<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998
REGISTRATION NO. 333-49677
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE
AMENDMENT
NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOLDCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MAINE 6719 APPLIED FOR
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
Organization)
83 EDISON DRIVE
AUGUSTA, MAINE 04336
(207) 623-3521
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DAVID E. MARSH
ANNE M. PARE
HOLDCO, INC.
83 EDISON DRIVE
AUGUSTA, MAINE 04336
(207) 623-3521
(NAMES, ADDRESSES, INCLUDING ZIP CODES, AND TELEPHONE NUMBERS,
INCLUDING AREA CODES, OF AGENTS FOR SERVICE)
---------------
WITH COPIES TO:
E. ELLSWORTH MCMEEN, III, ESQ.
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
125 WEST 55TH STREET
NEW YORK, NEW YORK 10019
(212) 424-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective date of the merger, which shall occur as soon as
practicable after this Registration Statement is declared effective and the
satisfaction of all conditions precedent to the merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
LOGO
CENTRAL MAINE POWER COMPANY
GENERAL OFFICE: 83 EDISON DRIVE, AUGUSTA, MAINE 04336
April , 1998
TO THE HOLDERS OF COMMON STOCK,
6% PREFERRED STOCK, AND DIVIDEND
SERIES PREFERRED STOCK OF
CENTRAL MAINE POWER COMPANY:
You are cordially invited to attend the Annual Meeting of Shareholders of
Central Maine Power Company ("Central Maine") on Thursday, May 21, 1998 at
10:00 a.m. at the Augusta Civic Center, in Augusta, Maine.
HOLDERS OF COMMON STOCK AND OF 6% PREFERRED STOCK OF CENTRAL MAINE ("VOTING
SHAREHOLDERS") ARE BEING ASKED TO VOTE ON IMPORTANT MATTERS, AS DESCRIBED
BELOW. HOLDERS OF DIVIDEND SERIES PREFERRED STOCK OF CENTRAL MAINE, WHILE NOT
VOTING ON ANY MATTERS, HAVE BEEN GIVEN NOTICE OF THE ANNUAL MEETING PURSUANT
TO MAINE CORPORATE LAW BECAUSE OF THE HOLDING COMPANY MATTER DESCRIBED BELOW.
Information about the business of the meeting is set forth in the Notice of
Meeting and the Proxy Statement and Prospectus on the following pages. This
year, Voting Shareholders are asked to elect two Directors and to approve the
appointment of independent auditors for Central Maine for the fiscal year
ending December 31, 1998.
In addition, at the Meeting, Voting Shareholders will be asked to approve an
Agreement and Plan of Merger, which will result in the formation of a holding
company structure for Central Maine. The management and Board of Directors of
Central Maine consider this change to be in the best interests of Central
Maine and its shareholders. The new structure will help Central Maine respond
more effectively and efficiently to competitive and regulatory changes
occurring in the electric utility industry and to new business opportunities
that may arise from these changes. The proposed structure will separate the
new holding company's regulated and unregulated lines of business in a manner
consistent with the newly enacted Maine electric utility restructuring law.
After the merger transaction, Central Maine will remain in existence as a
subsidiary of the new holding company.
It is important for you and Central Maine that each Voting Shareholder
participate in this Annual Meeting. WHETHER OR NOT VOTING SHAREHOLDERS PLAN TO
ATTEND, THEY SHOULD SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED
SELF-ADDRESSED ENVELOPE. No postage is necessary. Of course, if Voting
Shareholders attend the meeting, they will be able to vote their shares in
person.
A copy of portions of Central Maine's Annual Report for 1997, including
audited financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations, is attached as an appendix to
this Proxy Statement.
Cordially yours,
/s/ David T. Flanagan
David T. Flanagan
President and Chief Executive Officer
URGENT. VOTING SHAREHOLDERS SHOULD SIGN, DATE AND RETURN ENCLOSED PROXY
IMMEDIATELY.
<PAGE>
LOGO
CENTRAL MAINE POWER COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 21, 1998,
AT 10:00 A.M.
April , 1998
TO THE SHAREHOLDERS OF CENTRAL MAINE POWER COMPANY:
You are hereby notified of and invited to attend the Annual Meeting of the
Shareholders of Central Maine Power Company ("Central Maine"), to be held at
the Augusta Civic Center, Augusta, Maine, on May 21, 1998, at 10:00 a.m.,
Eastern Daylight Time, to hear reports on Central Maine affairs and, in the
case of holders of Common Stock and of 6% Preferred Stock of Central Maine
("Voting Shareholders"), to consider and act upon the following matters:
1. To elect two directors to Class II of Central Maine's Board of
Directors for a three-year term;
2. To approve an Agreement and Plan of Merger, a copy of which is
attached as Appendix I to the accompanying Proxy Statement and
Prospectus, pursuant to which
(a) the holders of Central Maine's Common Stock will become holders
of the Common Stock of HoldCo, Inc. ("HoldCo"), and HoldCo will
become the sole holder of Central Maine's Common Stock, with the
result that Central Maine will become a subsidiary of HoldCo; and
(b) the 6% Preferred Stock and Dividend Series Preferred Stock will
remain securities of Central Maine;
3. To approve the appointment by Central Maine's Board of Directors of
Coopers & Lybrand L.L.P., Portland, Maine, as Central Maine's
auditors for 1998; and
4. To consider and act upon any other matters that may properly come
before the meeting.
Holders of Dividend Series Preferred Stock of Central Maine, while not
voting on any matters at the Annual Meeting, have been given notice of the
meeting pursuant to Section 902 of the Maine Business Corporation Act because
of the holding company matter described in paragraph number 2 above.
The close of business on March 23, 1998 has been fixed as the record date
for determination of shareholders entitled to notice of, and Voting
Shareholders entitled to vote at, the Annual Meeting or any adjournment
thereof.
CERTAIN SHAREHOLDERS DISSENTING TO THE AGREEMENT AND PLAN OF MERGER ARE
ENTITLED, UPON COMPLIANCE WITH SECTION 909 OF THE MAINE BUSINESS CORPORATION
ACT, TO BE PAID THE FAIR VALUE OF THEIR SHARES, UNLESS ONE OF THE EXCEPTIONS
TO THE RIGHT OF DISSENT SET OUT IN SECTION 908 OF SAID ACT IS APPLICABLE.
SPECIFICALLY, HOLDERS OF CENTRAL MAINE COMMON STOCK WILL HAVE THE RIGHT TO
SUCH PAYMENT UPON FOLLOWING THE SPECIFIED STATUTORY PROCEDURES. CENTRAL MAINE
BELIEVES THAT HOLDERS OF CENTRAL MAINE'S DIVIDEND SERIES PREFERRED STOCK AND
6% PREFERRED STOCK WILL NOT HAVE ANY SUCH RIGHT, BECAUSE ONE OR MORE STATUTORY
EXCEPTIONS ARE APPLICABLE. SHOULD ANY HOLDER OF CENTRAL MAINE DIVIDEND SERIES
PREFERRED STOCK OR 6% PREFERRED STOCK SEEK TO ASSERT DISSENTERS' RIGHTS,
CENTRAL MAINE INTENDS TO CONTEST SUCH ASSERTION. SEE "PROPOSAL NO. 2:
<PAGE>
APPROVAL OF AGREEMENT AND PLAN OF MERGER--RIGHTS OF DISSENTING SHAREHOLDERS"
IN THE ACCOMPANYING PROXY STATEMENT AND PROSPECTUS. HOWEVER, HOLDERS OF 6%
PREFERRED STOCK WILL BE ENTITLED TO BE PAID THE FAIR VALUE OF THEIR SHARES
PURSUANT TO SECTION 910 OF THE MAINE BUSINESS CORPORATION ACT. SEE "PROPOSAL
NO. 2: APPROVAL OF AGREEMENT AND PLAN OF MERGER--MAINE CONTROL TRANSACTION
STATUTE" IN THE ACCOMPANYING PROXY STATEMENT AND PROSPECTUS.
By Order of the Board of Directors
/s/ Anne M. Pare
Anne M. Pare
Corporate Secretary and Clerk
Augusta, Maine
April , 1998
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED APRIL 8, 1998
PROXY STATEMENT
OF
CENTRAL MAINE POWER COMPANY
-----------
PROSPECTUS
OF
HOLDCO, INC.
COMMON STOCK
-----------
This Proxy Statement and Prospectus contains both a Proxy Statement for the
Annual Meeting of Shareholders of Central Maine Power Company ("Central
Maine"), to be held on May 21, 1998, and a Prospectus relating to the issuance
of up to 35,000,000 shares of common stock, par value $5 per share ("HoldCo
Common Stock"), of HoldCo, Inc., a Maine corporation ("HoldCo"). The issuance
of the HoldCo Common Stock will take place upon consummation of the proposed
merger (the "Merger") pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") among Central Maine, HoldCo and a Maine corporation to be formed by
HoldCo ("MergeCo"), a copy of which is attached hereto as Appendix I. The
holders of Common Stock, par value $5.00 per share ("Central Maine Common
Stock") and of 6% Preferred Stock, par value $100 per share ("6% Preferred
Stock") of Central Maine (collectively, "Voting Shareholders") will be asked to
approve the Merger Agreement at the Annual Meeting. At the time of the Merger,
HoldCo will be a wholly-owned subsidiary of Central Maine, and MergeCo will be
a wholly-owned subsidiary of HoldCo. Pursuant to the Merger Agreement, MergeCo
will merge with and into Central Maine and each outstanding share of Central
Maine Common Stock will automatically be converted into one share of HoldCo
Common Stock. As a result of the Merger, Central Maine will become a subsidiary
of HoldCo and the holders of Central Maine Common Stock will become holders of
HoldCo Common Stock. The outstanding shares of the 6% Preferred Stock and the
Dividend Series Preferred Stock, par value $100 per share, of Central Maine
("Dividend Series Preferred Stock", and, collectively with the 6% Preferred
Stock, the "Central Maine Preferred Stock"), will not be changed as a result of
the Merger and will continue to be outstanding shares of Central Maine. See
"Proposal No. 2: Approval of Agreement and Plan of Merger--Description of
HoldCo Capital Stock" for further information concerning the securities offered
hereby.
If the Merger is implemented, it will not be necessary for holders of Central
Maine Common Stock to surrender their existing stock certificates for stock
certificates of HoldCo. See "Proposal No. 2: Approval of Agreement and Plan of
Merger--Exchange of Stock Certificates Not Required."
The principal executive offices of Central Maine and HoldCo are located at 83
Edison Drive, Augusta, Maine 04336, telephone number (207) 623-3521.
This Proxy Statement and Prospectus and the accompanying form of proxy,
solicited on behalf of the Board of Directors, were first sent to security
holders of Central Maine on or about April , 1998.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Proxy Statement and Prospectus is April , 1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT AND PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
PROXY STATEMENT AND PROSPECTUS, OR THE SOLICITATION OF A PROXY IN ANY
JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT AND PROSPECTUS NOR THE ISSUANCE
OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR INCORPORATED HEREIN BY REFERENCE SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
HoldCo has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), covering the shares of HoldCo Common Stock to be issued
upon effectiveness of the Merger. This Proxy Statement and Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the SEC. Such
Registration Statement and the exhibits thereto may be inspected and copied,
at prescribed rates, at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2551 and 7 World Trade Center, Suite 1300, New York,
New York 10048. The SEC also maintains a web site that contains reports, proxy
statements and other information regarding registrants that file
electronically with the SEC. The address of such site is http://www.sec.gov.
Central Maine is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information can be inspected and
copied, at prescribed rates, at the offices of the SEC specified above.
Central Maine Common Stock is listed on the New York Stock Exchange ("NYSE").
Reports, proxy statements and other information concerning Central Maine may
be inspected at the offices of the NYSE.
HoldCo will become subject to the same informational requirements as Central
Maine following the Merger described in this Proxy Statement and Prospectus,
and will file reports, proxy statements and other information with the SEC in
accordance with the Exchange Act. Upon completion of the Merger, HoldCo Common
Stock will be listed on the NYSE, and Central Maine Common Stock will be
withdrawn from listing on the NYSE and registration under Section 12 of the
Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have heretofore been filed by Central Maine
with the SEC pursuant to the Exchange Act, are incorporated by reference in
this Proxy Statement and Prospectus and shall be deemed to be a part hereof:
(1) Central Maine's Annual Report on Form 10-K for the year ended
December 31, 1997.
(2) Central Maine's Current Reports on Form 8-K dated January 6, 1998,
January 14, 1998 and January 30, 1998.
2
<PAGE>
All documents filed by Central Maine with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement and Prospectus and prior to the termination of the offering covered
by this Proxy Statement and Prospectus shall be incorporated herein by
reference and shall be deemed to be a part hereof from the date of filing of
such documents (such documents, and the documents enumerated above, being
hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Proxy Statement and Prospectus to
the extent that a statement contained herein or in any other subsequently
filed Incorporated Document modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement and Prospectus.
AS DESCRIBED ABOVE, THIS PROXY STATEMENT AND PROSPECTUS INCORPORATES
DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
THESE DOCUMENTS, OTHER THAN EXHIBITS THERETO, ARE AVAILABLE UPON WRITTEN OR
TELEPHONE REQUEST DIRECTED TO ANNE M. PARE, ESQ., CORPORATE SECRETARY AND
CLERK, CENTRAL MAINE POWER COMPANY, 83 EDISON DRIVE, AUGUSTA, MAINE, 04336,
TELEPHONE NUMBER: (207) 623-3521. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MAY 1, 1998.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
QUESTIONS AND ANSWERS REGARDING THE HOLDING COMPANY STRUCTURE CREATED BY
THE MERGER............................................................... 6
SUMMARY OF PROXY STATEMENT AND PROSPECTUS................................. 9
GENERAL INFORMATION....................................................... 12
VOTING RIGHTS............................................................. 12
PROPOSAL NO. 1: ELECTION OF DIRECTORS..................................... 13
PROPOSAL NO. 2: APPROVAL OF AGREEMENT AND PLAN OF MERGER.................. 14
General................................................................. 14
Central Maine........................................................... 15
Maine Regulatory Background............................................. 16
Plan of Implementation.................................................. 16
Reasons for the Restructuring........................................... 18
Certain Considerations.................................................. 19
Merger Agreement........................................................ 20
Amendment or Termination of the Merger Agreement........................ 21
Conditions Precedent to the Merger...................................... 21
Merger Date............................................................. 21
Rights of Dissenting Shareholders....................................... 22
Maine Control Transaction Statute....................................... 23
Transfer of Certain Unregulated Subsidiaries to HoldCo.................. 23
Treatment of Preferred Stock............................................ 23
Treatment of Central Maine Indebtedness................................. 24
Dividend Policy......................................................... 24
Directors and Management of HoldCo and Central Maine.................... 25
Description of HoldCo Capital Stock..................................... 25
Comparison of Shareholder Rights........................................ 26
Stock Exchange Listing.................................................. 29
Transfer Agent and Registrar............................................ 29
Dividend Reinvestment and Common Stock Purchase Plan.................... 29
Common Stock Plans...................................................... 29
Regulation.............................................................. 30
Market Price of Central Maine Common Stock.............................. 30
Exchange of Stock Certificates Not Required............................. 31
Certain United States Federal Income Tax Considerations................. 31
Pro Forma Financial Information......................................... 33
Legal Opinion........................................................... 33
Experts................................................................. 33
PROPOSAL NO. 3: APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS................ 33
BOARD COMMITTEES, MEETINGS AND COMPENSATION............................... 33
SECURITY OWNERSHIP........................................................ 35
EXECUTIVE COMPENSATION.................................................... 37
SUMMARY COMPENSATION TABLE................................................ 37
PENSION PLAN TABLES AND EMPLOYMENT ARRANGEMENTS........................... 38
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION................ 40
SHAREHOLDER RETURN COMPARISON.......................................... 43
DEADLINE FOR SHAREHOLDER PROPOSALS..................................... 44
OTHER MATTERS.......................................................... 44
APPENDIX I FORM OF AGREEMENT AND PLAN OF MERGER
APPENDIX II FORM OF AMENDMENT TO ARTICLES OF INCORPORATION OF HOLDCO,
INC.
APPENDIX III FORM OF BY-LAWS OF HOLDCO, INC.
APPENDIX IV SECTIONS 908, 909 AND 910 OF THE MAINE BUSINESS
CORPORATION ACT
APPENDIX V FINANCIAL INFORMATION
</TABLE>
5
<PAGE>
QUESTIONS AND ANSWERS REGARDING THE HOLDING
COMPANY STRUCTURE CREATED BY THE MERGER
The following Questions and Answers highlight selected information on
Proposal 2 to be brought before the Annual Meeting regarding the approval of
the Merger Agreement; they do not necessarily contain all of the information
that might be important to every Voting Shareholder. For a more complete
discussion of the holding company matter, and the related Merger Agreement,
Voting Shareholders should read carefully this entire document and the
attached appendices and the documents referred to therein. For example, the
Form of Merger Agreement attached to this Proxy Statement and Prospectus as
Appendix I provides for the Merger, and the form of the amendment to HoldCo's
Articles of Incorporation ("HoldCo Charter") and the form of HoldCo By-Laws
("HoldCo By-Laws") (Appendices II and III) set out, among other things,
provisions governing the nature and scope of certain rights of HoldCo's
shareholders. See also "Available Information" on page 3 of this Proxy
Statement and Prospectus.
WHAT IS BEING PROPOSED?
The Central Maine Board of Directors (the "Central Maine Board") is
proposing the formation of a holding company structure, which is commonly used
throughout the utility industry. That structure would be effectuated by the
Merger, which is being submitted to the Voting Shareholders for approval.
Central Maine and certain of its subsidiaries would become direct subsidiaries
of the holding company. Current holders of Central Maine Common Stock would
own the common stock of the holding company rather than the common stock of
the utility itself. (Please see pages 16-18 of this Proxy Statement and
Prospectus.)
These charts show Central Maine's current structure and the proposed holding
company structure:
CURRENT STRUCTURE
CURRENT COMMON AND PREFERRED SHAREHOLDERS
CENTRAL MAINE
------------------------------------------------------
Electric Nuclear Generation Unregulated
Utility Interests Services Subsidiaries
Subsidiaries Companies
6
<PAGE>
PROPOSED STRUCTURE
CURRENT COMMON SHAREHOLDERS
CURRENT PREFERRED
SHAREHOLDERS
HOLDCO
----------------------------------------------
Unregulated
Central Maine Subsidiaries
------------------------------------------
Electric Nuclear Generation
Utility Interests Services
Subsidiaries Companies
WHY IS A HOLDING COMPANY BEING FORMED?
The main reason is to enable Central Maine to respond more effectively and
efficiently to competitive and regulatory changes occurring in the electric
utility industry and to take advantage of existing and new business
opportunities that may develop from these changes. The recently enacted Maine
utility restructuring law will require Central Maine's utility business to
consist primarily of transmission and distribution operations. Central Maine
believes that participation in existing and proposed non-utility businesses
will provide opportunities to mitigate the limitations inherent in engaging
primarily in the transmission and distribution business. The proposed
restructuring should enhance the financial separation of Central Maine's
utility business from its other businesses, and could provide greater
financing flexibility in pursuing non-utility business opportunities. (Please
see pages 18-19.) In addition, the holding company structure will facilitate
compliance by Central Maine with certain provisions of the new Maine electric
utility restructuring law.
HOW WOULD MY OWNERSHIP OF CENTRAL MAINE STOCK BE AFFECTED BY THE NEW
STRUCTURE?
Owners of Central Maine Common Stock would, upon the closing of the Merger,
automatically become owners of HoldCo Common Stock on a one-for-one basis.
Central Maine Preferred Stock (including the 6% Preferred Stock and Dividend
Series Preferred Stock) would remain securities of Central Maine. It is
expected that the HoldCo Common Stock would be traded on the New York Stock
Exchange. Central Maine Preferred Stock would continue to be traded as it is
traded currently. (Please see pages 20 and 23-24.)
WOULD SHAREHOLDERS HAVE TO TURN IN THEIR CURRENT STOCK CERTIFICATES?
No. The Central Maine Common Stock certificates would, upon the closing of
the Merger, automatically represent the same number of shares of HoldCo Common
Stock. IT WOULD NOT BE NECESSARY FOR HOLDERS OF COMMON STOCK TO SURRENDER
THEIR STOCK CERTIFICATES. If you wish, after the closing you could exchange
your Central Maine certificates for those of HoldCo by requesting that new
certificates be issued. (Please see page 31.)
HOW WOULD A HOLDING COMPANY STRUCTURE AFFECT COMMON AND PREFERRED STOCK
DIVIDENDS?
Instead of the common stock dividend coming from Central Maine, it would
come from HoldCo. When the restructuring takes effect, it is expected that the
HoldCo Common Stock dividends would be no less than the
7
<PAGE>
dividends Central Maine is paying on its common stock at that time.
Subsequently, the dividend would depend on the financial performance of
HoldCo's subsidiaries, principally Central Maine, and on other factors, as
determined by HoldCo's Board of Directors in its discretion. It is expected
that HoldCo dividends would be paid on approximately the same dates in each
year as Central Maine dividends are paid now. Central Maine Preferred Stock
would continue to be securities of Central Maine, and holders of Central Maine
Preferred Stock would continue to have priority as to Central Maine dividends.
(Please see pages 24-25.)
WOULD THE DIVIDEND REINVESTMENT PLAN REMAIN UNDER A HOLDING COMPANY STRUCTURE?
Yes. All shares of Central Maine Common Stock held under the Dividend
Reinvestment and Common Stock Purchase Plan would be automatically exchanged
for shares of HoldCo Common Stock. The Dividend Reinvestment and Common Stock
Purchase Plan would be continued with HoldCo Common Stock after the Merger.
(Please see page 29.)
WHO WOULD MANAGE THE HOLDING COMPANY AFTER THE HOLDING COMPANY STRUCTURE IS
FORMED?
The Board of Directors and certain of the current principal executive
officers of Central Maine would serve as the directors and executive officers
of HoldCo upon completion of the restructuring. (Please see page 25.)
HOW WOULD FORMATION OF A HOLDING COMPANY AFFECT PERSONAL FEDERAL INCOME TAXES?
The proposed restructuring should not affect for federal income tax purposes
the position of present Central Maine shareholders who receive HoldCo Common
Stock in connection with the proposed Merger. For capital gains purposes, the
tax basis and holding period of HoldCo Common Stock would be the same as those
for Central Maine Common Stock. (Please see pages 31-32.)
WHAT WOULD THE NEW HOLDING COMPANY BE CALLED?
We have not yet chosen a name for the holding company. It is temporarily
being called "HoldCo, Inc." When the name is chosen by Central Maine and
HoldCo, no further shareholder action will be required.
HOW SOON WOULD THE HOLDING COMPANY STRUCTURE BE FORMED, IF IT IS APPROVED BY
THE VOTING SHAREHOLDERS?
Management intends to form the holding company structure as soon as possible
after the Annual Meeting. However, receipt of approval or waiver of
jurisdiction from regulatory agencies (the Maine Public Utilities Commission,
the Connecticut Department of Public Utility Control, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission, and the Nuclear
Regulatory Commission) could have an effect on the timing. (Please see page
21.)
THE FURTHER PROVISIONS OF THIS PROXY STATEMENT AND PROSPECTUS PRESENT A
THOROUGH AND DETAILED DISCUSSION OF CENTRAL MAINE'S PROPOSAL TO FORM A HOLDING
COMPANY STRUCTURE, AND OF THE RELATED MERGER AGREEMENT.
8
<PAGE>
SUMMARY OF PROXY STATEMENT AND PROSPECTUS
The following summary of the matters to be voted on at the Annual Meeting is
qualified in its entirety by reference to the more detailed information set
forth elsewhere in this document, including the attached appendices and the
documents incorporated herein by reference.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Two persons have been nominated for election as Class II directors of
Central Maine. If the proposed Merger and related holding company structure
described below are approved and implemented, the directors of Central Maine
also will become, and be ratified as, directors of HoldCo. See "Proposal No.
2: Approval of Agreement and Plan of Merger--Directors and Management of
HoldCo and Central Maine."
PROPOSAL NO. 2
APPROVAL OF AGREEMENT AND PLAN OF MERGER
THE CENTRAL MAINE BOARD RECOMMENDS THAT THE VOTING SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER AGREEMENT TO FORM A HOLDING COMPANY.
PROPOSED MERGER
The Central Maine Board has authorized and approved the Merger Agreement,
subject, among other things, to approval by the Voting Shareholders, as part
of a restructuring of the corporate organization of Central Maine and its
subsidiaries. The Merger will result in Central Maine becoming a separate
subsidiary of a holding company, HoldCo, with the present holders of Central
Maine Common Stock becoming holders of HoldCo Common Stock. The name HoldCo,
Inc. is being used temporarily and will change prior to, or as part of, the
formation of a holding company structure for Central Maine.
In connection with the formation of a holding company structure, it is
contemplated that Central Maine will transfer its ownership interests in all
or certain of its unregulated subsidiaries to HoldCo, so that they will become
direct subsidiaries of HoldCo. (The proposed Merger and related changes to the
corporate structure of Central Maine and its subsidiaries are generally
referred to in this Proxy Statement and Prospectus as the "restructuring.")
REASONS FOR THE RESTRUCTURING
The Central Maine Board considers the proposed restructuring to be in the
best interests of Central Maine and its shareholders. Central Maine believes
that a holding company structure will provide long-term advantages through
increased organizational, managerial and financial flexibility that will
better position Central Maine to operate in a changing business and regulatory
environment by allowing it to take advantage of emerging non-utility business
opportunities that are related to Central Maine's core business, while
maintaining the principal business focus on its core transmission and
distribution business. In addition, the clearer separation of Central Maine's
core utility business from non-utility enterprises achieved by making HoldCo,
rather than Central Maine, the parent of some or all of Central Maine's non-
utility subsidiaries will better segregate the operations, risks and costs
associated with the non-utility businesses from those involved in providing
utility services, and will afford greater financial flexibility in pursuing
non-utility business opportunities. See "Proposal No. 2: Approval of Agreement
and Plan of Merger--Reasons for the Restructuring."
9
<PAGE>
ACCOMPLISHING THE RESTRUCTURING
The restructuring will be effected through a reverse triangular merger,
which is widely used in corporate restructurings. The outstanding shares of
Central Maine Common Stock will be converted into new shares of HoldCo Common
Stock on a share-for-share basis, and Central Maine will become a subsidiary
of HoldCo. The Central Maine Preferred Stock and debt securities of Central
Maine will remain outstanding at the Central Maine level. See "Proposal No. 2:
Approval of Agreement and Plan of Merger--Treatment of Preferred Stock" and
"--Treatment of Central Maine Indebtedness."
As part of the restructuring, it is contemplated that Central Maine will
transfer its ownership interests in certain of its unregulated subsidiaries to
HoldCo. See "Proposal No. 2: Approval of Agreement and Plan of Merger--
Transfer of Certain Unregulated Subsidiaries to HoldCo."
If approval by the Voting Shareholders is received, it is contemplated that
the Merger will become effective as soon as practicable following receipt of
all required regulatory approvals in respect of the Merger and related
restructuring, including approval by the Maine Public Utilities Commission
(the "MPUC"). An application for such approval by the MPUC was filed by
Central Maine on December 8, 1997.
NO EXCHANGE OF CERTIFICATES
Upon completion of the Merger, it will NOT be necessary to exchange
certificates representing Central Maine Common Stock for certificates
representing HoldCo Common Stock. Rather, certificates for Central Maine
Common Stock will, upon the closing, automatically be deemed to represent
certificates for the same number of shares of HoldCo Common Stock.
STOCK EXCHANGE LISTING
Application is being made to list HoldCo Common Stock on the New York Stock
Exchange ("NYSE").
REGULATORY APPROVALS
Central Maine must obtain certain authorizations from the MPUC, the
Securities and Exchange Commission (the "SEC"), the Federal Energy Regulatory
Commission (the "FERC"), and the Nuclear Regulatory Commission (the "NRC") and
authorization or waiver of jurisdiction from the Connecticut Department of
Public Utility Control (the "CDPUC") to implement various aspects of the
restructuring. See "Proposal No. 2: Approval of Agreement and Plan of Merger--
Conditions Precedent to the Merger."
DIVIDEND POLICY
When the restructuring takes effect, it is expected that the initial
dividend level on HoldCo Common Stock will be no less than the dividend level
on Central Maine Common Stock at that time. It also is expected that HoldCo
will pay dividends on approximately the same dates as that now followed by
Central Maine. Future dividend payments will depend primarily on the earnings
of HoldCo's subsidiaries, principally Central Maine, any dividend restrictions
of HoldCo and its subsidiaries, including Central Maine, other financial
considerations, and other factors as determined by HoldCo's Board of Directors
in its discretion. See "Proposal No. 2: Approval of Agreement and Plan of
Merger--Dividend Policy."
FEDERAL INCOME TAX CONSEQUENCES
The proposed restructuring should not affect for federal income tax purposes
the position of present Central Maine shareholders who receive HoldCo Common
Stock in connection with the proposed merger. See "Proposal No. 2: Approval of
Agreement and Plan of Merger--Certain United States Federal Income Tax
Considerations."
10
<PAGE>
SHAREHOLDER VOTE
Only holders of record at the close of business on March 23, 1998 (the
"Record Date") of shares of Central Maine Common Stock and Central Maine
Preferred Stock will be entitled to receive notice of the Annual Meeting with
respect to approval of the Merger Agreement to effect the restructuring. Only
holders of record on the Record Date of Central Maine Common Stock and 6%
Preferred Stock will be entitled to vote with respect to approval of the
Merger Agreement.
Approval of the Merger Agreement by the Voting Shareholders will require the
favorable vote of:
1. A majority of the outstanding shares of Central Maine Common Stock
entitled to vote at the meeting; and
2. A majority of the outstanding shares of Central Maine Common Stock and
6% Preferred Stock of Central Maine entitled to vote at the meeting, voting
together, with each share of Central Maine Common Stock having one-tenth of
one vote and each share of 6% Preferred Stock having one vote.
Central Maine's directors and executive officers and their affiliates own
less than one percent (1%) of the voting securities of Central Maine. After
the restructuring, they will continue to own less than one percent (1%) of the
voting securities of HoldCo.
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of Central Maine Common Stock dissenting to the Merger who comply
with the statutory requirements are entitled to receive payment of the fair
value of their shares if the Merger is completed. Central Maine believes that
holders of all classes and series of Central Maine Preferred Stock do not have
any such dissenters' rights. See "Proposal No. 2: Approval of Agreement and
Plan of Merger--Rights of Dissenting Shareholders." Following consummation of
the Merger, however, holders of 6% Preferred Stock of Central Maine may be
entitled to be paid the fair value of their shares pursuant to Section 910 of
the Maine Business Corporation Act. See "Proposal No. 2: Approval of Agreement
and Plan of Merger--Maine Control Transaction Statute."
PROPOSAL NO. 3
APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE VOTING SHAREHOLDERS VOTE TO
APPROVE THE APPOINTMENT OF COOPERS & LYBRAND L.L.P. AS CENTRAL MAINE'S
AUDITORS FOR 1998.
The Central Maine Board has appointed Coopers & Lybrand L.L.P. as the
independent public accountants to examine the financial statements of Central
Maine for the year 1998. If the proposed Merger and related holding company
structure described below are approved and implemented, Coopers & Lybrand
L.L.P. also will become, and be approved as, HoldCo's independent auditors for
1998.
11
<PAGE>
GENERAL INFORMATION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies by the Central Maine Board for the Annual Meeting of
the Shareholders of Central Maine, to be held on May 21, 1998, at 10:00 a.m.
at the Augusta Civic Center, Augusta, Maine. It is being mailed to the
shareholders on or about April , 1998.
Portions of the Annual Report of Central Maine for the year ended December
31, 1997, including audited financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations, are attached as
Appendix V.
VOTING RIGHTS
Only holders of record of shares of Central Maine Common Stock and 6%
Preferred Stock at the close of business on the Record Date, being March 23,
1998, are entitled to vote at the meeting. The total number of shares entitled
to vote at the meeting will be 32,442,752 shares of Central Maine Common Stock
and 5,713 shares of 6% Preferred Stock. Holders of Central Maine Common Stock
are entitled to one-tenth vote per share and holders of 6% Preferred Stock are
entitled to one vote per share regarding all matters that are expected to be
acted upon at the meeting. Accordingly, the holders of Central Maine Common
Stock are entitled to 3,244,275 votes, and the holders of 6% Preferred Stock
are entitled to 5,713 votes on each proposal at the meeting.
A majority of the total votes entitled to be cast at the meeting by the
holders of Central Maine Common Stock and 6% Preferred Stock on Proposals 1
and 3 will constitute a quorum with respect to action to be taken on Proposals
1 and 3. A majority of the total votes entitled to be cast by the holders of
Central Maine Common Stock, voting as a class, and by the holders of Central
Maine Common Stock and 6% Preferred Stock, voting together as a class, will
constitute a quorum with respect to action to be taken by such holders or
class, respectively, on Proposal 2. Abstentions, votes withheld from nominees
for director, and broker non-votes will be counted for the purpose of
determining whether a quorum is present for voting on those Proposals.
PROPOSAL NO. 1. With respect to the election of directors, nominees who
receive the greatest number of votes cast by the holders of Central Maine
Common Stock and 6% Preferred Stock, voting as a single class, 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.
PROPOSAL NO. 2. An affirmative vote of the holders of a majority of all the
outstanding shares of Central Maine Common Stock and 6% Preferred Stock,
voting as a single class, and an affirmative vote of the holders of a majority
of all the outstanding shares of Central Maine Common Stock, voting as a
single class, are required for approval of Proposal 2. Abstentions and broker
non-votes with respect to Proposal 2 will count as votes against that matter.
PROPOSAL NO. 3. An affirmative vote of a majority of the votes cast at the
meeting by the holders of Central Maine Common Stock and 6% Preferred Stock,
voting as a single class, is required for approval of Proposal 3. Abstentions
with respect to Proposal 3 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 will not be included in determining the total number of votes cast on
Proposal 3 and will have no effect on the matter.
Under the By-Laws of Central Maine, the election of directors at the Annual
Meeting shall at the option of any Voting Shareholder be by cumulative voting.
Accordingly, in connection with Proposal 1, each Voting Shareholder shall be
entitled to as many votes as pertain to the shares of stock owned by that
Voting Shareholder multiplied by the number of directors to be elected, and
may cast all such votes for a single director or may distribute them between
the two directors to be voted for, as that Voting Shareholder may see fit. If
any Voting Shareholder either gives written notice to the President of Central
Maine before the time fixed for the meeting of
12
<PAGE>
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 Voting Shareholders shall be entitled to cumulate their votes. Any Voting
Shareholder who wishes to vote cumulatively but who will not be present at the
meeting should give written notice to the President of Central Maine 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 between both nominees. If any Voting Shareholder has indicated his
or her intention to vote cumulatively (either by written notice or by a
statement made at the meeting), each Voting 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.
Voting Shareholders may vote at the meeting either in person or by duly
authorized proxy. The giving of a proxy by a Voting Shareholder will not
affect the Voting 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 Secretary of Central
Maine. 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 Central Maine, will be voted at the meeting or any adjourned
session thereof, all in accordance with the terms of such proxies.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
It is intended that the persons named in the accompanying proxy will vote to
elect the first two persons listed below to serve as Class II directors for a
three-year term expiring at the Annual Meeting of the Shareholders in the year
2001. However, if voting is cumulative, such persons may cumulate the total
number of votes to which the shareholder executing the proxy is entitled in
favor of one or both of the nominees in the manner that such persons shall in
their discretion determine, unless other instructions are given in the proxy
by the shareholder executing it. Nominees named in the accompanying proxy who
receive the greatest number of votes cast by the holders of Central Maine's
Common Stock and 6% Preferred Stock, voting as a single class, will be
elected, even though any such nominee may not receive a majority of the votes
cast. The remaining eight persons listed below as Class III and Class I
directors will continue in office for terms which expire at the 1999 and 2000
Annual Meeting of the Shareholders, respectively, or, in each case, until
their respective successors are duly elected and qualified. Should any person
named below as a Class II director be unable or unwilling to serve as a
director, persons acting under the proxy intend to vote for such other person
as management may recommend, or the Central Maine Board may exercise its
exclusive power to fix the number of directors at fewer than ten.
At its meeting on February 20, 1997, the Central Maine Board fixed the
number of directors at eleven effective March 21, 1997. On March 20, 1997,
Charles E. Monty, a Class II director since 1977, retired from service on the
Central Maine Board upon reaching age 70. Effective December 20, 1997, E.
James Dufour, also a Class II director, retired from the Central Maine Board
after 26 years of service. The Central Maine Board subsequently fixed the
number of directors at ten.
After consideration, the Central Maine Board has determined that it should
not establish specific term limits for directors of Central Maine. In light of
the regulatory and market changes affecting Central Maine's business during
the transition to competition that are expected to continue influencing the
conduct of Central Maine's business, the Central Maine Board believes that
Central Maine will benefit from the contributions of directors who have gained
knowledge and insight about Central Maine and its business through their
continued service on the Board. The Central Maine Board believes that its
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.
13
<PAGE>
Set forth below is information about each nominee and continuing director.
Each person listed has been serving as a director of Central Maine. In
addition, David T. Flanagan is President and Chief Executive Officer of
Central Maine, David M. Jagger serves as Chairman of the Central Maine Board,
and Charles H. Abbott serves as Vice Chairman of the Central Maine Board.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS AND BUSINESS EXPERIENCE FIRST
NAME AND DURING PAST FIVE YEARS AND CURRENT BECAME A
AGE DIRECTORSHIPS OF PUBLIC COMPANIES DIRECTOR
-------- --------------------------------------------- --------
<S> <C> <C>
CLASS II:
Duane D. Fitzgerald Chairman of the Board, Bath Iron Works 1996
(58)................... Corporation (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, John J. Nissen Baking Co., Blue
Cross and Blue Shield of Maine
David M. Jagger (56).... President and Treasurer, Jagger Brothers, Inc. 1988
(Textiles); Chairman of the Board of Central
Maine
CLASS III:
Charleen M. Chase (49).. Executive Director, Community Concepts, Inc. 1985
(Community action agency)
David T. Flanagan (50).. President and Chief Executive Officer of Central 1994
Maine, from January 1, 1994; Executive Vice
President (July 1991 through December 1993);
Chairman of the Board of Directors, Maine
Yankee Atomic Power Company (a)
Robert H. Gardiner (53). President, Maine Public Broadcasting Corporation 1992
(Public television)
Peter J. Moynihan (54).. Senior Vice President and Chief Investment 1995
Officer, UNUM Corporation (Insurance)
CLASS I:
Charles H. Abbott (62).. Chairman, Skelton, Taintor & Abbott, P.A. 1988
(Attorneys); Vice Chairman of the Board of
Central Maine
William J. Ryan (54).... Chairman, President and Chief Executive Officer, 1996
Peoples Heritage Financial Group, Inc.;
Director, Blue Cross and Blue Shield of Maine,
John J. Nissen Baking Co., Student Loan
Association of New England
Lyndel J. Wishcamper President, Wishcamper Properties, Inc. (Real 1996
(55)................... estate)
Kathryn M. Weare (49)... Owner and Manager, The Cliff House (Resort and 1992
conference center)
</TABLE>
- --------
(a) Central Maine owns 38 percent of the outstanding voting stock of Maine
Yankee Atomic Power Company.
PROPOSAL NO. 2
APPROVAL OF AGREEMENT AND PLAN OF MERGER
GENERAL
The Central Maine Board and management believe that the formation of a
holding company structure pursuant to the Merger Agreement will be in the best
interests of Central Maine and its shareholders. The restructuring will result
in Central Maine becoming a separate subsidiary of the new parent holding
company, HoldCo, with holders of Central Maine Common Stock becoming holders
of HoldCo Common Stock. As part of
14
<PAGE>
the restructuring, it is contemplated that Central Maine will transfer its
ownership interests in certain of its unregulated subsidiaries to HoldCo, so
that they will become direct subsidiaries of HoldCo.
The holding company structure is a well-established form of organization for
companies conducting multiple lines of business, particularly entities
engaging in both regulated and unregulated activities. It is increasingly
prevalent in the utility industry. The holding company structure is intended
to provide increased organizational, managerial and financial flexibility in
order to better position Central Maine to operate in the changing electric
utility industry.
THE CENTRAL MAINE BOARD RECOMMENDS APPROVAL OF THE MERGER AGREEMENT FOR
FORMATION OF THE HOLDING COMPANY, AND URGES EACH VOTING SHAREHOLDER TO VOTE
FOR THE MERGER AGREEMENT.
CENTRAL MAINE
Central Maine, a Maine corporation organized in 1905, is an investor-owned
electric utility engaged primarily in the business of generating, purchasing,
transmitting, distributing and selling electric energy for the benefit of
retail customers in southern and central Maine and wholesale customers,
principally other utilities. Its principal executive offices are located at 83
Edison Drive, Augusta, Maine 04336.
Central Maine serves approximately 528,000 customers in its 11,000 square-
mile service area in southern and central Maine. Central Maine's service area
contains the bulk of Maine's industrial centers and includes about 77 percent
of the total population of the State. Central Maine's industrial and
commercial customers include major producers of pulp and paper products,
producers of chemicals, plastics, electronic components, processed food and
footwear, and shipbuilders.
Central Maine currently has three subsidiaries that are considered public
utility companies: Maine Electric Power Company, Inc. ("MEPCo"), Aroostook
Valley Electric Company ("AVEC"), and NORVARCO. MEPCo, AVEC and NORVARCO are
referred to herein as the "Electric Utility Subsidiaries."
Central Maine has direct or indirect ownership interests in five nuclear
generating facilities in New England. Central Maine owns a 38 percent common
stock interest in Maine Yankee Atomic Power Company ("Maine Yankee"), which
owns the Maine Yankee plant, a nuclear generating plant in Wiscasset, Maine
that has been permanently shut down since August 6, 1997; a 9.5 percent common
stock interest in Yankee Atomic Electric Company, which has permanently shut
down its plant located in Rowe, Massachusetts; a 6 percent common stock
interest in Connecticut Yankee Atomic Power Company, which has permanently
shut down its plant in Haddam, Connecticut; and a 4 percent common stock
interest in Vermont Yankee Nuclear Power Corporation, which owns a plant in
Vernon, Vermont. In addition, 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 has been off-line for regulatory reasons
since March 31, 1996. These interests are referred to herein as the "Nuclear
Interests."
Central Maine has interests in certain other subsidiaries or companies that
operate or participate in businesses associated with the generation of
electricity: Kennebec Hydro Resources, Inc. ("Kennebec Hydro"), Kennebec Water
Power Company ("Kennebec Water") and the Gulf Island Pond Oxygenation Project
("GIPOP"). Kennebec Hydro, Kennebec Water and GIPOP are referred to herein as
the "Generation Services Companies."
Central Maine owns interests in several other subsidiaries: MaineCom
Services ("MaineCom"), CMP International Consultants ("CMPI"), Central
Securities Corporation ("Central"), Cumberland Securities Corporation
("Cumberland"), TeleSmart, and The Union Water-Power Company ("Union Water").
Central Maine has applied to the MPUC for authorization to form a new company
("Maine Natural Gas Company") pursuant to an agreement with New York State
Electric & Gas Corporation. A new natural gas development subsidiary of HoldCo
("GasCo") whose creation must also be approved by the MPUC would hold an
interest in
15
<PAGE>
Maine Natural Gas Company. In addition, Central Maine has requested
authorization from the MPUC to form an energy marketing affiliate, consistent
with the provisions of the law restructuring the electric utility industry in
Maine. MaineCom, CMPI, Central, Cumberland, TeleSmart and Union Water, along
with GasCo, are referred to herein as Central Maine's "unregulated
subsidiaries."
On April 28, 1997, Central Maine announced a plan to seek proposals for the
purchase of its generating assets and, as part of an auction process, received
final bids on December 10, 1997. On January 6, 1998, Central Maine announced
that it had reached agreement to sell all of its hydro, fossil and biomass
generating assets, including its interests in certain of the Generation
Services Companies and in AVEC, with a combined generating capacity of 1,185
megawatts, to an affiliate of Florida-based FPL Group, the winning bidder in
the auction process. The hydropower assets to be included in the sale
represent approximately 373 megawatts of generating capacity. Central Maine's
interest in the fossil-fueled generating assets included in the sale is 781
megawatts. The sole biomass plant is the 31-megawatt unit in Fort Fairfield,
Maine, owned by AVEC.
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, the date when retail
consumers in Maine will be able to choose their electricity provider. Central
Maine's interests in the power entitlements from approximately 50 purchased-
power agreements with non-utility generators representing approximately 488
megawatts and its Nuclear Interests are not included in the sale.
The sale is subject to various closing conditions, including the approval of
state and federal regulatory agencies.
MAINE REGULATORY BACKGROUND
On May 29, 1997, the Governor of Maine signed into law a bill enacted by the
Maine Legislature that will restructure the electric utility industry in Maine
by March 1, 2000. The principal restructuring provisions of the legislation
provide for customers to have direct retail access to generation services and
for deregulation of competitive electricity providers, beginning March 1,
2000, with transmission and distribution companies continuing to be regulated
by the MPUC. By that date, 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 facilities. The bill also
requires investor-owned utilities, after February 29, 2000, to sell their
rights to the capacity and energy from the purchased-power contracts that had
not previously been divested pursuant to the legislation, with certain minor
exceptions. As noted, Central Maine has entered into an agreement to divest
certain of its generation assets (See "Central Maine" above).
PLAN OF IMPLEMENTATION
To carry out the restructuring, Central Maine has formed a new Maine
corporation, HoldCo, Inc. The name of the holding company has not yet been
determined and, for purposes of this Proxy Statement and Prospectus, it is
referred to as HoldCo (which name is subject to change at the discretion of
the Central Maine Board and without further action by the shareholders prior
to or as part of the restructuring). Shortly before the restructuring is
effected, HoldCo will form a new Maine corporation ("MergeCo"). MergeCo will
be a transitory corporation, formed solely to effectuate the Merger, and will
cease to exist upon the Merger. Prior to the Merger, Central Maine will own
all the outstanding stock of HoldCo and HoldCo will own all the outstanding
stock of MergeCo. HoldCo currently does not have, and, prior to the Merger,
MergeCo will not have, any business or properties of its own, other than a
nominal capitalization.
The Merger Agreement provides that, subject to certain conditions including
approval by the Voting Shareholders, Central Maine will become a subsidiary of
HoldCo through the merger of MergeCo with and into Central Maine. In the
Merger, each share of Central Maine Common Stock will be converted into one
share of
16
<PAGE>
HoldCo Common Stock. (See "Exchange of Stock Certificates Not Required"
below.) A copy of the form of Merger Agreement is attached to this Proxy
Statement and Prospectus as Appendix I, and is incorporated herein by
reference.
In connection with the restructuring, Central Maine has requested
authorization from the MPUC to transfer to HoldCo its ownership interests in
the following unregulated subsidiaries: MaineCom, CMPI, Central, Cumberland,
TeleSmart and Union Water. To the extent that new businesses are acquired or
commenced that are not subject to regulation by the MPUC, such businesses will
be held by HoldCo or be operated by unregulated subsidiaries of HoldCo. It is
contemplated that after the restructuring, non-utility businesses in the
Central Maine system will be conducted by subsidiaries of HoldCo rather than
Central Maine. If the proposed restructuring is consummated, it is intended
that advances to and other investments in non-utility businesses will be made
by HoldCo rather than Central Maine and that the proceeds of financings by
Central Maine will be used entirely in the conduct of its electric utility
business. (See "Transfer of Certain Unregulated Subsidiaries" below.)
After the restructuring, the holders of Central Maine Common Stock will own
all of the outstanding HoldCo Common Stock, and HoldCo will own all of the
outstanding Central Maine Common Stock. It also is anticipated that after the
restructuring, HoldCo will own directly all of the outstanding stock of all or
certain of Central Maine's unregulated subsidiaries, and any other transferred
assets, which, together with HoldCo's ownership of all Central Maine Common
Stock, are expected to constitute all or substantially all of HoldCo's
business and properties.
The following diagrams illustrate the present corporate structure of Central
Maine and its subsidiaries and the intended organization upon the completion
of the restructuring.
CURRENT STRUCTURE
CURRENT COMMON AND PREFERRED SHAREHOLDERS
CENTRAL MAINE
------------------------------------------------------
Electric Nuclear Generation Unregulated
Utility Interests Services Subsidiaries
Subsidiaries Companies
17
<PAGE>
PROPOSED STRUCTURE
CURRENT COMMON SHAREHOLDERS
CURRENT PREFERRED
SHAREHOLDERS
HOLDCO
----------------------------------------------
Central Maine
Unregulated
Subsidiaries
------------------------------------------
Electric Nuclear Generation
Utility Interests Services
Subsidiaries Companies
The proposed restructuring should not affect for federal income tax purposes
the position of present shareholders of Central Maine who receive HoldCo
Common Stock in connection with the proposed merger. (See "Certain United
States Federal Income Tax Considerations" below.)
After the Merger, the outstanding shares of Central Maine Preferred Stock
will continue to be outstanding shares of Central Maine. Debt securities and
other indebtedness of Central Maine will continue to be obligations of Central
Maine, and, in the case of Central Maine's mortgage bonds so long as they
remain outstanding, will continue to be secured by a first mortgage lien on
all or a substantial portion of the properties of Central Maine, as provided
in the governing mortgage indenture. (See "Treatment of Preferred Stock" and
"Treatment of Central Maine Indebtedness" below.)
REASONS FOR THE RESTRUCTURING
Over the past several years, the electric utility industry has been affected
by regulatory and market changes resulting from adoption of the Energy Policy
Act of 1992; decisions of the FERC, including Orders 888 and 889 issued in
April 1996 mandating open access to transmission services; and in Maine in
particular, enactment of the new electric utility restructuring law, which
will limit Central Maine primarily to the transmission and distribution of
electricity, and require the creation of a separate entity to market energy
and capacity to retail consumers. In addition, expanding energy options for
consumers, due in part to the deregulation of the natural gas industry, have
also created competitive challenges for electric utilities. The novel
challenges and related opportunities presented by the new environment, as well
as earnings pressure in Central Maine's core business, have caused Central
Maine to assess comprehensively its business strategies, its direction and
focus, and its structure for continuing to provide regulated utility service
in the most efficient and competitive fashion for Maine customers. At the same
time, Central Maine seeks to attain greater organizational, managerial and
financial flexibility to adapt to and take advantage of the changing utility
business and emerging business opportunities that are non-utility in nature.
As a result of this assessment, Central Maine has identified a strategy of
increasing its long-term growth potential through investment in related
businesses combined with continued efforts to enhance efficiencies and
economies in its core business for the benefit of its shareholders and Maine
consumers. The move to a competitive energy industry, together with the
revolution in energy and telecommunications-related technologies, have created
significant new opportunities for energy and telecommunications service
providers to participate in non-utility business ventures that are related to
but separate from traditional regulated businesses. Although Central Maine
contemplates that such non-utility investments will be a relatively small
component of the entire
18
<PAGE>
system, pursuit of these business opportunities may play an important role in
facilitating Central Maine's ability to continue to enhance shareholder value.
Central Maine believes that diversified earnings from existing non-utility
businesses and proposed new business activities can help to mitigate the
limitations inherent in engaging primarily in the transmission and
distribution business. To respond timely and effectively to these business
challenges and opportunities, the Central Maine Board has concluded that it
should reorganize the structure of Central Maine's business. The holding
company structure is a well-established form of organization for companies
conducting multiple lines of business, particularly for entities engaging in
both regulated and unregulated activities. Several electric and gas companies
have been organized as holding companies for many years, and other utilities
have recently changed their organization to a holding company structure.
Because HoldCo will not be a regulated utility, it should generally be able
to pursue non-utility businesses without the delays and costs that are
inherent in the regulatory process. For example, within any limits structured
by the MPUC applying to non-utility businesses, HoldCo will be able to enter
into certain new non-utility businesses without obtaining the prior approval
of the MPUC. Any securities issued by HoldCo and by its non-utility
subsidiaries will not be subject to the jurisdiction of state utility
regulators or the FERC.
The holding company structure will also help Central Maine comply with
certain provisions of the new Maine restructuring law. As of March 1, 2000,
Central Maine, as a transmission and distribution utility, will be prohibited
from selling electric energy to retail customers. Any retail sales of
electricity must be done through a separate corporate affiliate of Central
Maine that is licensed by the MPUC for that purpose. The new restructuring
statute contains numerous specific standards of conduct governing the conduct
of a transmission and distribution utility and its affiliated electricity
provider and requires the MPUC to adopt rules to implement the standards.
Because of numerous constraints imposed by the standards of conduct on
dealings between a transmission and distribution utility and its marketing
affiliate, Central Maine determined that a holding company form of
organization in which the holding company, rather than Central Maine, is the
parent company of the marketing affiliate was required to facilitate
compliance with the standards.
By more clearly separating utility operations from non-utility enterprises,
the new corporate structure will afford greater financial flexibility that
will permit the use of financing techniques that are more directly suited to
the requirements, characteristics and risks of particular non-utility
operations. The ability to access different capital markets quickly with a
broad range of financial instruments and maturities will generally allow a
financing to be tailored to the type of investment being made. Financial
flexibility is necessary to ensure that alternative financing strategies are
available to HoldCo and its non-utility subsidiaries, since different types of
investments and their attendant ownership structures, cash flows, tax
considerations and risks require different financing techniques to optimize
the economic benefit of the investments.
By clearly separating Central Maine's electric utility business from the
non-utility businesses of other HoldCo subsidiaries, the holding company
structure will provide better insulation for regulated operations from the
performance of unregulated businesses. This structure mitigates the potential
impact on Central Maine of the risks of non-utility businesses. The holding
company structure will also facilitate the analysis and valuation of the
holding company's individual lines of business by the investment community.
CERTAIN CONSIDERATIONS
The Central Maine Board believes that the formation of a holding company is
in the best interests of the shareholders of Central Maine. Nevertheless, as
in the case of any company, the future performance of HoldCo Common Stock
cannot be guaranteed.
For a period of time following the formation of a holding company, the funds
required by HoldCo to enable it to pay dividends on shares of HoldCo Common
Stock are expected to be derived predominantly from the dividends paid to
HoldCo by Central Maine. Accordingly, the ability of HoldCo to pay dividends
to its shareholders, as a practical matter, will be governed by the ability of
Central Maine to pay dividends on its common stock held by HoldCo. The ability
of Central Maine to pay dividends on its common stock will continue
19
<PAGE>
to be subject, in addition to its earnings and the availability of other
funds, to the preferential dividend rights of the holders of Central Maine
Preferred Stock. Furthermore, Central Maine could issue additional preferred
stock in the future to meet its capital requirements. Such additional
preferred stock will also have preferential dividend rights. The Board of
Directors of Central Maine has made no determination that the restructuring
will affect the dividend policy of Central Maine.
The unregulated subsidiaries intended to be transferred to HoldCo in
connection with the restructuring may encounter competitive and other factors
not previously experienced by Central Maine and may have different, and
perhaps greater, investment risks than those involved in the regulated utility
business of Central Maine. There can be no assurance that such businesses will
be successful or, if unsuccessful, that they will not have a direct or
indirect adverse effect on HoldCo or on amounts available to investors in
HoldCo or such subsidiaries. Any losses incurred by such businesses will not
be recoverable in the utility rates of Central Maine.
The business activities of the unregulated subsidiaries intended to be
transferred to HoldCo in connection with the restructuring, and the assets
employed in connection therewith, will not be available to the holders of
Central Maine Preferred Stock as a source of cash for the payment of dividends
or other amounts. Central Maine Preferred Stock will continue to have priority
over the shares of Central Maine Common Stock as to the payment of dividends
and upon any liquidation, and will be on a parity with, or be otherwise
protected with respect to the issuance of, any additional preferred stock at
the Central Maine level.
HoldCo may obtain funds for its operating and capital expenses and for
investment in the unregulated subsidiaries from a number of sources, including
dividends HoldCo receives on its Central Maine Common Stock, borrowings, the
issuance of debt or equity securities by HoldCo and any dividends it may in
the future receive from any earnings of the unregulated subsidiaries, although
there can be no assurance that the unregulated subsidiaries will have any
earnings, or pay any dividends to HoldCo, in the foreseeable future.
MERGER AGREEMENT
After the conditions to effectiveness of the Merger Agreement are satisfied,
the Merger will become effective. Pursuant to the Merger Agreement, the
following events will occur upon the effectiveness of the Merger:
1. MergeCo will merge into Central Maine, with Central Maine being the
surviving corporation. On the filing of the Articles of Merger with the
Maine Secretary of State or on a later date specified in the Articles of
Merger (the "Merger Date"), MergeCo will cease to exist.
2. On the Merger Date, each outstanding share of Central Maine Common
Stock (excluding shares held by shareholders who have a right to dissent
and who have dissented in compliance with the requirements of Maine
corporate law) will be converted by operation of law into one share of
HoldCo Common Stock. Holders of Central Maine Common Stock before the
Merger will automatically become holders of HoldCo Common Stock, holding
the same number of shares, and will cease to be owners of Central Maine
Common Stock.
3. Also on the Merger Date, the outstanding shares of MergeCo common
stock (that is, shares issued to HoldCo at the time MergeCo was formed)
will, as a result of the merger of MergeCo into Central Maine with Central
Maine as the surviving corporation, be converted by operation of law into a
number of shares of Central Maine Common Stock equal to the number of
shares of Central Maine Common Stock outstanding immediately prior to the
share conversion described in the preceding paragraph 2.
4. Each share of HoldCo Common Stock issued to Central Maine when HoldCo
was formed will be cancelled.
As a result of the merger of MergeCo into Central Maine, Central Maine will
become a subsidiary of HoldCo, with HoldCo owning all shares of Central Maine
Common Stock that were outstanding.
20
<PAGE>
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
By mutual consent of their respective Boards of Directors, Central Maine,
HoldCo, and MergeCo may abandon the Merger or amend, modify or supplement the
terms of the Merger Agreement in such manner as may be agreed upon by them in
writing at any time before or after approval of the restructuring by the
Voting Shareholders of Central Maine. However, no such amendment, modification
or supplement shall, if agreed to after such approval by the Voting
Shareholders of Central Maine, change any of the principal terms of the Merger
Agreement.
The Merger Agreement provides that it may be terminated, and the Merger
abandoned, at any time, whether before or after approval of the Merger
Agreement by the Voting Shareholders of Central Maine, by action of the
Central Maine Board if such Board determines that the completion of the
restructuring would for any reason be inadvisable or not in the best interests
of Central Maine or its shareholders. None of the parties to the Merger
Agreement, nor any officer or director thereof, will have any liability to any
person, including, without limitation, any shareholder of Central Maine, in
the event of such termination and abandonment.
In making such determination, the Central Maine Board would consider, among
other things, the number of shareholders of Central Maine seeking to exercise
statutory dissenters' rights under applicable Maine law (described below under
"Rights of Dissenting Shareholders"). The Central Maine Board also may
terminate and abandon the restructuring if Central Maine has not received,
within an acceptable period of time after shareholder approval, the approval
of the MPUC and other regulatory agencies on terms that are satisfactory to
Central Maine. Central Maine is unable to predict under what other
circumstances, if any, the restructuring might be terminated and abandoned.
CONDITIONS PRECEDENT TO THE MERGER
The Merger Agreement provides that consummation of the Merger is subject to
approval of the principal terms of the Merger Agreement by the Voting
Shareholders of Central Maine, as is more fully set forth above under "Voting
Rights", and the shareholders of HoldCo and MergeCo, and to the approval by
the NYSE of HoldCo Common Stock for listing upon official notice of issuance.
If the Voting Shareholders of Central Maine approve the Merger, Central Maine
then will cause the shares of HoldCo and MergeCo to be voted in favor of the
Merger.
The Merger Agreement provides that completion of the Merger is subject to
receipt by Central Maine of all approvals of, and authorizations by, any
governmental or public authorities deemed necessary and advisable by the
Central Maine Board (which approvals and authorizations must be, at the time
of the Merger, in full force and effect, not revoked, and sufficient to
authorize the Merger). The proposed Merger and restructuring will not require
approval of any state utility regulatory commission except the MPUC and the
CDPUC, whose approval or waiver may be required due to Central Maine's
ownership interest in the Millstone No. 3 nuclear unit. Additionally, under
the Pubic Utility Holding Company Act of 1935, as amended (the "Holding
Company Act"), the SEC must approve the acquisition by HoldCo of Central Maine
Common Stock as effected by the Merger. Approvals must also be obtained from
the FERC and the NRC.
Finally, the Merger is conditioned upon receipt of a ruling from the
Internal Revenue Service or an opinion of tax counsel regarding certain tax
consequences of the Merger.
MERGER DATE
The Merger Agreement provides that the Merger Date will occur upon the
filing of the Articles of Merger with the Secretary of State of the State of
Maine, or on such later date not more than 60 days after such filing, as may
be specified in the Articles of Merger. Management anticipates that the Merger
Date will occur, and the other steps in the restructuring plan will be
completed, as soon as practical after the required approvals of the
21
<PAGE>
Voting Shareholders and regulatory agencies and listing authorization for
HoldCo Common Stock have been received.
RIGHTS OF DISSENTING SHAREHOLDERS
Certain shareholders of Central Maine dissenting to the proposed Merger
Agreement and related restructuring are entitled to payment of the fair value
of their shares. With respect to each such shareholder, Sections 908 and 909
of the Maine Business Corporation Act provide that, upon compliance with
certain statutory requirements, including (a) the filing of a written
objection to the Merger Agreement prior to the Voting Shareholders' vote on
the Merger Agreement, (b) not voting such shareholder's shares in favor of the
Merger Agreement, and (c) within 15 days after the date on which the Voting
Shareholders' vote on the Merger Agreement is taken, filing a written demand
for payment of the fair value of such shares, such shareholder will be
entitled to payment of such fair value if the Merger and restructuring are
consummated.
Holders of Central Maine Common Stock will have the right to such payment
upon following the specified statutory procedures. Central Maine believes that
holders of Central Maine Preferred Stock will not have any such right, because
one or more statutory exceptions are applicable. Should any holder of Central
Maine Preferred Stock seek to assert dissenters' rights, Central Maine intends
to contest such assertion. (For a discussion of certain rights of the holders
of 6% Preferred Stock, see "Maine Control Transaction Statute" below.)
A shareholder of Central Maine attempting to obtain payment of fair value
may object with respect to fewer than all of his shares. A vote against the
Merger Agreement does not satisfy the statutory requirement. Any objecting
shareholder failing to make a written demand within the 15-day period will be
bound by the Merger and restructuring and will have no dissenters' rights.
Written objections and written demands for payment should be sent by certified
or registered mail addressed to Anne M. Pare, Corporate Secretary and Clerk,
Central Maine Power Company, 83 Edison Drive, Augusta, Maine 04336, or
delivered in person to Central Maine's principal place of business at the same
address, to the attention of Anne M. Pare, Corporate Secretary and Clerk.
Any shareholder making such objection and demand shall thereafter be
entitled only to payment as provided in Section 909 and will not be entitled
to vote, or to receive future dividends, or to exercise any other rights of a
shareholder, with respect to the shares as to which he is objecting. No demand
may be withdrawn without the consent of Central Maine. At the time of filing
his demand for payment or within 20 days thereafter, each shareholder
demanding payment is required to submit to Central Maine the certificates
representing the shares as to which he is objecting for notation thereon that
such demand has been made. Failure to do so shall, at the option of Central
Maine, terminate the shareholder's rights under Section 909 unless a court
otherwise directs.
Within 10 days after the Merger Date, Central Maine will give written notice
thereof to each dissenting shareholder who has made written demand in
accordance with Section 909, and will offer to pay for the shares as to which
the shareholder has objected at a specified price deemed by Central Maine to
be the fair value thereof. If, within 30 days after the Merger Date, Central
Maine and such shareholder agree on the fair value, payment will be made
within 90 days after the Merger Date. If, within such 30-day period, one or
more dissenting shareholders and Central Maine do not so agree, then Central
Maine, within 30 days after receipt of a written demand from a dissenting
shareholder given within 60 days after the Merger Date, will, or at Central
Maine's election at any time within such 60-day period may, bring an action in
the Superior Court in Kennebec County, Maine, to determine the fair value. The
fair value shall be determined as of the day prior to the vote approving the
Merger Agreement and related restructuring, excluding any appreciation or
depreciation of the shares in anticipation thereof. If Central Maine fails to
institute such a proceeding, any dissenting shareholder may do so.
Upon payment by Central Maine of the fair value of a dissenting
shareholder's shares as to which the shareholder has objected, the shareholder
shall surrender the certificates representing such shares and shall cease to
have any interest in such shares.
22
<PAGE>
The foregoing discussion is qualified in its entirety by reference to
Sections 908 and 909 of the Maine Business Corporation Act, copies of which
are attached hereto as Appendix IV.
MAINE CONTROL TRANSACTION STATUTE
Under Section 910 of the Maine Business Corporation Act, holders of Central
Maine's 6% Preferred Stock will be entitled to payment of the fair value of
their shares. Section 910 provides that holders of voting stock of a
corporation with voting stock listed on a national securities exchange are
entitled to demand such payment upon occurrence of a "control transaction,"
which is generally defined as a transaction resulting in an individual, firm,
corporation or other entity (or group thereof) acquiring voting power over at
least 25% of the voting stock of such corporation. Because HoldCo will acquire
over 25% of Central Maine Common Stock in the Merger, the Merger will be a
control transaction. Pursuant to Section 910, notice will be provided to
holders of the 6% Preferred Stock, within 15 days after the Merger Date, that
the Merger has occurred and that they are entitled to demand fair value for
their shares of 6% Preferred Stock. Such holders then have 30 days after
provision of such notice to make such demand. Holders of Central Maine Common
Stock will not have any right to fair value under Section 910, because such
holders will automatically become holders of HoldCo Common Stock, and cease to
be holders of Central Maine Common Stock, upon the Merger.
The foregoing discussion is qualified in its entirety by reference to
Section 910 of the Maine Business Corporation Act, a copy of which is attached
hereto as Appendix IV.
TRANSFER OF CERTAIN UNREGULATED SUBSIDIARIES TO HOLDCO
As part of the restructuring, it is contemplated that Central Maine will
transfer directly to HoldCo its ownership interests in all or certain of
Central Maine's unregulated subsidiaries or other companies. As a result of
the proposed transfer, such interests no longer would be owned by Central
Maine.
The transfer of the unregulated interests to HoldCo may be conditioned upon
obtaining certain consents and other approvals, the specific terms and
conditions of which Central Maine cannot predict. It is possible that, based
on future events, the Central Maine Board may determine that it is not in the
best interests of Central Maine or its shareholders to transfer some or all of
these interests to HoldCo in connection with the proposed restructuring.
Provided the necessary regulatory and other approvals are obtained, the
Central Maine Board may decide to proceed with the remaining elements of the
restructuring plan without transferring some or all of these interests to
HoldCo.
TREATMENT OF PREFERRED STOCK
The proposed Merger and restructuring will not result in any change in the
terms of the outstanding Central Maine Preferred Stock, which will remain
outstanding at the Central Maine level and will not be converted into, or
otherwise become, a security of HoldCo. The decision to have Central Maine
Preferred Stock continue as a security of Central Maine is based, among other
things, upon a desire to avoid changing the nature of the investment
represented by such stock--namely, an investment in a senior security of a
regulated utility--as well as the desire of Central Maine not to limit its
ability to issue preferred stock in the future to help meet its capital
requirements.
Central Maine Preferred Stock will continue to rank senior to Central Maine
Common Stock (which, after the Merger, will be held by HoldCo) as to dividends
and as to the distribution of assets of Central Maine in the event of any
liquidation of Central Maine.
Separation from Central Maine of the assets and any earnings of certain of
Central Maine's unregulated interests will decrease the assets and earnings of
Central Maine to the extent that Central Maine's unregulated subsidiaries
contribute to Central Maine's earnings, and will result in such interests no
longer being of potential benefit to holders of Central Maine Preferred Stock
(that is, the assets and any earnings of these interests will not be available
to pay dividends or other amounts with respect to such Preferred Stock).
However, the utility
23
<PAGE>
operations of Central Maine presently constitute, and are expected to continue
to constitute for the foreseeable future, the predominant part of Central
Maine's consolidated assets and earnings. Accordingly, although Central Maine
is unable to predict the ultimate outcome of regulatory and other industry
changes, it is believed that this transaction will not materially affect the
holders of Central Maine Preferred Stock or the investment ratings of such
stock. (See "Transfer of Certain Unregulated Subsidiaries to HoldCo" above.)
Following the Merger, Central Maine will, to the extent that an exemption
therefrom is unavailable, continue to be subject to the informational and
other requirements under the Exchange Act and to hold annual shareholder
meetings. However, after the Merger, Central Maine may decide not to solicit
proxies from holders of the 6% Preferred Stock in connection with the election
of directors and in connection with other matters requiring the approval of
shareholders but not requiring a class vote of holders of the 6% Preferred
Stock, since the shares of Central Maine Common Stock owned by HoldCo will
have sufficient voting power to take action without the vote of Central Maine
6% Preferred Stock.
TREATMENT OF CENTRAL MAINE INDEBTEDNESS
The Merger and restructuring will not affect the terms of Central Maine's
indebtedness outstanding immediately prior to the Merger. The indebtedness of
Central Maine will be neither assumed nor guaranteed by HoldCo in connection
with the Merger. The decision to have the indebtedness of Central Maine
continue as obligations of Central Maine is based upon a desire not to alter,
or potentially alter, the nature of the investment represented by such
indebtedness--namely, a debt obligation of a regulated utility.
Separation from Central Maine of the assets and any earnings of certain of
its unregulated interests will decrease the assets and earnings of Central
Maine to the extent that Central Maine's unregulated subsidiaries contribute
to Central Maine's earnings, and will result in such interests no longer being
of potential benefit to holders of Central Maine's debt securities (that is,
the assets and any earnings of these interests will not be available to pay
interest or principal with respect to such securities). As noted above,
Central Maine's utility operations presently constitute, and are expected to
continue to constitute for the foreseeable future, the predominant part of
Central Maine's consolidated assets and earnings. Accordingly, although
Central Maine is unable to predict the ultimate outcome of regulatory and
other industry changes, it is believed that this transaction will not
materially affect the holders of Central Maine debt securities or the
respective investment ratings of these securities. (See "Transfer of Certain
Unregulated Subsidiaries to HoldCo" above.)
DIVIDEND POLICY
It is anticipated that the quarterly dividends on HoldCo Common Stock will
commence at a rate no less than that being paid on Central Maine Common Stock
at the time of the Merger, and will be paid on approximately the same dates in
each year as dividends on Central Maine Common Stock have been paid. The rate
and timing of dividends of HoldCo in the future will depend primarily on the
earnings of HoldCo's subsidiaries, principally Central Maine; the dividend
restrictions of HoldCo and its subsidiaries, including Central Maine; other
financial considerations; and other factors affecting HoldCo, as determined by
the Board of Directors of HoldCo in its discretion. The quarterly dividend
most recently declared by the Central Maine Board was $0.225 per share of
Central Maine Common Stock payable on April 30, 1998, to holders of record on
April 10, 1998.
Initially, the funds required by HoldCo to function as a holding company and
to enable it to pay dividends on HoldCo Common Stock following the Merger are
expected to be derived primarily from dividends paid by Central Maine on
Central Maine Common Stock. It is anticipated that such cash dividends paid by
Central Maine to HoldCo will be sufficient, together with any amounts provided
by other subsidiaries of HoldCo, to enable HoldCo to pay cash dividends on
HoldCo Common Stock. However, the dividend policy of Central Maine will
continue to be established by the Central Maine Board, and the amount of
dividends declared and paid by Central Maine will be subject to the
availability of earnings and other funds, and the needs of the utility
business, as determined by such Board. In addition, the ability of Central
Maine to pay dividends on Central Maine Common
24
<PAGE>
Stock to HoldCo will be subject to the prior dividend rights of Central Maine
Preferred Stock, to restrictions contained in the Articles of Incorporation of
Central Maine (the "Central Maine Charter") and in loan and other agreements
to which Central Maine is or may become a party, to other factors affecting
Central Maine, and to any applicable provisions of Maine law.
Payment of dividends on Central Maine Preferred Stock is anticipated to
continue at the specified rates without interruption or change; however, the
payment of these dividends also is dependent upon the earnings and financial
condition of Central Maine, upon other factors affecting Central Maine, and
any applicable provisions of Maine law.
DIRECTORS AND MANAGEMENT OF HOLDCO AND CENTRAL MAINE
The directors of Central Maine will become the directors of HoldCo upon the
completion of the Merger. (See "Proposal No. 1: Election of Directors" above.)
In approving the Merger Agreement, Voting Shareholders of Central Maine will
be considered to have ratified the election of these persons as directors of
HoldCo. Subsequent to the Merger, the composition of the Board of Directors of
HoldCo and Central Maine may change over time.
It is anticipated that the following persons will hold, at least initially,
the offices of HoldCo indicated below:
<TABLE>
<CAPTION>
NAME OFFICE
---- ------
<S> <C>
David T. Flanagan................. President and Chief Executive Officer
Arthur W. Adelberg................ Executive Vice President
David E. Marsh.................... Chief Financial Officer
F. Michael McClain................ Vice President, Corporate Development
Anne M. Pare...................... Corporate Counsel, Secretary and Treasurer
</TABLE>
HoldCo and Central Maine expect, from time to time, to render to the other
certain services and to make available the use of certain facilities and
equipment. The corporation receiving such services or using such facilities
and equipment will reimburse the other corporation for the fully allocated
cost or fair market value thereof, as appropriate. The agreements and
arrangements between HoldCo and Central Maine for the provision of such
services and the use of such facilities and equipment are subject to review
and approval by the MPUC. (See "Regulation" below.)
DESCRIPTION OF HOLDCO CAPITAL STOCK
The following description of HoldCo's capital stock is qualified in its
entirety by reference to the HoldCo Charter containing the provisions
describing HoldCo's capital stock attached hereto as Appendix II.
General
The authorized capital stock of HoldCo, as of the Merger Date, will consist
of 80,000,000 shares of HoldCo Common Stock, par value $5.00 per share and
5,000,000 shares of preferred stock, par value $100.00 per share.
HoldCo Preferred Stock
Although the HoldCo Charter authorizes the issuance of preferred stock,
HoldCo has no present plans to issue any preferred stock and there will not be
any HoldCo preferred stock outstanding at the Merger Date. The HoldCo Charter
authorizes the HoldCo Board of Directors to divide any preferred stock issued
by HoldCo into series and, within the limitations set forth in the HoldCo
Charter or prescribed by law, to fix and determine the relative rights and
preferences of the shares of any series so established. Such rights and
preferences include the maximum number of shares in a series, preferences as
to dividends and upon liquidation, dividend rate or rates, redemption prices
and terms, sinking fund provisions, if any, conversion rights, voting rights
and any other rights
25
<PAGE>
or preferences as to which the Maine Business Corporation Act permits
variations between different series of preferred stock.
HoldCo Common Stock
Voting: Each holder of HoldCo Common Stock will be entitled to one vote per
share on each matter, other than the election of directors, submitted to a
vote at a meeting of shareholders, subject to the rights, if any, of holders
of any preferred stock of HoldCo to vote on a matter as a class or series.
With respect to the election of directors, each holder of HoldCo Common Stock
shall be entitled to as many votes as pertain to his or her shares of HoldCo
Common Stock 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
of directors to be voted for in any amount.
Dividends: The holders of HoldCo Common Stock will be entitled to receive
such dividends as the HoldCo Board may from time to time declare, subject to
any rights of holders of any preferred stock of HoldCo. HoldCo's ability to
pay dividends will depend primarily upon the ability of its subsidiaries to
pay dividends or otherwise transfer funds to it. Financing arrangements,
charter provisions and regulatory requirements may impose restrictions on the
ability of HoldCo's subsidiaries to transfer funds to HoldCo in the form of
cash dividends. Such charter provisions include the provisions in the Central
Maine Charter which limit dividends on Central Maine Common Stock by certain
formulas and which also preclude the payment of dividends on Central Maine
Common Stock if there are any arrearages in payment of dividends on any
Dividend Series Preferred Stock of Central Maine.
Liquidation: In the event of any liquidation, dissolution or winding up of
HoldCo, the holders of HoldCo Common Stock will be entitled to receive the net
balance of any remaining assets of HoldCo, subject to any rights of HoldCo
creditors and holders of any preferred stock of HoldCo.
Preemptive Rights: Holders of HoldCo Common Stock and preferred stock will
not be entitled, as a matter of right, to subscribe for or purchase or receive
any new or additional issue of capital stock of HoldCo or securities
convertible into capital stock of HoldCo.
For a description of certain provisions relating to the HoldCo capital stock
that may have the effect of inhibiting or delaying a change of control
transaction involving HoldCo, see "Comparison of Shareholder Rights" below.
COMPARISON OF SHAREHOLDER RIGHTS
In the Merger, the holders of outstanding shares of Central Maine Common
Stock will receive shares of HoldCo Common Stock. Both HoldCo and Central
Maine are corporations formed in accordance with the laws of the State of
Maine, and the rights of shareholders of both corporations will be governed by
the provisions of the laws of the State of Maine. Following is a summary of
the material provisions of the HoldCo Charter and Bylaws of HoldCo (the
"HoldCo By-Laws") to be in effect on the Merger Date in comparison to the
provisions of the Central Maine Charter and the Bylaws of Central Maine (the
"Central Maine By-Laws"). This summary should be read in the context of, and
is qualified in its entirety by reference to, (i) the forms of HoldCo Charter
and HoldCo By-Laws, copies of which are attached hereto as Appendices II and
III, respectively, and (ii) the laws of the state of Maine. In addition, it
should be noted that HoldCo's ownership of 100% of the Central Maine Common
Stock after the consummation of the Merger will permit HoldCo to cast all of
the votes of Central Maine Common Stock with respect to any amendment of the
Central Maine Charter and Bylaws, except in cases where such amendment must
also be approved by holders of Central Maine Preferred Stock under Maine law
or by the terms of the Central Maine Charter or By-Laws.
Except as noted below, the HoldCo Charter and By-Laws are substantially the
same as the current Central Maine Charter and Central Maine By-Laws, except
that they do not include certain provisions that are unnecessary or that
specifically concern Central Maine Preferred Stock. Shareholders should be
aware that
26
<PAGE>
certain provisions in the HoldCo Charter and By-Laws may have the effect of
discouraging certain persons from acquiring large blocks of capital stock of
HoldCo, and the effect of inhibiting or delaying a change of control of
HoldCo. In particular, the HoldCo Charter contains fair price provisions
intended to reduce the possibility of unequal or unfair treatment of
shareholders in takeover situations. In addition, other potential takeover
protection provisions in the HoldCo Charter and By-Laws that are not
restatements of existing Maine law include: (i) the division of the HoldCo
Board of Directors into three classes of directors with the term of only one
class expiring each year and, subject to Maine law, permitting the removal of
directors only for cause upon the affirmative vote of the holders of at least
80% of the capital stock entitled to vote thereon, (ii) authorization for the
HoldCo Board of Directors to authorize the issuance of preferred stock in
series and to fix the rights and preferences of the series, (iii) advance
notice procedures with respect to nominations of candidates for election to
the HoldCo Board of Directors or proposals for business to be brought before a
meeting other than those adopted or recommended by the HoldCo Board of
Directors and (iv) provisions permitting amendment of certain provisions
contained in (X) the HoldCo Charter only by the vote of the holders of at
least 80% of shares entitled to vote and (Y) the HoldCo By-Laws only by the
vote of the holders of at least two-thirds of the shares entitled to vote. All
of these provisions, except the advance notice provisions described in (iii)
above, are substantially similar to the existing provisions in Central Maine's
Charter and By-Laws. With respect to removal of directors, current Maine law
generally permits shareholders to remove directors, with or without cause,
upon the affirmative vote of the holders of at least two-thirds of the shares
entitled to vote for directors.
Finally, it should be noted that the Maine Business Corporation Act contains
provisions (a) relating to business combinations with significant
shareholders, (b) limiting the personal liability of directors and (c)
specifically permitting directors to consider interests in addition to those
of shareholders in discharging their duties. The operation of those provisions
could have the effect of discouraging or delaying change-of-control
transactions.
Number of Directors
The Maine Business Corporation Act allows the number of persons constituting
the board of directors of a corporation to be fixed by the bylaws or the
articles of incorporation, or permits the bylaws or articles of incorporation
to provide that the number of directors may vary within a specified range, the
exact number to be determined by the board of directors. The Central Maine By-
Laws provide for a Board of Directors that may vary between nine (9) and
eighteen (18) members, inclusive, with the exact number to be determined by
the Central Maine Board. Currently the number of directors of Central Maine is
ten (10).
The HoldCo Charter retains the same range for the number of directors (no
fewer than nine (9) nor more than eighteen (18)), with the exact number to be
determined by the HoldCo Board of Directors; provided that on the Merger Date
the number of directors shall be equal to the number of directors on the Board
of Directors of Central Maine immediately prior to the Merger Date. In
addition, on the Merger Date, it is intended that the membership of the HoldCo
Board of Directors will be substantially similar to that of the Central Maine
Board.
Voting Rights and Capitalization
As noted under "Description of HoldCo Capital Stock" above, HoldCo Common
Stock will be entitled to one vote per share on each matter, other than the
election of directors by cumulative voting, submitted to a vote of
shareholders. The Central Maine Common Stock is entitled to 1/10th of a vote
per share on each matter, other than the election of directors by cumulative
voting, submitted to a vote of shareholders. Both the HoldCo By-Laws and the
Central Maine By-Laws permit cumulative voting by shareholders for the
election of directors. Under cumulative voting, each share of stock entitled
to vote in an election of directors has such number of votes as is equal to
the number of directors to be elected. A shareholder then may cast all of his
or her votes for a single candidate or may allocate them in any amount among
as many candidates as the shareholder may choose.
27
<PAGE>
The HoldCo Charter authorizes the HoldCo Board of Directors to determine the
voting rights, if any, of any series of preferred stock issued by HoldCo. The
Central Maine Charter provides that the 6% Preferred Stock issued by Central
Maine votes with Central Maine Common Stock on all matters, with one vote per
outstanding share, and allows the Board of Directors of Central Maine to
determine the voting rights, if any, of each series of Dividend Series
Preferred Stock issued by Central Maine.
The HoldCo Charter authorizes HoldCo to issue up to 80,000,000 shares of
common stock, the same amount as is currently authorized for Central Maine,
and up to 5,000,000 shares of preferred stock, approximately twice the amount
currently authorized for Central Maine.
Fair Price Provisions
The HoldCo Charter contains "fair price" provisions that are substantially
similar to those which are contained in the Central Maine Charter. The "fair
price" provisions included in the HoldCo Charter are intended to reduce the
possibility of unfair treatment of shareholders in takeover situations. In
addition, the HoldCo Charter provides that, when discharging their duties to
the corporation, the HoldCo Board of Directors shall give due consideration to
all factors they may consider relevant to their decision, including the
effects of the proposed transaction on HoldCo's or its subsidiaries'
employees, customers, suppliers, and other affected persons and entities and
on the communities and geographic areas in which HoldCo or its subsidiaries
provide service or are located. That provision is substantially similar to
that contained in the Maine Business Corporation Act. The Central Maine
Charter provides that the Central Maine Board may consider similar factors in
evaluating an offer of another party to purchase or exchange any securities or
property for any outstanding equity securities of Central Maine or any of its
subsidiaries or other companies in which Central Maine has an interest; merge
or consolidate with Central Maine or any other such company or purchase or
acquire all or substantially all of the properties and assets of Central Maine
or any other such company.
Removal of Directors
Both the HoldCo Charter and the Central Maine Charter provide that, subject
to any controlling provision of Maine law, a member of such company's Board of
Directors may be removed at any time by the shareholders of such company only
for cause and upon the affirmative vote of the holders of at least 80% of all
shares entitled to vote thereon. Vacancies on the Board of Directors of either
company may be filled only by the vote of a majority of directors then in
office unless the Maine Business Corporation Act confers such power on the
shareholders, in which case such vacancy may be filled by the vote thereon at
a special meeting called for the purpose of filling such vacancy. Current
Maine law generally permits shareholders to remove directors, with or without
cause, upon the affirmative vote of the holders of at least two-thirds of the
shares entitled to vote for directors.
Shareholder Proposals, Nomination of Directors by Shareholders
The HoldCo Charter provides that in order for a shareholder to properly
bring a proposal before the HoldCo annual meeting, such proposal must be
received by HoldCo not less than 60 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting. If the date of such
annual meeting is advanced by more than 30 days or delayed by more than 60
days, or in the case of HoldCo's first annual meeting after the Merger Date,
notice by the shareholder to be timely must be received not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of (i) the sixtieth day prior to such annual meeting or
(ii) the tenth day following the date on which notice of the date of the
annual meeting was given. This requirement is in addition to, and does not
otherwise affect, the provisions of the Exchange Act that will govern the
submission of proposals by shareholders for inclusion in HoldCo's proxy
statement. The Central Maine Charter and Central Maine By-Laws do not contain
similar provisions. The HoldCo Charter also requires that shareholder
nominations of candidates for election to the Board of Directors of HoldCo be
in writing and be received not less than 60 days nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting. If the date
of such annual meeting is advanced by more than 30 days or delayed by more
than 60 days, or in the case of HoldCo's first annual meeting after the Merger
Date, the nomination must be received not later than the close of business on
the later of (i) the sixtieth day prior to such annual meeting or (ii) the
tenth day following the date on which notice of the date of the annual meeting
was given. The Central Maine Charter and Central Maine By-Laws do not contain
similar provisions.
28
<PAGE>
Indemnification and Liability Provisions
The HoldCo By-Laws contain provisions regarding the indemnification of
directors, officers, and other agents of HoldCo that are substantially similar
to provisions contained in the Central Maine By-Laws. In addition, the HoldCo
Charter contains a provision on the limitation of personal liability of HoldCo
directors that repeats in substance the pertinent provision in the Maine
Business Corporation Act.
Amendment of Articles and Bylaws
Both the HoldCo Charter and Central Maine Charter may be amended by the vote
of the holders of at least a majority of the shares entitled to be cast for
such amendment, except (i) for the amendment of the provisions relating to the
Board of Directors and the fair price provisions, which require the vote of
the holders of at least 80% of the shares entitled to vote thereon and (ii)
with respect to the HoldCo Charter, for the advance notice, amendment and
limitation of director liability provisions, which also require the vote of
the holders of at least 80% of the shares entitled to vote thereon.
Similarly, the HoldCo By-Laws and Central Maine By-Laws may be amended by a
vote of the majority of directors then in office or the holders of at least a
majority of shares entitled to be cast for such amendment, except that any
amendment to the quorum, cumulative voting and amendment provisions require
the vote of the holders of at least two-thirds of the shares entitled to vote
thereon and may not be amended by the directors. The Central Maine By-Laws
also require a vote of two-thirds of the directors then in office to amend the
provisions of the Central Maine By-Laws relating to the qualification, number,
classification and term of Directors, the filling of vacancies and the
resignation and removal of Directors from office; the HoldCo By-Laws do not
contain comparable provisions relating to any such amendments.
STOCK EXCHANGE LISTING
HoldCo intends to apply to list HoldCo Common Stock on the NYSE. It is
expected that such listing will occur on, or soon after, the effective date of
the Merger. At the time of the listing of HoldCo Common Stock, Central Maine
Common Stock will be delisted from trading on the NYSE (since all outstanding
shares will be held by HoldCo). In the absence of such listing on the NYSE,
the Central Maine Board might elect not to consummate the restructuring
(including the Merger).
TRANSFER AGENT AND REGISTRAR
Bank Boston, N.A., the Transfer Agent and Registrar for Central Maine Common
Stock, will serve in the same capacities for the HoldCo Common Stock.
DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
On the Merger Date, HoldCo will assume Central Maine's existing Dividend
Reinvestment and Common Stock Purchase Plan as in effect immediately prior to
the Merger. Shares of Central Maine Common Stock held in the plan will
automatically become a like number of shares of HoldCo Common Stock, and
shares of HoldCo Common Stock will be subject to purchase under the Dividend
Reinvestment and Common Stock Purchase Plan on and after the Merger Date.
COMMON STOCK PLANS
On the Merger Date, shares of Central Maine Common Stock held under Central
Maine's 1987 Executive Incentive Plan and Long-Term Incentive Plan will
automatically become a like number of shares of HoldCo Common Stock, and
shares of HoldCo Common Stock will be subject to grant and delivery under such
plans on and after the Merger Date.
By approving the Merger Agreement, the Voting Shareholders of Central Maine
will be deemed to have approved the actions to be taken in connection with the
1987 Executive Incentive Plan and Long-Term Incentive
29
<PAGE>
Plan, including any amendments to the 1987 Executive Incentive Plan and Long-
Term Incentive Plan necessary to accomplish those actions.
REGULATION
Central Maine is subject to regulation by the MPUC as to retail rates,
accounting, service, territory served and issuance of securities, and in other
respects. Central Maine is also subject to the jurisdiction of (i) the FERC
under the Federal Power Act over certain of the electric utility facilities
and operations, wholesale rates and accounting practices of Central Maine, and
in certain other respects, and (ii) the NRC under the Atomic Energy Act with
respect to its 2.5 percent ownership interest in the Millstone No. 3 nuclear
unit in Waterford, Connecticut. Central Maine is presently exempt from all
provisions of the Holding Company Act, except provisions thereof relating to
the acquisition of securities of other public utility companies. Central Maine
is subject to public utility regulation for some purposes in Connecticut with
respect to its interest in the Millstone No. 3 nuclear unit.
Central Maine will continue to be subject to regulation as a public utility
after the Merger Date.
HoldCo is not a public utility. Under existing law, HoldCo will not, solely
by virtue of the Merger and restructuring, become a public utility in any
jurisdiction where Central Maine is subject to regulation, and so long as
HoldCo does not become a public utility, it will not, under existing law, be
subject to such jurisdiction. However, subsequent to the Merger and
restructuring, certain types of transactions between various members of the
system consisting of HoldCo and its subsidiaries will be subject to the
jurisdiction of the MPUC under provisions of Maine law governing transactions
between public utilities and affiliated interests, and reorganizations of
public utilities.
Central Maine believes that, upon consummation of the Merger and
restructuring each of HoldCo and Central Maine will qualify for an exemption
from all provisions of the Holding Company Act, except those provisions
relating to the acquisition of securities of public utility companies since
HoldCo and Central Maine and each of their respective utility subsidiaries
from which they derive any material part of their respective utility income
will be organized in the State of Maine and predominantly intrastate in
character, and will carry on their utility business within the State of Maine.
The joint application filed on March 4, 1998, by Central Maine and HoldCo with
the SEC under the Holding Company Act which requests that the SEC issue an
order authorizing consummation of the Merger thereunder also requests that the
SEC issue an order exempting both Central Maine and HoldCo from all provisions
of the Holding Company Act except Sections 9(a)(2) and 10 thereof pursuant to
Section 3(a)(1). The Holding Company Act may limit the ability of HoldCo to
acquire additional utility assets or securities.
In June 1995, the SEC Division of Investment Management issued a report
recommending significant revisions to, or limited repeal of, the Holding
Company Act. HoldCo and Central Maine, however, cannot predict whether
Congress will take any such action. Pending such action, the SEC indicated
that it would revise its rules and interpretations to modernize and simplify
holding company regulation. At this time, however, HoldCo and Central Maine
cannot predict the likelihood, timing or impact of such actions.
MARKET PRICE OF CENTRAL MAINE COMMON STOCK
On April 3, 1998, the high and low sales prices for Central Maine Common
Stock on the NYSE were $17 5/8 and $17 7/16, respectively.
EXCHANGE OF STOCK CERTIFICATES NOT REQUIRED
Upon completion of the Merger, it will not be necessary for holders of
Central Maine Common Stock to exchange their existing stock certificates for
stock certificates of HoldCo. Holders of Central Maine Common Stock
automatically will become holders of HoldCo Common Stock on a share-for-share
basis, and the present stock certificates for Central Maine Common Stock
automatically will represent shares of HoldCo Common
30
<PAGE>
Stock. After the restructuring, as presently outstanding stock certificates
are presented for registration of transfer, new certificates bearing the name
of HoldCo, Inc. (or such other name as may be substituted for, or otherwise
replace, the name of HoldCo, Inc.) will be issued. Furthermore, new
certificates of HoldCo will be issued in exchange for old certificates of
Central Maine upon the request of any shareholder.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes the material United States
federal income tax consequences of the Merger and is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Department regulations thereunder, judicial authority and current
administrative rulings and practice, all as in effect as of the date hereof.
Future legislation, regulations, administrative rulings or court decisions
could significantly change such authorities either prospectively or
retroactively. The following discussion does not address the consequences of
the Merger under state, local or foreign law nor does the discussion address
all aspects of United States federal income taxation that may be important to
a shareholder in light of such shareholder's particular circumstances or to a
shareholder subject to special rules including, without limitation, S
corporations, financial institutions, insurance companies, tax-exempt
entities, dealers in securities, taxpayers subject to alternative minimum tax,
persons who acquired Central Maine stock pursuant to the exercise of an
employee option (or otherwise as compensation), persons holding Central Maine
stock as part of a hedging or conversion transaction or a straddle or any
other derivative security. This discussion assumes that Central Maine
shareholders hold their respective shares of Central Maine stock as capital
assets within the meaning of Section 1221 of the Code.
The following discussion is limited to the United States federal income tax
consequences relevant to a holder of Central Maine stock that is a citizen or
resident of the United States, or any state thereof, or a corporation or other
entity created or organized under the laws of the United States, or any
political subdivision thereof, or an estate the income of which is subject to
United States federal income tax regardless of its source or a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have the authority to
control all substantial decisions of the trust.
No ruling from the Internal Revenue Service (the "IRS") concerning the
United States federal income tax consequences of the Merger will be requested.
It is a condition to the Merger Agreement that Central Maine receive an
opinion from LeBoeuf, Lamb, Greene & MacRae, L.L.P. that the Merger qualifies,
for United States federal income tax purposes, as a tax-free transaction under
Section 351 of the Code. The opinion will be based upon (i) certain
assumptions set forth therein and (ii) representations by the managements of
Central Maine and HoldCo. The opinion referred to above neither binds nor
precludes the IRS from adopting a contrary position and no assurance can be
given that contrary positions will not be successfully asserted by the IRS or
adopted by a court if the issues are litigated.
THE FOLLOWING IS A SUMMARY OF CERTAIN MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER, WITHOUT REFERENCE TO THE PARTICULAR FACTS AND
CIRCUMSTANCES OF ANY PARTICULAR SHAREHOLDER. IN ADDITION, THIS DISCUSSION DOES
NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES
OF THE MERGER. THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES OF ANY
TRANSACTION OTHER THAN THE MERGER. ACCORDINGLY, EACH SHAREHOLDER IS STRONGLY
URGED TO CONSULT WITH SUCH SHAREHOLDER'S TAX ADVISOR TO DETERMINE THE
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER.
Exchange of Central Maine Common Stock for HoldCo Common Stock No gain or
loss will be recognized for United States federal income tax purposes in
connection with the exchange of Central Maine Common Stock for HoldCo Common
Stock (except with respect to holders exercising dissenters' rights who may
recognize dividend income or gain or loss). (See "Central Maine Shareholders
who Exercise Dissenters' Rights or Rights
31
<PAGE>
under Section 910 of the Maine Business Corporation Act" below for a more
complete discussion.) The tax basis of the shares of HoldCo Common Stock
received in the Merger will equal the tax basis of the Central Maine Common
Stock surrendered in the Merger, and the holding period of the shares of
HoldCo Common Stock will include the holding period of the Central Maine
Common Stock.
Holders of Central Maine Preferred Stock Holders of Central Maine Preferred
Stock will not recognize gain or loss for United States federal income tax
purposes with respect to such shares as a result of the Merger (except with
respect to holders exercising rights under Section 910 of the Maine Business
Corporation Act who may recognize dividend income or gain or loss). (See
"Central Maine Shareholders who Exercise Dissenters' Rights or Rights under
Section 910 of the Maine Business Corporation Act" below for a more complete
discussion.)
Central Maine Shareholders who Exercise Dissenters' Rights or Rights under
Section 910 of the Maine Business Corporation Act Cash received by a
shareholder exercising dissenters' rights or rights under Section 910 of the
Maine Business Corporation Act will generally be treated for United States
federal income tax purposes as a dividend to the extent of Central Maine's
current or accumulated earnings and profits, unless the payment (i) results in
a "complete termination" of the shareholder's direct or indirect stock
interest in Central Maine under Section 302(b)(3) of the Code, (ii) is
"substantially disproportionate" with respect to the shareholder under Section
302(b)(2) of the Code or (iii) is "not essentially equivalent to a dividend"
with respect to the shareholder under Section 302(b)(1) of the Code. Any
amounts received by a holder of Central Maine 6% Preferred Stock attributable
to a declared accrued unpaid dividend will be treated as a payment of such
dividend and is not part of the amount paid in redemption of such preferred
stock under Section 302 of the Code. Shareholders should consult their tax
advisors to determine if any cash received in connection with their exercise
of dissenters' rights or rights under Section 910 of the Maine Business
Corporation Act will be characterized as a dividend under Section 302 of the
Code.
If any cash received pursuant to the exercise of dissenters' rights or
rights under Section 910 of the Marine Business Corporation Act is not treated
as a distribution taxable as a dividend, a shareholder exercising dissenters'
rights or rights under Section 910 of the Maine Business Corporation Act would
recognize taxable gain or loss equal to the difference between the amount of
cash received not characterized as a dividend and the shareholder's adjusted
tax basis in such holder's Central Maine stock.
Central Maine and HoldCo For United States federal income tax purposes, no
gain or loss will be recognized by Central Maine or HoldCo.
Capital Gain or Loss Gain or loss recognized as a result of exercising
dissenters' rights or rights under Section 910 of the Maine Business
Corporation Act will be capital gain or loss and in the case of a non-
corporate holder will be mid-term or long-term capital gain if the holding
period for the Central Maine stock is more than one year or eighteen months,
respectively.
Backup Withholding A shareholder of Central Maine stock may be subject to
backup withholding at the rate of 31% with respect to "reportable payments,"
which may include payments of cash as a result of exercising dissenters'
rights or rights under Section 910 of the Maine Business Corporation Act. The
payor will be required to deduct and withhold the prescribed amounts unless
such shareholder (i) is a corporation or comes within other exempt categories
and, when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss to exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder of Central Maine stock who does not provide
HoldCo with his or her correct taxpayer identification number may be subject
to penalties imposed by the IRS. Amounts paid as backup withholding do not
constitute an additional tax and will be credited against the shareholder's
United States federal income tax liabilities, so long as the required
information is provided to the IRS.
32
<PAGE>
PRO FORMA FINANCIAL INFORMATION
No consolidated financial statements of HoldCo are presented herein since
HoldCo presently has no assets other than nominal capitalization and no
liabilities, and any pro forma consolidated financial statements of HoldCo
would reflect no change from the financial statements of Central Maine prior
to implementation of the Merger.
LEGAL OPINION
LeBoeuf, Lamb, Greene & MacRae, L.L.P. (a limited liability partnership
including professional corporations), and Anne M. Pare, Esq., as counsel for
Central Maine and HoldCo, have rendered opinions to the effect that the HoldCo
Common Stock offered in this Proxy Statement and Prospectus will be validly
issued, fully paid and nonassessable.
EXPERTS
The consolidated financial statements of Central Maine and subsidiaries
included in this Proxy Statement and Prospectus, and the schedule included in
Central Maine's Annual Report on Form 10-K for 1997, have been audited by
Coopers & Lybrand L.L.P., independent public accountants, as indicated in
their reports with respect thereto, and are included and incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
PROPOSAL NO. 3
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
At its regular meeting held on February 19, 1998, the Board of Directors of
Central Maine acted to appoint Coopers & Lybrand L.L.P., Portland, Maine, as
auditors for Central Maine for 1998. At the Annual Meeting it is the intention
of the persons named in the proxy enclosed herewith to vote in favor of the
approval of such action by the Board of Directors. Representatives of Coopers
& Lybrand L.L.P. will attend the meeting and, if they so desire, may make a
statement; they will also respond to appropriate questions.
The appointment of Coopers & Lybrand L.L.P. 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 Audit Committee considered the appointment
of auditors for Central Maine for 1998 at its meeting held on February 17,
1998. The affirmative vote of a majority of the votes cast by the holders of
Central Maine Common Stock and 6% Preferred Stock, voting as a single class,
is sought for approval of the appointment.
If the proposed Merger and related holding company structure described above
are approved and implemented, Coopers & Lybrand L.L.P. will also become, and
be approved as, HoldCo's independent public accountants for the year 1998.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 3.
BOARD COMMITTEES, MEETINGS AND COMPENSATION
CERTAIN COMMITTEES OF THE CENTRAL MAINE BOARD
The Board's Audit Committee, which has as its members Kathryn M. Weare
(Chair), Duane D. Fitzgerald and Lyndel J. Wishcamper, held four meetings in
1997. The Audit Committee recommends to the Central Maine Board the
independent accountants to be selected by Central Maine 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 accountants and
33
<PAGE>
management Central Maine's internal accounting procedures and controls, and
the adequacy of the accounting services provided by Central Maine's personnel.
The Governance Committee, 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 Committee will
consider for nomination to the Board individuals whose names have been
submitted by shareholders in writing. Supporting information should accompany
any submission. In addition, the Central Maine Board has established a
committee composed of shareholders and non-employee directors to provide an
additional means of receiving names of persons for consideration by the
Governance Committee for nomination to the Central Maine Board. The Governance
Committee also oversees Central Maine's long-range corporate planning and
succession planning, and evaluates the performance of the President and Chief
Executive Officer. The Governance Committee held three meetings in 1997.
The Compensation and Benefits Committee, whose members are Charles H. Abbott
(Chair), Duane D. Fitzgerald and Peter J. Moynihan, held seven meetings in
1997. This committee reviews and makes recommendations to the Board concerning
compensation and benefit programs for executive officers and compensation for
directors of Central Maine. The Compensation and Benefits Committee also
administers Central Maine's 1987 Executive Incentive Plan and its Long-Term
Incentive Plan.
MEETINGS OF THE CENTRAL MAINE BOARD
The Central Maine Board held 13 meetings (including regularly scheduled and
special meetings) in 1997. Each director listed above attended more than 75
percent of the aggregate of the total number of Central Maine 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.
COMPENSATION OF DIRECTORS
In accordance with the established guidelines for the Central Maine Board,
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 Central Maine receives
an annual retainer of $8,400. Each other director who is not an executive
officer of Central Maine (an "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 Central
Maine Board attended, and all outside directors serving on a committee of the
Central Maine Board receive $300 for each committee meeting attended on a day
on which they have also attended a meeting of the full Central Maine 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
Central Maine 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.
In March 1988, the Central Maine Board established a voluntary deferred
compensation plan for outside directors. Under the plan, a director may elect
to have all or a specified portion, in increments of 25 percent, of his or her
retainer (but not meeting fees) for the calendar year following the election
and subsequent calendar years credited quarterly 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 the Central Maine Common Stock
("Compensation Units"). The number of Compensation Units credited to a
director's account is equal to the number of shares of Central Maine 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. Central Maine
matches Compensation Units in a director's account representing deferred
retainers with one-half the number of Compensation Units in the account.
Whenever dividends are paid on Central Maine 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.
34
<PAGE>
Effective January 1, 1998, the Central Maine Board terminated the retirement
plan for outside directors that had been effective since September 1991. With
the assistance of an independent compensation consultant, the Central Maine
Board has adopted amendments to its deferred compensation plan that aligns the
interests of the directors more closely with the interests of shareholders by
tying Central Maine Board compensation to the value of Central Maine Common
Stock. Accrued benefits under the former retirement plan have been converted
for all current directors to Compensation Units under the deferred
compensation plan. In addition, at the beginning of each year, each director
will receive a fixed grant of 500 Compensation Units. Dividend equivalents
will be added to Compensation Units on dividend payment dates for 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 Central Maine 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 Central Maine Common Stock on the payment date. The
number of Compensation Units in the accounts of directors under the deferred
compensation plan as of February 28, 1998 is shown in the table that appears
under the caption "SECURITY OWNERSHIP."
SECURITY OWNERSHIP
The following table lists the number of shares of the Central Maine Common
Stock beneficially owned as of April 1, 1998 by each director of Central Maine
and each of the executive officers of Central Maine named in the Summary
Compensation Table contained in this Proxy Statement. The total number of such
shares beneficially owned as of April 1, 1998 by all directors and executive
officers of Central Maine 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 February 28,
1998 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
Central Maine 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 Central Maine Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
DIRECTORS AND NAMED EXECUTIVE OWNED COMPENSATION UNITS
OFFICERS (AS OF APRIL 1, 1998) (AS OF FEBRUARY 28 , 1998)
----------------------------- --------------------- --------------------------
<S> <C> <C>
Charles H. Abbott............. 3,243 15,731
Charleen M. Chase............. 1,317 9,247
Duane D. Fitzgerald........... 500 3,209
David T. Flanagan............. 12,269 --
Robert H. Gardiner............ 1,000 8,703
David M. Jagger............... 1,000 18,176
Peter J. Moynihan............. 1,277 4,439
William J. Ryan............... 1,000 1,243
Kathryn M. Weare.............. 1,187 7,941
Lyndel J. Wishcamper.......... 2,514 3,263
Arthur W. Adelberg............ 5,220 --
David E. Marsh................ 6,414 --
Gerald C. Poulin.............. 7,024 --
Sara J. Burns................. 4,131 --
All directors and executive
officers as a group (includ-
ing persons listed above).... 59,215 71,952
</TABLE>
35
<PAGE>
The number of shares of Central Maine Common Stock beneficially owned as of
March 23, 1998 by each of the directors and named executive officers, and the
aggregate number of such shares beneficially owned as of that date by all
directors and executive officers as a group, constituted less than one percent
of the total shares of that class then outstanding. As of March 23, 1998, 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 March 23, 1998 was 1,518
shares. No director or officer owned as of March 23, 1998 any shares of 6%
Preferred Stock or Dividend Series Preferred Stock.
The following table sets forth the name and address of each shareholder
believed to be the beneficial owner of 5% or more of the outstanding shares of
Central Maine Common Stock, the number of shares beneficially owned by each
such shareholder and the percentage of shares so owned as of March 23,
1998.(1)
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS
---------------- ------------------ ----------
<S> <C> <C>
FMR Corp......................................... 3,234,200(2) 9.97%(2)
82 Devonshire Street
Boston, MA 02109
Goldman, Sachs & Co. and The Goldman Sachs Group,
L.P............................................. 1,817,500(3) 5.6%(3)
85 Broad Street
New York, NY 10004
</TABLE>
- --------
(1) Christine M. Nyhan, trustee, 1825 Spindrift Lane, La Jolla, California
92037, owned of record 1,675 shares of 6% Preferred Stock. Shares held by
Christine M. Nyhan, trustee, represent approximately .05 percent of the
combined voting power of Central Maine Common Stock and 6% Preferred Stock
and approximately 29.31 percent of the voting power of the 6% Preferred
Stock.
(2) Based solely on a Schedule 13G dated February 14, 1998, this amount
represents beneficial ownership of (a) 2,833,500 shares of Central Maine
Common Stock by Fidelity Management & Research Company, an investment
adviser, and (b) 400,700 shares of Central Maine 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 351,100 of these shares.
(3) Based solely on a Schedule 13G dated February 14, 1998, Goldman, Sachs &
Co. and The Goldman Sachs Group, L.P. share the power to vote and dispose
of 1,817,500 shares of Central Maine Common Stock.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The directors and officers of Central Maine filed in a timely manner their
reports on Forms 3, 4 and 5 as required under Section 16(a) of the Exchange
Act.
36
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table presents information on
compensation to David T. Flanagan, President and Chief Executive Officer, and
to other executive officers of Central Maine for 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
NAME RESTRICTED
AND STOCK ALL OTHER
PRINCIPAL AWARD(S) COMPENSATION
POSITION YEAR SALARY ($) BONUS ($)(1) ($)(1)(2) ($)(3)
--------- ---- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
David T. Flanagan....... 1997 315,000.00 218,531.25 97,125.00 2,603.26
President and Chief Ex-
ecutive Officer 1996 265,000.08 62,606.27 0 5,017.97
1995 240,000.00 76,000.00 0 4,989.60
Arthur W. Adelberg...... 1997 189,818.09 79,125.00 35,166.67 5,036.82
Executive Vice Presi-
dent 1996 166,334.32 28,262.51 0 4,768.44
1995 157,816.72 40,781.67 0 4,741.36
David E. Marsh.......... 1997 189,818.09 79,125.00 35,166.67 4,386.53
Chief Financial Officer 1996 166,123.59 25,768.75 0 4,833.91
1995 157,816.72 40,781.67 0 4,800.91
Gerald C. Poulin........ 1997 158,200.08 61,935.30 27,526.80 3,571.41
Chief Operating Offi-
cer, 1996 137,294.23 23,362.25 0 4,511.31
Energy Services 1995 127,366.72 27,736.27 0 3,821.00
Sara J. Burns........... 1997 139,000.00 56,250.00 25,000.00 2,601.01
Chief Operating Offi-
cer,
Distribution Services
(4)
</TABLE>
- --------
(1) For 1997, amounts are awards under the 1987 Executive Incentive Plan.
(2) At December 31, 1997, the number of shares and value of the aggregate
restricted stock holdings of each of the named executive officers were as
follows: Mr. Flanagan, 9,406 shares and $143,441; Mr. Adelberg, 3,639 shares
and $55,944; Mr. Marsh, 3,639 shares and $55,944; Mr. Poulin, 3,012 shares and
$45,933; and for Ms. Burns, 1,413 shares and $21,548. The aggregate restricted
stock holdings listed for the named executive officers include contingent
grants of performance restricted shares of Central Maine Common Stock under
Central Maine's Long-Term Incentive Plan ("LTIP") for the 3-year performance
period beginning January 1, 1995, for Messrs. Flanagan, Adelberg, Marsh and
Poulin. Aggregate restricted stock holdings for Ms. Burns are awards under the
Executive Incentive Plan ("EIP") that are restricted for 3 years after the
award. Vesting of the LTIP shares is subject to attaining a threshold level of
performance. For the 3-year performance period beginning January 1, 1995, the
specified level of performance was not attained. As a result, the performance
restricted shares contingently granted for that performance period plus
additional performance restricted shares resulting from the reinvestment of
dividends through January 1998 were forfeited on March 19, 1998.
The number of LTIP shares forfeited and their value as of the forfeiture
date were as follows:
<TABLE>
<CAPTION>
NUMBER OF VALUE AS OF FORFEITURE
NAME SHARES FORFEITED DATE (MARCH 19, 1998)
---- ---------------- ----------------------
<S> <C> <C>
David T. Flanagan................. 9,531 $165,601
Arthur W. Adelberg................ 3,688 64,079
David E. Marsh.................... 3,688 64,079
Gerald C. Poulin.................. 3,052 53,028
</TABLE>
37
<PAGE>
Dividends on the performance restricted shares under the LTIP were earned at
the same rate as dividends on the unrestricted Central Maine Common Stock and
were reinvested in additional performance restricted shares during the
performance period until the forfeiture. Dividends on shares of restricted
stock granted under the EIP are earned at the same rate as dividends on the
unrestricted Central Maine Common Stock and are paid either during the 3-year
restriction period applicable to these shares or at the end of the restriction
period.
(3) For 1997, amounts of All Other Compensation include (i) matching
contributions by Central Maine to the Employee Savings and Investment Plan for
Non-Union Employees (401(k) Plan) in the amount of $2,075 for Mr. Flanagan,
$4,780.03 for Mr. Adelberg, $4,075.49 for Mr. Marsh, $3,182.83 for Mr. Poulin,
and $2,601.01 for Ms. Burns; and (ii) the value of term life insurance
premiums paid under universal life insurance policies in the amount of $582.26
for Mr. Flanagan, $256.79 for Mr. Adelberg, $311.04 for Mr. Marsh, and $388.58
for Mr. Poulin. Central Maine 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 by Central Maine under its
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.
(4) Effective May 1, 1997.
PENSION PLAN TABLES AND EMPLOYMENT ARRANGEMENTS
BASIC PENSION PLAN
Central Maine makes payments to the Retirement Income Plan for Non-Union
Employees (the "Basic Pension Plan") for full-time non-union employees of
Central Maine, including the executive officers. Estimated annual retirement
benefits payable by Central Maine under the Basic Pension Plan, assuming
retirement on December 31, 1997 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.
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------
AVERAGE ANNUAL SALARY FOR
5 HIGHEST CONSECUTIVE YEARS
PRECEDING RETIREMENT 15 20 25 30 35
--------------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$150,000.............................. $34,799 $46,399 $57,999 $69,598 $ 72,198
175,000.............................. 41,174 54,899 68,624 82,348 85,573
200,000.............................. 47,549 63,399 79,248 95,098 98,948
225,000.............................. 47,549 63,399 79,248 95,098 112,323
250,000.............................. 47,549 63,399 79,248 95,098 112,323
275,000.............................. 47,549 63,399 79,248 95,098 112,323
300,000.............................. 47,549 63,399 79,248 95,098 112,323
325,000.............................. 47,549 63,399 79,248 95,098 112,323
350,000.............................. 47,549 63,399 79,248 95,098 112,323
375,000.............................. 47,549 63,399 79,248 95,098 112,323
400,000.............................. 47,549 63,399 79,248 95,098 112,323
</TABLE>
For Ms. Burns, an executive officer named in the Summary Compensation Table,
compensation covered by the Basic Pension Plan consists of base salary shown
in the Salary column of that 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 1997, the 1997
covered compensation under the Basic Pension Plan for Messrs. Flanagan,
Adelberg, Marsh and Poulin was limited to that amount of their respective base
38
<PAGE>
salaries. Messrs. Flanagan, Adelberg, Marsh and Poulin and Ms. Burns have been
credited with 12, 11, 23, 26 and 11 years of service, respectively. 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.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Central Maine maintains a Supplemental Executive Retirement Plan (the
"SERP") that provides supplemental retirement income to selected executive
officers of Central Maine. Estimated annual retirement benefits payable by
Central Maine under the SERP, assuming retirement on December 31, 1997 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.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
AVERAGE ANNUAL
COMPENSATION
FOR 3 HIGHEST YEARS 15 20 25 30 35
------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$150,000........................... $ 23,701 $ 31,601 $ 39,501 $ 47,402 $ 64,302
175,000........................... 27,076 36,101 45,126 54,152 73,677
200,000........................... 30,451 40,601 50,752 60,902 83,052
225,000........................... 40,201 53,601 67,002 80,402 92,427
250,000........................... 49,951 66,601 83,252 99,902 115,177
275,000........................... 59,701 79,601 99,502 119,402 137,927
300,000........................... 69,451 92,601 115,752 138,902 160,677
325,000........................... 79,201 105,601 132,002 158,402 183,427
350,000........................... 88,951 118,601 148,252 177,902 206,177
375,000........................... 98,701 131,601 164,502 197,402 228,927
400,000........................... 108,451 144,601 180,752 216,902 251,677
</TABLE>
For Messrs. Flanagan, Adelberg, Marsh and Poulin, compensation covered by
the SERP consists of base salary shown in the Salary column of the Summary
Compensation Table, and incentive awards received under Central Maine's 1987
Executive Incentive Plan, including amounts shown in the Bonus and Restricted
Stock Awards columns of that Table. Messrs. Flanagan, Adelberg, Marsh and
Poulin and Ms. Burns have been credited with 12, 11, 23, 26 and 11 years of
service, respectively. 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 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. Ms. Burns does not
participate in the SERP.
Under an employment agreement with Central Maine, 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 1987 Executive Incentive
Plan, not to exceed $200,000 per year.
Separate employment agreements between Central Maine and Messrs. Adelberg,
Marsh and Poulin, respectively, provide certain retirement benefits for these
executive officers in the event of involuntary termination without cause or
constructive discharge. These provisions are described below.
EMPLOYMENT AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Effective June 1, 1997, Central Maine entered into an employment agreement
with Ms. Burns and, effective January 1, 1998, separate employment agreements
with Messrs. Adelberg, Flanagan, Marsh and Poulin. The agreements are intended
to encourage these executive officers to continue their employment so that
Central Maine will have the continuing benefit of their services during a
period of transition in its business due to regulatory and competitive market
changes and in the event of a change of control of Central Maine.
39
<PAGE>
The agreements provide for a specified minimum base salary and for
participation in benefit plans in accordance with the provisions of those
plans. In addition, the agreements for Messrs. Flanagan, Adelberg, Marsh and
Poulin provide for certain retirement benefits. 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 the Basic Pension Plan
and the SERP. Central Maine 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.
Other than benefits payable under the Basic Pension Plan and the SERP,
retirement benefits for Messrs. Adelberg, Marsh and Poulin under their
respective agreements are payable only in the event of involuntary termination
of employment without cause or certain events constituting a constructive
discharge. The retirement benefit for Mr. Adelberg is equal to 2.6 percent of
his average base salary over a three-year period times his years of service,
payable on the later of age 55 or a date associated with certain termination
events. Under the existing agreement, the retirement benefit payable to Mr.
Marsh is equal to 50 percent of the average of three years of base salary
beginning on a date relating to specified termination events. Mr. Marsh is
also entitled to retiree medical benefits equal to those available under
Central Maine's retiree medical benefits plan. Mr. Poulin is entitled, under
the agreement with Central Maine, to receive certain age and service credit
under the Basic Pension Plan and the SERP and to a 25 percent enhancement of
his pension benefit under the Basic Pension Plan, with no discounts relating
to age and years of service. In addition, he is entitled to certain retiree
medical benefits.
The agreements also provide for severance benefits for certain terminations
of employment. If, within 36 months following a change of control of Central
Maine, the executive officer's employment is terminated without cause or the
executive officer is constructively discharged, he or she will be entitled to
(1) a lump sum amount equal to 2.99 times base salary and, in some cases,
certain incentive compensation; (2) the continuation of coverage available
under Central Maine's group medical and other group benefit plans for a
specified period; and (3) limited outplacement services. 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 annual base salary.
The agreements for Messrs. Adelberg, Marsh and Poulin continue in effect
until December 31, 1999, and for Mr. Flanagan until December 31, 2002, and are
automatically extended for one year on each December 31 unless either Central
Maine or the executive officer gives prior notice of an intention not to
extend his agreement. These agreements provide for one final three-year
extension after a change of control. The agreement for Ms. Burns continues in
effect until May 31, 2000 and provides for a payment equal to one-half of her
base salary provided she remains employed by Central Maine until the earlier
of (a) a change of control, or (b) May 31, 2000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW. The objectives of the Compensation and Benefits Committee of the
Board of Directors of Central Maine (the "Committee") in administering Central
Maine's executive compensation programs 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 Central Maine's executive officers and its
shareholders by supporting and increasing shareholder value.
The Committee believes that the three existing components of total direct
compensation for Central Maine's executive officers, namely, base salary,
annual incentives and long-term incentives, are appropriate means of achieving
these objectives. For 1997, the Committee redesigned these items with the
assistance of an independent compensation consultant to be more highly
leveraged for performance and shareholder value enhancement and to be more
competitive in a changing business environment.
40
<PAGE>
To achieve its objectives, the Committee determined that the elements of
direct compensation needed to be realigned with an expanded competitive
market. This market includes electric utilities in the EEI 100 Index 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 expanded market
will better enable Central Maine to attract and retain executive talent that
is essential in aggressively managing Central Maine's changing business
requirements in an increasingly competitive climate resulting from federal and
state regulatory and legislative initiatives that have opened the generation
and transmission markets to competition, including a recently enacted Maine
law restructuring the electric utility industry in Maine, and that will result
in further competition in Central Maine's business.
Total compensation opportunities provided by base salary and annual and
long-term incentives have been redesigned 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. After reviewing market information provided by its
compensation consultant showing that base salary levels for the executive
officers as a group were on average approximately 25 percent below market, in
late 1996 the Committee adjusted the base salaries of the executive officers
other than Mr. Flanagan an average 13 percent to bring the salaries of these
officers within range of but lower than the market for their positions. No
further adjustments were made in 1997.
After conducting a separate evaluation of the compensation and benefits of
the President and Chief Executive Officer in 1997, the Committee adjusted Mr.
Flanagan's base salary by approximately 19 percent to narrow the substantial
gap between his salary and the median market salary for his position to 80
percent of the blended utility and general industry market.
ANNUAL INCENTIVES. In 1997, Central Maine's annual incentive compensation
program for its executive officers, including the President and Chief
Executive Officer, reflected two important strategic objectives of Central
Maine relating to the restructuring of the electric utility industry in Maine,
including the ability to recover strandable costs, and the reduction of
Central Maine's financial exposure to uncertainties surrounding operation of
the Maine Yankee nuclear plant, which were weighted at 40 percent and 30
percent, respectively. The incentive compensation program for 1997 also
included customer satisfaction goals, revenue targets and a goal to reduce
purchased power costs, each of which was weighted at 10 percent. In addition,
the Committee adopted individual performance goals which were key components
of corporate strategy.
The Committee determined that a substantial percentage of the objectives
under these company performance goals were attained in 1997. The Committee
applied this level of performance and a criterion utilizing the performance of
Central Maine's stock during the year to determine the overall award pool for
participants in the annual incentive compensation program. The Committee
determined the overall award pool to be 1.66 times target levels of incentive
compensation for this group.
The Committee believes that management's efforts with respect to the
favorable agreement reached for the sale of Central Maine's generating assets,
the provisions of the new Maine electric utility restructuring law recognizing
the right to recover stranded costs, and the reduction of Central Maine's
risks associated with Maine Yankee have combined to affect positively Central
Maine's stock price and to reposition Central Maine more favorably for the
future. As a result, the Committee supported awards above target levels of
short-term incentive compensation.
41
<PAGE>
The Committee determined that Mr. Flanagan had exceeded target performance
under his individual goals and awarded him 1.85 times his target short-term
incentive compensation of one-half of base salary. Awards to the other
executive officers, who met their individual goals at varying levels, ranged
from 1.2 to 2.1 times their target incentive compensation. Target incentive
awards for this group are 25 percent to 30 percent base salary, depending on
position.
LONG-TERM INCENTIVE COMPENSATION. The Long-Term Incentive Plan ("LTIP"), in
which Mr. Flanagan and other named executive officers participate, is intended
to focus attention more sharply on a performance objective that is designed to
increase value to shareholders over the longer term. Under the LTIP,
contingent grants of performance restricted shares of Central Maine Common
Stock have been made at the beginning of three-year performance periods. These
shares, as well as additional shares resulting from the reinvestment of
dividends, have remained completely at risk and subject to forfeiture to the
extent performance results have not been achieved. At the end of the
performance period, the number of shares payable is based on the ranking of
the three-year average of Central Maine's total shareholder return (stock
price plus dividends) against the three-year average of the total shareholder
return of other utilities in the EEI 100 Index against which Central Maine's
performance is measured in the performance graph.
Although the market value of Central Maine Common Stock increased during the
three-year performance period ending December 31, 1997, which resulted in
Central Maine ranking 22nd out of 97 indexed utilities for 1997, the threshold
level of performance with respect to the ranking of Central Maine's 3-year
average total shareholder return was not attained. As a result, the shares
contingently granted for that period plus shares accrued through dividend
reinvestment were forfeited. Mr. Flanagan forfeited 9,531 shares, and the
other named executive officers forfeited lesser amounts.
OTHER POLICIES. Effective January 1, 1997, Central Maine's executive
officers and other members of management will be required to increase their
holdings of 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 required for other executive officers and
members of management.
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 because it is anticipated that compensation paid to
Central Maine's executive officers will be less than one million dollars.
Compensation and Benefits Committee
Charles H. Abbott (Chair)
Duane D. Fitzgerald
Peter J. Moynihan
42
<PAGE>
SHAREHOLDER RETURN COMPARISON
The graph below compares the cumulative total shareholder return on the
Common Stock of the Company with the cumulative total return on the S&P 500
Index and the Edison Electric Institute Index of 100 investor-owned electric
utilities ("EEI 100 Index") at December 31 for each of the last five fiscal
years (assuming the investment of $100 in the Company's Common Stock, the S&P
500 Index and the EEI 100 Index on December 31, 1992, and the reinvestment of
all dividends).
LINE GRAPH
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Central Maine Power Company...................... $100 $ 68 $ 66 $ 75 $ 65 $ 91
S&P 500 Index.................................... $100 $110 $112 $153 $189 $252
EEI 100 Index.................................... $100 $111 $ 98 $129 $130 $166
</TABLE>
43
<PAGE>
DEADLINE FOR SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1999 Annual
Meeting of the Shareholders must be received on or before December 8, 1998,
for inclusion in the proxy materials relating to that meeting. Any such
proposals should be sent to Anne M. Pare, Corporate Secretary and Clerk,
Central Maine Power Company, 83 Edison Drive, Augusta, Maine 04336.
OTHER MATTERS
The accompanying proxy is solicited by and on behalf of the Board of
Directors of Central Maine Power Company for use at the Annual Meeting of the
Shareholders to be held on May 21, 1998 or any adjournments thereof. The cost
of solicitation will be paid by Central Maine. No solicitation is to be made
by specially engaged employees or other paid solicitors except that Corporate
Investor Communications, Inc. will solicit Voting Shareholders of record and
broker nominees on behalf of Central Maine, for which it will receive a fee of
approximately $5,000, plus reasonable expenses. Banks, brokerage firms and
other custodians, nominees and fiduciaries will be reimbursed by Central Maine
for reasonable expenses incurred in sending proxy materials to beneficial
owners of Central Maine's Common Stock and 6% Preferred Stock. In addition,
directors, officers or employees of Central Maine may solicit proxies by
telephone or in person, the costs of which will be nominal.
The Board of Directors of Central Maine does not know of any matter, other
than the matters set forth in this Proxy Statement, to be acted upon at this
Annual Meeting. However, if any other matter shall be properly brought before
the 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
Augusta, Maine
April , 1998
Again, we call the attention of holders of Central Maine Common Stock
and 6% Preferred Stock to the enclosed Proxy. We would appreciate it very
much if they would VOTE, DATE, SIGN and RETURN IT PROMPTLY, regardless of
whether they plan to attend the meeting.
44
<PAGE>
APPENDIX I
FORM OF AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made as of , 1998, by
and among CENTRAL MAINE POWER COMPANY, a Maine corporation ("Central Maine"),
CMP MERGER CO., a Maine corporation ("MergeCo"), and HOLDCO, INC., a Maine
corporation ("HoldCo").
WHEREAS, Central Maine has authorized capital consisting of (i) 80,000,000
shares of Common Stock, with a par value of $5 per share ("Central Maine
Common Stock"), of which 32,442,752 shares are issued and outstanding as of
the date hereof; (ii) 2,000,000 shares of Preferred Stock, with a par value of
$25 per share ("Central Maine $25 Preferred Stock"), no shares of which are
issued and outstanding as of the date hereof; (iii) 5,713 shares of 6%
Preferred Stock, with a par value of $100 per share ("Central Maine 6%
Preferred Stock"), all of which shares are issued and outstanding as of the
date hereof; and (iv) 2,300,000 shares of Dividend Series Preferred Stock,
with a par value of $100 per share ("Central Maine Dividend Series Preferred
Stock"), of which 1,115,275 shares are issued and outstanding as of the date
hereof; the number of shares of outstanding Central Maine Common Stock being
subject to increase to the extent shares may be issued pursuant to Central
Maine's Dividend Reinvestment and Common Stock Purchase Plan prior to the
Merger Date (as defined below), and the number of shares of outstanding
Central Maine Dividend Series Preferred Stock being subject to decrease to the
extent shares are redeemed or purchased and retired by Central Maine prior to
said Merger Date; and
WHEREAS, MergeCo has authorized capital consisting of 1,000 shares of Common
Stock, with a par value of $5 per share ("MergeCo Common Stock"), of which 100
shares are issued and outstanding and are owned beneficially and of record by
HoldCo; and
WHEREAS, HoldCo has authorized capital consisting of 80,000,000 shares of
Common Stock, with a par value of $5 per share ("HoldCo Common Stock"), of
which 100 shares are issued and outstanding and are owned beneficially and of
record by Central Maine; and
WHEREAS, the Boards of Directors of the respective parties hereto deem it
advisable to merge MergeCo with and into Central Maine (the "Merger") in
accordance with the Maine Business Corporation Act ("Maine BCA"), this
Agreement and the Articles of Merger attached hereto as Exhibit A (the
"Articles"), for the purpose and with the effect of establishing HoldCo as the
parent corporation of Central Maine in a transaction intended to qualify for
tax-free treatment;
NOW, THEREFORE, in consideration of the premises and agreements contained
herein, the parties agree that (i) MergeCo shall be merged with and into
Central Maine, said action constituting the "Merger", (ii) Central Maine shall
be the corporation surviving the Merger, and (iii) the terms and conditions of
the Merger, the means of carrying it into effect and the manner of converting
and exchanging shares of capital stock shall be as follows:
ARTICLE 1
THE MERGER
1.1 Plan of Merger. This Agreement shall constitute a plan of merger between
Central Maine and MergeCo (Central Maine and MergeCo being sometimes referred
to herein as the "Participating Corporations") in accordance with Section 901
of the Maine BCA.
1.2 Articles of Merger. Subject to and in accordance with the provisions of
this Agreement, the Articles shall be executed by the Participating
Corporations and delivered to the Secretary of State of the State of Maine for
filing, as provided in Section 903 of the Maine BCA.
I-1
<PAGE>
1.3 Merger Date. The Merger shall become effective upon the filing of the
Articles with the Secretary of State of the State of Maine or on such later
date not more than 60 days after such filing as may be specified in the
Articles (such effective date being herein called the "Merger Date"). On the
Merger Date, the separate existence of MergeCo shall cease and MergeCo shall
be merged with and into Central Maine, which shall continue its corporate
existence as the surviving corporation (Central Maine, as the surviving
corporation, being sometimes referred to herein as the "Surviving
Corporation"). Central Maine, as the Surviving Corporation, shall succeed,
without other transfer, to all the rights and property of MergeCo and shall be
subject to all the debts and liabilities of MergeCo in the same manner as if
Central Maine had itself incurred them. All rights of creditors and all liens
upon the property of each of Central Maine and MergeCo shall be preserved
unimpaired.
1.4 Appropriate Actions. Prior to, at and after the Merger Date, HoldCo,
Central Maine and MergeCo, respectively, shall take all such actions as may be
necessary or appropriate in order to effectuate the Merger. In this
connection, HoldCo shall issue the shares of HoldCo Common Stock for which
outstanding shares of Central Maine Common Stock will be exchanged and
surrendered on a share-for-share basis to the extent provided in Article 2 of
this Agreement. In case at any time after the Merger Date any further action
is necessary or desirable to carry out the purposes of this Agreement and to
vest the Surviving Corporation with full title to all properties, assets,
privileges, rights, immunities and franchises of either of the Participating
Corporations, the officers and directors of each of the Participating
Corporations as of the Merger Date shall take all such further action.
ARTICLE 2
TERMS OF CONVERSION AND EXCHANGE OF SHARES
On the Merger Date:
2.1 Central Maine Common Shares. Each share of Central Maine Common Stock
issued and outstanding immediately prior to the Merger shall be automatically
changed and converted into and exchanged for one share of HoldCo Common Stock,
which shall thereupon be issued and fully-paid and non-assessable; provided,
however, that such conversion and exchange shall not affect shares of holders,
if any, who perfect their rights as dissenting shareholders under Sections 908
and 909 of the Maine BCA.
2.2 Central Maine Preferred Shares. Shares of Central Maine $25 Preferred
Stock, Central Maine 6% Preferred Stock and Central Maine Dividend Series
Preferred Stock issued and outstanding immediately prior to the Merger shall
not be converted or otherwise affected by the Merger, except that holders of
Central Maine 6% Preferred Stock will be entitled to be paid the fair value of
their shares in accordance with Section 610 of the Maine BCA. Each such share
shall continue to be (i) issued and outstanding and (ii) a fully-paid and non-
assessable share of Central Maine $25 Preferred Stock, Central Maine 6%
Preferred Stock or Central Maine Dividend Series Preferred Stock, as the case
may be, of the Surviving Corporation.
2.3 MergeCo Shares. The shares of MergeCo Common Stock issued and
outstanding immediately prior to the Merger shall be automatically changed and
converted into a number of shares of common stock, par value $5.00 per share,
of the Surviving Corporation (which shall thereupon be issued and fully-paid
and non-assessable), equal to the number of shares of Central Maine Common
Stock as are issued and outstanding immediately prior to the Merger Date.
2.4 HoldCo Shares. Each share of HoldCo Common Stock issued and outstanding
and held by Central Maine immediately prior to the Merger shall be cancelled.
2.5 Central Maine Stock Options. Each outstanding option to purchase shares
of Central Maine Common Stock will be assumed by HoldCo. Each such option will
be exercisable in accordance with its existing terms for the same number of
shares of HoldCo Common Stock as the number of shares of Central Maine Common
Stock subject to such option.
I-2
<PAGE>
ARTICLE 3
ARTICLES OF INCORPORATION AND BYLAWS
3.1 Central Maine's Articles of Incorporation. From and after the Merger
Date, and until thereafter amended as provided by law, the Articles of
Incorporation of Central Maine as in effect immediately prior to the Merger
shall be and continue to be the Articles of Incorporation of the Surviving
Corporation.
3.2 Central Maine's Bylaws. From and after the Merger Date, and until
thereafter amended as provided by law, the Bylaws of Central Maine as in
effect immediately prior to the Merger shall be and continue to be the Bylaws
of the Surviving Corporation.
ARTICLE 4
DIRECTORS AND OFFICERS
4.1 Central Maine's Directors and Officers. The persons who are directors
and officers of Central Maine immediately prior to the Merger shall continue
as directors and officers, respectively, of the Surviving Corporation and
shall continue to hold office as provided in the Bylaws of the Surviving
Corporation. If, at or following the Merger Date, a vacancy shall exist in the
Board of Directors or in the position of any officer of the Surviving
Corporation, such vacancy may be filled in the manner provided in the Bylaws
of the Surviving Corporation.
ARTICLE 5
STOCK CERTIFICATES
5.1 Pre-Merger Central Maine Common Stock. Following the Merger Date, each
holder of an outstanding certificate or certificates that, prior to the Merger
Date, represented shares of Central Maine Common Stock may, but shall not be
required to, surrender the same to HoldCo for cancellation or registration of
transfer, and each such holder or transferee will be entitled to receive in
exchange a certificate or certificates representing the same number of shares
of HoldCo Common Stock as the shares of Central Maine Common Stock previously
represented by the stock certificate(s) surrendered.
5.2 Outstanding Certificates. Until surrendered or presented for
registration of transfer in accordance with Section 5.1 above, each
outstanding certificate that, prior to the Merger Date, represented Central
Maine Common Stock shall be deemed and treated for all corporate purposes to
represent the ownership of the same number of shares of HoldCo Common Stock as
though such surrender and exchange had taken place.
5.3 Post-Merger Rights of Holders. Following the Merger Date, the holders of
certificates representing Central Maine Common Stock outstanding immediately
prior to the Merger Date shall cease to have any rights with respect to stock
of the Surviving Corporation and their sole rights shall be with respect to
the HoldCo Common Stock into and for which their shares of Central Maine
Common Stock shall have been converted and exchanged in the Merger, subject to
the rights of any dissenting shareholders under Section 909 of the Maine BCA.
ARTICLE 6
CONDITIONS TO THE MERGER
Completion of the Merger is subject to the satisfaction of the following
conditions:
6.1 Shareholder Approval. The principal terms of this Agreement and the
transactions provided for herein shall have been approved by holders of
capital stock of each of the Participating Corporations as and to the extent
required by their respective Articles of Incorporation and the Maine BCA.
I-3
<PAGE>
6.2 HoldCo Common Stock Listed. The HoldCo Common Stock to be issued and to
be reserved for issuance pursuant to the Merger shall have been approved for
listing, upon official notice of issuance, by the New York Stock Exchange.
6.3 Tax Ruling or Opinion. There shall have been obtained a ruling or
rulings of the Internal Revenue Service, or an opinion of tax counsel, in form
and substance satisfactory to the Board of Directors of Central Maine and its
counsel, with respect to certain tax consequences of the Merger and related
matters.
6.4 Regulatory Approvals. All authorizations by and approvals of any
governmental or public authority or agency deemed necessary or advisable by
the Board of Directors of Central Maine in connection with the Merger and
other related transactions shall have been obtained, shall be in full force
and effect, shall not have been revoked and shall be legally sufficient to
authorize the transactions contemplated by this Agreement.
ARTICLE 7
AMENDMENT AND TERMINATION
7.1 Amendment. The parties to this Agreement, by mutual consent of their
respective Boards of Directors, may amend, modify or supplement this Agreement
in such manner as may be agreed upon by them in writing at any time before or
after approval of this Agreement by the pre-Merger shareholders of Central
Maine (as provided in Section 6.1 above); provided, however, that no such
amendment, modification or supplement shall, if agreed to after such approval
by the pre-Merger shareholders of Central Maine, change any of the principal
terms of this Agreement.
7.2 Termination. This Agreement may be terminated and the Merger and other
transactions provided for by this Agreement may be abandoned at any time,
whether before or after approval of this Agreement by the pre-Merger
shareholders of Central Maine, by action of the Board of Directors of Central
Maine if such Board of Directors determines for any reason that the completion
of the transactions provided for herein would for any reason be inadvisable or
not in the best interests of Central Maine or its shareholders. The parties
hereto, and any officers or directors thereof, shall not have liability to any
person, including, without limitation, any shareholder of Central Maine, in
the event of such termination.
ARTICLE 8
ASSUMPTION OF OBLIGATIONS UNDER CENTRAL MAINE STOCK PLANS
8.1 Assumption of Plans. HoldCo shall take all required corporate action to
assume as of the Merger Date the obligations of Central Maine under the
Central Maine 1987 Executive Incentive Plan and the Central Maine Long-Term
Incentive Plan.
ARTICLE 9
MISCELLANEOUS
9.1 Approval of HoldCo Shareholder. By its execution and delivery of this
Agreement, Central Maine, as the sole pre-Merger shareholder of HoldCo,
consents to, approves and adopts this Agreement and approves the Merger,
subject to approval of this Agreement by pre-Merger shareholders of Central
Maine (as provided in Section 6.1 above).
9.2 Approval of MergeCo Shareholder. By its execution and delivery of this
Agreement, HoldCo, as the sole pre-Merger shareholder of MergeCo, consents to,
approves and adopts this Agreement and approves the Merger, subject to
approval of this Agreement by pre-Merger shareholders of Central Maine (as
provided in Section 6.1 above).
I-4
<PAGE>
9.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maine.
IN WITNESS WHEREOF, Central Maine, HoldCo and MergeCo, pursuant to approval
and authorization duly given by resolutions adopted by their respective Boards
of Directors, have each caused this Agreement to be executed by its President
or one of its Vice Presidents and its corporate seal affixed hereto and
attested by its Secretary or one of its Assistant Secretaries.
Central Maine:
CENTRAL MAINE POWER COMPANY, [Corporate Seal]
a Maine corporation
Attest: _____________________________
By: _________________________________
Name:
Its: ________________________________ Title:
HoldCo: [Corporate Seal]
HOLDCO, INC.,
a Maine corporation Attest: _____________________________
Name:
By: _________________________________
Title:
Its: ________________________________
MergeCo: [Corporate Seal]
CMP MERGER CO., Attest: _____________________________
a Maine corporation Name:
Title:
By: _________________________________
Its:_________________________________
I-5
<PAGE>
EXHIBIT A TO
APPENDIX I
STATE OF MAINE
ARTICLES OF MERGER
OF
CMP MERGER CO.
----------------
A MAINE CORPORATION
INTO
CENTRAL MAINE POWER COMPANY*
----------------
A MAINE CORPORATION
* A QUASI-PUBLIC CORPORATION HAVING THE RIGHT TO ENGAGE IN BUSINESS AS AN
ELECTRIC COMPANY
Pursuant to Title 13-A M.R.S.A. (S)903, the undersigned corporations adopt
the following Articles of Merger:
First: The plan of merger is set forth in Exhibit A attached hereto and made
a part hereof.
Second: As to each participating corporation, the number of shares
outstanding and the number of shares entitled to vote on such plan, and the
number of such shares voted for and against the plan, are as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NAME OF SHARES SHARES ENTITLED SHARES VOTED SHARES VOTED
CORPORATION OUTSTANDING TO VOTE FOR AGAINST
----------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
CMP Merger Co. 100 shs. of 100 100 0
Common Stock
Central Maine Power Company 32,442,752 shs. 32,442,752
of Common Stock
5,713 shs. of 5,713
6% Preferred
Stock
</TABLE>
Third: Holders of Central Maine Common Stock and 6% Preferred Stock were
entitled to vote together as a single class, and holders of Central Maine
Common Stock were entitled to vote as a separate class.
Fourth: The address of the registered office in Maine of CMP Merger Co.,
herein designated as the merged corporation, is c/o Secretary and Clerk,
Central Maine Power Company, 83 Edison Drive, Kennebec County, Augusta, Maine
04336.
The address of the registered office in Maine of Central Maine Power
Company, herein designated as the surviving corporation, is 83 Edison Drive,
Kennebec County, Augusta, Maine 04336.
I-6
<PAGE>
Dated _______________________________ CENTRAL MAINE POWER COMPANY*
(Surviving Corporation)
I certify that I have custody of the
minutes showing the above action by
the shareholders of Central Maine By __________________________________
Power Company
_____________________________________
_____________________________________ (type or print name and capacity)
(Clerk, Secretary or Asst.
Secretary)
I certify that I have custody of the By __________________________________
minutes showing the above action by _____________________________________
the shareholders of CMP Merger Co. (type or print name and capacity)
_______________________________________ CMP MERGER CO.
(Clerk, Secretary or Asst. (Merged Corporation)
Secretary)
By __________________________________
_____________________________________
(type or print name and capacity)
By __________________________________
_____________________________________
(type or print name and capacity)
- --------
* The name of the corporation should be typed, and the document must be
signed by (1) the Clerk or (2) the President or a Vice-President and the
Secretary or an Assistant Secretary or such other officer as the bylaws may
designate as a second certifying officer.
I-7
<PAGE>
APPENDIX II
FORM OF AMENDMENT TO ARTICLES OF INCORPORATION OF HOLDCO, INC.
For Use By The For Use By The
Secretary of ARTICLES OF AMENDMENT Secretary of
State HOLDCO, INC. State
File No. _________ , 19
(AMENDMENT BY SHAREHOLDERS VOTING AS SEPARATE CLASS)
Fee Paid _________ Pursuant to 13-A MRSA (S)(S)805 and ------------------
807, the undersigned corporation Deputy Secretary
adopts these Articles of Amendment: of State
C.B. _____________
Date _____________ ------------------
A True Copy When
Attested
By Signature
FIRST: As set out in detail in "THIRD", one or more classes of shares of the
corporation were entitled to vote on the following amendment as a
separate class.
------------------
Deputy Secretary
of State
SECOND: The amendment set out in Exhibit A attached was adopted by the
shareholders (Circle one)
A. at a meeting legally called and held on, , 1998 OR
B. by unanimous written consent on , 1998
THIRD: On said date, the number of shares of each class outstanding and
entitled to vote on such amendment (whether or not entitled to vote as
a separate class), the manner in which each such class was entitled to
vote (whether or not as a separate class), and the number of shares
voted for and against said amendment, respectively, were as follows:
<TABLE>
<CAPTION>
DESIGNATION OF NO. OF SHARES
EACH CLASS OUTSTANDING
HOWEVER ENTITLED MANNER IN WHICH AND ENTITLED VOTED VOTED
TO VOTE ENTITLED TO VOTE TO VOTE FOR AGAINST
---------------- --------------------- ------------- ----- -------
<S> <C> <C> <C> <C>
Common Stock As a separate class 100 100 0
--- --- ---
Totals of All Classes 100 100 0
</TABLE>
FOURTH: If such amendment provides for exchange, reclassification or
cancellation of issued shares the manner in which the same shall be
effected is contained in Exhibit B attached hereto, if it is not set
forth in the amendment itself.
FIFTH: If such amendment effects a change in the number or par values of
authorized shares, the number of shares which the corporation has
authority to issue after giving effect to such amendment, is as
follows:
<TABLE>
<CAPTION>
SERIES NUMBER PAR VALUE
CLASS (IF ANY) OF SHARES (IF ANY)
--------------- -------- ---------- ---------
<S> <C> <C> <C>
Common Stock 80,000,000 $ 5.00
Preferred Stock 5,000,000 $100.00
</TABLE>
The aggregate par value of all such shares (of all classes and series)
having par value is $900,000,000
The total number of all such shares (of all classes and series) without par
value is 0 shares
SIXTH: Address of the registered office in Maine:
83 Edison Drive, Augusta, Maine 04336
-----------------------------------------------------------------------
(STREET, CITY AND ZIP CODE)
II-1
<PAGE>
MUST BE COMPLETED FOR VOTE
OF SHAREHOLDERS -------------------------------------
(NAME OF CORPORATION)
- --------------------------------------
I certify that I have custody of By* _________________________________
the minutes showing the above (SIGNATURE)
action by the shareholders.
-------------------------------------
- -------------------------------------- (TYPE OR PRINT NAME AND CAPACITY)
(SIGNATURE OF CLERK)
By* _________________________________
(SIGNATURE)
-------------------------------------
(TYPE OR PRINT NAME AND CAPACITY)
- --------
* In addition to any certification of custody of minutes this document MUST be
signed by (1) the CLERK OR (2) the PRESIDENT or a vice-president AND the
SECRETARY, an assistant secretary or other officer the bylaws designate as
second certifying officer OR (3) if no such officers, a majority of
directors then in office OR (4) if no directors, the holders, or such of
them designated by the HOLDERS, OF RECORD OF A MAJORITY OF ALL OUTSTANDING
SHARES entitled to vote thereon OR (5) the HOLDERS OF ALL OUTSTANDING
SHARES.
NOTE: This form should not be used if any class of shares is entitled to vote
as a separate class for any of the reasons set out in (S)806, or because the
articles so provide. For vote necessary for adoption see (S)805.
II-2
<PAGE>
EXHIBIT A TO ARTICLES OF AMENDMENT DATED , 1998
FILED BY HOLDCO, INC.
VOTED: that the Articles of Incorporation of the Corporation be amended to
(i) change the name of the Corporation to , (ii) amend
Article Fourth increasing the authorized amount of and describing the
Corporation's capital stock and (iii) add Article Seventh containing
provisions relating to purpose, governance, shareholder proposals,
fair price requirements, amendments, and limitation on director
liability, as attached.
II-3
<PAGE>
ARTICLE FOURTH--DESCRIPTION OF CAPITAL STOCK
A. AUTHORIZED CLASSES AND NUMBERS OF SHARES. The aggregate number of shares
which [HoldCo, Inc.] (hereinafter called the "Corporation") shall have
authority to issue is eighty-five million (85,000,000) shares, consisting of
eighty million (80,000,000) shares of Common Stock of the par value of five
dollars ($5.00) per share (hereinafter called the "Common Stock") and five
million (5,000,000) shares of Preferred Stock of the par value of one hundred
dollars ($100.00) per share (hereinafter called the "Preferred Stock").
B. COMMON STOCK PROVISIONS.
1. Dividends. Subject to any rights of holders of Preferred Stock, such
dividends (payable in cash, stock or otherwise) as may be determined by the
Board of Directors may be declared and paid on the Common Stock from time
to time from any funds, property or shares legally available therefor.
2. Voting Rights. Subject to any rights of holders of Preferred Stock to vote
on a matter as a class or series, each outstanding share of Common Stock
shall be entitled to one vote on each matter submitted to a vote of holders
of Common Stock at a meeting of shareholders; provided however, that to the
extent the By-laws permit cumulative voting by shareholders for the
election of directors of the Corporation, each outstanding share of Common
Stock may be voted in such manner for such election.
3. Liquidation, Dissolution or Winding Up. In the event of any liquidation,
dissolution or winding up of the Corporation, the holders of Common Stock
shall be entitled to receive the net balance of any assets of the
Corporation remaining after any distribution of the assets of the
Corporation to the holders of Preferred Stock to the extent necessary to
satisfy any preferences to such assets.
C. PREFERRED STOCK PROVISIONS. The Board of Directors shall have authority by
resolution to divide the Preferred Stock into one or more series, to issue
shares of any such series and, within the limitations set forth in these
Articles of Incorporation or prescribed by law, to fix and determine the
relative rights and preferences of the shares of any series so established
including, without limitation, the following:
1. the maximum number of shares to constitute such series, which may
subsequently be increased or decreased (but not below the number of shares
of such series then outstanding) by resolution of the Board of Directors,
the distinctive designation thereof and the stated value thereof if
different from the par value thereof;
2. whether the shares of such series shall have any voting powers, in addition
to the voting powers provided by law and if any, the terms of such voting
powers;
3. the dividend rate or rates, if any, on the shares of such series or the
manner in which such rate or rates shall be determined, the conditions and
dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any
other class or classes or on any other series of capital stock and whether
such dividends shall be cumulative or noncumulative;
4. whether the shares of such series shall be subject to redemption by the
Corporation, and, if made subject to redemption, the times, prices and
other terms, limitations, restrictions or conditions of such redemption;
5. the relative amounts, and the relative rights or preferences, if any, of
payment in respect of shares of such series, which the holders of shares of
such series shall be entitled to receive upon the liquidation, dissolution
or winding up of the Corporation;
6. whether the shares of such series shall be subject to the operation of a
retirement or sinking fund and, if so, the extent to which and the manner
in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or to
other corporate purposes, and the terms and provisions relative to the
operation of such retirement or sinking fund;
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class, classes or series, or other
securities, whether or not issued by the Corporation, and if so convertible
or
II-4
<PAGE>
exchangeable, the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same; and
8. any other preference, relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, as
shall not be inconsistent with law, this Article Fourth or any resolution
of the Board of Directors pursuant hereto.
ARTICLE SEVENTH--OTHER PROVISIONS
A. PURPOSE
The Corporation is organized for the purpose of engaging in any lawful act
or activity for which corporations may be organized under the Business
Corporation Act of the State of Maine (the "MBCA").
B. GOVERNANCE
1.Powers. The business and affairs of the Corporation shall be managed by, or
under the direction of, a Board of Directors, which shall exercise all of the
powers of the Corporation except as are by law or by these Articles of
Incorporation or the Bylaws of the Corporation conferred upon or reserved to
the shareholders of the Corporation.
2.Number, Tenure and Qualifications of Directors.
a. Number of Directors. Subject to the rights of the holders of any class
or series of capital stock having a preference over Common Stock as to
dividends or upon liquidation to elect Directors under specified
circumstances, the Board of Directors shall consist of not fewer than
nine nor more than eighteen members, the exact number (i) to be equal to
the number of directors of Central Maine Power Company at the time of
adoption of this Article, subject to change exclusively by the Board of
Directors as provided in this Article, and (ii) if to be changed to some
other number not fewer than nine nor more than eighteen persons
subsequent to adoption of this Article, to be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the total number of authorized Directors (whether or
not there exist any vacancies in previously authorized directorships at
the time any such resolution is presented to the Board for adoption).
b. Terms of Directors. The directors shall be divided into three classes
for the purpose of providing for staggered director terms, to be
designated Class I, Class II and Class III. Each class shall consist, as
nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. By unanimous written consent
of the Board of Directors, the initial classes shall be elected as
follows: Class I directors shall be elected for a term expiring at the
annual meeting of shareholders to be held in 1999, Class II directors
shall be elected for a term expiring at the annual meeting of
shareholders to be held in 2000, and Class III directors shall be
elected for a term expiring at the annual meeting of shareholders to be
held in 2001. At each succeeding annual meeting of shareholders,
successors to the class of directors whose term expires at that annual
meeting shall be elected for three-year terms. If the number of
directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each
class as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term
of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director. A director shall hold office
until the annual meeting of shareholders for the year in which his or
her term expires and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
c. Filling Vacancies. Subject to the rights of the holders of any class or
series of capital stock having a preference over Common Stock as to
dividends or upon liquidation to elect Directors under specified
circumstances, newly created directorships resulting from any increase
in the authorized number of
II-5
<PAGE>
Directors or any vacancies in the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or
other cause may be filled only by a majority vote of the Directors then
in office, though less than a quorum of the Board of Directors, acting
at a regular or special meeting. If any applicable provision of the MBCA
expressly confers power on shareholders to fill such a directorship at a
special meeting of shareholders, such a directorship may be filled at
such a meeting only by the affirmative vote of at least 80 percent of
the combined voting power of all of the then outstanding shares of
Voting Stock (as defined in clause (d) below), voting together as a
single class. Any Director elected in accordance with the two preceding
sentences shall hold office for the remainder of the full term of the
class of Directors in which the new directorship was created or the
vacancy occurred and until such Director's successor shall have been
elected and qualified.
d. Removal of Directors. Subject to any controlling provision of Maine law
and subject to the right of the holders of any class or series of
capital stock having a preference over Common Stock as to dividends or
upon liquidation to elect Directors under specified circumstances, any
Director, or the entire Board of Directors, may be removed from office
at any time by the holders of Voting Stock, but only for cause and only
by the affirmative vote of the holders of at least 80 percent of the
combined voting power of all of the then outstanding shares of Voting
Stock, voting together as a single class. For purposes of this Article
Seventh, Section B, the term "Voting Stock" shall mean the outstanding
shares of capital stock of all classes and series of the Corporation
entitled to vote generally in the election of Directors of the
Corporation, in each case voting together as a single class.
3.Additional Authority of Board. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is expressly authorized to
make, alter, amend or repeal the Bylaws of the Corporation. The holders of
shares of Voting Stock shall, to the extent such power is at the time
conferred on them by applicable law, also have the power to make, alter, amend
or repeal the Bylaws of the Corporation, provided that, subject to any
controlling provision of Maine law, any proposal by or on behalf of an
Interested Shareholder or a director who is not a Disinterested Director to
make, alter, amend or repeal the Bylaws shall require approval by the
affirmative vote described in Article Seventh, Section E, unless either (a)
such action has been approved by a majority of the Board of Directors prior to
such Interested Shareholder first becoming an Interested Shareholder or (b)
prior to such Interested Shareholder first becoming an Interested Shareholder,
a majority of the Board of Directors has approved such Interested Shareholder
becoming an Interested Shareholder and, subsequently, a majority of the
Disinterested Directors has approved such action. The terms "Interested
Shareholder" and "Disinterested Director" have the meanings set forth in
Article Seventh, Section D.3.
4.Board Consideration. In discharging their duties, the Board of Directors
may, in considering the best interests of the Corporation and its
shareholders, consider the effects of any action upon employees, suppliers and
customers of the Corporation and its subsidiaries, communities in which
offices or other establishments of the Corporation and its subsidiaries are
located and all other pertinent factors.
5.Nomination and Election of Director. Subject to the rights of holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, nominations for the election of directors shall
be made by the Board of Directors. In addition, any shareholder entitled to
vote in the election of directors generally may nominate one or more persons
for election as directors at an annual meeting of shareholders, but only if
written notice of such shareholder's intent to make such nomination or
nominations has been received by the Secretary of the Corporation not less
than sixty nor more than ninety days prior to the first anniversary of the
preceding year's annual meeting of shareholders. In the event that the date of
the annual meeting of shareholders is advanced by more than thirty days or
delayed by more than sixty days from such anniversary or, in the case of the
Corporation's first annual meeting of shareholders, notice by the shareholder
to be timely must be received not earlier than the ninetieth day prior to such
annual meeting and not later than the close of business on the later of (a)
the sixtieth day prior to such annual meeting or (b) the tenth day following
the day on which notice of the date of the annual meeting was mailed or public
disclosure thereof was made by the Corporation, whichever first occurs. Each
such notice by a shareholder shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated;
II-6
<PAGE>
(b) a representation that the shareholder is a holder of record of stock of
the Corporation entitled to vote at such meeting and intends to appear in
person or by duly authorized written proxy at a meeting to nominate the person
or persons specified in the notice; (c) a description of all arrangements or
understandings between the shareholder or any person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the shareholder and each nominee and any
other person or persons (naming such person or persons) relating to the
nomination or nominations; (d) the class and number of shares of the
Corporation which are beneficially owned by such shareholder and the person to
be nominated as of the date of such shareholder's notice and by any other
shareholders known by such shareholder to be supporting such nominees as of
the date of such shareholder's notice; (e) such other information regarding
each nominee proposed by such shareholder as would be required to be included
in a proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission; and (f) the written consent of each nominee to serve as a
director of the Corporation if so elected. The shareholder shall also comply
with all applicable requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations thereunder, with
respect to the matters set forth in this Article Seventh, Section B(5).
In addition, in the event the Corporation calls a special meeting of
shareholders for the purpose of electing one or more directors, any
shareholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a special meeting
only if written notice of such shareholder's intent to make such nomination or
nominations, setting forth the information and complying with the form
described in the immediately preceding paragraph, has been received by the
Secretary of the Corporation not earlier than the ninetieth day prior to such
special meeting and not later than the close of business on the later of (i)
the sixtieth day prior to such special meeting or (ii) the tenth day following
the day on which notice of the date of the special meeting was mailed or
public disclosure thereof was made by the Corporation, whichever comes first.
The shareholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Article Seventh, Section B(5).
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures established by the Board of
Directors or otherwise set forth in this Article Seventh, Section B. The
presiding officer of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Article Seventh, Section B(5) and if he or she
should so determine, the defective nomination shall be disregarded.
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
C. SHAREHOLDER PROPOSALS
At any meeting of the shareholders, only such business shall be conducted as
shall have been properly brought before such meeting. To be properly brought
before an annual meeting of shareholders, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting
by or at the direction of the Board of Directors or (c) otherwise properly
brought before the meeting by a shareholder. For business to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a shareholder's notice must be received no less than sixty days nor
more than ninety days prior to the first anniversary of the preceding year's
annual meeting of shareholders; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty days or delayed by
more than sixty days from such anniversary or in the case of the Corporation's
first annual meeting of shareholders, notice by the shareholder to be timely
must be received not earlier than the ninetieth day prior to such annual
meeting of shareholders and not later than the close of business on the later
of (a) the sixtieth day prior to such annual meeting or (b) the tenth day
following the date on which notice of the date of the annual meeting was
mailed or public disclosure thereof was made, whichever first occurs. Each
such notice shall set forth as to each matter the shareholder proposes to
bring before the annual meeting of shareholders: (a) a brief description of
the business desired to be brought before the annual meeting of shareholders
and the reasons for conducting such business at such meeting, (b) the name and
address, as they appear on the Corporation's books,
II-7
<PAGE>
of the shareholder proposing such business, (c) the class, series and number
of shares of the Corporation which are beneficially owned by the shareholder,
and (d) any material interest of the shareholder or any person that directly,
or indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, the shareholder in such business. The
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Article Seventh, Section C. To be properly brought before a
special meeting, business must be (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors
or (b) otherwise properly brought before the meeting by or at the direction of
the Board of Directors. No business may be brought before a special meeting by
shareholders.
No business shall be conducted at any meeting of the shareholders except in
accordance with the procedures set forth in this Article Seventh, Section C.
The presiding officer of the meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Article Seventh, Section
C, and if he or she should so determine, any such business not properly
brought before the meeting shall not be transacted. Nothing herein shall be
deemed to affect any rights of shareholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act or any successor provision.
D. FAIR PRICE PROVISIONS
1.Fair Price Provisions. The vote of the shareholders of the Corporation
required to approve any Business Combination shall be as set forth in this
Section D. The term "Business Combination" shall have the meaning ascribed to
it in Subsection 1(b) of this Section D. Certain other capitalized terms shall
have the respective meanings ascribed to them in Subsection 3 of this Section
D.
a. In addition to any affirmative vote required by law or these Articles of
Incorporation and except as otherwise expressly provided in Subsection 2
of this Section D:
i. any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Shareholder or (ii) any other person
(whether or not itself an Interested Shareholder) which is, or after
such merger or consolidation would be, an Affiliate of an Interested
Shareholder; or
ii. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or
with any Interested Shareholder or any Affiliate of any Interested
Shareholder of assets of the Corporation or any Subsidiary having
an aggregate Fair Market Value of $5,000,000 or more; or
iii. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Shareholder or
any Affiliate of any Interested Shareholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $5,000,000 or more, other than the
issuance of securities upon the conversion, exchange or exercise
of securities of the Corporation or any Subsidiary that were not
acquired by such Interested Shareholder (or such Affiliate) from
the Corporation or a Subsidiary; or
iv. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Shareholder or any Affiliate of any Interested
Shareholder; or
v. any transaction involving the Corporation or any Subsidiary (whether
or not with or into or otherwise involving an Interested
Shareholder, and including, without limitation, any reclassification
of securities, including any reverse stock split, or
recapitalization or reorganization of the Corporation, or any merger
or consolidation of the Corporation with any of its Subsidiaries or
any self tender offer for or repurchase of securities of the
Corporation by the Corporation or any Subsidiary), which has the
effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity securities or
securities convertible into, or exchangeable or exercisable for,
equity securities of the Corporation or any Subsidiary which is
II-8
<PAGE>
directly or indirectly beneficially owned by any Interested
Shareholder or any Affiliate of any Interested Shareholder;
shall require the affirmative vote of the holders of at least 80 percent of
the combined voting power of all of the then outstanding shares of Voting
Stock, in each case voting together as a single class (it being understood
that for purposes of this Article each share of the Voting Stock shall have
the number of votes granted to it in or pursuant to these Articles of
Incorporation or the By-Laws of the Corporation), which vote shall include the
affirmative vote of at least two-thirds ( 2/3) of the combined voting power of
all of the then outstanding shares of Voting Stock not beneficially owned by
the Interested Shareholder. Such affirmative vote shall be required
notwithstanding any provision of law or any other provision of these Articles
of Incorporation or any agreement with any national securities exchange or
otherwise which might permit a lesser vote or no vote, and shall be in
addition to any affirmative vote required of the holders of any class or
series of capital stock pursuant to law or in or pursuant to these Articles of
Incorporation.
b. The term "Business Combination" as used in this Section D shall mean any
transaction that is referred to in any one or more of clauses (i)
through (v) of Subsection 1(a) of this Section D.
2.Exceptions. The provisions of Subsection 1(a) of this Section D shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required
by law, by or pursuant to any other provision of these Articles of
Incorporation, or by any agreement with any national securities exchange, if,
in the case of a Business Combination that does not involve any cash or other
consideration being received by the shareholders of the Corporation, solely in
their respective capacities as shareholders of the Corporation, the condition
specified in the following Subsection 2(a) is met, or, in the case of any
other Business Combination, the condition specified in the following
Subsection 2(a) or the conditions specified in the following Subsection 2(b)
are met:
a. such Business Combination shall have been approved by a majority of the
Disinterested Directors; or
b. each of the five conditions specified in the following clauses (i)
through (v) shall have been met:
i. the aggregate amount of the cash and the Fair Market Value as of the
Consummation Date of any consideration other than cash to be received
per share by holders of Common Stock in such Business Combination
shall be at least equal to the highest of the following (it being
intended that the requirements of this clause b(i) shall be required
to be met with respect to all shares of Common Stock outstanding
whether or not the Interested Shareholder has acquired any shares of
the Common Stock):
I if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid in order to acquire any shares of Common Stock
beneficially owned by the Interested Shareholder which were
acquired beneficially by such Interested Shareholder (x) within
the two-year period immediately prior to the Announcement Date or
(y) in the transaction in which it became an Interested
Shareholder, whichever is higher; or
II the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is
higher; or
III the amount which bears the same percentage relationship to the
Fair Market Value of the Common Stock on the Announcement Date
as the highest per share price determined in clause b(i)(I)
above bears to the Fair Market Value of the Common Stock on the
date of the commencement of the acquisition of the Common Stock
by such Interested Shareholder; and
ii. the aggregate amount of the cash and the Fair Market Value as of the
Consummation Date of any consideration other than cash to be
received per share by holders of the shares of any class or series
of Voting Stock (other than Common Stock) shall be at least equal to
the highest of the following (it being intended that the
requirements of this clause b(ii) shall be required to be met with
respect to every class and series of such outstanding Voting Stock,
whether or not the Interested Shareholder has previously acquired
any shares of a particular class or series of Voting Stock):
II-9
<PAGE>
I if applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid in order to acquire any shares of such class or series
of Voting Stock beneficially owned by the Interested Shareholder
which were acquired beneficially by such Interested Shareholder
(x) within the two-year period immediately prior to the
Announcement Date or (y) in the transaction in which it became an
Interested Shareholder, whichever is higher; or
II if applicable, the highest preferential amount per share to which
the holders of shares of such class or series of Voting Stock are
entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; or
III the Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or the Determination Date,
whichever is higher; or
IV the amount which bears the same percentage to the Fair Market
Value of such class or series of Voting Stock on the Announcement
Date as the highest per share price in b(ii)(I) above bears to
the Fair Market Value of such Voting Stock on the date of the
commencement of the acquisition of such Voting Stock by such
Interested Shareholder; and
iii. the consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as was previously paid in
order to acquire beneficially shares of such class or series of
Voting Stock that are beneficially owned by the Interested
Shareholder and, if the Interested Shareholder beneficially owns
shares of any class or series of Voting Stock that were acquired
with varying forms of consideration, the form of consideration to
be received by each holder of such class or series of Voting Stock
shall be, at the option of such holder, either cash or the form
used by the Interested Shareholder to acquire beneficially the
largest number of shares of such class or series of Voting Stock
beneficially acquired by it prior to the Announcement Date; and
iv. after such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business
Combination:
I such Interested Shareholder shall not have become the beneficial
owner of any additional shares of Voting Stock of the
Corporation, except as part of the transaction in which it became
an Interested Shareholder or upon conversion, exchange or
exercise of securities acquired by it prior to becoming an
Interested Shareholder or as a result of a pro rata stock
dividend or stock split; and
II such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a shareholder),
of any loans, advances, guaranties, pledges or other financial
assistance or tax credits or other tax advantages provided by the
Corporation or any Subsidiary, whether in anticipation of or in
connection with such Business Combination or otherwise; and
III such Interested Shareholder shall not have caused any material
change in the Corporation's business or capital structure,
including, without limitation, the issuance of shares of capital
stock of the Corporation to any third party; and
IV there shall have been (x) no failure to declare and pay at the
regular date therefor the full amount of dividends (whether or
not cumulative) on any outstanding capital stock having a
preference over Common Stock as to dividends or upon liquidation
except as approved by a majority of the Disinterested Directors,
(y) no reduction in the annual rate of dividends paid on Common
Stock (except as necessary to reflect any subdivision of the
Common Stock), except as approved by a majority of the
Disinterested Directors and (z) an increase in such annual rate
of dividends (as necessary to prevent any such reduction) in the
event of any reclassification (including any reverse stock
split), recapitalization, reorganization, self tender offer or
any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the
failure so to increase such annual rate was approved by a
majority of the Disinterested Directors; and
II-10
<PAGE>
v. a proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, rules and
regulations), whether or not the Corporation is then subject to such
requirements, shall be mailed by and at the expense of the
Interested Shareholder at least 30 days prior to the Consummation
Date of such Business Combination to the holders of Voting Stock of
the Corporation (whether or not such proxy or information statement
is required to be mailed pursuant to such Act or subsequent
provisions), and shall contain at the front thereof in a prominent
place (i) any recommendations as to the advisability (or
inadvisability) of the Business Combination which the Disinterested
Directors, if any, may choose to state, and (ii) the opinion of a
reputable national investment banking firm as to the fairness (or
not) of such Business Combination from the point of view of the
remaining holders of Voting Stock of the Corporation (such
investment banking firm to be engaged solely on behalf of the
remaining public shareholders, to be paid a reasonable fee for its
services by the Corporation upon receipt of such opinion, to be
unaffiliated with such Interested Shareholder, and, if there are at
the time any Disinterested Directors, to be selected by a majority
of the Disinterested Directors).
3.Definitions. For purposes of this Article:
a. "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on January 1, 1998.
b. "Announcement Date" shall mean the date of first public announcement of
the proposed Business Combination.
c. A person shall be a "beneficial owner" of any Voting Stock:
i. which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
ii. which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether or not such right is exercisable
immediately) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (ii) the right to
vote or direct the vote pursuant to any agreement, arrangement or
understanding; or
iii. which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any shares
of Voting Stock.
d. In the event of any Business Combination in which the Corporation
survives, the phrase "any consideration other than cash to be received"
as used in this Section D shall include the shares of Common Stock
and/or the shares of any other class or series of outstanding Voting
Stock retained by the holders of such shares.
e. "Consummation Date" shall mean the date of the consummation of the
Business Combination.
f. "Determination Date" shall mean the date on which the Interested
Shareholder became an Interested Shareholder.
g. "Disinterested Director" shall mean any member of the Board of Directors
of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Shareholder and was a member of the Board prior to the time
that the Interested Shareholder became an Interested Shareholder, and
any successor of a Disinterested Director who is unaffiliated with, and
not a nominee of, the Interested Shareholder
II-11
<PAGE>
and who is recommended to succeed a Disinterested Director by a majority
of Disinterested Directors then on the Board of Directors.
h. "Fair Market Value" shall mean: (a) in the case of stock, the highest
closing sale price during the 30-day period commencing on the 40th day
preceding the date in question of a share of such stock on the Composite
Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not
quoted on the New York Stock Exchange-Composite Tape, on the principal
United States securities exchange registered under the Securities
Exchange Act of 1934 on which such stock is listed, or, if such stock is
not listed on any such exchange, the highest closing sale price or bid
quotation with respect to a share of such stock during the 30-day period
commencing on the 40th day preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are
available, the fair market value on the date in question of a share of
such stock as determined by a majority of the Disinterested Directors in
good faith; and (b) in the case of property other than cash or stock,
the fair market value of such property on the date in question as
determined by a majority of the Disinterested Directors in good faith.
i. "Interested Shareholder" shall mean any person (other than the
Corporation, Central Maine Power Company or any Subsidiary or any
employee benefit plan of the Corporation or any Subsidiary) who or
which:
i. is the beneficial owner, directly or indirectly, of more than 10
percent of the combined voting power of all of the then outstanding
shares of Voting Stock; or
ii. is an Affiliate of the Corporation and at any time within the two-
year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10 percent or more of
the combined voting power of all of the then outstanding shares of
Voting Stock; or
iii. is an assignee of or has otherwise succeeded to the beneficial
ownership of any shares of Voting Stock that were at any time
within the two-year period immediately prior to the date in
question beneficially owned, directly or indirectly, by an
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions
not involving a public offering within the meaning of the
Securities Act of 1933.
j. For the purposes of determining whether a person is an Interested
Shareholder pursuant to Subsection 3(i) of this Section D, the number of
shares of Voting Stock deemed to be outstanding shall include shares
deemed owned by such Interested Shareholder through application of
Subsection 3(c) of this Section D but shall not include any other shares
of Voting Stock that may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
k. A "person" shall include, without limitation, any individual, firm,
corporation or other entity or group (as such term is used in Regulation
13D-G of the General Rules and Regulations under the Securities Exchange
Act of 1934, as in effect on January 1, 1998).
l. "Subsidiary" shall mean any Corporation more than 50 percent of whose
outstanding equity securities having ordinary voting power in the
election of directors is owned, directly or indirectly, by the
Corporation or by a Subsidiary or by the Corporation and one or more
Subsidiaries; provided, however, that for the purposes of the definition
of Interested Shareholder set forth in Subsection 3(i) of this Section
D, the term "Subsidiary" shall mean only a Corporation of which a
majority of each class or series of capital stock entitled to vote
generally in the election of directors of such Corporation is owned,
directly or indirectly, by the Corporation.
m. The term "Voting Stock" shall mean the outstanding shares of capital
stock of all classes and series of the Corporation entitled to vote
generally in the election of directors of the Corporation, in each case
voting together as a single class.
II-12
<PAGE>
4.Miscellaneous. A majority of the Disinterested Directors shall have the
power to determine, on the basis of information known to them, all facts
necessary to determine compliance with this Article including, without
limitation:
a. whether a person is an Interested Shareholder;
b. the number of shares of Voting Stock beneficially owned by any person;
c. whether a person is an Affiliate or Associate of another person;
d. whether the requirements of Subsection 2(b) of this Section D have been
met with respect to any Business Combination;
e. whether the assets which are the subject of any Business Combination
have, or the consideration to be received for the issuance or transfer
of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $5,000,000 or more;
and
f. such other matters with respect to which a determination is required
under this Article.
The good faith determination of a majority of the Disinterested Directors on
such matters shall be conclusive and binding for all purposes of this Article,
and the Disinterested Directors shall be fully protected in making such good
faith determinations.
Nothing contained in this Article shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
E. AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon shareholders
herein are granted subject to this reservation; provided, however, that except
with respect to the designation of the rights and preferences of series of
Preferred Stock pursuant to Article Fourth, Section C, which is delegated to
the Board of Directors, and notwithstanding any other provisions of these
Articles of Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that a lesser percentage or separate class vote may
be specified by law, these Articles of Incorporation or the Bylaws of the
Corporation), any lawful amendment of these Articles of Incorporation may be
made by affirmative vote by at least the proportion specified below of the
aggregate number of votes which the holders of the then outstanding shares of
Common Stock and Preferred Stock are entitled to cast on the amendment and, if
the shares of one or more classes or series are entitled under these Articles
of Incorporation or otherwise by law to vote thereon as a class, affirmative
vote by the same proportion of the aggregate number of votes which the holders
of the then outstanding shares of such one or more classes or series are
entitled to cast on the amendment. The proportion referred to above in this
Article Seventh, Section E shall be 80% in the case of any amendment of the
provisions set forth in Article Seventh, Sections B, C, D, E and F of these
Articles of Incorporation, and shall be a majority in all other cases.
F. LIMITATION ON DIRECTOR LIABILITY
A person who is or was a director of the Corporation shall not be personally
liable to the Corporation or its shareholders for monetary damages for failure
to discharge any duty as a director, unless the director is found not to have
acted honestly or in the reasonable belief that the action was in or not
opposed to the best interests of the Corporation or its shareholders. If the
MBCA is amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of the directors of
the Corporation shall be eliminated or limited to the fullest extent permitted
by the MBCA, as so amended. The elimination and limitation of liability
provided herein shall continue after a director has ceased to occupy such
position as to acts or omissions occurring during such director's term or
terms of office, and no amendment, repeal or modification of this Section F
shall apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of
such director occurring prior to such amendment, repeal or modification.
II-13
<PAGE>
APPENDIX III
FORM OF BY-LAWS OF HOLDCO, INC.
SECTION 1. ARTICLES OF INCORPORATION
The name of the Corporation and its location shall be as set forth in the
Articles of Incorporation. References in these By-Laws to the Articles of
Incorporation or the Charter shall mean the Articles of Incorporation as from
time to time in effect. References in these By-Laws to the Maine Business
Corporation Act (the "Act") and to particular sections of the Act are to the
Act and such sections as from time to time in effect.
SECTION 2. SHAREHOLDERS' MEETINGS
2.1. Annual Meeting. An annual meeting of the shareholders for the purpose
of electing Directors and transacting such other business as may properly come
before the annual meeting shall be held on the third Thursday in May in each
year, at such hour as may be fixed by the Chairman of the Board of Directors,
by the President or by a majority of the members of the Board of Directors
then in office. If that day be a legal holiday, the meeting shall be held on
the next succeeding day not a legal holiday. Purposes for which an annual
meeting is to be held, additional to the election of Directors and those
prescribed by law, by the Articles of Incorporation or by these By-Laws, may
be specified by the Chairman of the Board of Directors, by the President or by
a majority of the members of the Board of Directors then in office.
2.2. Special Meeting in Place of Annual Meeting. In case an annual meeting
of the shareholders shall be omitted through inadvertence or otherwise, the
business of such meeting may be transacted at a special meeting duly called in
lieu thereof and any action taken at such special meeting shall have the same
force and effect as if taken at the annual meeting, and in such case all
references in these By-Laws to the annual meeting of the shareholders shall be
deemed to refer to such special meeting. Any such special meeting shall be
called as provided in Section 2.3.
2.3. Special Meetings. A special meeting of the shareholders may be called
at any time by the Chairman of the Board of Directors, by the President, by a
majority of the members of the Board of Directors then in office, unless
otherwise provided by law, by the holders of not less than 10% of the
outstanding shares of the Corporation entitled to vote at the meeting or as
otherwise provided in the Articles of Incorporation. Each call of a special
meeting shall state the place, date, hour and purposes of the meeting.
2.4. Organization of Meetings. At each meeting of the shareholders the
Chairman of the Board of Directors, or in his absence the Vice Chairman of the
Board of Directors, or in their absence the President, shall act as chairman
of the meeting. Procedure at the meeting shall be established by the chairman
of the meeting.
2.5. Place of Meetings. All meetings of the shareholders shall be held at
the principal office of the Corporation in the State of Maine, Edison Drive,
Augusta, Maine, or at such other place as shall be fixed by the Chairman of
the Board of Directors, by the President or by a majority of the members of
the Board of Directors then in office.
2.6. Notice of Meetings. Written notice of each meeting of shareholders
shall be given in accordance with the provisions of the Act, including,
without limitation, Section 604 of the Act, unless such notice shall be waived
as provided in the Act, including, without limitation, Section 605 of the Act.
2.7. Quorum of Shareholders. At all shareholders' meetings, unless otherwise
specifically provided in the Articles of Incorporation (including, without
limitation, provisions thereof, or resolutions adopted by the Board of
Directors pursuant thereto, establishing the terms of any stock having a
preference, as to dividends or otherwise, over common stock of the
Corporation) or the Act, a representation of shares of the Corporation
entitled in the aggregate to a majority of the total votes to which the
outstanding shares of capital stock of the Corporation of all classes are then
entitled with respect to a particular matter shall be necessary to constitute
a quorum for the purposes of action on that matter at that meeting. Whether or
not a quorum is present, any
III-1
<PAGE>
meeting may be adjourned either from time to time until a quorum shall be
present or sine die by a majority vote of whatever stock shall be represented
at that meeting. When a quorum is present at any meeting, a majority of the
votes to which stock represented thereat and voting is entitled shall, except
when a larger vote is required by law, by the Article of Incorporation or by
these By-Laws, decide any question brought before such meeting.
2.8. Voting. At all shareholders' meetings, unless otherwise provided in the
Articles of Incorporation and except with respect to the election of
Directors, holders of record of stock entitled to vote on any question or at
any election shall be entitled to one vote for each share of stock held by
them respectively. Except as otherwise provided in the Articles of
Incorporation with respect to elections of Directors by holders of any series
of stock having a preference, as to dividends or otherwise, over common stock
of the Corporation, in elections of Directors by the shareholders, each
shareholder having the right to vote shall be entitled to as many votes as
pertain to his shares of stock multiplied by the number of Directors to be
elected, and he may cast all such votes for a single Director or may
distribute them among the number to be voted for, or any two or more of them,
as he may see fit. Such vote may, in all cases, be given by proxy duly
authorized in writing; but no proxy granted more than six months before the
meeting, which shall be named therein, shall be accepted, and no proxy shall
be valid after the final adjournment of such meeting.
2.9. Voting Inspectors. At all meetings of shareholders there shall be one
or more voting inspectors as provided in the Act, including, without
limitation, Section 609 of the Act.
SECTION 3. BOARD OF DIRECTORS
3.1. Powers. The business and affairs of the Corporation shall be managed by
the Board of Directors. The Board of Directors may exercise all of the powers
of the Corporation and do and perform, or cause to be done and performed, all
such lawful acts and things as are not by law, by the Articles of
Incorporation, or by these By-Laws, required to be exercised or done by the
shareholders.
3.2. Committees. The Board of Directors, by a resolution adopted by a
majority of the full Board of Directors, may designate from among its members
an Executive Committee and other Committees, each consisting of two or more
Directors, and may delegate to such Committee or Committees all the authority
of the Board of Directors except those which by the Act, including, without
limitation, Section 713 of the Act, the Articles of Incorporation, or these
By-Laws, may not be exercised by such Committee or Committees. Alternate
members of such Committee or Committees may also be appointed as specified in
said Section 713. Except as the Board of Directors may otherwise determine,
the business of such Committee or Committees shall be conducted as nearly as
may be in the same manner as is provided by these By-Laws for the conduct of
business by the Board of Directors. Each such Committee shall report its
actions to the Board of Directors.
3.3. Regular Meetings. A regular meeting of the Board of Directors may be
held without call or notice immediately after and at the same place as the
annual meeting of the shareholders. Other regular meetings of the Board of
Directors may be held without call or notice if the time and place of such
meetings are fixed by the Board of Directors, provided that notice of the
first regular meeting following any such determination shall be given to each
Director.
3.4. Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors, by the President, or, if he
is absent or is unable to act, by any Vice President, or by any two Directors.
The person or persons calling the special meeting shall set the time and place
thereof.
Notice of each special meeting of the Board of Directors shall be given by
the Clerk, the Secretary or the person or persons calling the meeting.
It shall be sufficient notice to a Director of a special meeting to send
notice by mail at least forty-eight hours or by telegram at least twenty-four
hours before the meeting addressed to him at his usual or last known business
or residence address or to give notice to him in person or by telephone at
least twenty-four hours before
III-2
<PAGE>
the meeting. Notice of a meeting need not be given to any Director who signs a
waiver of notice, either before or after the meeting. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
Board of Directors need be specified in the notice of the meeting except as
otherwise required by the Articles of Incorporation, these By-Laws or the Act.
3.5. Action Without A Meeting. Action may be taken by the Board of Directors
without a meeting as provided in the Act, including, without limitation,
Sections 708, 711 and 712 of the Act.
3.6. Quorum. At any meeting of the Directors a majority of the Directors
then in office shall constitute a quorum for the transaction of business. The
Directors present at a duly called or held meeting at which a quorum was once
present may continue to do business at the meeting notwithstanding the
withdrawal of enough Directors to leave less than a quorum. Any meeting may be
adjourned from time to time by a majority of the votes cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice if the time and place to which it is adjourned are
fixed and announced at such meeting.
3.7. Action by Vote. The vote of a majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors unless the vote of a greater number is required by the Articles of
Incorporation, these By-Laws or the Act.
3.8. Compensation. The Board of Directors may, by resolution, authorize the
payment to all Directors of a fixed sum for attendance at each meeting. No
such payment shall preclude any Director from serving the Corporation in any
other capacity and receiving compensation therefor. The Board of Directors may
also, by resolution, authorize the reimbursement of all expenses of each
Director related to the Director's attendance at any Board of Directors
meeting, including a meeting adjourned because of lack of a quorum.
SECTION 4. OFFICERS AND AGENTS
4.1. Enumeration; Qualification. The officers of the Corporation shall
consist of a Chairman of the Board of Directors, a President, one or more Vice
Presidents, a Treasurer, a Clerk, a Secretary and such other officers, if any,
as the Board of Directors from time to time may in their discretion elect or
appoint. The President shall be elected from the Board of Directors, and the
Chairman of the Board of Directors and any Vice Chairman of the Board shall be
elected from those Directors who are not employees of the Corporation. The
Clerk shall be a resident of the State of Maine. Any two or more offices may
be held by the same person. Any officer may be required by the Board of
Directors to give bond for the faithful performance of his duties to the
Corporation in such amount and with such sureties as the Board of Directors
may determine.
4.2. Powers. Subject to the Act, the Articles of Incorporation and the other
provisions of these By-Laws, each officer shall have such duties and powers as
are usually incident to his respective office and such other duties and powers
as may be prescribed from time to time by the Board of Directors.
4.3. Election. The Chairman of the Board of Directors, the President and the
Clerk shall be elected annually by the Board of Directors at their first
meeting following the annual meeting of the shareholders. Other officers may
be elected or appointed by the Board of Directors at said meeting or at any
other time.
4.4. Tenure. Except as otherwise provided by the Act, by the Articles of
Incorporation or by these By-Laws, the Chairman of the Board of Directors, the
President and the Clerk shall hold office until the first meeting of the Board
of Directors following the next annual meeting of shareholders and until their
respective successors are chosen and qualified, and each other officer shall
hold office until the first meeting of the Directors following the next annual
meeting of shareholders unless, in any case, a shorter period shall have been
specified by the terms of his election or appointment, or until he sooner
dies, resigns, is removed or becomes disqualified.
III-3
<PAGE>
SECTION 5. RESIGNATION, VACANCIES AND REMOVALS
Any Director or officer may resign at any time by delivering his resignation
in writing to the Chairman of the Board of Directors, the President or the
Clerk or to a meeting of the Board of Directors. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Any vacancy, however occurring, on the Board of Directors, may be filled in
accordance with the provisions of the Articles of Incorporation. Any vacancy,
however occurring, in the office of any officer may be filled by the Board of
Directors. The Board of Directors may remove any officer as provided in the
Act including, without limitation, Section 715 of the Act.
SECTION 6. STOCK CERTIFICATES,
TRANSFERS OF SHARES AND RECORD DATES
6.1. Stock Certificates. Each shareholder, upon payment in full for his
shares, shall be entitled to a certificate certifying the number and the class
and the designation of the series, if any, of the shares owned by him, in such
form as shall, in conformity to law, be prescribed from time to time by the
Board of Directors. Such certificate shall conform with the provisions of the
Act and be signed by any two of the President or any Vice President and by the
Treasurer or any Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. If the certificate is countersigned by the
Clerk, a transfer agent or any assistant transfer agent, or registered by a
registrar, other than the Corporation itself or an employee of the
Corporation, any other signature on the certificate may be a facsimile. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of its issue.
6.2. Loss of Certificates. In the case of the alleged loss or destruction or
the mutilation of a certificate of stock, a duplicate certificate may be
issued in place thereof, upon such terms as the Directors may prescribe.
6.3. Transfer on Books. Subject to the restrictions, if any, stated or noted
on the stock certificates, shares of stock may be transferred on the books of
the Corporation by the surrender to the Corporation or one of its transfer
agents of the certificate therefor properly endorsed or accompanied by a
written assignment and power of attorney properly executed, with necessary
transfer stamps affixed, and with such proof of the authenticity of signature
as the Board of Directors or the particular transfer agent may reasonably
require. Except as may be otherwise required by law, by the Articles of
Incorporation or by these By-Laws, the Corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock
for all purposes, including the payment of dividends and the right to receive
notice and to vote with respect thereto, regardless of any transfer, pledge or
other disposition of such stock until the shares have been transferred on the
books of the Corporation in accordance with the requirements of these By-Laws.
It shall be the duty of each shareholder to notify the Corporation of his
post office address.
6.4. Record Date. The Board of Directors may by resolution fix in advance a
record date not exceeding sixty (60) days nor less than ten (10) full days
prior to (a) the date of any shareholders' meeting for the purpose of
determining shareholders entitled to notice of and to vote at such meeting and
any adjournment thereof, or (b) the date of the payment of any dividend, other
distribution, right or other benefit, including the issuance of rights to
subscribe for securities, for the purpose of determining shareholders entitled
to receive such dividend, other distribution, right or other benefit; and may
by resolution, subject to such time limitations, fix a record date for any
other proper purpose.
SECTION 7. INSTRUMENTS
7.1. Checks, etc. All checks, drafts, and orders for payment of money shall
be signed in the name of the Corporation or any assumed name under which the
Corporation has duly filed a certificate and shall be countersigned by such
officers or agents as the Board of Directors shall from time to time designate
for that purpose.
III-4
<PAGE>
7.2. Contracts, Conveyances, etc. When the execution of any contract,
conveyance, or other instrument has been authorized without specification of
the executing officers, the President, any Vice President, the Treasurer, the
Clerk or the Secretary may execute such contract, conveyance, or other
instrument in the name and on behalf of the Corporation. The Board of
Directors shall have power to designate which officers and agents shall have
the power and authority to execute any instrument on behalf of the
Corporation.
7.3. Voting Shares of Other Corporations. Shares of stock of, or other
interests in other corporations or enterprises, registered in the name of the
Corporation, may be voted by the President or a proxy appointed by the
President. The Board of Directors may, by resolution, appoint some other
person to vote any such shares or interests.
SECTION 8. AMENDMENTS
These By-Laws may be altered, amended or repealed, except as may be
otherwise expressly provided by law or in other sections of these By-Laws or
in the Articles of Incorporation, at any annual or special meeting of the
shareholders called for the purpose, of which the notice shall include the
proposed action, by vote of shareholders holding shares entitled in the
aggregate to a majority of the total votes to which the outstanding shares of
capital stock of the Corporation of all classes are then entitled, except that
in the case of the provisions of Section 2.7 relating to the requirements for
a quorum, in the case of the provisions of Section 2.8 relating to cumulative
voting and the provisions of this Section 8 pertaining to the foregoing
sections, such vote shall be by the affirmative vote of shareholders holding
shares entitled in the aggregate to two-thirds of the total votes to which the
outstanding shares of capital stock of the Corporation of all classes are then
entitled. These By-Laws may also be altered, amended or repealed by vote of a
majority of the Board of Directors then in office, except that the Board of
Directors shall not alter, amend or repeal the provisions of Section 2.7
relating to the requirements for a quorum or the provisions of Section 2.8
relating to cumulative voting, or any provision of this Section 8 pertaining
to the foregoing sections, except in any case to conform the same to legal
requirements or the Articles of Incorporation, or to resolutions of the Board
of Directors, adopted pursuant to the Articles of Incorporation, establishing
the terms of stock of the Corporation, or any series thereof, having a
preference, as to dividends or otherwise, over common stock of the
Corporation.
SECTION 9. INDEMNIFICATION
9.1. To the extent permitted and in the manner provided by the Act, the
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer or employee of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, trustee, partner, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust, pension or other employee
benefit plan, or other enterprise, against expenses (including attorneys'
fees), judgments, fines, assessments, and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding. Expenses incurred in defending a civil, criminal, administrative
or investigative action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding, as
authorized in the specific case in the manner provided by the Act, upon
receipt of an undertaking by or on behalf of the person seeking
indemnification to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation.
The foregoing rights of indemnification shall not be deemed exclusive of any
other rights to which any person seeking indemnification may be entitled under
any agreement, vote of shareholders or disinterested directors or otherwise,
and shall continue as to a person who has ceased to be a director, officer,
trustee, partner, fiduciary, employee or agent and shall inure to the benefit
of the heirs, executors and administrators of such a person.
9.2. The Corporation shall have power to purchase and maintain insurance, in
such amounts as the Board of Directors may deem appropriate, on behalf of any
person who is or was a director, officer, employee or agent
III-5
<PAGE>
of the Corporation, or is or was serving at the request of the Corporation as
a director, officer, trustee, partner, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust, pension or other employee
benefit plan, or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under applicable provisions of law.
9.3. The Corporation may enter into an indemnity agreement with any
director, officer, employee or agent of the Corporation, or any director,
officer, trustee, partner, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust, pension or other employee
benefit plan or other enterprise, upon terms and conditions that the Board of
Directors deems appropriate, as long as the provisions of the agreement are
not impermissible under applicable law.
9.4. Any amendment or repeal of this Section 9 shall not be retroactive in
effect. In case any provision in this Section 9 shall be determined at any
time to be unenforceable in any respect, the other provisions shall not in any
way be affected or impaired thereby, and the affected provision shall be given
the fullest possible enforcement in the circumstances, it being the intention
of the Corporation to afford indemnification and advancement of expenses to
the persons indemnified hereby to the fullest extent permitted by law.
SECTION 10. TITLES OF SECTIONS
All titles of sections are inserted for convenience only, and are not a part
of these By-Laws or to be used in the construction thereof.
III-6
<PAGE>
APPENDIX IV
SECTIONS 908, 909 AND 910 OF THE MAINE BUSINESS CORPORATION ACT
SECTION 908. Right Of Shareholders To Dissent 1. Except as provided in
subsections 3 and 4, any shareholders of a domestic corporation, by complying
with section 909, shall have the right to dissent from any of the following
corporate actions:
A. Any plan of merger or consolidation in which the corporation is
participating; or
B. Any sale or other disposition, excluding a mortgage or other security
interest, of all or substantially all of the property and assets of the
corporation not made in the usual and regular course of its business,
including a sale in liquidation, but not including a sale pursuant to an
order of a court having jurisdiction in the premises or a sale for cash on
terms requiring that all or substantially all of the net proceeds of sale
be distributed to the shareholders in accordance with their respective
interests within one year after the date of sale; or
C. Any other action as to which a right to dissent is expressly given by
this Act.
2. A shareholder may dissent as to less than all of the shares registered in
his name. In that event, his rights shall be determined as if the shares as to
which he has dissented and his other shares were registered in the names of
different shareholders.
3. There shall be no right of dissent in the case of shareholders of the
surviving corporation in a merger.
A. If such corporation is, on the date of filing of the articles of
merger, the owner of all the outstanding shares of the other corporations,
domestic or foreign, which are parties to the merger, or
B. If a vote of the shareholders of such surviving corporation was not
necessary to authorize such merger.
4. There shall be no right of dissent in the case of holders of any class or
series of shares in any of the participating corporations in a merger or
consolidation, which shares were, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting of
shareholders at which the plan of merger or consolidation was to be voted on,
either:
A. Registered or traded on a national securities exchange; or
B. Registered with the Securities and Exchange Commission pursuant to
section 12(g) of the Act of Congress known as the Securities Exchange Act
of 1934, as the same has been or may hereafter be amended, being Title 15
of the United States Code Annotated, (S) 781(g); unless the articles of
incorporation of that corporation provide that there shall be a right of
dissent.
5. The exceptions from the right of dissent provided for in subsection 3,
paragraph B and in subsection 4 shall not be applicable to the holders of a
class or series of shares of a participating corporation if, under the plan of
merger or consolidation, such holders are required to accept for their shares
anything, except:
A. Shares of the surviving or new corporation resulting from the merger
or consolidation, or such shares plus cash in lieu of fractional shares; or
B. Shares, or shares plus cash in lieu of fractional shares, of any other
corporation, which shares were, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting of
shareholders at which the plan of merger or consolidation was acted upon,
either:
(1) Registered or traded on a national securities exchange; or
(2) Held of record by not less than 2,000 shareholders; or
C. A combination of shares, or shares plus cash in lieu of fractional
shares, as set forth in paragraphs A and B.
IV-1
<PAGE>
SECTION 909. Right Of Dissenting Shareholders To Payment For Shares. 1. A
shareholder having a right under any provision of this Act to dissent to
proposed corporate action shall, by complying with the procedure in this
section, be paid the fair value of his shares, if the corporate action to
which he dissented is effected. The fair value of shares shall be determined
as of the day prior to the date on which the vote of the shareholders, or of
the directors in case a vote of the shareholders was not necessary, was taken
approving the proposed corporate action, excluding any appreciation or
depreciation of shares in anticipation of such corporate action.
2. The shareholder, whether or not entitled to vote, shall file with the
corporation, prior to or at the meeting of shareholders at which such proposed
corporate action is submitted to a vote, a written objection to the proposed
corporate action. No such objection shall be required from any shareholder to
whom the corporation failed to send notice of such meeting in accordance with
this Act.
3. If the proposed corporate action is approved by the required vote and the
dissenting shareholder did not vote in favor thereof, the dissenting
shareholder shall file a written demand for payment of the fair value of his
shares. Such demand
A. Shall be filed with the corporation or, in the case of a merger or
consolidation, with the surviving or new corporation; and
B. Shall be filed by personally delivering it, or by mailing it via
certified or registered mail, to such corporation at its registered office
within this State or to its principal place of business or to the address
given to the Secretary of State pursuant to section 906, subsection 4,
paragraph B; it shall be so delivered or mailed within 15 days after the
date on which the vote of shareholders was taken, or the date on which
notice of a plan of merger of a subsidiary into a parent corporation
without vote of shareholders was mailed to shareholders of the subsidiary;
and
C. Shall specify the shareholder's current address; and
D. May not be withdrawn without the corporation's consent.
4. Any shareholder failing either to object as required by subsection 2 or
to make demand in the time and manner provided in subsection 3 shall be bound
by the terms of the proposed corporate action. Any shareholder making such
objection and demand shall thereafter be entitled only to payment as in this
section provided and shall not be entitled to vote or to exercise any other
rights of a shareholder.
5. The right of a shareholder otherwise entitled to be paid for the fair
value of his shares shall cease, and his status as a shareholder shall be
restored, without prejudice to any corporate proceedings which may have been
taken during the interim,
A. If his demand shall be withdrawn upon consent, or
B. If the proposed corporate action shall be abandoned or rescinded, or
the shareholders shall revoke the authority to effect such action, or
C. If, in the case of a merger, on the date of the filing of the articles
of merger the surviving corporation is the owner of all the outstanding
shares of the other corporations, domestic and foreign, that are parties to
the merger, or
D. If no action for the determination of fair value by a court shall have
been filed within the time provided in this section, or
E. If a court of competent jurisdiction shall determine that such
shareholder is not entitled to the relief provided by this section.
6. At the time of filing his demand for payment for his shares, or within 20
days thereafter, each shareholder demanding payment shall submit the
certificate or certificates representing his shares to the corporation or its
transfer agent for notation thereon that such demand has been made; such
certificates shall promptly be returned after entry thereon of such notation.
A shareholder's failure to do so shall, at the option of the corporation,
terminate his rights under this section, unless a court of competent
jurisdiction, for good and sufficient cause
IV-2
<PAGE>
shown, shall otherwise direct. If shares represented by a certificate on which
notation has been so made shall be transferred, each new certificate issued
therefor shall bear a similar notation, together with the name of the original
dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights in the corporation other than those which
the original dissenting shareholder had after making demand for payment of the
fair value thereof.
7. Within the time prescribed by this subsection, the corporation, or, in
the case of a merger or consolidation, the surviving or new corporation,
domestic or foreign, shall give written notice to each dissenting shareholder
who has made objection and demand as herein provided that the corporate action
dissented to has been effected, and shall make a written offer to each such
dissenting shareholder to pay for such shares at a specified price deemed by
such corporation to be the fair value thereof. Such offer shall be made at the
same price per share to all dissenting shareholders of the same class. The
notice and offer shall be accompanied by a balance sheet of the corporation
the shares of which the dissenting shareholder holds, as of the latest
available date and not more than 12 months prior to the making of such offer,
and a profit and loss statement of such corporation for the 12 months' period
ended on the date of such balance sheet. The offer shall be made within the
later of 10 days after the expiration of the period provided in subsection 3,
paragraph B, for making demand, or 10 days after the corporate action is
effected; corporate action shall be deemed effected on a sale of assets when
the sale is consummated, and in a merger or consolidation when the articles of
merger or consolidation are filed or upon which later effective date as is
specified in the articles of merger or consolidation as permitted by this Act.
8. If within 20 days after the date by which the corporation is required, by
the terms of subsection 7, to make a written offer to each dissenting
shareholder to pay for his shares, the fair value of such shares is agreed
upon between any dissenting shareholder and the corporation, payment therefor
shall be made within 90 days after the date on which such corporate action was
effected, upon surrender of the certificate or certificates representing such
shares. Upon payment of the agreed value the dissenting shareholder shall
cease to have any interest in such shares.
9. If within the additional 20-day period prescribed by subsection 8, one or
more dissenting shareholders and the corporation have failed to agree as to
the fair value of the shares:
A. Then the corporation may, or shall, if it receives a demand as
provided in subparagraph (1), bring an action in the Superior Court in the
county in this State where the registered office of the corporation is
located praying that the fair value of such shares be found and determined.
If, in the case of a merger or consolidation, the surviving or new
corporation is a foreign corporation without a registered office in this
State, such action shall be brought in the county where the registered
office of the participating domestic corporation was last located. Such
action:
(1) Shall be brought by the corporation, if it receives a written
demand for suit from any dissenting shareholder, which demand is made
within 60 days after the date on which the corporate action was
effected; and if it receives such demand for suit, the corporation
shall bring the action within 30 days after receipt of the written
demand; or,
(2) In the absence of a demand for suit, may at the corporation's
election be brought by the corporation at any time from the expiration
of the additional 20-day period prescribed by subsection 8 until the
expiration of 60 days after the date on which the corporate action was
effected;
B. If the corporation fails to institute the action within the period
specified in paragraph A, any dissenting shareholder may thereafter bring
such an action in the name of the corporation;
C. No such action may be brought, either by the corporation or by a
dissenting shareholder, more than 6 months after the date on which the
corporate action was effected;
D. In any such action, whether initiated by the corporation or by a
dissenting shareholder, all dissenting shareholders, wherever residing,
except those who have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to the proceeding as an action
against their shares
IV-3
<PAGE>
quasi in rem. A copy of the complaint shall be served on each dissenting
shareholder who is a resident of this State as in other civil actions, and
shall be served by registered or certified mail, or by personal service
without the State, on each dissenting shareholder who is a nonresident. The
jurisdiction of the court shall be plenary and exclusive;
E. The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, has
satisfied the requirements of this section and is entitled to receive
payment for his shares; as to any dissenting shareholder with respect to
whom the corporation makes such a request, the burden is on the shareholder
to prove that he is entitled to receive payment. The court shall then
proceed to fix the fair value of the shares. The court may, if it so
elects, appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. The appraisers shall
have such power and authority as shall be specified in the order of their
appointment or an amendment thereof;
F. All shareholders who are parties to the proceeding shall be entitled
to judgment against the corporation for the amount of the fair value of
their shares, except for any shareholder whom the court shall have
determined not to be entitled to receive payment for his shares. The
judgment shall be payable only upon and concurrently with the surrender to
the corporation of the certificate or certificates representing such
shares. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares;
G. The judgment shall include an allowance for interest at such rate as
the court may find to be fair and equitable in all the circumstances, from
the date on which the vote was taken on the proposed corporate action to
the date of payment. If the court finds that the refusal of any shareholder
to accept the corporate offer of payment for his shares was arbitrary,
vexatious or not in good faith, it may in its discretion refuse to allow
interest to him;
H. The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any
part of such costs and expenses may be apportioned and assessed as the
court may deem equitable against any or all of the dissenting shareholders
who are parties to the proceeding to whom the corporation shall have made
an offer to pay for the shares, if the court shall find that the action of
such shareholders in failing to accept such offer was arbitrary or
vexatious or not in good faith.
Such expenses shall include reasonable compensation for and reasonable
expenses of the appraisers, but shall exclude the fees and expenses of counsel
for any party and shall exclude the fees and expenses of experts employed by
any party, unless the court otherwise orders for good cause. If the fair value
of the shares as determined materially exceeds the amount which the
corporation offered to pay therefor, or if no offer was made, the court in its
discretion may award to any shareholder who is a party to the proceeding such
sum as the court may determine to be reasonable compensation to any expert or
experts employed by the shareholder in the proceeding, and may, in its
discretion, award to any shareholder all or part of his attorney's fees and
expenses; and
I. At all times during the pendency of any such proceeding, the court may
make any and all orders which may be necessary to protect the corporation
or the dissenting shareholders, or which are otherwise just and equitable.
Such orders may include, without limitation, orders:
(1) Requiring the corporation to pay into court, or post security
for, the amount of the judgment or its estimated amount, either before
final judgment or pending appeal;
(2) Requiring the deposit with the court of certificates representing
shares held by the dissenting shareholders;
(3) Imposing a lien on the property of the corporation to secure the
payment of the judgment, which lien may be given priority over liens
and incumbrances contracted after the vote authorizing the corporate
action from which the shareholders dissent;
(4) Staying the action pending the determination of any similar
action pending in another court having jurisdiction.
IV-4
<PAGE>
10. Shares acquired by a corporation pursuant to payment of the agreed value
therefor or to payment of the judgment entered therefor, as in this section
provided, may be held and disposed of by such corporation as in the case of
other treasury shares, except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
11. The objection required by subsection 2 and the demand required by
subsection 3 may, in the case of a shareholder who is a minor or otherwise
legally incapacitated, be made either by such shareholder, notwithstanding his
legal incapacity, or by his guardian, or by any person acting for him as next
friend. Such shareholder shall be bound by the time limitations set forth in
this section, notwithstanding his legal incapacity.
12. Appeals shall lie from judgments in actions brought under this section
as in other civil actions in which equitable relief is sought.
13. No action by a shareholder in the right of the corporation shall abate
or be barred by the fact that the shareholder has filed a demand for payment
of the fair value of his shares pursuant to this section.
SECTION 910. Right Of Shareholders To Receive Payment For Shares Following A
Control Transaction. 1. Shareholders entitled to rights; exceptions. Any
holder of the voting shares of a corporation that becomes the subject of a
control transaction described in subsection 2 shall be entitled to the rights
and remedies provided in this section, unless:
A. The bylaws, by amendment adopted within 90 days of the effective date
of this Act and not subsequently rescinded by an amendment of the articles
of incorporation, provide that this section shall not be applicable to the
corporation; or
B. The articles of incorporation provide that this section shall not be
applicable to the corporation.
2. Definitions. As used in this section, unless the context indicates
otherwise, the following terms have the following meanings.
A. A "controlling person" means:
(1) A person who has, or a group of persons acting in concert that
has, voting power over voting shares of the corporation that would
entitle the holders of those shares to cast at least 25% of the votes
that all shareholders would be entitled to cast in an election of the
directors of the corporation; or
(2) A person who has, or a group of persons acting in concert that
has, voting power over at least 25% of the shares in any class of
shares entitled to elect all the directors, or any specified number of
them.
A. "person" includes any individual, firm, corporation or other
entity.
B. Notwithstanding paragraph A, a person or group of persons which would
otherwise be a controlling person within the meaning of this section shall
not be deemed a controlling person unless, subsequent to the effective date
of this section, that person or group increases the percentage of
outstanding voting shares of the corporation over which it has voting power
to a percentage in excess of the percentage of outstanding voting shares of
the corporation over which that person or group had voting power on the
effective date of this section, and to at least the amount specified in
paragraph A.
C. For the purposes of this section:
(1) A person is not a controlling person under paragraph A if that
person holds voting power, in good faith and not for the purpose of
circumventing this section, as an agent, bank, broker, nominee or
trustee for one or more beneficial owners who do not individually or,
if they are a group acting in concert, as a group have the voting power
specified in paragraph A or who are not considered a controlling person
under paragraph B;
(2) A person has voting power over a voting share if that person has
or shares, directly or indirectly, through any option, contract,
arrangement, understanding, voting trust, conversion right or
IV-5
<PAGE>
relationship, or by acting jointly or in concert or otherwise, the
power to vote, or to direct the voting of, that voting share; and
(3) A person engaged in business as an underwriter or group
consisting of persons engaged in business as underwriters is not a
controlling person under paragraph A if that person or group holds
voting power specified in paragraph A, in good faith and not for the
purpose of circumventing this section, over shares of the corporation
acquired through participation in good faith in a firm commitment
underwriting of an offering of shares registered under the United
States Securities Act of 1933.
D. A "control transaction" means the acquisition by a person or group of
the status of a controlling person.
E. The "control transaction date" means the date on which a controlling
person becomes a controlling person.
3. Notice of control transaction to be given to shareholders. Within 15 days
of the control transaction date, notice that a control transaction has
occurred shall be given by the controlling person to each shareholder of
record of the corporation holding voting shares. If the controlling person so
requests, the corporation shall, at the option of the corporation and at the
expense of the controlling person, either furnish a list of all such
shareholders to the person or group or mail the notice to all such
shareholders. There shall be included in, or enclosed with, the notice a copy
of this section. Any list provided by the corporation to a controlling person
pursuant to this subsection shall be used only for the purpose of giving the
notice required by this subsection.
4. Shareholder demand for payment. After the control transaction date, any
holder of voting shares of the corporation may, prior to or within 30 days
after the notice required by subsection 3 is given, which time period shall be
specified in the notice, make written demand on the controlling person for
payment of the amount provided in subsection 5 with respect to the voting
shares of the corporation held by the shareholder, and the controlling person
shall pay that amount to the shareholder. The demand of the shareholder shall
state the number and class or series, if any, of the shares owned by him with
respect to which the demand is made.
5. Shareholder entitled to receive payment for shares. A shareholder making
written demand under subsection 4 shall be entitled to receive cash for each
of his shares in an amount equal to the fair value of each voting share as of
the day prior to the control transaction date, taking into account all
relevant factors, including an increment representing a proportion of any
value payable for acquisition of control of the corporation.
6. Submission of certificates; notation. At the time of filing his demand
for payment for his shares pursuant to subsection 4, or within 20 days
thereafter, each shareholder demanding payment shall submit the certificate or
certificates representing his shares to the corporation or its transfer agent
for notation thereon that such demand has been made; such certificates shall
promptly be returned after entry thereon of such notation. A shareholder's
failure to do so shall, at the option of the controlling person, terminate his
rights under this section, unless a court of competent jurisdiction, for good
and sufficient cause shown, shall otherwise direct. If shares represented by a
certificate on which notation has been so made shall be transferred, each new
certificate issued for those shares shall bear a similar notation, together
with the name of the original holder of the shares who made the written
demand, and a transferee of the shares shall acquire by the transfer no rights
in the corporation other than those which the original demanding shareholder
had after making demand for payment of the fair value of the shares.
7. Written offer; balance sheet. Within 10 days after the expiration of the
period provided in subsection 4 for making demand, the controlling person
shall make a written offer to each demanding shareholder to pay for those
shares at a specified price deemed by the controlling person to be the fair
value of those shares. The offer shall be made at the same price per share to
all demanding shareholders of the same class. The notice and offer shall be
accompanied by a balance sheet of the corporation as of the latest available
date and not more than 12 months prior to the making of the offer, and a
profit and loss statement of the corporation for the 12 months' period ended
on the date of the balance sheet.
IV-6
<PAGE>
8. Agreement on fair value; payment. If, within 30 days after the expiration
of the period provided in subsection 4 for making demand, the fair value of
the shares is agreed upon between any demanding shareholder and the
controlling person, payment for those shares shall be made within 90 days
after the date on which the written offer required by subsection 7 was made,
upon surrender of the certificate or certificates representing those shares.
Upon payment of the agreed value, the demanding shareholder shall cease to
have any interest in the shares.
9. Failure to reach agreement on fair value of shares. If, within the
additional 30-day period prescribed by subsection 8, one or more demanding
shareholders and the controlling person have failed to agree as to the fair
value of shares:
A. The controlling person may, or shall, if it receives a demand as
provided in subparagraph (1), bring an action in the Superior Court in the
county in this State where the registered office of the corporation is
located praying that the fair value of those shares be found and
determined. This action:
(1) Shall be brought by the controlling person, if it receives a
written demand for suit from any demanding shareholder, which demand is
made within 60 days after the date on which the written offer required
by subsection 7 was made; and if it receives a demand for suit, the
controlling person shall bring the action within 30 days after receipt
of the written demand; or
(2) In the absence of a demand for suit, may at the election of the
controlling person be brought by the controlling person at any time
from the expiration of the additional 30-day period prescribed by
subsection 8 until the expiration of 60 days after the date on which
the written offer required by subsection 7 was made;
B. If the controlling person fails to institute the action within the
period specified in paragraph A, any demanding shareholder may thereafter
bring such an action in the name of the controlling person;
C. No such action may be brought, either by the controlling person or by
a demanding shareholder, more than 6 months after the date on which the
written offer required by subsection 7 was made;
D. In any such action, whether initiated by the controlling person or by
a demanding shareholder, all demanding shareholders, wherever residing,
except those who have agreed with the controlling person upon the price to
pay for their shares, shall be made parties to the proceeding as an action
against their shares quasi in rem. A copy of the complaint shall be served
on each demanding shareholder who is a resident of this State as in other
civil actions, and shall be served by registered or certified mail, or by
personal service without the State, on each demanding shareholder who is a
nonresident. The jurisdiction of the court shall be plenary and exclusive;
E. The court shall determine whether each demanding shareholder, as to
whom the controlling person requests the court to make such determination,
has satisfied the requirements of this section and is entitled to receive
payment for his shares; as to any demanding shareholder with respect to
whom the controlling person makes such a request, the burden is on the
shareholder to prove that he is entitled to receive payment. The court
shall then proceed to fix the fair value of the shares. The court may, if
it so elects, appoint one or more persons as appraisers to receive evidence
and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as shall be specified in the order of
their appointment or an amendment to the order of appointment;
F. All shareholders who are parties to the proceedings shall be entitled
to judgment against the controlling person for the amount of the fair value
of their shares, except for any shareholder whom the court shall have
determined not to be entitled to receive payment for his shares. The
judgment shall be payable only upon and concurrently with the surrender to
the controlling person of the certificate or certificates representing
those shares. Upon payment of the judgment, the demanding shareholder shall
cease to have any interest in those shares;
G. The judgment shall include an allowance for interest at such rate as
the court may find to be fair and equitable in all the circumstances, from
the control transaction date to the date of payment. If the court finds
that the refusal of any shareholder to accept the controlling person's
offer of payment for his shares was arbitrary, vexatious or not in good
faith, it may in its discretion refuse to allow interest to him;
IV-7
<PAGE>
H. The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the controlling person, but all or
any part of those costs and expenses may be apportioned and assessed as the
court may deem equitable against any or all of the demanding shareholders
who are parties to the proceeding to whom the controlling person shall have
made an offer to pay for the shares, if the court finds that the action of
those shareholders in failing to accept that offer was arbitrary or
vexatious or not in good faith. Those expenses shall include reasonable
compensation for and reasonable expenses of the appraisers, but shall
exclude the fees and expenses of counsel for any party and shall exclude
the fees and expenses of experts employed by any party, unless the court
otherwise orders for good cause. The court shall award each shareholder who
is a party to the proceeding reasonable compensation for any expert or
experts employed by the shareholder in the proceeding and the shareholder's
reasonable attorney's fees and expenses, if:
(1) No offer was made; or
(2) The fair value of the shares as determined materially exceeds the
amount which the controlling person offered to pay therefor; and
I. At all times during the pendency of any such proceeding, the court may
make any and all orders which may be necessary to protect the corporation,
the controlling person or the demanding shareholders, or which are
otherwise just and equitable. Those orders may include, without limitation,
orders:
(1) Requiring the controlling person to pay into court, or post
security for, the amount of the judgment or its estimated amount,
either before final judgment or pending appeal;
(2) Requiring the deposit with the court of certificates representing
shares held by the demanding shareholders;
(3) Imposing a lien on the property of the controlling person to
secure the payment of the judgment, which lien may be given priority
over liens and incumbrances contracted by the controlling person after
the control transaction date; and
(4) Staying the action pending the determination of any similar
action pending in another court having jurisdiction.
10. Holding and disposal of shares acquired by payment. Shares acquired by a
controlling person pursuant to payment of the agreed value therefor or to
payment of the judgment entered therefor, as provided in this section, may be
held and disposed of as authorized and issued shares.
11. Minors. The demand required by subsection 4 may be made, in the case of
a shareholder who is a minor or otherwise legally incapacitated, either by the
shareholder, notwithstanding his legal incapacity, or by his guardian, or by
any person acting for him as next friend. The shareholder shall be bound by
the time limitations set forth in this section, notwithstanding his legal
incapacity.
12. Appeals. Appeals shall lie from judgments in actions brought under this
section as in other civil actions in which equitable relief is sought.
13. Compliance; shareholder rights. If a person or group of persons
proposing to engage in a control transaction complies with the requirements of
this section in connection with the control transaction, the effectiveness of
the rights afforded in this section to shareholders may be conditioned upon
the consummation of the control transaction.
The person or group of persons shall give prompt written notice of the
satisfaction of any such condition to each shareholder who has made demand as
provided in this section.
14. Application. This section does not apply to:
A. Any corporation that is the subject of a control transaction and that
does not have a class of voting shares:
IV-8
<PAGE>
(1) Registered or traded on a national securities exchange; or
(2) Registered with the Securities and Exchange Commission pursuant
to the Act of Congress known as the Securities Exchange Act of 1934, as
the same has been or may hereafter be amended, United States Code
Annotated, Title 15, Section 78a et seq.;
B. Any person or group that inadvertently becomes a controlling person if
that controlling person divests itself of a sufficient amount of its voting
shares so that it is no longer a controlling person, as soon as
practicable, but in no event more than 30 days after that person or group
receives notice from the corporation that it has become a controlling
person, or to any corporation that is the subject of a control transaction
and that on the effective date of this section was a subsidiary of any
other corporation. For purposes of this paragraph, "subsidiary" shall mean
any corporation as to which any other corporation has acquired or has the
right to acquire, directly or indirectly, through the exercise of warrants,
options and rights and the conversion of all convertible securities,
whether issued or granted by the subsidiary or otherwise, voting power over
voting shares of the subsidiary that would entitle the holders thereof to
cast in excess of 50% of the votes that all shareholders would be entitled
to cast in the election of directors of that subsidiary; provided that a
subsidiary will not be deemed to cease being a subsidiary so long as such
corporation remains a controlling person within the meaning of subsection
2; or
C. Any person or group that becomes a controlling person solely as a
result of the corporation's purchase or redemption of its own voting
shares.
IV-9
<PAGE>
APPENDIX V
SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1993 through 1997. 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 elsewhere
herein. The selected consolidated financial data for the years ended December
31, 1993 through 1997 are derived from the audited consolidated financial
statements of the Company.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Electric operating reve-
nue.................... $ 954,176 $ 967,046 $ 916,016 $ 904,883 $ 893,577
Net income (loss)....... 13,422 60,229 37,980 (23,265) 61,302
Long-term obligations... 400,923 587,987 622,251 638,841 581,844
Redeemable preferred
stock.................. 39,528 53,528 67,528 80,000 80,000
Total assets............ 2,298,966 2,010,914 1,992,919 2,046,007 2,004,862
Earnings (loss) per com-
mon share.............. $ 0.16 $ 1.57 $ 0.86 $ (1.04) $ 1.65
Dividends declared per
common share........... $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 1.395
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Readers are also urged to carefully review
and consider the various disclosures made by the Company which attempt to
advise interested parties of the facts which affect the Company's business.
Factors that could cause actual results to differ materially include, among
other matters, the permanent closure and decommissioning of the Maine Yankee
nuclear generating plant and resulting regulatory proceedings; the actual
costs of decommissioning the Maine Yankee plant; outages at the other
generating units in which the Company holds interests; electric utility
restructuring, including the ongoing state and federal activities; the results
of the Company's planned sale of its generating assets; the Company's ability
to recover its costs resulting from the January 1998 ice storms; future
economic conditions; earnings-retention and dividend-payout policies;
developments in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory treatment of stranded costs;
the Company's investments 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.
OVERVIEW
As in 1996, the Company experienced higher-than-normal operations costs in
1997 from its interest in nuclear generation, particularly its 38 percent
interest in the now-closed Maine Yankee Plant, and incurred significant costs
replacing their energy. Maine Yankee went off-line for repairs in December
1996. On August 6,
V-1
<PAGE>
1997 the Maine Yankee Atomic Power Company Board of Directors voted
unanimously to close the plant permanently for economic reasons. The Company
incurred additional expenses of $46.0 million in 1997 to replace Maine Yankee
energy and pay its share of increased repair and other operations at the
plant. These costs were the major factor in the deterioration of the per-share
earnings from $1.57 in 1996 to $0.16 in 1997. The Company expects its share of
Maine Yankee costs to decrease by approximately $30.0 million in 1998 as the
plant moves toward decommissioning. See "Permanent Shutdown of Maine Yankee
Plant" below for further discussion. In addition, $5.0 million of increased
expense over 1996 was incurred to replace energy for the Millstone Unit 3
plant in Connecticut, which was taken off-line for safety modifications and
requires U.S. Nuclear Regulatory Commission approval to restart and the
Connecticut Yankee Plant, closed permanently on December 4, 1996, and now
being decommissioned.
The increased expenses could have a minor ratemaking impact. The Company's
earnings level will trigger the sharing provision of the Alternative Rate Plan
(ARP). The ARP, which took effect January 1, 1995, with regulatory approval,
provides for annual July 1 adjustments to price caps on the Company rates. The
adjustments are keyed to prior-year inflation and to measures of utility
performance.
Under the ARP, actual earnings for 1997 outside a bandwidth of 350 basis
points, above or below the 10.55 percent rate of return allowance, triggers
the profit sharing mechanism. A return below the low end of the range provides
for additional revenue through rates equal to one-half of the difference
between the actual earned rate of return, 1.04 percent in 1997, and the 7.05
percent (10.55--3.50) low end of the bandwidth. The Company remains committed
nonetheless to its public pledge to hold price increases at or below the rate
of inflation. In its annual ARP compliance filing in March 1998, the Company
requested a price-cap increase of 1.8 percent consistent with that pledge,
which includes only a small component related to earnings sharing.
The Company also plans to seek reimbursement for its costs of restoring
service to its customers after the severe ice storm of January 7 through 9,
1998 and a second storm that struck part of the Company's service territory on
January 24, 1998. The incremental costs of the repair efforts estimate is $60
to $65 million. Most of the expense was labor-related. The Company used
hundreds of crews from out-of-state utilities, tree companies, and
construction firms to repair unprecedented damage that included more than
2,500 broken utility poles. The two storms required more than 400,000 service
restorations.
A January 15, 1998 order of the MPUC allowed the Company to defer such
incremental costs on its books pending the Company's filing under the ARP,
which allows the PUC to consider and provide recovery for costs of
"extraordinary events" that have a significant impact on the utility and are
not reflected in the general indexing formula. The Company's basic rates
include a provision for "average" levels of tree trimming and outage repair as
a normal cost of supplying service. The basic rates do not include rainy-day
provisions for once-in-a-century-or-worse disasters like the January ice
storms. The Company is pursuing available means of mitigating the cost impact
of the storms, including any federal assistance that may be available.
CMP announced on January 6 that it had agreed to sell its hydro, oil-fired,
and biomass generation to Florida-based FPL Group for $846 million. If the
regulatory agencies approve the sale, approximately $500 million of the value
received could be applied to CMP's estimated $1.3 billion of stranded costs or
other obligations, reducing the amount of revenue that must be produced from
each unit of kilowatt-hour sales to recover those costs. The asset sale was
required by Maine's 1997 electric-restructuring law, which mandated retail
competition in electricity in March 2000. The utility is still seeking buyers
for its storage dams, non-utility-power contract energy, and its share of a
regional transmission tie to Quebec.
The Company continues to face the challenges of competition and industry
restructuring, and must achieve and maintain financial performance and
resources commensurate with both the provision of service demanded by
customers and the obligation to achieve competitive returns on investor
capital.
V-2
<PAGE>
RESULTS OF OPERATIONS
The Company generated net income of $13.4 million in 1997, compared to $60.2
million in 1996, and $38.0 million in 1995. Earnings applicable to common
stock were $5.2 million in 1997 or $0.16 per share, compared to $50.8 million
or $1.57 per share in 1996 and $27.8 million or $0.86 per share in 1995. Once
again the replacement power and other costs related to the now-closed Maine
Yankee nuclear plant were the main factors that eroded per-share earnings in
1997.
The Company incurred additional expenses of $46.0 million in 1997 to replace
Maine Yankee energy and to pay its share of increased repair and other
operations at the Plant. In addition, shutdowns at the Millstone Unit No. 3
and Connecticut Yankee Plants increased 1997 replacement-power cost by $5.0
million.
The Company's 1996 after-tax financial results benefited by approximately
$15.3 million, or $0.47 per share, from non-recurring items related to
settlement of federal income-tax issues, an extended outage at a non-utility
generator under contract to sell energy to CMP, and other items not applicable
to 1997.
Dividends declared per common share have remained at $0.90 on an annual
basis for the three years ended December 31, 1997.
Revenues and Sales
Electric operating revenues decreased by $12.9 million or 1.3% to $954.2
million in 1997, and increased by $51.0 million or 5.6% to $967.0 million in
1996. Lower non-territorial energy sales--a consequence of Maine Yankee being
off-line and reducing the Company's total energy supply--were the main factor
in the revenue decline in 1997. However, service-area revenues did rise 2.2
percent to $890.2 million. The components of the change in electric operating
revenues are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Revenues from Company service area kilowatt hour
sales............................................. $ 17.9 $ 15.0
Revenues from non territorial sales................ (27.1) 33.4
Other Company operating revenues................... (1.5) 3.0
Maine Electric Power Company, Inc. fuel cost recov-
ery and other revenues............................ (2.2) (0.4)
----------- ----------
Total Change in Electric Operating Revenues........ $ (12.9) $ 51.0
=========== ==========
</TABLE>
Refer to "Alternative Rate Plan" section, for a discussion of new rates and
their impact on revenues.
The Company's service-area sales for the years 1997, 1996 and 1995 are shown
in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
% % %
KWH CHANGE KWH CHANGE KWH CHANGE
----- ------ ----- ------ ----- ------
(KILOWATT-HOURS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential......................... 2,817 (0.4)% 2,829 1.0% 2,802 (2.0)%
Commercial.......................... 2,529 1.6 2,489 0.5 2,477 1.6
Industrial.......................... 3,784 2.6 3,689 4.0 3,547 (4.7)
Wholesale and lighting.............. 228 5.3 217 58.9 136 (8.7)
----- ---- ----- ---- ----- ----
Total Service-Area Sales............ 9,358 1.5% 9,224 2.9% 8,962 (2.2)%
===== ==== ===== ==== ===== ====
</TABLE>
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 the Company's water-heating programs, increased
sales in the pulp and paper industry, and the addition of a wholesale
customer. The decrease in 1995 was attributed to low economic growth, the loss
of a major industrial
V-3
<PAGE>
customer in September 1994, energy management, and loss of sales due to
conversions from electricity to alternative fuels for such purposes as space
and water heating.
The average number of residential customers increased by 4,822 in 1997,
5,157 in 1996, and 5,076 in 1995, while average usage per residential customer
declined 1.5% in 1997, 0.15% in 1996 and 3.1% in 1995.
The 1997 increase in commercial sales reflects increases in transportation,
retail trade and service sectors. Combined, these sectors comprise
approximately 79% of commercial sales. Sales to all others in the commercial
sector were lower than 1996. Sales to Maine Yankee increased by 1.7 million
kilowatt hours in 1997 and by 4 million kilowatt hours in 1996 due to the
Plant's extended outages in both periods and the ultimate permanent shutdown
of the plant in August 1997.
Industrial sales levels are significantly affected by sales to the pulp-and-
paper industry, which accounts for approximately 60% of industrial sales and
approximately 24% of total service-area sales. Sales to the pulp-and-paper
sector decreased by 0.8% in 1997 and increased by 3.7% in 1996, and decreased
by 8.6% in 1995. 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 the Company has made with several paper companies to back
down some of their self-generation and buy electricity from the Company at a
discounted rate. The 1995 decrease reflects lower sales levels primarily due
to the late-1994 loss of a major customer that had previously purchased
approximately 280 million kilowatt-hours annually. 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 the Company's actions to
preserve its remaining large-industrial-customer base and other customer
groups. Sales to all other industrial customers as a group increased 8.2% in
1997, 4.5% in 1996 and 2.7% in 1995.
Alternative Rate Plan
In December 1994, the MPUC approved a stipulation, signed by most of the
parties to the Company's ARP proceeding, which took effect January 1, 1995.
This follow-up proceeding to the Company's 1993 base-rate case was ordered by
the MPUC in an effort to develop a five-year plan containing price-cap,
profit-sharing, and pricing-flexibility components. The price-cap mechanism
provides for adjusting the Company's retail rates annually on July 1,
commencing in 1995, at a percentage combining (1) a price index, (2) a
productivity offset, (3) a sharing mechanism, and (4) flow-through items and
mandated costs. The price cap applies to all of the Company's retail rates,
and includes fuel-and-purchased-power costs that previously had been treated
separately. The components of the July 1, 1995, price-cap increase of 2.43%
are the inflation index of 2.92%, reduced by a productivity offset of 0.5%,
and increased by 0.01% for flow-through items and mandated costs. The
components of the July 1, 1996, price-cap increase of 1.26% consisted of an
inflation index of 2.55% and earnings sharing and mandated cost items of
0.64%, reduced by a productivity offset of 1.0%, and sharing of contract
restructuring and buyout savings of 0.93%. The components of the July 1, 1997
price cap increase of 1.10% consisted of an inflation index of 2.12% reduced
by a productivity and qualified facility ("QF") offset of 1.42% and increased
by 0.40% for flowthrough items and mandated costs. As originally stated in the
MPUC's order approving the ARP, operation under the ARP continues to meet the
criteria of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS No. 71). As a result,
the Company will continue to apply the provisions of SFAS No. 71 to its
accounting transactions and to its financial statements.
The Company believes the ARP provides the benefits of needed pricing
flexibility to set prices between defined floor and ceiling levels in three
service categories: (1) existing customer classes, (2) new customer classes
for optional targeted services, and (3) special-rate contracts. The Company
believes that the added flexibility will position it more favorably to meet
the competition from other energy sources that has eroded segments of its
customer base. Some price adjustments can be implemented upon 30-days' notice
by the Company, while certain others are subject to expedited review by the
MPUC. The Company has utilized this feature in providing new rates to
approximately 29,000 customers representing approximately 45% of annual
kilowatt-hour sales and 32%
V-4
<PAGE>
of service-area revenues. 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.
The ARP also contains provisions to protect the Company and ratepayers
against unforeseen adverse results from its operation. These include review by
the MPUC if the Company's actual return on equity falls outside a designated
range, a mid-period review of the ARP by the MPUC in 1997 (including possible
modification or termination), and a "final" review by the MPUC in 1999 to
determine whether or with what changes the ARP should continue after 1999.
Significant results of the 1997 mid-period review were an increase to 11.5% in
the ROE used for earnings sharing (effective with the July 1999 price change)
and reaffirmation by the MPUC to allow the Company to meet the requirements
established by SFAS No. 71. The Company submitted its 1998 compliance filing
in March 1998.
While the ARP provides the Company with an expanded opportunity to be
rewarded for efficiency, it also presents the risk of reduced rates of return
if costs rise unexpectedly, like those that have resulted from the recent
outages at Maine Yankee, or if revenues from sales decline or are not adequate
to fund costs. The Company believes the ARP continues to be a competitive
advantage.
For a detailed discussion of the ARP, refer to Note 3 to Consolidated
Financial Statements, "Regulatory Matters"--"Alternative Rate Plan," and
"Meeting the Requirements of SFAS 71."
RESTRUCTURING LEGISLATION
MPUC Proceeding to Set Prices for Transmission and Distribution Business
The MPUC initiated a proceeding for the Company in which the MPUC would
determine the prices to be charged by the transmission and distribution
business beginning in March 2000. See Note 3 "Regulatory Matters"--"Industry
Restructuring and Strandable Costs." On December 5, 1997, the Company
presented its revenue requirement justification, including stranded costs, to
the MPUC. The Company's filing reflected an annual transmission and
distribution revenue requirement of $295.2 million and also reflected recovery
of an estimated net present value $1.3 billion in stranded costs. The
Company's estimated stranded costs amount did not include the effects of the
sale of generating assets discussed below.
Subsequently, the Company supplemented its filing by updating its revenue
requirement calculations, including recovery of stranded costs, on February
10, 1998, to reflect an estimate of the effect of the sale of generating
assets on stranded costs and other items. Additionally, the Company's February
10, 1998 filing included its proposal for the design of prices for the
transmission and distribution business, beginning March 2000. The Company's
supplemental filing reflects an annual transmission and distribution revenue
requirement of $280.5 million and recovery of an estimated net present value
$0.8 billion in stranded costs. The total annual revenue amount requested to
be included in transmission and distribution prices beginning March 2000 is
$449.5 million. The sale of generating assets should allow the Company to
reduce its stranded costs obligations from the previously estimated $1.3
billion to the now anticipated $0.8 billion. The Company is requesting a
return on equity of 12.5% and an increase in the common equity ratio from the
current 40% to a desired 55%. The Company's rate design proposal reflects an
approach that is expected to minimize customer confusion and bill impacts as
retail choice begins in March 2000. However, the Company does recommend a
movement to less variable and more fixed rate components over time as stranded
cost recovery decreases and in a manner that will not significantly impact any
customers. The Company is unable to predict with certainty the outcome of the
MPUC proceeding establishing prices for its transmission and distribution
business. The MPUC is expected to reach a decision in late 1998 and provide
for a limited update for certain items closer to March 2000.
AGREEMENT FOR SALE OF COMPANY'S GENERATION ASSETS
On April 28, 1997, the Company announced a plan to seek proposals to
purchase its generating assets and, as part of an auction process, received
final bids on December 10, 1997. On January 6, 1998, the Company
V-5
<PAGE>
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 $18 million for assets sold by Union Water
Power Company, a subsidiary of the Company, to Florida-based FPL Group, the
winning bidder in the auction process.
The hydropower assets to be included in the sale represent approximately 373
megawatts of generating capacity. The fossil-fueled assets included in the
sale consist of the Company's interest in the William F. Wyman steam plant in
Yarmouth, Maine, the largest of the Company's three fossil-fueled generating
assets at 594 megawatts, Mason Station in Wiscasset, Maine, at 145 megawatts,
and Cape Station in South Portland, Maine, at 42 megawatts. The sole biomass
plant is the 31-megawatt unit in Fort Fairfield, Maine, owned by a wholly-
owned subsidiary of the Company.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing
approximately 488 megawatts, its 2.5-percent interest in the Millstone Unit
No. 3 nuclear generating unit in Waterford, Connecticut, its 3.59-percent
interest in the output of the Vermont Yankee nuclear generating plant in
Vernon, Vermont, and its entitlement in the NEPOOL Phase II interconnection
with Hydro-Quebec all attracted insufficient interest to be included in the
present sale. The Company will continue to seek buyers for those assets. The
Company did not offer for sale its interests in the Maine Yankee (Wiscasset,
Maine), Connecticut Yankee (Haddam, Connecticut) and Yankee Atomic (Rowe,
Massachusetts) nuclear generating plants, all of which are in the process of
being decommissioned.
The electric utility restructuring law passed by the Maine Legislature in
the spring of 1997 requires the Company to divest its generating plants and
power-purchase agreements by March 1, 2000, when its customers will be free to
choose among competitive energy suppliers, but the Company elected to conduct
an earlier sale. In addition, as part of its agreement with FPL Group, the
Company entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000.
Substantially all of the generating assets included in the sale are subject
to the lien of the Company's General and Refunding Mortgage Indenture dated as
of April 15, 1976 (the "Indenture"). Therefore, substantially all of the
proceeds from sale must be deposited with the trustee under the Indenture at
the closing of the sale to free the generating assets from the lien of the
Indenture. Proceeds on deposit with the trustee may be used by the Company to
redeem or repurchase bonds under the terms of the Indenture, including the
possible discharge of the Indenture. In addition, the proceeds could provide
the flexibility to redeem or repurchase outstanding equity securities. The
Company must also provide for payment of applicable taxes resulting from the
sale. The manner and timing of the ultimate application of the sale proceeds
after closing are in any event subject to various factors, including Indenture
provisions, market conditions and terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants will
reduce the Company's stranded costs and other costs, which could lower the
amount that would otherwise be collected from customers by nearly half a
billion dollars. However, the Company will incur incremental costs as a result
of the power buy-back arrangements in excess of the pre-sale costs of capacity
and energy from the plants being sold, which will effectively lower the amount
of sale proceeds available to reduce stranded and other costs. The Company
believes that the reduction in stranded and other costs could permit a
reduction in rates for the Company's customers.
The sale is subject to various closing conditions, including the approval of
state and federal regulatory agencies, which approval process the Company
expects could take approximately four to twelve months, and is subject to
consents or covenant waivers from certain of the Company's lenders. The
Company cannot predict whether or in what form such approvals, consents or
waivers will be obtained.
The Company believes that consummation of the asset sale described above
would constitute significant progress in resolving some of the uncertainties
regarding the effects of electric-utility industry restructuring on the
Company's investors; however, significant risks and uncertainties would
remain. These include, in addition
V-6
<PAGE>
to those enumerated above under "Note Re Forward-Looking Statements," but are
not limited to: (1) the possibility that a state or federal regulatory agency
will impose adverse conditions on its approval of the asset sale; (2) the
possibility that new state or federal legislation will be implemented that
will increase the risks to such investors from those contemplated by current
legislation; and (3) the possibility of legislative, regulatory or judicial
decisions that would reduce the ability of the Company to recover its stranded
costs from that contemplated by existing law.
PROPOSED FORMATION OF HOLDING COMPANY
To prepare further for the restructured electric utility industry
contemplated by the legislation, on December 8, 1997, the Company filed an
application with the MPUC for authorization to create a holding company that
would have as subsidiaries the Company, the Company's existing non-utility
subsidiaries and other entities. The Company believes that a holding company
structure will facilitate the Company's transition to a partially deregulated
electricity market that is scheduled to open access to electricity for Maine
consumers beginning on March 1, 2000. Competing as an electric energy provider
in that market as of that date will require the creation of an energy company
that is legally separate from the Company. The Company also proposed the
creation of an affiliated energy marketing affiliate in the MPUC filing.
The Company's application to the MPUC also requested approval of the
creation of a limited liability company in which a proposed new subsidiary of
the holding company would hold a fifty percent membership interest to
participate in the natural gas distribution business in Maine, with the
remaining fifty percent interest being held by New York State Electric & Gas
Corporation ("NYSEG") or its affiliate. For further discussion of the NYSEG
joint venture, see "Expansion of Lines of Business," below.
The proposed holding company formation must also be approved by federal
regulators, including the Securities and Exchange Commission and the FERC, and
by the holders of the Company's common stock and 6% Preferred Stock. The
Company is taking steps to pursue these approvals, but cannot predict the
outcome.
EXPANSION OF LINES OF BUSINESS
The Company is preparing for competition by expanding its business
opportunities through subsidiaries that capitalize on core competencies. One
subsidiary, MaineCom Services, arranges fiber-optic data service for bulk
carriers, offering support for cable television or "super-cellular" personal
communication vendors, and providing other telecommunications consulting
services. TeleSmart is a wholly-owned credit and collections subsidiary.
Another wholly-owned subsidiary, CMP International Consultants, provides
utility consulting (domestic and international) and research, and engineering
and environmental services. The 100-percent owned Union Water Power Company
provides management of rivers and recreational facilities, locating of
underground utility facilities and infrared photography, real estate brokerage
and management, modular housing, and utility construction services. The
subsidiaries often utilize skills of former Company employees and regularly
compete for business with other companies. In addition, a division of the
Company is focusing on retail competition by developing effective marketing
techniques and energy-efficient services and products.
As noted above, the Company and NYSEG have signed a joint-venture agreement
to distribute natural gas to many Maine communities that are not currently
served with that fuel. The Company and NYSEG propose to offer natural-gas
service in five areas of Maine, primarily the Augusta, Bangor, Bath-Brunswick,
Rumford and Waterville areas. None of the 60 towns in those areas currently
has a natural-gas distribution system in place. The gas would be drawn from
two new gas-pipeline projects now under development by unrelated parties that
would carry Canadian gas, after receipt of additional regulatory approvals,
through Maine and into the regional energy market using substantial portions
of electric transmission-line corridors owned by the Company and MEPCo under
agreements entered into on March 16, 1998. On March 9, 1998, the MPUC gave
preliminary approval to the Company-NYSEG proposal, subject to final approval
after submission of detailed plans on financing, construction, and other
matters. Competing applications to serve some of the areas have been filed.
The Company cannot predict the outcome of the MPUC proceeding. The Company
will continue to evaluate the
V-7
<PAGE>
opportunity to be a provider of natural gas to Maine customers, and the
economics thereof, including monitoring progress of the planned pipelines,
competitive considerations and relevant regulatory decisions.
FiveCom LLC ("FiveCom"), a majority-owned subsidiary of the Company's
wholly-owned MaineCom Services, is building a fiber-optic cable network
connecting cities in New England and plans to sell capacity on the network to
telephone companies, Internet providers, and other telecommunications
businesses. FiveCom has used transmission-line corridors owned by the Company,
and a substantial part of the expanded network in Connecticut and
Massachusetts will occupy utility corridors of Northeast Utilities, which owns
a minority interest in FiveCom. The Company's equity investment in MaineCom
Services at the end of 1997 was $15.9 million. In addition, the Company is
providing up to $30 million to FiveCom through a loan arrangement for the
development and construction of the expanded network, and for working capital.
The Company believes there is a growing need for such a fiber-optic network in
New England, but cannot predict the results of this venture.
PERMANENT SHUTDOWN OF MAINE YANKEE PLANT
On August 6, 1997, the Board of Directors of Maine Yankee voted to
permanently cease power operations at its nuclear generating plant at
Wiscasset, Maine (the "Plant") and to begin decommissioning the Plant. As
reported in detail in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, its Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997 and its Current
Reports on Form 8-K dated May 15, 1997 and August 1, 1997, and reported in
more condensed form below, the Plant experienced a number of operational and
regulatory problems and has been shut down since December 6, 1996. The
decision to close the Plant permanently was based on an economic analysis of
the costs, risks and uncertainties associated with operating the Plant
compared to those associated with closing and decommissioning it. The Plant's
operating license from the Nuclear Regulatory Commission ("NRC") was scheduled
to expire on October 21, 2008.
Recent Operating History. The Plant provided reliable and low-cost power
from the time it commenced operations in late 1972 to 1995. Beginning in early
1995, however, Maine Yankee encountered various operational and regulatory
difficulties with the Plant. In 1995, the Plant was shut down for almost the
entire year to repair a large number of steam generator tubes that were
exhibiting defects. Shortly before the Plant was to go back on-line in
December 1995, a group with a history of opposing nuclear power released an
undated, unsigned, anonymous letter alleging that in 1988 Yankee Atomic (then
an affiliated consultant of Maine Yankee) and Maine Yankee had used the
results of a faulty computer code as a basis to apply to the NRC for an
increase in the Plant's power output. In response to the allegation, on
January 3, 1996, the NRC issued a Confirmatory Order that restricted the Plant
to 90 percent of its licensed thermal operation level, which restriction was
still in effect when the Plant was permanently shut down.
As a result of the controversy associated with the allegations, the NRC, at
the request of the Governor of Maine, conducted an intensive Independent
Safety Assessment ("ISA") of the Plant in the summer and fall of 1996. On
October 7, 1996, the NRC issued its ISA report, which found that while the
Plant had been operated safely and could continue to operate, there were
weaknesses that needed to be addressed, which would require substantial
additional spending by Maine Yankee. On December 10, 1996, Maine Yankee
responded to the ISA report, acknowledged many of the weaknesses, and
committed to revising its operations and procedures to address the NRC's
criticisms.
Another result of the controversy associated with the allegations was an
investigation of Maine Yankee initiated by the NRC's Office of Investigations
("OI"), which, in turn, referred certain issues to the United States
Department of Justice ("DOJ") for possible criminal prosecution. Subsequently,
on September 27, 1997, the DOJ, through the United States Attorney for Maine,
announced that its review had revealed insufficient grounds for criminal
prosecution. The Company believes that the OI investigation, however, could
ultimately result in the imposition of civil penalties, including fines, on
Maine Yankee, and expects resolution of outstanding NRC enforcement action in
1998.
V-8
<PAGE>
In 1996 the Plant was generally in operation at the 90-percent level from
late January to early December, except for a two-month outage from mid-July to
mid-September. The Plant was shut down again on December 6, 1996, to address
several concerns, and has not operated since then. The precipitating event
causing the shutdown was the need to evaluate and resolve cable-separation
compliance issues, and on December 18, 1996, the NRC issued a Confirmatory
Action Letter requiring the Plant to remain shut down until Maine Yankee's
plan for resolving the cable-separation issues was accepted by the NRC.
Subsequently, Maine Yankee uncovered additional issues, including among others
the possibility of having to replace defective fuel assemblies, address
additional cable-separation issues, and determine the condition of the Plant's
steam generators, which contributed to further operational uncertainty. On
January 29, 1997, the Plant was placed on the NRC's Watch List, and on January
30, 1997, the NRC issued a supplemental Confirmatory Action Letter requiring
the resolution of additional concerns before the Plant could be restarted.
In December 1996 Maine Yankee requested proposals from several utilities
with large and successful nuclear programs to provide a management team, and
ultimately contracted with Entergy Nuclear, Inc., effective February 13, 1997,
for management services that included providing a new president and regulatory
compliance officer. The Entergy-provided management team made progress in
addressing technical issues, but a number of operational and regulatory
uncertainties remained. On May 27, 1997, the Board of Directors of Maine
Yankee voted to minimize spending while preserving the options of restarting
the Plant or conveying ownership interests to a third party. After
unsuccessful negotiations with one prospective purchaser, Maine Yankee found
no other interest in purchasing the Plant and, based on its economic analysis,
closed the Plant permanently.
As required by the NRC, on August 7, 1997, Maine Yankee certified to the NRC
that Maine Yankee had permanently ceased operations and that all fuel
assemblies had been permanently removed from the Plant's reactor vessel. On
August 27, 1997, Maine Yankee filed the required Post-Shutdown Activities
Report with the NRC, describing its planned post-shutdown activities and a
proposed schedule.
Costs. The Company has been incurring substantial costs in connection with
its 38-percent share of Maine Yankee costs, as well as additional costs for
replacement power while the Plant has been out of service. For the twelve
months ended December 31, 1997, such costs amounted to approximately $132.3
million for the Company: $72.8 million due to basic operations and maintenance
costs, $54.0 million due to replacement power costs and $5.5 million
associated with incremental costs of operations and maintenance. The Maine
Yankee Board's decision to close the Plant mitigated the costs the Company
would otherwise have incurred in 1997 through a phasing down of Maine Yankee's
operations and maintenance costs, with Maine Yankee's workforce having been
reduced from approximately 475 to 214 employees as of December 31, 1997, and
further reductions planned, but did not reduce the need to buy replacement
energy and capacity. The amount of costs for replacement energy and capacity
varies based on the Company's power requirements and market conditions, but
the Company expects such costs to be within a range of approximately $5.0
million to $5.5 million per month during 1998, based on current energy and
capacity needs and market conditions. Under the electric utility restructuring
legislation enacted by the Maine Legislature in May 1997 discussed below, the
Company's obligations to provide replacement power will terminate on March 1,
2000, along with its other power-supply obligations. The impact of the
nuclear-related costs on the Company was the major obstacle to achieving
satisfactory results in 1997, despite the approximately $75 million in annual
Maine Yankee-related costs embedded in the current determination of the
Company's required revenues for ratemaking purposes and despite success in
controlling other operating costs. See "Results of Operations" above.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $29.8 million as of December 31, 1997, and under Maine Yankee's
Power Contracts and Additional Power Contracts, the Company is responsible for
38-percent of the costs of decommissioning the Plant. Maine Yankee's most
recent estimate of the cost of decommissioning is $380.6 million, based on a
1997 study by an independent engineering consultant, plus estimated costs of
interim spent-fuel storage of $127.6 million, for an estimated total cost of
$508.2 million (in 1997 dollars). The previous estimate for decommissioning,
by the same consultant, was $316.6 million (in 1993 dollars), which resulted
in approximately $14.9 million being collected annually from Maine Yankee's
sponsors pursuant to a 1994 Federal Energy Regulatory Commission ("FERC") rate
V-9
<PAGE>
order. Through December 31, 1997, Maine Yankee had collected approximately
$199.5 million for its decommissioning obligations.
On November 6, 1997, Maine Yankee submitted the new estimate to the FERC as
part of a rate case reflecting the fact that the Plant is no longer operating
and has entered the decommissioning phase. If the FERC accepts the new
estimate, the amount of Maine Yankee's collections for decommissioning would
rise from the $14.9 million previously allowed by the FERC to approximately
$36 million per year. Several interested parties have intervened in the FERC
proceeding, including the MPUC.
On September 1, 1997, Maine Yankee estimated the sum of the future payments
for the closing, decommissioning and recovery of the remaining investment in
Maine Yankee to be approximately $930 million, of which the Company's 38-
percent share would be approximately $353 million. Legislation enacted in
Maine in 1997 calling for restructuring the electric utility industry provides
for recovery of decommissioning costs, to the extent allowed by federal
regulation, through the rates charged by the transmission and distribution
companies. Based on the legislation and regulatory precedent established by
the FERC in its opinion relating to the decommissioning of the Yankee Atomic
nuclear plant, the Company believes that it is entitled to recover
substantially all of its share of such costs from its customers and as of
December 31, 1997, is carrying on its consolidated balance sheet a regulatory
asset and a corresponding liability in the amount of $329 million, which is
the $353 million discussed above net of the Company's post-September 1, 1997
cost-of-service payments to Maine Yankee.
Management Audit. On September 2, 1997, the MPUC released the report of a
consultant it had retained to perform a management audit of Maine Yankee for
the period January 1, 1994, to June 30, 1997. The report contained both
positive and negative conclusions, the latter including: that Maine Yankee's
decision in December 1996 to proceed with the steps necessary to restart the
Plant was "imprudent", that Maine Yankee's May 27, 1997 decision to reduce
restart expenses while exploring a possible sale of the Plant was
"inappropriate", based on the consultant's finding that a more objective and
comprehensive competitive analysis at that time "might have indicated a
benefit for restarting" the Plant; and that those decisions resulted in Maine
Yankee incurring $95.9 million in "unreasonable" costs. On October 24, 1997,
the MPUC issued a Notice of Investigation initiating an investigation of the
shutdown decision and of the operation of the Plant prior to shutdown, and
announced that it had directed its consultant to extend its review to include
those areas. The Company believes the report's negative conclusions are
unfounded and may be contradictory. The Company has been charging its share of
the Maine Yankee expenses to income, and believes it would have substantial
constitutional and jurisdictional grounds to challenge any effort in an MPUC
proceeding to alter wholesale Maine Yankee rates made effective by the FERC.
On November 7, 1997, Maine Yankee initiated a legal challenge to the MPUC
investigation in the Maine Supreme Judicial Court alleging that such an
investigation falls exclusively within the jurisdiction of the FERC and that
the MPUC investigation is therefore barred on constitutional grounds. The
Company filed a similar legal challenge on the same day. The MPUC subsequently
stayed its investigation pending the outcome of Maine Yankee's FERC rate case,
in which the MPUC is participating, while indicating that its consultant would
continue its extended review. Based on preliminary indications from the
consultant, the Company expects the report on the extended review to call for
additional disallowances, which Maine Yankee has said it expects to contest
vigorously.
Maine Yankee Debt Restructuring and FERC Rate Proceeding. Maine Yankee
entered into agreements in August 1997 with the holders of its outstanding
First Mortgage Bonds and its lender banks (the "Standstill Agreements") under
which the bondholders and banks agreed that they would not assert that the
August 1997 voluntary permanent shutdown of the Plant constituted a covenant
violation under Maine Yankee's First Mortgage Indenture or its two bank credit
agreements. The parties also agreed in the Standstill Agreements to maintain
Maine Yankee's bank borrowings at a level below that of the prior aggregate
bank commitments, which level Maine Yankee considered adequate for its
foreseeable needs. The Standstill Agreements, as extended in October 1997,
were to terminate on January 15, 1998, by which date Maine Yankee was to have
reached agreement on restructured debit arrangements reflecting its
decommissioning status. Maine Yankee's rate filing with the FERC reflected the
Plant's decommissioning status and requested an effective date of January 15,
1998,
V-10
<PAGE>
for the amendments to Maine Yankee's Power Contracts and Additional Power
Contracts, which revise Maine Yankee's wholesale rates and clarify and confirm
the obligations of Maine Yankee's sponsors to continue to pay their shares of
Maine Yankee's costs during the decommissioning period.
On January 14, 1998, the FERC issued an "Order Accepting for Filing and
Suspending Power Sales Contract Amendment, and Establishing Hearing
Procedures" (the "FERC Order") in which the FERC accepted for filing the rates
associated with the amended Power Contracts and made them effective January
15, 1998, subject to refund. The FERC also granted intervention requests,
including among others those of the MPUC, Maine Yankee's largest bondholder,
and two of its lender banks, denied the request of an intervenor group to
summarily dismiss part of the filing, and ordered that a public hearing be
held concerning the prudence of Maine Yankee's decision to shut down the Plant
and on the justness and reasonableness of Maine Yankee's proposed rate
amendments. The Company expects the prudence issue to be pursued vigorously by
several intervenors, including among others the MPUC, which stayed its own
prudence investigation pending the outcome of the FERC proceeding after the
jurisdictional challenge by Maine Yankee and the Company discussed above. The
hearing in the FERC rate proceeding is scheduled to begin on December 1, 1998.
The Company cannot predict the outcome of the FERC proceeding.
On January 15, 1998, Maine Yankee, its bondholders and lender banks revised
the Standstill Agreements and extended their term to April 15, 1998, subject
to satisfying certain milestone obligations during the term of the extension.
One such obligation was that Maine Yankee must have accepted, by February 12,
1998, an underwritten commitment to refinance its bonds and bank debt, subject
only to closing conditions reasonably capable of being satisfied by April 15,
1998, and reasonably satisfactory to the bondholders and banks. Maine Yankee
accepted such a commitment prior to the deadline, received regulatory approval
of the refinancing on March 9, 1998, and is negotiating final loan
documentation, and preparing for a closing before April 15. The proposed
refinancing consists of an extendible three-year bank credit facility and an
eight-year term loan facility.
Other Maine Yankee Shareholders. Higher nuclear-related costs are also
affecting other stockholders of Maine Yankee in varying degrees. Bangor Hydro-
Electric Company, a Maine-based 7% stockholder, cited its "deteriorating"
financial condition, suspended its common stock dividend, and eventually
obtained rate relief. Maine Public Service Company, a 5% stockholder, cited
problems in satisfying financial covenants in loan documents, reduced its
common stock dividend substantially in early March 1997 and obtained rate
relief. Northeast Utilities (20% stockholder through three subsidiaries),
which is also adversely affected by the substantial additional costs
associated with the three shut-down Millstone nuclear units and the
permanently shut-down Connecticut Yankee unit, as well as significant
regulatory issues in Connecticut and New Hampshire, has implemented an
indefinite suspension of its quarterly common stock dividends. Largely as a
result of nuclear-related costs, Northeast Utilities reported a loss of $135
million for 1997 and continues to experience difficulty in satisfying loan
covenants. 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, and would
constitute a default under Maine Yankee's bond indenture and its two major
credit agreements unless cured within applicable grace periods by the
defaulting stockholder or other stockholders. The Company cannot predict,
however, what effect, if any, the financial difficulties being experienced by
some Maine Yankee stockholders will have on Maine Yankee or the Company.
INTERESTS IN OTHER NUCLEAR PLANTS
On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic
Power Company voted to permanently shut down the Connecticut Yankee plant for
economic reasons, and to decommission the unit, which had not operated since
July of 1996. The Company has a 6% equity interest in Connecticut Yankee,
totaling approximately $6.6 million at December 31, 1997. The Company incurred
replacement power costs of approximately $5.2 million during the twelve months
ended December 31, 1997. Based on cost estimates provided by Connecticut
Yankee, the Company determined its share of the cost of Connecticut Yankee's
continued compliance with regulatory requirements, recovery of its plant
investments, decommissioning and closing the plant to be approximately $36.9
million and is carrying a regulatory asset and a corresponding
V-11
<PAGE>
liability in that amount on its consolidated balance sheet as of December 31,
1997. The Company is currently recovering through rates an amount adequate to
recover these expenses.
The Company has a 2.5% direct ownership interest in Millstone Unit No. 3,
which is operated by Northeast Utilities. This facility has been off-line
since April 1996 due to Nuclear Regulatory Commission ("NRC") concerns
regarding license requirements and the Company cannot predict when it will
return to service. Millstone Unit No. 3, along with two other units at the
same site owned by Northeast Utilities, is on the NRC's "watch list" in
"Category 3", which requires formal NRC action before a unit can be restarted.
The Company incurred replacement power costs related to Millstone Unit No. 3
of approximately $4.9 million during the twelve months ended December 31,
1997. On August 7, 1997, the Company and other minority owners of Millstone
Unit No. 3 filed suit and initiated an arbitration claim against Northeast
Utilities, its trustees, and two of its subsidiaries, alleging mismanagement
of the unit by the defendants. The minority owners are seeking to recover
their additional costs resulting from such mismanagement, including their
replacement power costs. The Company cannot predict the outcome of the
litigation and arbitration.
ENVIRONMENTAL MATTERS
Federal, state and local environmental laws and regulations cover air and
water quality, land use, power plant and transmission line siting, noise and
aesthetics, solid and hazardous waste and other environmental matters.
Compliance with these laws and regulations impacts the manner and cost of
electric service by requiring, among other things, changes in the design and
operation of existing facilities and changes or delays in the location,
design, construction and operation of new facilities. These environmental
regulations most significantly affect the Company's electric power generating
facilities, which are to be sold to FPL Group, as discussed above. The
purchase agreement contemplates that CMP would retain the liabilities and
obligations which occurred prior to the transfer of those assets and those
incurred subsequent to the transfer will become the obligation of FPL. In
addition, certain environmental proceedings under federal and state hazardous
substance and hazardous waste regulations (such as the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
Resource Conservation and Recovery Act ("RCRA") and similar state statutes)
are discussed below. See Note 4 "Commitments and Contingencies"--"Legal and
Environmental Matters".
OPEN-ACCESS TRANSMISSION SERVICE RULING
On April 24, 1996, the Federal Energy Regulatory Commission (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 take wholesale transmission service they provide themselves
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.
On July 9, 1996, the Company and MEPCO submitted compliance filings to meet
the new pro forma tariff non-price minimum terms and conditions of non-
discriminatory transmission service. Since then CMP and MEPCO have made
additional filings revising their tariffs in response to subsequent FERC
Orders. In addition, CMP filed on February 21, 1997, a revised tariff to
comport with the NEPOOL Open Access Transmission Tariff. Since July 9, 1996,
the Company and MEPCO have been transmitting energy pursuant to their filed
tariffs, subject to refund. FERC subsequently issued Orders No. 888-A and 888-
B which generally reaffirm Order No. 888 and clarify certain terms.
V-12
<PAGE>
Also on April 24, 1996, FERC 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. The Company participated in efforts to develop a
regional OASIS for New England, which was operational January 3, 1997. FERC
subsequently approved a New England Power Pool-wide Open Access Tariff,
subject to refund and issuance of further orders. The Company also
participated in revising the New England Power Pool Agreement, which is
pending FERC approval.
COMPETITION AND ECONOMIC DEVELOPMENT
The Company faces competition in several aspects of its traditional business
and anticipates that competition will continue to put pressure on both sales
and the price the Company can charge for its product. Alternative fuels and
recent modifications to regulations that had restricted competition from
suppliers outside of the Company's service territory have expanded customers'
energy options. As a result, the Company continues to pursue retention of its
customer base. This increasingly competitive environment has resulted in the
Company's entering into contracts 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, the Company
redesigned some rates to encourage off-peak usage and discourage switching to
alternative fuels. These include water-heat and space-heat retention rates,
Super-Saver rates, which discount off-peak usage, Diesel Deferral rates,
Economic Development rates, and the Maine Made Incentive program, which target
small businesses. 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 45% of
annual service area kilowatt-hour sales and 32% 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. Refer to Note 4 to Consolidated Financial
Statements, "Commitments and Contingencies--Competition," for additional
information.
NON-UTILITY GENERATORS
In accordance with prior MPUC policy and the ARP, $92 million of buy-out or
contract-restructuring costs incurred since January 1992 were included in
Deferred Charges and Other Assets on the Company's balance sheet and will be
amortized over their respective fuel savings periods. The Company restructured
42 contracts representing 349 megawatts of capacity that should result in
approximately $258 million in fuel savings over the next five years.
In 1997 the Company also replaced a purchased power contract for energy from
a wood-fired power plant in Ashland, Maine. The existing purchased power
contract was terminated and a new agreement for 40 megawatts, at lower rates
was signed, which is estimated to save CMP customers the equivalent of $21
million in net present value. Refer to Note 6 to Consolidated Financial
Statements, "Capacity Arrangements--Non-Utility Generators," for more
information.
On October 31, 1997, a contract with a major NUG from which the Company was
obligated to purchase electricity at substantially above-market prices
expired. As a result, the Company expects annual operating income to increase
by approximately $25 million. Two months of this benefit, or approximately $4
million, are reflected in 1997 results.
V-13
<PAGE>
EXPENSES AND TAXES
Fuel expense, comprised of fuel used for company generation and the energy
portion of purchased power, increased by approximately $29 million in 1997.
The increase is due primarily to increased fuel cost for company owned
facilities and additional purchased power to replace the loss of output from
the nuclear facilities. Fuel expense fluctuates with changes in the price of
oil, the level of energy generated and purchased, and changes in the Company's
own generation mix.
The extended outage and ultimate closing of Maine Yankee (see "Permanent
Shutdown of Maine Yankee Plant") resulted in significant increases in fuel
expense, including purchased-power energy and purchased-power capacity
expense, and affected the Company's generation mix in 1997 and 1996. The
Company replaced this power through short-term agreements.
The Company's oil-fired generation increased to 35.1% of the Company's net
generation in 1997, compared to 16.3% in 1996 net generation, and 21.6% in
1995. The NUG component of the energy mix increased to 35.2% in 1997 from
31.4% in 1996, as a result of the ongoing outage and ultimate closing of Maine
Yankee (see "Permanent Shutdown of Maine Yankee Plant"). The average price of
NUG energy of 8.4 cents per kilowatt-hour is significantly higher than the
Company's own cost of generation, and much higher than the price of energy on
today's open market. The Company continues to try to moderate the cost of non-
utility generation by pursuing renegotiation of contracts, by supporting
legislative bills that would promote that objective, and by other means such
as strict contract-term enforcement.
Purchased-power capacity expense is the non-fuel operation, maintenance, and
cost-of-capital expense associated with power purchases, primarily from the
Company's share of the Yankee nuclear generating facilities. In 1997,
purchased-power capacity expense increased by $4.1 million. The increase is
due primarily to the costs associated with the Maine Yankee plant and the need
to replace the capacity when the Maine Yankee plant shut-down permanently in
August 1997.
In December 1996, the Board of Directors of Connecticut Yankee Atomic Power
Company announced a permanent shutdown of the Connecticut Yankee plant for
economic reasons and their intent to decommission the plant. The Company has a
6% equity interest in Connecticut Yankee, totaling approximately $6.6 million
at December 31, 1997. Purchased power capacity expense in 1997, 1996 and 1995
includes $7.4 million, $11.5 million and $11.5 million, respectively, of costs
related to this facility. During 1992, Yankee Atomic Electric Company, in
which the Company is a 9.5% equity owner, discontinued power generation and
prepared a plan for decommissioning. Purchased-power capacity expense in 1997,
1996 and 1995 contained approximately $4.6 million, $4.8 million and $3.9
million, respectively, of costs related to this facility. The level of
purchased-power capacity expense also fluctuates with the timing of the
maintenance and refueling outages at the Vermont Yankee nuclear generating
facility in which the Company has a 4% equity interest. The cost of capacity
increases during refueling periods. Refer to Note 6 to Consolidated Financial
Statements, "Capacity Arrangements--Power Agreements," and "Interests in Other
Nuclear Plants" above for a more detailed discussion.
In 1997, other operations expense increased by approximately $23.6 million
as compared to the year ended December 31, 1996. The major contributors to the
increase were the absence of the effect of a $6.4 million reversal in 1996 for
a reserve established in 1995, $3.7 million of amortization and costs
associated with a large purchased-power contract buyout, $4.3 million of
additional transmission and distribution expenses, and $1.9 million of expense
for post-retirement benefits being collected in rates under the ARP.
Previously post-retirement benefits were deferred for future recovery. In
addition, various other operations expenses of $7.3 million contributed to the
1997 increase.
The 1996 reduction in other operation and maintenance expense is attributed
to the reversal of a reserve of $6.4 million established in 1995 for the
Company's workers compensation regulatory asset for which recovery was not
certain. In the June 1996 ARP decision, the MPUC approved recovery of this
regulatory asset. Also in 1996, the Company increased the workers compensation
obligation and charged the increase of $1.6 million to expense. As a result, a
net year-over-year reduction of $11.2 million for workers compensation was
recorded.
V-14
<PAGE>
The Company did incur an increase in distribution expenses of $4.1 million,
mainly due to line-clearance activities. The Company has contractual
obligations related to demand-side energy-management programs which increased
expense by $2.8 million in 1996. Maintenance expense other than distribution
increased $3.5 million, of which $1.4 million was for repairs at the Millstone
Unit No. 3 nuclear facility.
Maintenance expense decreased by $3.5 million primarily due to decreased
storm activity in 1997 versus 1996, as well as the lower costs involved with a
turbine/generator project at a Company steam station when comparing 1997 to
1996.
Federal and State income taxes fluctuate with the level of pre-tax earnings
and the regulatory treatment of taxes by the MPUC. This expense decreased by
$22.7 million as compared to the year ended December 31, 1996. The decrease is
due primarily to lower pre-tax earnings for the 12 months ended December 31,
1997.
Other income decreased by $2.5 million in 1997 as compared to 1996 primarily
due to excess expenses over revenue associated with a non-operating division
of the Company, and resulting lower taxes due to this occurrence.
Other interest expense increased in 1997 over 1996 primarily due to
additional interest incurred for tax audit settlements and amended returns
interest.
In 1997, interest expense reflected a net decrease of $100 thousand as
compared to the year ended December 31, 1996. Other interest increased due to
a higher level of short-term borrowings and interest expenses associated with
various IRS issues. The long-term debt interest expense decrease was due
primarily to the lower level of Medium-Term Notes outstanding than in 1996.
Interest expense decreased in 1996 by $1.4 million due to lower levels of
Medium-Term Notes and the repurchase of $11.5 million of Series N General and
Refunding Mortgage Bonds. Long-term debt interest expense includes $1 million
of accelerated amortization of loss on reacquired debt, as specified in the
1996 ARP. Short-term interest costs over the period 1995 through 1997
fluctuated with the levels of rates and outstanding balances of short-term
debt.
In July 1997 and 1996, the Company redeemed $14 million of its 8 7/8% Series
Preferred Stock at par, under the mandatory and optional sinking-fund
provisions of that series. This reduced dividends by approximately $1,860,000
in 1977 and $620,000 in 1996.
State and federal income taxes fluctuate with the level of pre-tax earnings
and the regulatory treatment of taxes by the MPUC. A settlement with the
Internal Revenue Service on audits for the years 1992-1994 provided an
increase to income tax expense of approximately $1.4 million in 1997. In 1996,
the settlement with the Internal Revenue Service on audits for the years 1988-
1991 provided a decrease to income tax expense of approximately $4.8 million.
See Note 2 to Consolidated Financial Statements, "Income Taxes" and Note 4,
"Commitments and Contingencies," for more information.
YEAR 2000 COMPUTER ISSUES
In the next two years, most large companies will face a potentially serious
information systems (computer) problem because most software application and
operational programs written in the past will not properly recognize calendar
dates beginning in the year 2000. This could force computers to either shut
down or lead to incorrect calculations. The Company began the process of
identifying the changes required to their computer programs and hardware
during the year 1996. The majority of the necessary modifications to the
Company's centralized financial, customer, and operational information systems
are expected to be completed by the end of 1998. The Company believes it will
incur approximately $3.0 million of costs by March 31, 2000, associated with
making the necessary modifications identified to date to the centralized
systems. As of December 31, 1997 approximately $1.5 million of costs have been
incurred. Noncentralized systems are currently being reviewed for Year 2000
problems. The Company is unable to predict the costs to be incurred for
correction of such noncentralized systems, but expects the scope and schedule
for such work to be less complex than for its
V-15
<PAGE>
centralized information systems. In addition, the Company cannot predict the
extent of its vulnerability to third parties' noncompliance and their failure
to remediate year 2000 issues.
LIQUIDITY AND CAPITAL RESOURCES
The MPUC approved increases in electric retail rates of 1.10%, 1.26% and
2.43% in 1997, 1996 and 1995, respectively, that produced additional cash
pursuant to the price cap mechanism in the ARP. Increases in rates under the
ARP were based on increases in the related price index, the sharing mechanism
and provisions for certain mandated costs. Prior rate increases were provided
to fund costs of fuel, energy-management programs, operations, maintenance,
systems improvements, and investments in generation needed to ensure the
Company's continued ability to provide reliable electric service.
Approximately $89.0 million of cash was provided from net income after
adding back non-cash items. Approximately $7.8 million of cash was used for
fluctuations in working capital. Other operating activities, including the
financing of deferred energy-management programs required cash resources of
approximately $4.6 million.
The level of cash balances and activity in capital investment programs have
required little investment-related activity during 1997 and 1996. The
redemption of Medium-Term Notes and the purchase of 8 7/8% Series Preferred
Stock used $25 million and $14 million, respectively, of cash during 1997.
Dividends paid on common stock were $29.2 million, while preferred-stock
dividends were $8.5 million.
Capital-investment activities, primarily construction expenditures, utilized
$45.8 million in cash during 1997. Construction expenditures comprised
approximately $3.7 million for generating projects, $2.6 million for
transmission, $24.6 million for distribution, and $9.4 million for general
facilities and other construction expenditures for a total of $40.3 million.
The Company invested $4.8 million in affiliates in 1997. The two major
components of the investments were the $5.8 million invested in MaineCom
Services and Aroostook Valley Electric Company's repayment of an advance of
$1.2 million.
The Company estimates its capital expenditures for the period 1998 through
2002 at approximately $275 million. Actual capital expenditures will depend
upon the availability of capital and other resources, load forecasts, customer
growth, and general business conditions. During the five-year period, the
Company also anticipates incurring approximately $434 million for sinking
funds, and debt and equity maturities.
The Company estimates that for the period 1998 through 2002, internally
generated funds from operating activities should provide a substantial portion
of the construction-program requirements. However, the availability at any
particular time of internally generated funds for such requirements will
depend on working-capital needs, market conditions, and other relevant
factors.
Replacement power costs and increased operation and maintenance expenses had
a significant negative effect on cash and liquidity in 1997. The Company
incurred additional expenses of $46 million in 1997 over 1996 to replace Maine
Yankee power and pay its share of increased repair and other operations at the
plant. The Company expects its share of Maine Yankee costs to decrease by
approximately $30 million in 1998 as the plant moves toward decommissioning.
In addition, shutdowns at other nuclear facilities increased 1997 replacement-
power costs by $5 million; these facilities include Millstone Unit No. 3 in
Connecticut, which was taken off-line for safety modifications and requires
U.S. Nuclear Regulatory Commission approval to restart, and the Connecticut
Yankee plant, which closed permanently on December 4, 1996, and is now being
decommissioned.
At the annual meeting of the stockholders of the Company on May 15, 1997,
the holders of the Company's outstanding preferred stock consented to the
issuance of $350 million in principal amount of the Company's Medium-Term
Notes in addition to the $150 million in principal amount to which they had
previously consented. This expansion of the Medium-Term Note program is being
implemented to increase the Company's financing flexibility in anticipation of
restructuring and increased competition. As of December 31, 1997, $43 million
of
V-16
<PAGE>
Medium-Term Notes were outstanding which, under the terms of the program, will
permit issuance of an additional $457 million of such notes. On February 24,
1998, the Company issued a two-year 6.38% Medium-Term Note in the principal
amount of $30 million, and on March 20, 1998, issued 18-month 6.35% Medium-
Term Notes in the aggregate principal amount of $30 million, raising the total
outstanding to $103 million.
To support its short-term capital requirements, on October 23, 1996, the
Company entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders.
The arrangement has two credit facilities: a $75 million, 364-day revolving
credit facility that currently matures on October 21, 1998, and a $50 million,
3-year revolving credit facility that matures on October 22, 1999. Both credit
facilities require annual fees on the total credit lines. The fees are based
on the Company's credit ratings and allow for various borrowing options
including LIBOR-priced, base-rate-priced and competitive-bid-priced loans.
Access to commercial paper markets has been substantially precluded, as a
result of downgrading of the Company's credit ratings. The amount of
outstanding short-term borrowing will fluctuate with day-to-day operational
needs, the timing of long-term financing, and market conditions. The Company
had $60 million outstanding as of December 31, 1997 under the 364-day
revolving credit facility, all of which had been paid as of March 25, 1998.
In 1997, the Company deposited approximately $2.2 million in cash, net of
withdrawals, with the Trustee under the Company's General and Refunding
Mortgage Indenture in satisfaction of the renewal and replacement fund and
other obligations under the Indenture. The total of such cash on deposit with
the Trustee as of December 31, 1997, was approximately $61.7 million. Under
the Indenture such cash may be applied at any time, at the direction of the
Company, to the redemption of bonds outstanding under the Indenture at a price
equal to the principal amount of the bonds being redeemed, without premium,
plus accrued interest to the date fixed for redemption. Such cash may also be
withdrawn by the Company by substitution of allocated property additions or
available bonds.
On February 26, 1998, the Company called for redemption on March 30, 1998,
all of the outstanding $11 million principal amount of its General and
Refunding Mortgage Bonds, Series N 8.50% Due 2001, at a redemption price equal
to their principal amount plus accrued interest to the date fixed for
redemption. On the same day the Company also called for redemption on March
30, 1998, all of the outstanding $50 million principal amount of its General
and Refunding Mortgage Bonds, Series R 7 7/8% Due 2023, also at a redemption
price equal to their principal amount plus accrued interest. The bond
redemptions are being funded from the approximately $61.7 million on deposit
with the trustee under the renewal and replacement fund and release provisions
of the Company's General and Refunding Mortgage Indenture. On February 27,
1998, the Company called for redemption on April 1, 1998, 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 are being paid on the
preferred stock since the redemption date is a regular dividend payment date.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This
statement, which is effective for fiscal years ending after December 15, 1997,
establishes simplified standards for computing and presenting earnings per
share ("EPS"). In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement, which is effective for fiscal years
beginning after December 15, 1997 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
anticipates that adoption of these standards will not have a significant
impact on its financial statements.
V-17
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Financial Statements and Financial Statement Schedule
Management report on responsibility for financial reporting............... V-19
Report of Independent Accountants......................................... V-20
Financial Statements:
Consolidated Statement of Earnings for the three years ended December
31, 1997, 1996 and 1995................................................ V-21
Consolidated Balance Sheet as of December 31, 1997 and 1996............. V-22
Consolidated Statement of Cash Flows.................................... V-23
Consolidated Statement of Capitalization and Interim Financing.......... V-24
Consolidated Statement of Changes in Common Stock Investment............ V-25
Notes to Consolidated Financial Statements.............................. V-26
</TABLE>
V-18
<PAGE>
REPORT OF MANAGEMENT
The Management of Central Maine Power Company and its subsidiary is
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.
The Company maintains a system of internal accounting controls that is
designed to provide reasonable assurance that the Company's 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 its goals in a cost-effective manner.
The Company has 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 has established an Audit Committee, composed entirely
of outside directors, which oversees the Company's 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.
Coopers & Lybrand L.L.P., independent public accountants, has been retained
to audit the Company'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 David E. Marsh
President and Chief Executive Chief Financial Officer
Officer
V-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Central Maine Power Company
We have audited the consolidated financial statements and the financial
statement schedule of Central Maine Power Company and subsidiary listed in
Item 8 and Item 14(a) of this Form 10-K. These financial statements and
financial statements schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Central Maine
Power Company and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Portland, Maine
January 30, 1998
V-20
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Electric Operating Revenues (Notes 1 and
3)..................................... $ 954,176 $ 967,046 $ 916,016
----------- ----------- -----------
Operating Expenses
Fuel used for company generation
(Notes 1 and 6)...................... 34,946 16,827 18,702
Purchased power--energy (Notes 1 and
6)................................... 419,144 407,926 408,072
Purchased power--capacity (Note 6).... 112,810 108,720 93,489
Other operation....................... 206,494 182,910 188,013
Maintenance........................... 33,904 37,449 32,862
Depreciation and amortization (Note
1)................................... 54,132 53,694 55,023
Federal and state income taxes (Note
2)................................... 7,424 30,125 13,328
Taxes other than income taxes......... 28,303 27,861 27,885
----------- ----------- -----------
Total Operating Expenses............ 897,157 865,512 837,374
----------- ----------- -----------
Equity In Earnings Of Associated
Companies (Note 6)..................... 6,260 6,138 7,217
----------- ----------- -----------
Operating Income........................ 63,279 107,672 85,859
----------- ----------- -----------
Other Income (Expense)
Allowance for equity funds used during
construction
(Note 1)............................. 642 851 663
Other, net............................ 1,806 5,255 7,170
Income taxes (Notes 2 and 3).......... (738) (1,897) (2,704)
----------- ----------- -----------
Total Other Income.................. 1,710 4,209 5,129
----------- ----------- -----------
Income Before Interest Charges.......... 64,989 111,881 90,988
----------- ----------- -----------
Interest Charges
Long term debt (Note 7)............... 44,346 47,966 50,307
Other interest (Note 7)............... 7,660 4,341 3,244
Allowance for borrowed funds used
during construction
(Note 1)............................. (439) (655) (543)
----------- ----------- -----------
Total Interest Charges.............. 51,567 51,652 53,008
----------- ----------- -----------
Net Income.............................. 13,422 60,229 37,980
Dividends On Preferred Stock............ 8,209 9,452 10,178
----------- ----------- -----------
Earnings Applicable To Common Stock..... $ 5,213 $ 50,777 $ 27,802
----------- ----------- -----------
Weighted Average Number Of Shares Of
Common Stock Outstanding............... 32,442,752 32,442,752 32,442,752
Earnings Per Share Of Common Stock
(Basic and Diluted).................... $ 0.16 $ 1.57 $ 0.86
Dividends Declared Per Share Of Common
Stock.................................. $ 0.90 $ 0.90 $ 0.90
</TABLE>
The accompanying notes are an integral part of these financial statements.
V-21
<PAGE>
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Electric Property, at original cost (Notes 6 and 7)...... $1,674,876 $1,644,434
Less: Accumulated Depreciation (Notes 1 and 6).......... 634,384 598,415
---------- ----------
Net electric property in service....................... 1,040,492 1,046,019
---------- ----------
Construction work in progress (Note 4).................. 15,105 20,007
Nuclear fuel, less accumulated amortization of $9,035 in
1997 and 1996.......................................... 1,157 1,157
---------- ----------
Total net electric property........................... 1,056,754 1,067,183
Investments In Associated Companies, at equity (Notes 1
and 6).................................................. 76,509 67,809
---------- ----------
Total Net Electric Property and Investments in Associ-
ated Companies....................................... 1,133,263 1,134,992
---------- ----------
Current Assets
Cash and cash equivalents............................... 20,841 8,307
Accounts receivable, less allowances for uncollectible
accounts of $2,400 in 1997 and $4,177 in 1996:
Service--billed......................................... 84,323 84,396
Service--unbilled (Notes 1 and 3)....................... 46,807 45,721
Other accounts receivable............................... 15,247 17,517
Prepaid income taxes (Note 2)........................... -- 264
Fuel oil inventory, at average cost..................... 5,390 9,256
Materials and supplies, at average cost................. 11,779 12,172
Funds on deposit with trustee (Note 7).................. 61,694 59,512
Prepayments and other current assets.................... 9,110 9,500
---------- ----------
Total Current Assets.................................. 255,191 246,645
---------- ----------
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects,
net (Note 1)........................................... 84,026 89,551
Yankee Atomic purchased-power contract (Note 6)......... 13,056 16,463
Connecticut Yankee purchased-power contract (Note 6).... 36,877 45,769
Maine Yankee purchased-power contract (Note 6).......... 329,206 --
Regulatory assets--deferred taxes (Note 2).............. 236,632 239,291
Deferred charges and other assets (Notes 1 and 3)....... 210,715 238,203
---------- ----------
Total Deferred Charges and Other Assets............... 910,512 629,277
---------- ----------
Total Assets.......................................... $2,298,966 $2,010,914
========== ==========
STOCKHOLDERS' INVESTMENTS AND LIABILITIES
Capitalization (see separate statement) (Note 7)
Common stock investment................................. $ 487,594 $ 511,578
Preferred stock......................................... 65,571 65,571
Redeemable preferred stock.............................. 39,528 53,528
Long-term obligations................................... 400,923 587,987
---------- ----------
Total Capitalization.................................. 993,616 1,218,664
---------- ----------
Current Liabilities and Interim Financing
Interim financing (see separate statement) (Note 7)..... 238,000 32,500
Sinking-fund requirements (Note 7)...................... 9,411 9,375
Accounts payable........................................ 97,080 93,197
Dividends payable....................................... 9,202 9,512
Accrued interest........................................ 11,201 11,610
Accrued income taxes (Note 2)........................... 3,001 --
Miscellaneous current liabilities....................... 15,762 21,342
---------- ----------
Total Current Liabilities and Interim Financing....... 383,657 177,536
---------- ----------
Commitments and Contingencies (Notes 4 and 6)
Reserves and Deferred Credits
Accumulated deferred income taxes (Note 2).............. 350,912 357,994
Unamortized investment tax credits (Note 2)............. 30,533 31,988
Yankee Atomic purchased-power contract (Note 6)......... 13,056 16,463
Connecticut Yankee purchased-power contract (Note 6).... 36,877 45,769
Maine Yankee purchased-power contract (Note 6).......... 329,206 --
Regulatory liabilities--deferred taxes (Note 2)......... 56,852 52,616
Other reserves and deferred credits (Note 5)............ 104,257 109,884
---------- ----------
Total Reserves and Deferred Credits................... 921,693 614,714
---------- ----------
Total Stockholders' Investment and Liabilities........ $2,298,966 $2,010,914
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
V-22
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Operating Activities
Net income..................................... $ 13,422 $ 60,229 $ 37,980
Items not requiring (providing) cash:
Depreciation................................... 44,170 44,104 43,676
Amortization................................... 34,291 34,881 37,196
Deferred income taxes and investment tax cred-
its, net...................................... (2,204) 3,318 (3,710)
Allowance for equity funds used during con-
struction..................................... (642) (851) (663)
Changes in certain assets and liabilities:
Accounts receivable............................ 1,257 (3,565) (12,539)
Inventories.................................... 4,259 (4,884) 595
Other current assets........................... 390 (308) (1,954)
Accounts payable............................... 4,617 (16,862) 12,025
Accrued taxes and interest..................... 2,856 (4,970) 30,282
Miscellaneous current liabilities.............. (5,580) 7,472 3,335
Deferred energy-management costs............... (1,940) (5,222) (4,075)
Maine Yankee outage accrual.................... (10,350) 8,280 (4,710)
Purchased-power contract buyouts............... -- (75) (13,405)
Other, net..................................... 7,664 3,961 11,495
-------- --------- --------
Net Cash Provided by Operating Activities.... 92,210 125,508 135,528
-------- --------- --------
Investing Activities
Construction expenditures...................... (40,306) (46,922) (44,867)
Investments in associated companies............ (4,769) (12,059) (600)
Changes in accounts payable--investing activi-
ties.......................................... (734) 1,889 (1,655)
-------- --------- --------
Net Cash Used by Investing Activities........ (45,809) (57,092) (47,122)
-------- --------- --------
Financing Activities
Issuances:
Revolving credit agreement..................... 52,500 7,500 --
Medium-term notes.............................. -- 10,000 30,000
Other long-term obligations.................... -- 870 --
Redemptions:
Mortgage bonds................................. -- (11,500) --
Preferred stock................................ (14,000) (14,000) (5,472)
Medium-term notes.............................. (25,000) (34,000) (65,000)
Finance Authority of Maine..................... (6,800) (6,300) --
Short-term obligations, net.................... -- -- (8,000)
Other long-term obligations.................... (645) (1,780) (860)
Funds on deposit with trustee.................. (2,182) (29,593) --
Dividends:
Common stock................................... (29,220) (29,220) (29,222)
Preferred stock................................ (8,520) (9,763) (10,287)
-------- --------- --------
Net Cash Used by Financing Activities........ (33,867) (117,786) (88,841)
-------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................. 12,534 (49,370) (435)
Cash and Cash Equivalents, beginning of year.... 8,307 57,677 58,112
-------- --------- --------
CASH AND CASH EQUIVALENTS, End Of Year.......... $ 20,841 $ 8,307 $ 57,677
======== ========= ========
Supplemental Cash-Flow Information:
Cash paid during the year for:
Interest (net of amounts capitalized).......... $ 47,551 $ 47,835 $ 51,127
Income taxes (net of amounts refunded of
$29,045 in 1995).............................. $ 7,105 $ 32,632 $(11,994)
</TABLE>
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.
V-23
<PAGE>
CONSOLIDATED STATEMENT OF CAPITALIZATION AND INTERIM FINANCING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1997 1996
---------------- ----------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Capitalization (Note 7)
Common Stock Investment:
Common stock, par value $5 per share:
Authorized--80,000,000 shares Outstand-
ing--32,442,752 shares in 1997 and
1996................................... $ 162,214 $ 162,214
Other paid in capital...................... 277,168 276,818
Retained earnings.......................... 48,212 72,546
---------- ----------
Total Common Stock Investment.......... 487,594 39.6% 511,578 40.9%
---------- ----- ---------- -----
Preferred Stock--not subject to mandatory
redemption................................ 65,571 5.3 65,571 5.2
---------- ----- ---------- -----
Preferred Stock--subject to mandatory re-
demption.................................. 46,528 60,528
Less: current sinking fund requirements.... 7,000 7,000
---------- ----------
Redeemable Preferred Stock--subject to
mandatory redemption...................... 39,528 3.2 53,528 4.3
---------- ----- ---------- -----
Long Term Obligations:
Mortgage bonds............................ 421,000 421,000
Less: unamortized debt discount........... 1,437 1,620
---------- ----------
Total Mortgage Bonds................... 419,563 419,380
---------- ----------
Medium term notes.......................... 43,000 68,000
Less: unamortized debt discount............ -- --
---------- ----------
Total Medium-Term Notes................ 43,000 68,000
---------- ----------
Other Long-Term Obligations:
Lease obligations......................... 34,517 36,283
Pollution-control facility and other
notes.................................... 84,254 91,699
---------- ----------
Total Other Long-Term Obligations...... 118,771 127,982
---------- ----------
Less: Current Sinking Fund Requirements and
Current Maturities........................ 180,411 27,375
---------- ----------
Total Long-Term Obligations............ 400,923 32.6 587,987 47.0
---------- ----- ---------- -----
Total Capitalization................... 993,616 80.7 1,218,664 97.4
---------- ----- ---------- -----
Interim Financing (Note 7):
Short-term obligations.................... 60,000 7,500
Current maturities of long-term obliga-
tions.................................... 178,000 25,000
---------- ----------
Total Interim Financing................ 238,000 19.3 32,500 2.6
---------- ----- ---------- -----
Total Capitalization and Interim Fi-
nancing............................... $1,231,616 100.0% $1,251,164 100.0%
========== ===== ========== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
V-24
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
-----------------------------------------------------
AMOUNT AT OTHER PAID- RETAINED
SHARES PAR VALUE IN CAPITAL EARNINGS TOTAL
---------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE--DECEMBER 31,
1994.................... 32,442,752 $162,214 $275,627 $ 53,482 $491,323
---------- -------- -------- -------- --------
Net income............... 37,980 37,980
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (10,178) (10,178)
Cost for reacquired pre-
ferred stock............ 581 (581)
Shareholders Rights Plan
redemption.............. (324) (324)
Capital stock expense.... 403 403
-------- --------
BALANCE--DECEMBER 31,
1995.................... 32,442,752 162,214 276,287 51,504 490,005
---------- -------- -------- -------- --------
Net income............... 60,229 60,229
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (9,452) (9,452)
Cost for reacquired pre-
ferred stock............ 536 (536)
Capital stock expense.... (5) (5)
-------- --------
BALANCE--DECEMBER 31,
1996.................... 32,442,752 162,214 276,818 72,546 511,578
---------- -------- -------- -------- --------
Net income............... 13,422 13,422
Dividends declared:
Common stock........... (29,199) (29,199)
Preferred stock........ (8,209) (8,209)
Cost for reacquired pre-
ferred stock............ 348 (348)
Capital stock expense.... 2 2
-------- --------
BALANCE--DECEMBER 31,
1997.................... 32,442,752 $162,214 $277,168 $ 48,212 $487,594
========== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
V-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Description
Central Maine Power Company (the Company) is an investor-owned 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 the accounts of the Company
and its 78%-owned subsidiary, Maine Electric Power Company, Inc. (MEPCO). The
Company accounts for its investments in associated companies not subject to
consolidation using the equity method. The 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.
Impact of New Accounting Standards
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This
statement, which is effective for fiscal years ending after December 15, 1997,
establishes simplified standards for computing and presenting earnings per
share ("EPS"). In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement, which is effective for fiscal years
beginning after December 15, 1997 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
anticipates that adoption of these standards will not have a significant
impact on its financial statements.
Regulation
The rates, operations, accounting, and certain other practices of the
Company and MEPCO are subject to the regulatory authority of the Maine Public
Utilities Commission (MPUC) and the Federal Energy Regulatory Commission
(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.
V-26
<PAGE>
The Company's utility plant in service as of December 31 was comprised as
follows:
<TABLE>
<CAPTION>
AVERAGE
REMAINING
AVERAGE SERVICE
SERVICE LIFE
1997 1996 LIFE* 12/31/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Generation....................... $ 514,815 $ 506,159 37.6 years 20.9 years
Transmission..................... 250,109 247,666 41.6 years 25.2 years
Distribution..................... 704,345 685,142 37.7 years 28.8 years
General.......................... 205,607 205,467 18.6 years 13.3 years
---------- ----------
$1,674,876 $1,644,434
========== ==========
</TABLE>
- --------
* Based on the Company'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 3.0% in each of 1997, 1996 and
1995.
Allowance for Funds Used During Construction (AFC)
The Company capitalizes 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 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 9.7 percent, 8.7 percent,
and 8.4 percent in 1997, 1996 and 1995, respectively.
Deferred Charges and Other Assets
The Company defers and amortizes certain costs in a manner consistent with
authorized or probable ratemaking treatment. The Company 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,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NUG contract buy-outs and restructuring (Note 6).... $ 92,946 $ 113,796
Energy-management costs............................. 31,995 35,986
Postretirement benefits (Note 5).................... 20,900 22,962
Financing costs..................................... 18,560 20,684
Environmental site clean-up costs (Note 4).......... 7,891 7,876
Non-operating property, net......................... 7,624 7,176
Workers Compensation................................ 5,350 6,050
Other, including MEPCO.............................. 25,449 23,673
----------- -----------
Total............................................. $ 210,715 $ 238,203
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1998.................................................. $26,934
1999.................................................. 24,433
2000.................................................. 23,323
2001.................................................. 19,818
2002.................................................. 19,226
</TABLE>
V-27
<PAGE>
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. The Company is allowed a current return on these assets based on its
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, 1997, substantially all deferred taxes related to
Seabrook I have been amortized. The recoverable investments as of December 31,
1997, and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- RECOVERY
1997 1996 PERIODS ENDING
----------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Recoverable costs of:
Seabrook I................ $ 141,084 $ 141,084 2015
Other Projects............ 57,491 57,491 2001
----------- -----------
198,575 198,575
----------- -----------
Less: accumulated amortiza-
tion....................... 114,035 108,209
Less: related income taxes.. 514 815
----------- -----------
Total Net Recoverable
Investment............. $ 84,026 $ 89,551
=========== ===========
</TABLE>
NOTE 2: INCOME TAXES
The components of federal and state income-tax provisions reflected in the
Consolidated Statement of Earnings are as follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current......................................... $ 8,534 $21,682 $15,965
Deferred........................................ (5,922) 5,751 2,278
Investment tax credits, net..................... (1,455) (464) (1,715)
Regulatory deferred............................. 5,390 (623) (2,619)
------- ------- -------
Total Federal Taxes........................... 6,547 26,346 13,909
------- ------- -------
State:
Current......................................... $ 1,831 $ 7,022 $ 3,777
Deferred........................................ (1,720) (10) 343
Regulatory deferred............................. 1,504 (1,336) (1,997)
------- ------- -------
Total State Taxes............................. 1,615 5,676 2,123
------- ------- -------
Total Federal and State Income Taxes.......... $ 8,162 $32,022 $16,032
======= ======= =======
Federal and state income taxes charged to:
Operating expenses.............................. $ 7,424 $30,125 $13,328
Other income.................................... 738 1,897 2,704
------- ------- -------
$ 8,162 $32,022 $16,032
======= ======= =======
</TABLE>
V-28
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at statutory
federal rate..................... $ 6,990 35.0% $30,301 35.0% $18,161 35.0%
------- ---- ------- ---- ------- ----
Permanent differences:
Investment tax-credit amortiza-
tion........................... (1,469) (7.3) (1,482) (1.7) (1,613) (3.1)
Dividend-received deduction..... (1,911) (9.6) (1,895) (2.2) (2,219) (4.3)
Other, net...................... (80) (.4) (293) (0.3) (217) (0.4)
------- ---- ------- ---- ------- ----
3,530 17.7 26,631 30.8 14,112 27.2
======= ==== ======= ==== ======= ====
Effect of timing differences for
items which receive flow through
treatment:
Tax-basis repairs............... (1,020) (5.1) (1,229) (1.4) (891) (1.7)
Depreciation differences flowed
through in prior years......... 2,923 14.6 2,327 2.7 2,291 4.4
Accelerated flowback of deferred
taxes on loss on abandoned gen-
erating projects............... 1,700 8.5 1,708 1.9 1,873 3.6
Benefits related to Section 1245
Losses......................... (1,818) (9.1) -- -- -- --
IRS audit resolution regarding
depreciation methods........... 852 4.3 (3,230) (3.7) -- --
Loss on Reacquired Debt......... 540 2.7 537 0.6 535 1.0
Provision for deferred taxes
relating to normalization of
certain short-term timing
differences*................... -- -- (2,545) (4.9)
Flowback of Excess Federal
Deferred Taxes due to TRA86.... (1,005) (5.0) (520) (0.6) (400) (0.8)
Other, net...................... 845 4.2 122 0.1 (1,066) (2.0)
------- ---- ------- ---- ------- ----
Federal Income Tax Expense and Ef-
fective Rate..................... $ 6,547 32.8% $26,346 30.4% $13,909 26.8%
======= ==== ======= ==== ======= ====
</TABLE>
- --------
* During 1995, the Company adjusted the deferred tax balances for certain
normalized items.
The Company and MEPCO record deferred income-tax expense in accordance with
regulatory authority; they also defer investment and energy tax credits and
amortize them over the estimated lives of the assets that generated the
credits.
A valuation allowance has not been recorded at December 31, 1997, and 1996,
as the Company expects that all deferred income tax assets will be realized in
the future.
V-29
<PAGE>
Accumulated deferred income taxes consisted of the following in 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets resulting from:
Investment tax credits, net....................... $ 21,047 $ 22,050
Regulatory liabilities............................ 25,188 17,919
Alternative minimum tax........................... 6,053 10,241
All other......................................... 27,072 26,588
----------- -----------
79,360 76,798
----------- -----------
Deferred tax liabilities resulting from:
Property.......................................... 295,293 288,370
Abandoned plant................................... 57,921 61,729
Regulatory assets................................. 77,572 85,508
----------- -----------
430,786 435,607
----------- -----------
Accumulated deferred income taxes, end of year, net. $ 351,426 $ 358,809
=========== ===========
Accumulated deferred income taxes, recorded as:
Accumulated deferred income taxes................. $ 350,912 $ 357,994
Recoverable costs of Seabrook 1 and abandoned pro-
jects, net....................................... 514 815
----------- -----------
$ 351,426 $ 358,809
=========== ===========
</TABLE>
NOTE 3: REGULATORY MATTERS
Alternative Rate Plan
Effective January 1, 1995, rate regulation for the Company underwent a
fundamental change with the implementation of the ARP, which replaced
traditional regulation. Instead of rate changes based on the level of costs
incurred and capital investments, the ARP provides for one annual adjustment
of an inflation-based cap on each of the Company's rates, with no separate
reconciliation and recovery of fuel and purchased-power costs. Under the ARP,
the MPUC is continuing to regulate the Company's operations and prices,
provide for continued recovery of deferred costs, and specify a range for its
rate of return. The MPUC confirmed in its order approving the ARP that the ARP
is intended to comply with the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
As a result, the Company will continue to apply the provisions of SFAS No. 71
to its accounting transactions and its future financial statements. See
"Meeting the Requirements of SFAS No. 71," below.
The ARP contains a mechanism that provides price caps on the Company's
retail rates to increase annually on July 1, which commenced July 1, 1995, by
a percentage combining (1) a price index, (2) a productivity offset, (3) a
sharing mechanism, and (4) flow-through items and mandated costs. The price
cap applies to all of the Company's retail rates, and includes fuel-and-
purchased power cost that previously had been treated separately. Under the
ARP, fuel expense is no longer subject to reconciliation or specific rate
recovery, but is subject to the annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity factors,
a general productivity offset of 1.0%, (0.5% for 1995), and a second formula-
based offset that started in 1996 intended to reflect the limited effect of
inflation on the Company's purchased-power costs during the proposed five-year
initial term of the ARP.
The sharing mechanism will adjust the subsequent year's July price-cap
change in the event the Company's earnings are outside a range of 350 basis
points above or below the Company's allowed return on equity, starting
V-30
<PAGE>
at the 10.55% allowed return (1995) and indexed annually for changes in
capital costs. Outside that range, profits and losses would be shared equally
by the Company and ratepayers in computing the price-cap adjustment. This
feature commenced with the price-cap change of July 1, 1996, and reflected
1995 results. The ROE used for earnings sharing was increased to 11.5%
effective with the July 1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost savings
from non-utility generator contract buy-outs and restructuring, recovery of
energy-management costs, penalties for failure to attain customer-service and
energy-efficiency targets. The ARP also generally defines mandated costs that
would be recoverable by the Company notwithstanding the index-based price cap.
To receive such treatment, a mandated cost's revenue requirement must exceed
$3 million and have a disproportionate effect on the Company or the electric-
power industry.
Pursuant with the annual price-change provision in the ARP, the MPUC
approved the following increases:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Inflation Index.......................................... 2.12% 2.55% 2.92%
Productivity Offset...................................... (1.00) (1.00) (.50)
Qualfying Facility Offset................................ (.42) -- --
Earnings Sharing......................................... -- .32 --
Flowthrough and Mandated Items........................... .40 (0.61) .01
----- ----- ----
1.10% 1.26% 2.43%
===== ===== ====
</TABLE>
Industry Restructuring and Strandable Costs
Legislation that will restructure the electric-utility industry in Maine by
March 1, 2000, was enacted by the Maine Legislature in May 1997, and is
discussed in detail under this heading below. A departure from traditional
regulation, however, could have a substantial impact on the value of utility
assets and on the ability of electric utilities to recover their costs through
rates. In the absence of full recovery, utilities would find their above-
market costs to be "stranded", or unrecoverable, in the new competitive
setting.
The Company has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of the Company'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 the
Company's strandable costs is related to above-market costs of purchased-power
obligations arising from the Company's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, and deferred regulatory assets.
There is a high degree of uncertainty that surrounds stranded-cost estimates,
resulting from having to rely on projections and assumptions about future
conditions, including, among others, estimates of the future market for power.
Restructuring Legislation and MPUC Proceeding: The 1997 Maine restructuring
legislation requires the MPUC, when retail access begins, to provide a
"reasonable opportunity" to recover stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. Stranded costs are defined as the legitimate, verifiable and
unmitigatable costs made unrecoverable as a result of the restructuring
required by the legislation and would be determined by the MPUC as provided in
the legislation. The MPUC must conduct separate adjudicatory proceedings to
determine the stranded costs for each utility and the corresponding revenue
requirements and stranded-cost charges to be charged by each transmission-and-
distribution utility. Those proceedings must be completed by July 1, 1999. The
MPUC has initiated the proceeding that will determine the Company's stranded
costs, corresponding revenue requirements and stranded-cost charges to be
charged by it when it becomes a transmission-and-distribution utility and has
scheduled completion of the proceeding for the second half of 1998. On
December 5, 1997, the Company filed direct testimony in the proceeding
estimating its future revenue requirements as a transmission-and-distribution
utility and providing an updated estimate of its strandable costs, which are
to be defined by the MPUC later in the proceeding. The Company estimated its
V-31
<PAGE>
strandable costs at approximately $1.3 billion and explained the assumptions
underlying the estimate. The estimate was developed without consideration of
the Company's own generating assets, most of which are under contract to be
sold to FPL Group in 1998. The Company's strandable costs, therefore, could be
partially mitigated by the proceeds, in excess of book value of nearly $500
million. The Company cannot predict the results of the proceeding.
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 electricity providers, commencing March 1, 2000,
with transmission and distribution companies continuing to be regulated by the
MPUC.
Upon the commencement of retail access on March 1, 2000, the Company, as a
transmission and distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider that
is affiliated with the Company would be allowed to sell electricity outside
the Company's service territory without limitation as to amount, but within
the Company's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within the Company's
service territory, as determined by the MPUC.
In addition, 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.
Finally, recovery of nuclear-plant decommissioning costs as required by
federal law, rule or order, will be funded through transmission-and-
distribution utility rates and charges.
Agreement for Sale of Company's Generation Assets
On January 6, 1998, the Company announced that it had reached agreement to
sell all of its hydro-fossil and biomass power plants with a combined
generating capacity of 1,185 megawatts for $846 million in cash to Florida-
based FPL Group. The related book value for these assets is approximately $221
million at December 31, 1997. In addition, as part of its agreement with FPL
Group, the Company entered into energy buy-back agreements to assist in
fulfilling its obligation to supply its customers with power until March 1,
2000.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing
approximately 488 megawatts, its 2.5-percent interest in the Millstone III
nuclear generating unit in Waterford, Connecticut, its 3.59-percent interest
in the output of the Vermont Yankee nuclear generating plant in Vernon,
Vermont, and its entitlement in the NEPOOL Phase II interconnection with
Hydro-Quebec all attracted insufficient interest to be included in the present
sale. The Company will continue to seek buyers for those assets. The Company
did not offer for sale its interests in the Maine Yankee (Wiscasset, Maine),
Connecticut Yankee, (Haddam, Connecticut) and Yankee Atomic (Rowe,
Massachusetts) nuclear generating plants, all of which are in the process of
being decommissioned.
Substantially all of the generating assets included in the sale are subject
to the lien of the Company's General and Refunding Mortgage Indenture dated as
of April 15, 1976 (the "Indenture"). Therefore, substantially all of the
proceeds from sale must be deposited with the trustee under the Indenture at
the closing of the sale to free the generating assets from the lien of the
Indenture. Proceeds on deposit with the trustee may be used by the Company to
redeem or repurchase bonds under the terms of the Indenture, including the
possible discharge of the Indenture. In addition, the proceeds could provide
the flexibility to redeem or repurchase outstanding equity securities. The
Company must also provide for payment of applicable taxes resulting from
V-32
<PAGE>
the sale. The manner and timing of the ultimate application of the sale
proceeds after closing are in any event subject to various factors, including
Indenture provisions, market conditions and terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants will
reduce the Company's stranded costs and other costs, which could lower the
amount that would otherwise be collected from customers by nearly half a
billion dollars. However, the Company will incur incremental costs as a result
of the power buy-back arrangements in excess of the pre-sale costs of capacity
and energy from the plants being sold, which will effectively lower the amount
of sale proceeds available to reduce stranded and other costs.
Storm Damage to Company's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and
severity struck the Company's service territory, causing power outages for
approximately 280,000 of the Company's 528,000 customers, on January 9
immediately after the storm, and substantial widespread damage to the
Company's transmission and distribution system. To restore its electrical
system, the Company supplemented its own crews with utility and tree-service
crews from throughout the northeastern United States and the Canadian maritime
provinces, with assistance from the Maine national guard. The Company
estimates the incremental costs of the repair effort at $60--$65 million, of
which most of the expense was labor related.
On January 15, 1998, the Maine Public Utilities Commission ("MPUC") issued
an Order (the "Order") allowing the Company to defer on its books the
incremental non-capital costs associated with the Company's efforts to restore
service in response to the damage resulting from the storm. The Order requires
the Company, as part of its annual filing under its Alternative Rate Plan
("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.
Meeting the Requirements of SFAS No. 71
The Company continues to meet the requirements of SFAS No. 71, as described
above. The standard provides specialized accounting for regulated enterprises,
which requires recognition of assets and liabilities that enterprises in
general could not record. Examples of regulatory assets include deferred
income taxes associated with previously flowed through items, NUG buyout
costs, losses on abandoned plants, deferral of postemployment benefit costs,
and losses on debt refinancing. If an entity no longer meets the requirements
of SFAS No. 71, then regulatory assets and liabilities must be written off.
The ARP provides incentive-based rates intended to recover the cost of
service plus a rate of return on the Company's investment together with a
sharing of the costs or earnings between ratepayers and the shareholders
should the earnings be less than or exceed a target rate of return. The
Company has received recognition from the MPUC that the rates implemented as a
result of the ARP continue to provide specific recovery of costs deferred in
prior periods.
The recent legislation enacted in Maine associated with industry
restructuring specifically addressed the issue of cost recovery of regulatory
assets stranded as a result of industry restructuring. Specifically, the
legislation requires the MPUC, when retail access begins, to provide a
"reasonable opportunity" for the recovery of stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail
access under the legislation. As provided for in EITF 97-4, "Deregulation of
the Pricing of Electricity," the Company will continue to record regulatory
assets in a manner consistent with SFAS No. 71 as long as future recovery is
probable since the Maine legislation provides the opportunity to recover
regulatory assets including stranded costs through the rates of the
transmission and distribution company. The Company anticipates that once a
detailed plan for deregulation of generation is known, the application of SFAS
No. 71 to the unregulated generation segment will no longer apply
V-33
<PAGE>
and the Company will be required to discontinue SFAS No. 71 for any remaining
generation segment of its business. The Company further anticipates, based on
current generally accepted accounting principles, that SFAS No. 71 will
continue to apply to the regulated distribution and transmission segments of
its business. Future regulatory rules or other circumstances could cause the
application of FAS 71 to be discontinued, which could result in a noncash
write-off of previously established regulatory assets.
NOTE 4: COMMITMENTS AND CONTINGENCIES
Construction Program
The Company'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. The Company's current forecast of capital expenditures for the
five-year period 1997 through 2002, are as follows:
<TABLE>
<CAPTION>
1999-
1998 2002 TOTAL
------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Type of Facilities:
Generating projects.............................. $ 5 $ -- $ 5
Transmission..................................... 3 14 17
Distribution..................................... 31 131 162
General facilities and other..................... 17 74 91
------ ------- -------
Total Estimated Capital Expenditures........... $ 56 $ 219 $ 275
====== ======= =======
</TABLE>
Customer Retention
The Company 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 the Company for five years and not to switch
fuels, install new self-generation equipment, or seek another supplier of
electricity for existing electrical load during that period. New electrical
load in excess of a stated minimum level could be served by other sources, but
the Company could compete for that load.
The Company 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 the Company. The revenue loss from such a usage shift could
have been substantial.
The Company estimates that based on the rate reductions provided in these
agreements, its gross revenues were approximately $27 million lower in 1995,
approximately $45 million lower in 1996 and approximately $65 million lower in
1997, 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 $30 million as a result of linkage
between retail tariffs and some contract prices.
Legal and Environmental Matters
The Company is subject to regulation by federal and state authorities with
respect to air and water quality, the handling and disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. Electric utility companies generally use or generate in
their operations a range of potentially
V-34
<PAGE>
hazardous products and by-products that are the focus of such regulation. The
Company believes that its current practices and operations are in compliance
with all existing environmental laws except for such non-compliance as would
not have a material adverse effect on the Company's financial position. The
Company reviews its overall compliance and measures the liability quarterly by
assessing a range of reasonably likely costs for each identified site using
currently available information, including existing technology, presently
enacted laws and regulations, experience gained at similar sites, and the
probable level of involvement and financial condition of other potentially
responsible parties. These estimates include costs for site investigations,
remediation, operation and maintenance, monitoring and site closure.
New and changing environmental requirements could hinder the construction
and/or modification of generating units, transmission and distribution lines,
substations and other facilities, and could raise operating costs
significantly. As a result, the Company may incur significant additional
environmental costs, greater than amounts reserved, in connection with the
generation and transmission of electricity and the storage, transportation and
disposal of by-products and wastes. The Company may also encounter
significantly increased costs to remedy the environmental effects of prior
waste handling activities. The cumulative long-term cost impact of
increasingly stringent environmental requirements cannot accurately be
estimated.
On October 1, 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities"
("SOP"). The principal objective of the SOP is to improve the manner in which
existing authoritative accounting literature is applied by entities to
specific situations of recognizing, measuring and disclosing environmental
remediation liabilities. The SOP became effective January 1, 1997. This SOP
has not had a material impact on the company's financial position or results
of operations.
The Company has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that the Company expects to incur for identified waste disposal sites.
In most cases, additional future environmental cleanup costs are not
reasonably estimatable due to a number of factors, including the unknown
magnitude of possible contamination, the appropriate remediation methods, the
possible effects of future legislation or regulation and the possible effects
of technological changes. The Company cannot predict the schedule or scope of
remediation due to the regulatory process and involvement of non-governmental
parties. At December 31, 1997, the liability recorded by the Company for its
estimated environmental remediation costs amounted to $2.1 million, which
management has determined to be the most probable amount within the range of
$2.1 million to $8.0 million. Such costs may be higher if the Company is found
to be responsible for cleanup costs at additional sites or identifiable
possible outcomes change.
Proposed Federal Income Tax Adjustments.--On September 3, 1997, the Company
received from the Internal Revenue Service ("IRS") a Revenue Agent's Report
summarizing all adjustments proposed by the IRS as a result of its audit of
the Company's federal income tax returns for the years 1992 through 1994, and
on September 12, 1997, the Company received a notice of deficiency relating to
the proposed disallowances. There are two significant disallowances among
those proposed by the IRS. The first is a disallowance of the Company's write-
off of the under-collected balance of fuel and purchased-power costs and the
unrecovered balance of its unbilled Electric Revenue Adjustment Mechanism
("ERAM") revenues, both as of December 31, 1994, which were charged to income
in 1994 in connection with the adoption of the ARP effective January 1, 1995.
The second major adjustment would disallow the Company's 1994 deduction of the
cost of the buyout of the Fairfield Energy Venture purchased-power contract by
the Company in 1994. The aggregate tax impact, including both federal and
state taxes, of the unresolved issues amounts to approximately $39.0 million,
over 90 percent of which is associated with the two major disallowances. The
two major disallowances relate largely to the timing of the deductions and
would not affect income except for the cumulative interest impact which,
through December 31, 1997, amounted to $13.1 million, or a decrease in net
income of $7.8 million, and which could increase interest expense
approximately $441,000 per month until either the tax deficiency is paid or
the issues are resolved in favor of the Company, in which case no interest
would be due. If the IRS were to prevail, the Company believes the deductions
would be amortized over periods of up to twenty, post-1994, tax years. The
Company believes its tax treatment of the unresolved issues was proper and as
a result, the potential interest
V-35
<PAGE>
discussed above has not been accrued. On December 10, 1997, the Company filed
a petition in the United States Tax Court contesting the entire amount of the
deficiencies. The Company plans to seek review of the asserted deficiencies by
an IRS Appeals Officer to determine whether all or part of the dispute can be
resolved in advance of a court determination. Absent such a resolution, the
Company plans to pursue vigorously the Tax Court litigation, but cannot
predict the result.
Nuclear Insurance
The Price-Anderson Act (Act) is a federal statute providing, among other
things, a limit on the maximum liability for damages resulting from a nuclear
incident. The liability is provided for by existing private insurance and by
retrospective assessments for costs in excess of that covered by insurance, up
to $79.3 million for each reactor owned, with a maximum assessment of $10
million per reactor in any year. Based on the Company's indirect ownership in
four nuclear-generation facilities (See Note 6, "Capacity Arrangements--Power
Agreements") and its 2.5% ownership interest in the Millstone Unit No. 3
nuclear plant, the Company's retrospective premium could be as high as $6
million in any year, for a cumulative total of $47.6 million, exclusive of the
effect of inflation indexing and a 5% surcharge in the event that total public
liability claims from a nuclear incident should exceed the funds available to
pay such claims.
In addition to the insurance required by the Act, the nuclear generating
facilities referenced 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. Based
on current premiums and the Company's indirect and direct ownership in nuclear
generating facilities, this adjustment could range up to approximately $3.6
million annually.
Joint Venture
The Company and New York State Electric & Gas Corp. have signed a joint-
venture agreement to distribute natural gas to many Maine communities that
aren't now served with that fuel. If state regulators approve, a new company
owned equally by CMP and NYSEG would be in a position to offer gas in the
Augusta and Bangor areas, and in other communities including Bath, Bethel,
Brunswick, North Windham, Rumford, and Waterville.
NOTE 5: PENSION AND OTHER BENEFITS
Pension Benefits
The Company has two separate non-contributory, defined-benefit plans that
cover substantially all of its union and non-union employees. The Company's
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 the
Company 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.
During 1995, the Company offered a Special Retirement Offer (SRO) to
qualifying employees. Approximately 200 employees accepted the offer. The $7-
million cost of the SRO was included in pension expense. As part of the SRO,
the plans were amended to add five years to age and five years to credited
service for all plan participants for purposes of eligibility and early
retirement discounts.
V-36
<PAGE>
A summary of the components of net periodic pension cost for the non-union
and union defined-benefit plans in 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
NON- NON- NON-
UNION UNION UNION UNION UNION UNION
-------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 2,375 $ 1,694 $ 2,334 $ 1,780 $ 2,014 $ 1,414
Interest cost........... 5,727 3,973 5,225 3,852 5,653 3,889
Return on assets........ (10,683) (7,286) (8,168) (5,036) (16,135) (9,786)
Net amortization........ 5,119 3,626 2,911 1,536 10,030 6,028
Early Retirement........ -- -- -- -- 3,859 3,141
-------- ------- ------- ------- -------- -------
Net Periodic Pension
Cost................. $ 2,538 $ 2,007 $ 2,302 $ 2,132 $ 5,421 $ 4,686
======== ======= ======= ======= ======== =======
</TABLE>
Assumptions used in accounting for the non-union and union defined-benefit
plans in 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................. 7.00% 7.50% 7.25%
Rate of increase in future compensation levels............. 4.5% 4.5% 4.5%
Expected long-term return on assets........................ 8.75% 8.5% 8.5%
</TABLE>
The following table sets forth the actuarial present value of pension-
benefit obligations, the funded status of the plans, and the liabilities
recognized on the Company's balance sheet at December 31, 1997, and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
NON- NON-
UNION UNION UNION UNION
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Present value of benefit obligations:
Vested................................ $68,483 $52,048 $62,461 $47,617
------- ------- ------- -------
Accumulated benefit................... $71,839 $53,781 $64,394 $48,783
------- ------- ------- -------
Projected benefit....................... $87,607 $60,806 $75,570 $55,688
Plan assets at estimated market value
(primarily stocks, bonds, and guaran-
teed annuity contracts)................ 85,707 54,803 77,996 48,091
------- ------- ------- -------
Funded status--projected benefit obliga-
tion in excess of or (less than) plan
assets................................. 1,900 6,003 (2,426) 7,597
Unrecognized prior service cost......... (1,629) (1,352) (1,785) (1,481)
Unrecognized net gain................... 16,015 4,884 19,819 3,745
Unrecognized (net obligation) net asset. (134) 1,405 (163) 1,675
------- ------- ------- -------
Net Pension Liability Recognized in
the Balance Sheet.................... $16,152 $10,940 $15,445 $11,536
======= ======= ======= =======
</TABLE>
Savings Plan
The Company 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.
V-37
<PAGE>
The Company's contributions to the savings plan trust were $1.8 million in
1997, $1.7 million in 1996 and $1.6 million in 1995.
Post-Retirement Benefits
In addition to pension and savings-plan benefits, the Company 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. The Company is utilizing a 20 year amortization period.
Segregation in an external fund is required for amounts collected in rates.
The Company funded $3 million in November 1997 and plans to monitor and fund
the same amount annually in order to meet its obligation. Once amounts are
funded, the return on those assets will be reflected in postretirement benefit
cost.
As a result of the MPUC order, the Company 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 1997, 1996 and 1995 were $9.7, $9.8 and $7.6
million, respectively. With the reduction in the deferred account of $1.8
million in 1997, and the excess over those amounts of $1.1 million in 1996 and
$6.2 million in 1995, deferred for future recovery. The total amount deferred
as a regulatory asset as of December 31, 1997 was $21 million. A summary of
the components of net periodic postretirement benefit cost for the plan in
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost..................................... $ 1,201 $ 1,347 $ 846
Interest on accumulated postretirement benefit
obligation...................................... 4,702 5,720 7,389
Special retirement offer......................... -- -- 200
Amortization of transition obligation............ 3,704 4,080 4,606
Amortization of prior service cost............... -- 35 42
Amortization of gain............................. (1,029) (329) (188)
------- ------- -------
Postretirement benefits expense................ 8,578 10,853 12,895
Deferred postretirement benefits expense......... -- (1,056) (6,204)
------- ------- -------
Postretirement Benefit Expense Recognized in
the Statement of Earnings..................... $ 8,578 $ 9,797 $ 6,691
======= ======= =======
</TABLE>
V-38
<PAGE>
The following table sets forth the accumulated postretirement benefit
obligation, the funded status of the plan, and the liability recognized on the
Company's balance sheet at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................ $ 47,323 $ 51,815
Fully eligible active plan participants......... 2,499 2,707
Other active plan participants.................. 19,927 19,381
----------- -----------
Total accumulated postretirement benefit obli-
gation....................................... 69,749 73,903
Plan assets, at fair value........................ 3,025 849
----------- -----------
Accumulated postretirement benefits obligation in
excess of plan assets............................ 66,724 73,054
Unrecognized net gain (loss)...................... 19,680 15,987
Unrecognized prior service cost................... (5) (5)
Unrecognized transition obligation................ (55,563) (59,267)
----------- -----------
Accrued Postretirement Benefit Cost Recognized
in the Balance Sheet......................... $ 30,836 $ 29,769
=========== ===========
</TABLE>
The assumed health-care cost-trend rates range from 5.6% to 6.5% for 1997
reducing to 5.0% overall over 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. Rates
range from 6.4% to 9.3% for 1995, 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 $0.5 million and the accumulated postretirement benefit
obligation by $8.5 million. Additional assumptions used in accounting for the
postretirement benefit plan in 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................. 7.00% 7.50% 7.25%
Rate of increase in future compensation levels............. 4.50% 4.50% 4.50%
</TABLE>
The Company 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.
Effective September 1, 1996, the Company implemented a phase-out of the
long-term care portion of its retiree medical plans. With the exception of one
group of approximately 200 retirees, all benefits of this type will be
eliminated by September 1, 2002.
NOTE 6: CAPACITY ARRANGEMENTS
Power Agreements
The Company, through certain equity interests, owns 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.
V-39
<PAGE>
Pertinent data related to these power agreements as of December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
MAINE VERMONT CONNECTICUT YANKEE
YANKEE YANKEE YANKEE ATOMIC
----------- --------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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: Ca-
pacity (MW)............. -- 19 -- --
1997 energy and capacity
costs................... 78,384 6,216 7,608 4,719
Long-term obligations and
redeemable preferred
stock................... 112,087 7,699 9,117 --
Estimated decommissioning
obligation.............. 329,206 13,860 36,877 13,056
Accumulated
decommissioning fund.... 75,794 6,161 15,623 12,690
</TABLE>
Under the terms of its agreements, the Company 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 has been
shut down since December 6, 1996. The decision to close the Plant permanently
was based on an economic analysis of the costs, risks and uncertainties
associated with operating the Plant compared to those associated with closing
and decommissioning it.
The Plant's operating license from the Nuclear Regulatory Commission ("NRC")
was due to expire on October 21, 2008.
Costs: The Company has been incurring substantial costs in connection with
its 38% share of Maine Yankee costs, as well as additional costs for
replacement power while the Plant has been out of service. For the twelve
months ended December 31, 1997, such costs amounted to approximately $132.3
million for the Company: $72.8 million due to basic operations and maintenance
costs, $54.0 million due to replacement power costs and $5.5 million
associated with incremental costs of operations and maintenance.
The Company's 38% ownership interest in Maine Yankee's common equity
amounted to $29.8 million as of December 31, 1977, and under Maine Yankee's
Power Contracts and Additional Power Contracts, the Company 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). 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, 1997, Maine Yankee had collected approximately
$199.5 million for its decommissioning obligations.
On November 6, 1997, Maine Yankee submitted the new estimate to the FERC as
part of a rate case reflecting the fact that the Plant is no longer operating
and has entered the decommissioning phase. If the FERC
V-40
<PAGE>
accepts the new estimate, the amount of Maine Yankee's collections for
decommissioning would rise from the $14.9 million previously allowed by the
FERC to approximately $36 million per year. Several interested parties have
intervened in the FERC proceeding, including state regulators.
On September 1, 1997, Maine Yankee estimated the sum of the future payments
for the closing, decommissioning and recovery of the remaining investment in
Maine Yankee to be approximately $930 million, of which the Company's 38%
share would be approximately $353 million. Legislation enacted in Maine in
1997 calling for restructuring the electric utility industry provides for
recovery of decommissioning costs, to the extent allowed by federal
regulation, through the rates charged by the transmission and distribution
companies. Based on the legislation and regulatory precedent established by
the FERC in its opinion relating to the decommissioning of the Yankee Atomic
nuclear plant, the Company believes that it is entitled to recover
substantially all of its share of such costs from its customers and as of
December 31, 1997, is carrying on its consolidated balance sheet a regulatory
asset and a corresponding liability in the amount of $329 million, which is
the $353 million discussed above net of the Company's post-September 1, 1997
cost-of-service payments to Maine Yankee.
Management Audit: The MPUC released the report of a consultant it had
retained to perform a management audit of Maine Yankee for the period January
1, 1994, to June 30, 1997. One conclusion of the report was that Maine
Yankee's decision in December 1996 to proceed with the steps necessary to
restart the Plant was "imprudent", that Maine Yankee's May 27, 1997 decision
to reduce restart expenses while exploring a possible sale of the Plant was
"inappropriate", and that the decisions resulted in Maine Yankee incurring
$95.9 million in "unreasonable" costs. On October 24, 1997, the MPUC issued a
Notice of Investigation initiating an investigation of the shutdown decision
and of the operation of the Plant prior to shutdown, and announced that it had
directed its consultant to extend its review to include those areas. The
Company does not know how the MPUC plans to use the consultant's report, but
believes the report's negative conclusions are unfounded and may be
contradictory.
Maine Yankee Debt Restructuring and FERC Rate Proceeding: Maine Yankee
entered into agreements in August 1997 with the holders of its outstanding
First Mortgage Bonds and its lender banks (the "Standstill Agreements") under
which the bondholders and banks agreed that they would not assert that the
August 1997 voluntary permanent shutdown of the Plant constituted a covenant
violation under Maine Yankee's First Mortgage Indenture or its two bank credit
agreements. The Standstill Agreements, as extended in October 1997, were to
terminate on January 15, 1998, by which date Maine Yankee was to have reached
agreement on restructured debt arrangements reflecting its decommissioning
status. On January 15, 1998, Maine Yankee, its bondholders and lender banks
revised the Standstill Agreements and extended their term to April 15, 1998.
On November 6, 1997, Maine Yankee filed a rate proceeding with the FERC
reflecting the Plant's decommissioning status and requesting an effective date
of January 15, 1998, for the amendments to Maine Yankee's power contracts and
additional power contracts. On January 14, 1998, the FERC issued an order
accepting for filing the rates associated with the amended power contracts and
made them effective January 15, 1998, subject to refund.
V-41
<PAGE>
Condensed financial information on Maine Yankee Atomic Power Company is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Earnings:
Operating revenues............................ $ 238,586 $185,661 $205,977
Operating income.............................. 18,170 17,150 18,527
Net income.................................... 9,037 8,106 8,571
Earnings applicable to common stock........... 7,613 6,637 7,057
---------- -------- --------
Company's Equity Share of Net Earnings...... $ 2,893 $ 2,522 $ 2,682
---------- -------- --------
Investment:
Net electric property and nuclear fuel........ $ 17,938 $222,360 $242,399
Current assets................................ 71,098 44,979 34,799
Deferred charges and other assets............. 1,484,612 334,722 303,760
---------- -------- --------
Total Assets................................ 1,573,648 602,061 580,958
---------- -------- --------
Less:
Redeemable preferred stock.................... 17,400 18,000 18,600
Long-term obligations......................... 270,299 223,572 224,185
Current liabilities........................... 35,518 34,265 30,904
Reserves and deferred credits................. 1,172,066 255,472 236,653
---------- -------- --------
Net Assets.................................. $ 78,365 $ 70,752 $ 70,616
---------- -------- --------
Company's Equity in Net Assets.............. $ 29,779 $ 26,886 $ 26,834
========== ======== ========
</TABLE>
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 $6.6 million at December 31, 1997. The Company 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 $36.9 million and has recorded a regulatory
asset and a liability on the consolidated balance sheet. The Company 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. The Company relied on Yankee Atomic for less than 1% of the
Company's system capacity. Its 9.5% equity investment in Yankee Atomic is
approximately $2.2 million. The Company 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 $13.1 million.
The Company 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 Company's Generation Assets." The
Company also has a 2.5% ownership interest in the Millstone Unit No. 3 nuclear
plant operated by Northeast Utilities, and is entitled to approximately 29-
megawatt share of that unit's capacity. The Company's plant in service,
nuclear fuel, decommissioning fund, and related accumulated depreciation and
amortization attributable to these units as of December 31, 1997, and 1996
were as follows:
<TABLE>
<CAPTION>
WYMAN 4 MILLSTONE 3
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Plant in service, nuclear fuel and
decommissioning fund...................... $116,367 $116,372 $112,227 $112,040
Accumulated depreciation and amortization.. 66,239 63,023 42,412 39,181
</TABLE>
V-42
<PAGE>
Millstone Unit No. 3, along with two other units at the same site owned by
Northeast Utilities, is on the NRC's "watch list" in "Category 3", which
requires formal NRC action before a unit can be restarted. The Company
incurred replacement power costs related to Millstone Unit No. 3 of
approximately $4.9 million during the twelve months ended December 31, 1997.
Power-Pool Agreements
The New England Power Pool, of which the Company is a member, has contracted
in its Hydro-Quebec Projects to purchase power from Hydro-Quebec. The
contracts entitle the Company to 44.5 megawatts of capacity credit in the
winter and 127.25 megawatts of capacity credit during the summer. The Company
has entered into facilities-support agreements for its share of the related
transmission facilities. The Company's share of the support responsibility and
of associated benefits is approximately 7%.
The Company is making facilities-support payments on approximately $27.1
million, its remaining share of the construction cost for these transmission
facilities incurred through December 31, 1997. These obligations are reflected
on the Company's consolidated balance sheet as lease obligations with a
corresponding charge to electric property.
Non-Utility Generators
The Company 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 1998 to 2023. They require the Company to purchase the energy at
specified prices per kilowatt-hour, which are often above market prices. As of
December 31, 1997, facilities having 558 megawatts of capacity covered by
these contracts were in-service. The costs of purchases under all of these
contracts amounted to $306.4 million in 1997, $313.4 million in 1996, and
$314.4 million in 1995.
The Company's estimated contractual obligations with NUGs as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
(DOLLARS IN
MILLIONS)
<S> <C>
1998............................. $ 296
1999............................. 294
2000............................. 294
2001............................. 273
2002............................. 281
2003 - 2023...................... 2,161
------
$3,599
======
</TABLE>
NOTE 7: CAPITALIZATION AND INTERIM FINANCING
Retained Earnings
Under terms of the most restrictive test in the Company's General and
Refunding Mortgage Indenture and the Company's Articles of Incorporation, no
dividend may be paid on the common stock of the Company if such dividend would
reduce retained earnings below $29.6 million. At December 31, 1997, the
Company's retained earnings were $48.2 million, of which $18.6 million were
not so restricted.
Mortgage Bonds
Substantially all of the Company's electric-utility property and franchises
are subject to the lien of the General and Refunding Mortgage.
V-43
<PAGE>
The Company'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. In 1997, the
Company deposited approximately $2.2 million, net of withdrawals, in cash with
the Trustee under the Company's General and Refunding Mortgage Indenture in
satisfaction of the renewal and replacement fund and other obligations under
the Indenture. The total of such cash on deposit with the Trustee as of
December 31, 1997, was approximately $61.7 million. Under the Indenture such
cash may be applied at any time, at the direction of the Company, to the
redemption of bonds outstanding under the Indenture at a price equal to the
principal amount of the bonds being redeemed, without premium, plus accrued
interest to the date fixed for redemption. Such cash may also be withdrawn by
the Company by substitution of allocated property additions or available
bonds.
Mortgage Bonds outstanding as of December 31, 1997, and 1996 were as
follows:
<TABLE>
<CAPTION>
INTEREST
SERIES REDEEMED/MATURITY RATE 1997 1996
------ ------------------- -------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Central Maine Power Company
General and Refunding Mortgage Bonds:
U........................ 1998 - April 15 7.54% $ 25,000 $ 25,000
S........................ 1998 - August 15 6.03 60,000 60,000
T........................ 1998 - November 1 6.25 75,000 75,000
O........................ 1999 - January 1 7 3/8 50,000 50,000
P........................ 2000 - January 15 7.66 75,000 75,000
N........................ 2001 - September 15 8.50 11,000 11,000
Q........................ 2008 - March 1 7.05 75,000 75,000
R........................ 2023 - June 1 7 7/8 50,000 50,000
----------- -----------
Total Mortgage Bonds....... $ 421,000 $ 421,000
=========== ===========
</TABLE>
Subsequent to year-end, the Company called for redemption all of the
outstanding $11 million principal amount of its General and Refunding Mortgage
Bonds, Series N 8.50% Due 2001, at a redemption price equal to their principal
amount plus accrued interest to the date fixed for redemption. On the same day
the Company also called for redemption on March 30, 1998, all of the
outstanding $50 million principal amount of its General and Refunding Mortgage
Bonds, Series R 7 7/8% Due 2023, also at a redemption price equal to their
principal amount plus accrued interest. The bond redemptions are being funded
from the approximately $61.7 million on deposit with the trustee under the
renewal and replacement fund and release provisions of the Company's General
and Refunding Mortgage Indenture.
Limitations on Unsecured Indebtedness
The Company'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 the Company's preferred stock; 20% of defined
capitalization amounted to $211 million as of December 31, 1997. Unsecured
indebtedness, as defined, amounted to $144 million as of December 31, 1997.
Medium-Term Notes
In May 1989, holders of the Company's preferred stock consented to the
issuance of unsecured Medium-Term Notes in an aggregate principal amount of
$150 million outstanding at any one time. At the annual meeting of the
stockholders of the Company on May 15, 1997, the holders of the Company's
outstanding preferred stock consented to the issuance of $350 million in
principal amount of the Company's Medium-Term Notes in addition to the $150
million in principal amount to which they had previously consented. As of
December 31, 1997, $43 million of Medium-Term Notes were outstanding. 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.
V-44
<PAGE>
Medium-Term Notes outstanding as of December 31, 1997, and 1996 were as
follows:
<TABLE>
<CAPTION>
INTEREST
MATURITY RATE 1997 1996
-------- --------- ------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Series A:
2000............................................ 9.65% $ 5,000 $ 5,000
Series B:
1998............................................ 5.32 8,000 23,000
Series C:
1998-2001....................................... 7.40-7.85 30,000 40,000
------- -------
Total Medium Term Notes........................ $43,000 $68,000
======= =======
</TABLE>
Pollution-Control Facility and Other Notes
Pollution-control facility and other notes outstanding as of December 31,
1997, and 1996 were as follows:
<TABLE>
<CAPTION>
SERIES INTEREST RATE MATURITY 1997 1996
------ ------------- ---------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Central Maine Power Com-
pany:
Yarmouth Installment
Notes................ 6 3/4% June 1, 2002 $ 9,805 $ 10,250
Yarmouth Installment
Notes................ 6 3/4 December 1, 2003 1,000 1,000
Industrial Development
Authority of the
State of New Hamp- 7 3/8 May 1, 2014 11,000 11,000
shire Notes.......... 7 3/8 May 1, 2014 8,500 8,500
Finance Authority of
Maine................ 8.16 January 1, 2005 53,329 60,129
Maine Electric Power
Company, Inc.:
Promissory Notes...... Variable* November 1, 2000 620 820
----------- -----------
Total Pollution-Con-
trol Facility and
Other Notes........ $ 84,254 $ 91,699
=========== ===========
</TABLE>
- --------
* The average rate was 6.5% in 1997 and 6.3% in 1996.
The bonds issued by the Industrial Development Authority of the State of New
Hampshire are supported by loan agreements between the Company and the
Authority. The bonds are subject to redemption at the option of the Company 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 the Company
entered into a loan agreement under which the Company 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, the Company 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
The Company 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 $31.2 million and $33.1 million at December
31, 1997, and 1996, respectively. Assets acquired under capital leases are
recorded as electric property at the lower of fair-market
V-45
<PAGE>
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, 2002, together with the present value of the minimum lease payments, are
as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1998................................................ $ 5,440
1999................................................ 5,270
2000................................................ 5,099
2001................................................ 4,928
2002................................................ 4,758
Thereafter.......................................... 51,603
-------
Total minimum lease payments...................... 77,098
Less: amounts representing interest................. 42,581
-------
Present Value of Net Minimum Lease Payments....... $34,517
=======
</TABLE>
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, 2002, are as follows:
<TABLE>
<CAPTION>
SINKING FUND MATURING DEBT TOTAL
------------ ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1998.................................... 2,411 178,000 180,411
1999.................................... 9,854 60,000 69,854
2000.................................... 10,518 80,000 90,518
2001.................................... 10,948 21,000 31,948
2002.................................... 18,765 -- 18,765
</TABLE>
Operating Lease Obligations
The Company 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, 1997:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1998................................................ $ 4,924
1999................................................ 4,135
2000................................................ 3,999
2001................................................ 3,415
2002................................................ 3,410
Thereafter.......................................... 1,301
-------
$21,184
=======
</TABLE>
Rent expense under all operating leases was approximately $6.1 million, $5
million, and $5.7 million for the years ended December 31, 1997, 1996 and
1995, respectively.
V-46
<PAGE>
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, 1997 and 1996. 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 Company based on the
weighted average life of each class of instruments.
The estimated fair values of the Company's financial instruments as of
December 31, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Redeemable preferred stock.............. $ 46,528 $ 48,247 $ 60,528 $ 57,228
Mortgage bonds.......................... 421,000 421,151 421,000 415,578
Medium-term notes....................... 43,000 43,378 68,000 67,667
Pollution-control facility and other
notes.................................. 84,254 83,163 91,699 91,791
</TABLE>
Cumulative Preferred Stock
Preferred-stock balances outstanding as of December 31, 1997, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
CURRENT SHARES
OUTSTANDING 1997 1996 1995
-------------- -------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Preferred Stock--Not Subject to Manda-
tory Redemption:
$25 par value--authorized 2,000,000
shares; outstanding: None $ -- $ -- $ --
$100 par value noncallable--
authorized 5,713 shares;
outstanding 6% voting.............. 5,713 571 571 571
$100 par value callable--authorized
2,300,000* shares; outstanding:
3.50% series (redeemable at $101). 220,000 22,000 22,000 22,000
4.60% series (redeemable at $101). 30,000 3,000 3,000 3,000
4.75% series (redeemable at $101). 50,000 5,000 5,000 5,000
5.25% series (redeemable at $102). 50,000 5,000 5,000 5,000
7 7/8% series (optional redemption
after 9/1/97, at $100)........... 300,000 30,000 30,000 30,000
-------- -------- --------
Preferred Stock--Not Subject to
Mandatory Redemption........... $ 65,571 $ 65,571 $ 65,571
======== ======== ========
Redeemable Preferred Stock--Subject to
Mandatory Redemption:
Flexible Money Market Preferred
Stock, Series A--7.999% (395,275
shares in 1997, 1996 and 1995)..... 395,275 39,528 39,528 39,528
8 7/8% series (redeemable at
$101.97)........................... 70,000 7,000 21,000 35,000
-------- -------- --------
Redeemable Preferred Stock--
Subject to Mandatory
Redemption..................... $ 46,528 $ 60,528 $ 74,528
======== ======== ========
</TABLE>
- --------
* 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.
V-47
<PAGE>
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.
Sinking-fund provisions for the Flexible Money Market Preferred Stock,
Series A, 7.999%, require the Company 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. The Company 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 five-year period ending
December 31, 2000, is $9 million annually beginning in 1999. In 1995, the
Company purchased 54,725 shares on the open market that may be used to reduce
the sinking-fund requirement in 1999.
Subsequent to year end, the Company called for redemption 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 are being paid on the
preferred stock since the redemption date is a regular dividend payment date.
Interim Financing and Credit Agreements
The Company uses funds obtained from short-term borrowing to provide initial
financing for construction and other corporate purposes.
To support its short-term capital requirements, on October 23, 1996, the
Company entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders.
The arrangement has two credit facilities: a $75 million, 364-day revolving
credit facility that currently matures on October 21, 1998, and a $50-million,
3-year revolving credit facility that matures on October 22, 1999. Both credit
facilities require annual fees on the total credit lines. The fees are based
on the Company's credit ratings and allow for various borrowing options
including LIBOR-priced, base-rate-priced and competitive-bid-priced loans.
Access to commercial paper markets has been substantially precluded, as a
result of the downgrading of the Company's credit ratings. The amount of
outstanding short-term borrowing will fluctuate with day-to-day operational
needs, the timing of long-term financing, and market conditions. The Company
had $60 million outstanding as of December 31, 1997 under the 364-day
revolving credit facility at 6.63%.
V-48
<PAGE>
NOTE 8: QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited, consolidated quarterly financial data pertaining to the results of
operations are shown below.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
1995
Electric operating
revenues............. $ 263,312 $ 202,584 $ 217,872 $ 232,248
Operating income...... 39,361 4,052 22,169 20,277
Net income (loss)..... 26,376 (8,619) 10,400 9,823
Earnings (loss) per
common share*........ .73 (.34) .24 .23
</TABLE>
- --------
* Earnings per share are computed using the weighted-average number of common
shares outstanding during the applicable quarter.
V-49
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection 1 of Section 719 of the Maine Business Corporation Act empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, trustee, partner, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust, pension or other employee
benefit plan or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding; provided
that no indemnification may be provided for any person with respect to any
matter as to which he shall have been finally adjudicated not to have acted
honestly or in the reasonable belief that his action was in or not opposed to
the best interests of the corporation or its shareholders or, in the case of a
person serving as a fiduciary of an employee benefit plan or trust, in or not
opposed to the best interests of that plan or trust, or its participants or
beneficiaries or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order or conviction adverse to
such person, or by settlement or plea of nolo contendere or its equivalent,
shall not of itself create a presumption that such person did not act honestly
or in the reasonable belief that his action was in or not opposed to the best
interests of the corporation or its shareholders, or in the case of a person
serving as a fiduciary of an employee benefit plan or trust, in or not opposed
to the best interests of that plan or trust, or its participants or
beneficiaries and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 719 further provides that to the extent that a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
Subsection 1 of Section 719, or in defense of any claim, issue or matter
referred to therein, he shall be indemnified against expenses, including
attorney's fees, actually and reasonably incurred by him in connection
therewith; that the indemnification provided for by Section 719 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise; and that a corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, trustee, partner,
fiduciary, employee or agent of another corporation, partnership, joint
venture, trust, pension or other employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under Section
719.
The By-Laws of the Registrant provide, in effect, that the Registrant will
provide the indemnity described in Section 719 of the Maine Business
Corporation Act, to the extent and under the circumstances described therein.
The By-Laws also provide that the Registrant (i) shall have the power to
purchase insurance on behalf of any director, officer, employee or agent
against any liability and expenses incurred in connection with any proceedings
to the extent permitted by applicable law, and (ii) may enter into indemnity
agreements with any director, officer, employee or agent to the extent
permitted by applicable law.
Upon effectiveness of the Merger, the Registrant expects to have in effect
liability insurance protecting its directors and officers against liability by
reason of their being or having been directors or officers, as permitted by
the By-Laws of the Registrant.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<C> <S>
2 Form of Agreement and Plan of Merger (Appendix I to the Proxy
Statement and Prsopectus).
3(a) Form of Amendment to Articles of Incorporation of HoldCo, Inc.
(Appendix II to the Proxy Statement and Prospectus).
3(b) Form of By-laws of HoldCo, Inc. (Appendix III to the Proxy
Statement and Prospectus).
3(c) Articles of Incorporation of Central Maine Power Company
("Central Maine"), as amended (incorporated by reference to
Exhibit 3-1 of Central Maine's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 1-5139), dated
March 19, 1993).
3(d) By-laws of Central Maine Power Company, as amended
(incorporated by reference to Exhibit A-4 of Central Maine's
Application and Declaration under the Public Utility Holding
Company Act of 1935 on Form U-1 (File No. 70-9183), dated
March 4, 1998).
5(a)* Opinion of Anne M. Pare, Esq.
5(b) and 8* Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Consent of Anne M. Pare, Esq. (included as part of Exhibit
23(a)* 5(a))
23(b)* Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included as
part of Exhibits 5(b) and 8).
23(c) Consent of Coopers & Lybrand L.L.P.
24* Power of Attorney.
99* Form of Proxy.
</TABLE>
- --------
*Previously filed with this Registration Statement.
(b) The financial statement schedules are incorporated by reference from
Central Maine Power Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to
II-2
<PAGE>
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 1 TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF AUGUSTA, MAINE, ON
THE 10TH DAY OF APRIL, 1998.
HoldCo, Inc.
/s/ David E. Marsh
By __________________________________
NAME:DAVID E. MARSH
TITLE:CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
President and Chief
* Executive Officer April 10, 1998
- ------------------------------------- and Director
(DAVID T. FLANAGAN) (Principal
Executive Officer)
Executive Vice
* President and April 10, 1998
- ------------------------------------- Director
(ARTHUR W. ADELBERG)
/s/ David E. Marsh Chief Financial
- ------------------------------------- Officer and April 10, 1998
(DAVID E. MARSH) Director (Principal
Financial and
Accounting Officer)
/s/ David E. Marsh
*By ____________________________
David E. Marsh
as Attorney-in-Fact
April 10, 1998
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2 Form of Agreement and Plan of Merger (Appendix I to the Proxy
Statement and Prospectus).
3(a) Form of Amendment to Articles of Incorporation of HoldCo, Inc.
(Appendix II to the Proxy Statement and Prospectus).
3(b) Form of By-laws of HoldCo, Inc. (Appendix III to the Proxy
Statement and Prospectus).
3(c) Articles of Incorporation of Central Maine Power Company, as
amended (incorporated by reference to Exhibit 3-1 of Central
Maine's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-5139), dated March 19, 1993).
3(d) By-laws of Central Maine Power Company, as amended (incorporated
by reference to Exhibit A-4 of Central Maine's Application and
Declaration under the Public Utility Holding Company Act of 1935
on Form U-1 (File No. 70-9183), dated March 4, 1998).
5(a)* Opinion of Anne M. Pare, Esq.
5(b) and 8* Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23(a)* Consent of Anne M. Pare, Esq. (included as part of Exhibit 5(a)).
23(b)* Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included as
part of Exhibits 5(b) and 8).
23(c) Consent of Coopers & Lybrand L.L.P.
24* Power of Attorney.
99* Form of Proxy.
</TABLE>
- --------
*Previously filed with this Registration Statement.
<PAGE>
Exhibit 23(c)
Consent of Independent Accountants
We consent to the incorporation by reference into the Pre-effective
Amendment No. 1 to the registration statement of HoldCo, Inc. on Form S-4 of our
report dated January 30, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Central Maine Power Company and
subsidiary as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997. We also consent to the reference of our firm
under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Portland, Maine
April 10, 1998
