redemption:
$25 par value--authorized 2,000,000 shares;
outstanding: None $ -- $ --
$100 par value noncallable -authorized 5,713
shares; outstanding 6% voting.................... 5,713 571 571
$100 par value callable--authorized 2,300,000*
shares; outstanding:
3.50% series (redeemable at $101)................. 220,000 22,000 22,000
4.60% series (redeemable at $101)................. 30,000 3,000 3,000
4.75% series (redeemable at $101)................. 50,000 5,000 5,000
5.25% series (redeemable at $102)................. 50,000 5,000 5,000
7 7/8% series (optional redemption after 9/1/97,
at $100)......................................... -- 30,000
6% stock owned by CMP Group, Inc.................. 533 (43) --
------- -------
Total............................................. $35,528 $65,571
======= =======
Redeemable Preferred Stock--Subject to Mandatory
Redemption:
Flexible Money Market Preferred Stock, Series A--
7.999% (279,100 shares in 1998, 395,275 shares in
1997 and 1996)................................... 189,100 27,910 39,528
8 7/8% series (redeemable at $101.97)............. -- 7,000
------- -------
Total............................................. $27,910 $46,528
======= =======
- --------
* Total authorized $100 par value callable is 2,300,000 shares. Shares
outstanding are classified as Not Subject to Mandatory Redemption and
Subject to Mandatory Redemption.
Sinking-fund provisions for the 8 7/8% Series Preferred Stock require the
Company to redeem all shares at par plus an amount equal to dividends accrued
to the redemption date on the basis of 70,000 shares annually commencing on
July, 1996. The Company also has the non-cumulative right to redeem up to an
equal amount of the respective number of shares annually, beginning in 1996,
at par plus an amount equal to dividends accrued to the redemption date. The
sinking-fund requirement for the five-year period ending December 31, 2000 is
$7.0 million annually beginning in 1996. The Company redeemed $14 million of
these shares at par in 1996 and 1997 pursuant to the mandatory and optional
sinking-fund provisions. On July 1, 1998 Central Maine redeemed the final $7
million of its Preferred Stock 8 7/8% Series through its mandatory sinking
fund provisions. In connection with the Central Maine common stock conversion,
a number of holders of the 6% preferred stock requested
A-62
payment at fair value for their shares pursuant to section 910 of the Maine
Business Corporation Act. CMP Group purchased 533 shares from various
shareholders of Central Maine 6% preferred stock.
Sinking-fund provisions for the Flexible Money Market Preferred Stock,
Series A, 7.999%, require Central Maine to redeem all shares at par plus an
amount equal to dividends accrued to the redemption date on the basis of
90,000 shares annually beginning in October 1999. Central Maine also has the
non-cumulative right to redeem up to an equal number of shares annually
beginning in 1999, at par plus an amount equal to dividends accrued to the
redemption date. The sinking-fund requirement for the period 1998 through 2001
is $9 million annually with a final sinking fund requirement of $910 thousand
in 2002.
On April 1, 1998, Central Maine 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.
Interim Financing and Credit Agreements
Central Maine uses funds obtained from short-term borrowing to provide
initial financing for construction and other corporate purposes.
To support its short-term capital requirements, in October 1996, Central
Maine 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 originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility
that matures on October 22, 1999. Effective December 15, 1998, the banks'
commitments under the 364-day facility were reduced from $75 million to $25
million, and other provisions were amended to reflect the reorganization of
Central Maine into a holding-company structure and recognize other changed
circumstances. Both credit facilities require annual fees on the total credit
lines. The fees are based on Central Maine'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 Central Maine'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 amount of outstanding short-term borrowing will fluctuate with day-to-day
operational needs, the timing of long-term financing, and market conditions.
Central Maine had $5.0 million outstanding under the 364-day revolving credit
facility at 6.63% and $50 million outstanding under the 3-year revolving
credit facility at 6.11%.
CMP Group and its subsidiaries had a total of $16.4 million outstanding,
made up of revolving credit facility and other short-term financings as of
December 31, 1998.
Note 11: Quarterly Financial Data (Unaudited)
CMP Group's unaudited, consolidated quarterly financial data pertaining to
the results of operations are shown below.
Quarter ended
-------------------------------------------
March 31* June 30* September 30 December 31
--------- -------- ------------ -----------
(Dollars in thousands, except per-
share amounts)
1998
Electric operating revenues......... $248,745 $208,216 $234,056 $247,722
Operating income.................... 39,934 14,326 26,370 45,251
Net income (loss)................... 16,398 572 17,440 18,500
Earnings (loss) per common share*... .51 .02 .54 .57
For the years prior to 1998, CMP Group, Inc. was not in existence; the
figures for the years 1996 and 1997 are the same as Central Maine's.
- --------
* Same results as Central Maine. CMP Group was formed September 1, 1998.
A-63
Central Maine's unaudited, consolidated quarterly financial data pertaining
to the results of operations are shown below.
Quarter ended
--------------------------------------
September December
March 31 June 30 30 31
-------- -------- --------- --------
(Dollars in thousands, except per-
share amounts)
1998
Electric operating revenues............... $248,745 $208,216 $234,027 $247,573
Operating income.......................... 39,934 14,326 25,753 46,636
Net income (loss)......................... 18,295 1,646 13,135 21,747
Earnings (loss) per common share*......... .51 .02 .38 .67
1997
Electric operating revenues............... $268,367 $210,074 $226,134 $249,601
Operating income.......................... 27,513 8,881 7,394 19,491
Net income (loss)......................... 16,027 (2,539) (5,845) 5,779
Earnings (loss) per common share*......... .43 (.15) (.24) .12
1996
Electric operating revenues............... $274,139 $216,358 $228,987 $247,562
Operating income.......................... 39,601 20,495 14,667 32,909
Net income................................ 27,857 9,096 3,392 19,884
Earnings per common share*................ .78 .20 .04 .54
- --------
* Earnings per share are computed using the weighted-average number of common
shares outstanding during the applicable quarter.
A-64
CM154B DETACH HERE
PROXY
CMP GROUP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
(Common Shareholders)
The undersigned shareholder hereby appoints Arthur W. Adelberg and David E.
Marsh, and either of them, proxies, with power of substitution, to vote all
shares that the undersigned is entitled to vote at the Annual Meeting of the
Shareholders of CMP Group, Inc. to be held on May 20, 1999, at 10:00 A.M. EDT,
at the Augusta Civic Center, North Wing, Augusta, Maine, and at any
adjournments, on the proposals described in the accompanying Joint Proxy
Statement as marked on the reverse side, and in their discretion on any other
matters that may properly come before the meeting or any adjournment. If this
proxy is properly signed, your shares will be voted as you directed by marking
the boxes on the reverse side. IF NO DIRECTION IS GIVEN, YOUR SHARES WILL BE
VOTED FOR THE ELECTION OF ALL NOMINEES FOR DIRECTOR NAMED ON THE REVERSE SIDE
---
AND FOR PROPOSAL 2 ON THE REVERSE SIDE.
---
- ----------- -----------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- ----------- -----------
CMP GROUP, INC.
c/o EquiServe
P.O. Box 8040
Boston, MA 02266-8040
[Logo] CMP Group
CM154A DETACH HERE
[X] Please mark
votes as in
this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
---
1. Election of Directors.
Nominees: Charleen M. Chase, David T. Flanagan,
Robert H. Gardiner and Peter J.
Moynihan
VOTE WITHHOLD
FOR [_] [_] VOTE FOR
ALL ALL
[_]______________________________________________________________
To withhold vote for any nominee, write that nominee's name above
FOR AGAINST ABSTAIN
2. Approval of [_] [_] [_]
PricewaterhouseCoopers LLP
as auditors for 1999.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [_]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
Please date, sign exactly as name(s)
appear at left, and return promptly
in enclosed envelope. If signing for
a corporation or partnership, sign in
that name and indicate your title. If
signing as attorney, executor,
guardian, trustee or custodian,
please add your title.
Signature:_______________ Date:________ Signature:________________ Date:________