UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
001-14786 CMP GROUP, INC. 01-0519429
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
1-5139 CENTRAL MAINE POWER COMPANY 01-0042740
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
the filing requirements for at least the past 90 days.
CMP Group, Inc.: Yes X No
Central Maine Power Company: Yes X No
This combined Form 10-Q is separately filed by CMP Group, Inc., and Central
Maine Power Company. Information contained herein relating to either individual
registrant is filed by such registrant on its own behalf. Each registrant makes
no representation as to information relating to the other registrant.
As of August 6, 1999, the number of shares of Common Stock outstanding for each
registrant was as follows:
Registrant Shares
CMP Group, Inc., Common Stock, $5 Par Value 32,442,552
Central Maine Power Company, Common Stock, $5 Par Value (All
held by CMP Group, Inc.) 31,211,471
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Table of Contents
Page
Number
Glossary 1
Part I. Financial Information
Item 1 - Consolidated Financial Statements
CMP Group, Inc.
Consolidated Statement of Earnings for the Three Months
Ended June 30, 1999 and 1998 5
Consolidated Statement of Earnings for the Six Months
Ended June 30, 1999 and 1998 6
Consolidated Balance Sheet - June 30, 1999 and December 31, 1998:
Assets 7
Stockholders' Equity and Liabilities 8
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 9
Central Maine Power Company
Consolidated Statement of Earnings for the Three Months
Ended June 30, 1999 and 1998 10
Consolidated Statement of Earnings for the Six Months
Ended June 30, 1999 and 1998 11
Consolidated Balance Sheet - June 30, 1999 and December 31, 1998:
Assets 12
Stockholders' Equity and Liabilities 13
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 14
Notes to Consolidated Financial Statements 15
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 46
Part II. Other Information 48
Signatures 51
GLOSSARY
The following abbreviations or acronyms are used in the text of this Form 10-Q
as defined below:
Term Definition
Form 10-K Annual Report on Form 10-K
ARP Alternative Rate Plan
APB Accounting Principles Board
Assigned Agreements Maine Yankee's Power Contracts,
Additional Power Contracts and Capital Funds
Agreements, as amended, with its Sponsors.
Central Maine Central Maine Power Company, a regulated
electric utility and subsidiary of CMP Group.
Central Securities Central Securities Corporation, a wholly owned
subsidiary of Central Maine which owns and
manages real estate.
CERCLA Comprehensive Environmental Response,
Compensation, and Liability Act.
CMP Group CMP Group, Inc., is the holding company
organized effective September 1, 1998, which
owns all of the common stock of Central Maine
Power Company, Union Water Power Company,
MaineCom Services, CNEX, MainePower, TeleSmart
and New England Gas Development.
CMP Group System CMP Group and its wholly-owned and directly
and indirectly controlled subsidiaries.
CMP Natural Gas CMP Natural Gas, L.L.C., a limited-
liability company owned by subsidiaries of CMP
Group and Energy East to distribute
natural gas in Maine.
CNEX A wholly owned subsidiary of CMP Group,
(previously called CMP International
Consultants), which provides utility consulting
(domestic and international) and research.
Connecticut DPUC Connecticut Department of Public Utility Control
Cumberland Securities Cumberland Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
Connecticut Yankee Connecticut Yankee Atomic Power Company
D&P Duff & Phelps Credit Rating Co.
DOE United States Department of Energy
DOJ United States Department of Justice
EE Merger Corp. A Maine corporation that is a wholly-owned
subsidiary of Energy East
EITF Emerging Issues Task Force of FASB
Energy East Energy East Corporation, a New York holding
company which is an energy delivery, products
and services company doing business in New York,
Massachusetts, Maine and New Hampshire, in
addition to being the parent company of NYSEG
effective May 1, 1998, and which entered into an
Agreement and Plan of Merger dated as of June
14, 1999, with CMP Group and EE Merger Corp.
EPA United States Environmental Protection Agency.
EPS Earnings per share
ERAM Electric Revenue Adjustment Mechanism
FASB Financial Accounting Standards Board
FCC Federal Communications Commission
FERC Federal Energy Regulatory Commission
FEV Fairfield Energy Venture
FPL FPL Group, Inc.
Indenture General and Refunding Mortgage Indenture between
Central Maine and State Street Bank and Trust
Company, Trustee, dated as of April 15, 1976, as
amended and supplemented.
IPO Initial Public Offering
IRC Internal Revenue Code
IRS United States Internal Revenue Service
ISO Independent System Operator
Kwh Kilowatt-hour
MaineCom MaineCom Services, a CMP Group subsidiary which
arranges fiber-optic data service for bulk
carriers.
Maine Yankee Maine Yankee Atomic Power Company, a 38-percent
owned subsidiary of Central Maine.
MEPCO Maine Electric Power Company, Inc., a 78-percent
owned subsidiary of Central Maine which owns a
345-KV transmission line from Wiscasset, Maine,
to New Brunswick, Canada.
Merger Agreement The Agreement and Plan of Merger dated as of
June 14, 1999, by and among CMP Group, Energy
East and EE Merger Corp.
MRS Monitored Retrievable Storage
Moody's Moody's Investors Service
MPUC Maine Public Utilities Commission
NB Power New Brunswick Power Corporation.
NEON NorthEast Optic Network, Inc., a corporation of
which MaineCom owns 38.5-percent of the common
stock, which is building a fiber optic network
in New England and New York.
NEPOOL New England Power Pool
NERC North American Electric Reliability Council
NORVARCO A wholly-owned subsidiary of Central Maine.
NORVARCO is one of two general partners with 50%
interests in Chester SVC Partnership, which owns
a static var compensator facility located in
Chester, Maine.
NPCC Northeast Power Coordinating Council
NRC United States Nuclear Regulatory Commission
NYSEG New York State Electric & Gas Corporation, a
utility subsidiary of Energy East.
NUG Non-utility generator
New England Gas Development New England Gas Development Corporation, a
wholly-owned subsidiary of CMP Group created in
September 1998 to hold up to a 50-percent
ownership interest in CMP Natural Gas.
OASIS Open Access Same-time Information System.
OPA Maine Office of the Public Advocate
Plant Maine Yankee nuclear generating plant at
Wiscasset, Maine
PURPA Public Utility Regulatory Policies Act of 1978.
RCRA Resource Conservation and Recovery Act.
SAB Securities and Exchange Commission's Staff
Accounting Bulletins.
S&P Standard & Poor's Corp.
SEC Securities and Exchange Commission
Secondary Purchasers 28 municipal and cooperative utilities that had
purchased Maine Yankee power under identical
contracts with Maine Yankee sponsors.
SFAS Statement of Financial Accounting Standards
TeleSmart A wholly owned subsidiary of CMP Group which
provides accounts receivable management.
Union Water The Union Water Power Company, a wholly owned
subsidiary of CMP Group.
Vermont Yankee Vermont Yankee Nuclear Power Corporation.
Waste Act Federal Low-level Radioactive Waste Policy
Amendments Act.
Yankee Atomic Yankee Atomic Electric Company
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of CMP Group, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheet as of June 30, 1999, and the Consolidated Statement of Income and
Consolidated Cash Flows for the periods ended June 30, 1999 and 1998. CMP Group
is the parent holding company of Central Maine, Union Water, MaineCom, CNEX and
New England Gas Development. Central Maine constitutes substantially all of CMP
Group's assets, revenues and expenses. All nonutility operating transactions are
included in other non-utility revenues and operating expenses in CMP Group's
Consolidated Statement of Income.
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CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Three Months
Ended June 30,
1999 1998
Revenues
Electric operating revenues $ 214,686 $ 208,216
Other non-utility revenues 10,482 1,113
Total Revenues 225,168 209,329
Operating Expenses
Fuel used for company generation 1,260 7,909
Purchased power
Energy 88,842 85,469
Other (capacity) 31,214 21,086
Other operation 64,747 52,180
Maintenance 8,025 8,564
Depreciation and amortization 12,005 13,808
Taxes other than income taxes 4,748 5,987
Total Operating Expenses 210,841 195,003
Operating Income 14,327 14,326
Other Income (Expense)
Equity in earnings of associated companies 320 157
Allowance for equity funds used during construction 115 115
Other, net 6,961 975
Minority interest in consolidated net income (69) (66)
Gain on sale of investments and properties 6,022 12
Total Other Income (Expense) 13,349 1,193
Interest Charges
Long-term debt 7,579 10,649
Other interest 11,950 2,351
Allowance for borrowed funds used during construction (77) (72)
Total Interest Charges 19,452 12,928
Income Before Income Taxes and Preferred Dividends 8,224 2,591
Income taxes 3,264 945
Dividends on Preferred Stock of Subsidiary 919 1,074
Net Income $ 4,041 $ 572
Weighted Average Number Of Shares Of Common
Stock Outstanding 32,442,552 32,442,752
Earnings Per Share Of Common Stock - Basic $ 0.12 $ 0.02
Earnings Per Share Of Common Stock - Diluted $ 0.12 $ 0.02
Dividends Declared Per Share Of Common Stock $ 0.225 $0.225
The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Six Months
Ended June 30,
1999 1998
Revenue
Electric operating revenues $485,380 $456,961
Other non-utility revenues 16,421 1,810
Total Revenues 501,801 458,771
Operating Expenses
Fuel used for company generation 10,207 11,981
Purchased power
Energy 183,317 189,764
Other (capacity) 53,988 45,462
Other operation 117,951 97,954
Maintenance 16,299 18,679
Depreciation and amortization 26,677 27,630
Taxes other than income taxes 12,153 13,041
Total Operating Expenses 420,592 404,511
Operating Income 81,209 54,260
Other Income (Expense)
Equity in earnings of associated companies (2,659) 1,748
Allowance for equity funds used during construction 307 289
Other, net 8,196 1,611
Minority interest in consolidated net income (694) (114)
Gain on sale of investments and properties 13,033 11
Total Other Income (Expense) 18,183 3,545
Interest Charges
Long-term debt 18,132 21,499
Other interest 13,330 4,027
Allowance for borrowed funds used during construction (214) (199)
Total Interest Charges 31,248 25,327
Income Before Income Taxes 68,144 32,478
Income taxes 29,008 12,537
Dividends on Preferred Stock of Subsidiary 1,838 2,971
Net Income $ 37,298 $ 16,970
Weighted Average Number Of Shares Of Common
Stock Outstanding 32,442,552 32,442,752
Earnings Per Share Of Common Stock - Basic $1.15 $0.52
Earnings Per Share Of Common Stock - Diluted $1.14 $0.52
Dividends Declared Per Share Of Common Stock $0.45 $0.45
The accompanying notes are an integral part of these financial statements
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CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
ASSETS June 30, December 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents $ 335,094 $ 30,540
Accounts receivable, less allowance for uncollectible accounts of
$2,953 in 1999 and $3,136 in 1998
Service - billed 69,277 81,169
- unbilled 44,918 53,296
Other accounts receivable 11,559 13,753
Inventories, at average cost
Fuel oil 100 5,879
Materials and supplies 8,899 13,126
Funds on deposit with trustee 1 1
Prepayments and other current assets 4,230 10,268
Total Current Assets 474,078 208,032
Electric Property, at original cost 1,321,053 1,750,837
Less: Accumulated depreciation 540,591 694,410
Net electric property in service 780,462 1,056,427
Property, non utility 19,464 23,244
Less: Accumulated Depreciation 5,592 6,802
Net Non-Utility property 13,872 16,442
Construction work in progress 14,823 19,538
Nuclear fuel 1,830 1,147
Total net property 810,987 1,093,554
Investments In Associated Companies, at equity 58,209 71,880
Total Net Property and Investments in Associated Companies 869,196 1,165,434
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net 75,795 78,539
Yankee Atomic purchased-power contract 5,466 7,761
Connecticut Yankee purchased-power contract 27,927 29,913
Maine Yankee purchased-power contract 256,410 273,895
Regulatory assets-nuclear impairment 82,982 --
Regulatory assets - deferred taxes 212,045 235,451
Other deferred charges and other assets 253,691 263,859
Deferred Charges and Other Assets, Net 914,316 889,418
Total Assets $2,257,590 $2,262,884
The accompanying notes are an integral part of these financial statements
</TABLE>
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES
June 30, December 31,
1999 1998
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 101,628 $ 298,356
Sinking-fund requirements 18,716 11,455
Accounts payable 63,931 90,960
Dividends payable 8,243 7,304
Accrued interest 3,604 7,524
Accrued income taxes 154,386 19,911
Miscellaneous current liabilities 18,402 15,909
Total Current Liabilities and Interim Financing 368,910 451,419
Commitments and Contingencies (Note 4)
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 68,744 376,043
Unamortized investment tax credits 14,347 29,064
Yankee Atomic purchased-power contract 5,466 7,761
Connecticut Yankee purchased-power contract 27,927 29,913
Maine Yankee purchased-power contract 256,410 273,895
Regulatory assets-nuclear impairment 16,642 -
Regulatory liabilities - deferred taxes 60,504 58,376
Deferred gain on generation asset sale 520,861 -
Other reserves and deferred credits 197,658 116,805
Total Other Liabilities and Deferred Credits 1,168,559 891,857
Long-Term Debt
Mortgage debt - 117,683
Other long-term obligations 124,205 228,598
Total Long-Term Obligations 124,205 346,281
Redeemable Preferred Stock 18,910 18,910
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 286,035 285,835
Reacquired common stock (987) (827)
Retained earnings 94,217 71,668
Preferred stock 35,528 35,528
Total Stockholders' Equity 577,006 554,417
Total Stockholders' Equity and Liabilities $2,257,590 $2,262,884
The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Six Months
ended June 30,
1999 1998
CASH FROM OPERATIONS
Net income $ 37,298 $ 16,970
Items not requiring (not providing) cash:
Depreciation 21,627 22,566
Amortization 19,269 19,062
Deferred income taxes and investment tax credits, net (14,739) 24,676
Allowance for equity funds used during construction (307) (289)
Preferred stock dividends of subsidiary 1,838 2,971
Gain on sale of investments and properties (13,033) --
Incremental power supply (13,903) --
Changes in certain assets and liabilities:
Accounts receivable 22,464 27,262
Other current assets 4,302 2,827
Inventories 1,455 (2,523)
Accounts payable (22,246) (25,424)
Accrued taxes and interest 4,103 (12,528)
Miscellaneous current liabilities 2,220 7,767
Deferred ice storm cost -- (51,323)
Deferred energy-management costs (631) (1,428)
Restructuring of purchased power contract -- (22,500)
Carrying cost 4,631 --
Other, net 1,323 5,954
Net Cash Provided by Operating Activities 55,671 14,040
INVESTING ACTIVITIES
Construction expenditures (21,470) (21,059)
Investments in and loans to affiliates -- (18,120)
Central Maine sale of assets 850,629 --
Tax payments related to sale of assets (153,650) --
Selling expense for sale of generation assets (11,697) --
Proceeds from sale of investments and properties 18,119 --
Changes in accounts payable - investing activities (4,783) (2,090)
Net Cash Provided (Used) by Investing Activities 677,148 (41,269)
FINANCING ACTIVITIES
Issuances:
Revolving credit agreement -- 18,500
Medium-term notes -- 117,000
Redemptions:
Mortgage bonds (118,717) (117,283)
Preferred stock -- (41,618)
Medium-term note (217,000) (10,000)
Revolving credit agreement (50,000) --
Other long-term obligations (11,860) (575)
Short-term obligations, net (15,000) --
Funds on deposit with trustee -- 61,694
Purchase of treasury stock (160) --
Dividends:
Common stock (14,609) (14,609)
Preferred stock of subsidiary (919) (3,794)
Net Cash Provided (Used) by Financing Activities (428,265) 9,315
Net Increase (Decrease) in Cash 304,554 (17,914)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 30,540 20,841
CASH AND CASH EQUIVALENTS, END OF YEAR $ 335,094 $ 2,927
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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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of Central Maine, the unaudited financial statements included
herein reflect all adjustments necessary to present fairly the Consolidated
Balance Sheet as of June 30, 1999, and the Consolidated Statement of Income and
Consolidated Cash Flows for the periods ended June 30, 1999 and 1998. Central
Maine's consolidated financial statements include the accounts of Central Maine
and its wholly owned and controlled subsidiaries. All nonutility operating
transactions are included in other non-utility revenues and operating expenses
in Central Maine's Consolidated Statement of Income.
Central Maine Power Company and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
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For the Three Months
Ended June 30,
1999 1998
Revenues
Electric operating revenues $214,737 $208,216
Other non-utility revenues 631 1,113
Total Revenues 215,368 209,329
Operating Expenses
Fuel used for company generation 1,260 7,909
Purchased power
Energy 88,842 85,469
Other (capacity) 31,214 21,086
Other operation 55,518 52,180
Maintenance 7,978 8,564
Depreciation and amortization 11,757 13,808
Taxes other than income taxes 4,735 5,987
Total Operating Expenses 201,304 195,003
Operating Income 14,064 14,326
Other Income (Expense)
Equity in earnings of associated companies 2,712 157
Allowance for equity funds used during construction 115 115
Other, net 6,225 975
Minority interest in consolidated net income (69) (66)
Gain on sale of investments and properties 24 12
Total Other Income (Expense) 9,007 1,193
Interest Charges
Long-term debt 7,534 10,649
Other interest 11,793 2,351
Allowance for borrowed funds used during construction (77) (72)
Total Interest Charges 19,250 12,928
Income Before Income Taxes 3,821 2,591
Income taxes 567 945
Net Income 3,254 1,646
Dividends on Preferred Stock 919 1,074
Earnings Applicable to Common Stock $ 2,335 $ 572
Weighted Average Number Of Shares Of Common
Stock Outstanding 31,211,471 32,442,752
Earnings Per Share Of Common Stock - Basic and Diluted $0.07 $0.02
Dividends Declared Per Share Of Common Stock $0.36 $0.225
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Six Months
Ended June 30,
1999 1998
Revenues
Electric operating revenues $485,307 $456,961
Other non-utility revenues 1,110 1,810
Total Revenues 486,417 458,771
Operating Expenses
Fuel used for company generation 10,207 11,981
Purchased power
Energy 183,317 189,764
Other (capacity) 53,988 45,462
Other operation 103,367 97,954
Maintenance 16,039 18,679
Depreciation and amortization 26,206 27,630
Taxes other than income taxes 12,096 13,041
Total Operating Expenses 405,220 404,511
Operating Income 81,197 54,260
Other Income (Expense)
Equity in earnings of associated companies 3,683 1,748
Allowance for equity funds used during construction 307 289
Other, net 6,799 1,611
Minority interest in consolidated net income (694) (114)
Gain on sale of investments and properties 7,034 11
Total Other Income (Expense) 17,129 3,545
Interest Charges
Long-term debt 18,038 21,499
Other interest 13,166 4,027
Allowance for borrowed funds used during construction (214) (199)
Total Interest Charges 30,990 25,327
Income Before Income Taxes 67,336 32,478
Income taxes 26,435 12,537
Net Income 40,901 19,941
Dividends on Preferred Stock 1,838 2,971
Earnings Applicable to Common Stock $ 39,063 $ 16,970
Weighted Average Number Of Shares Of Common
Stock Outstanding 31,211,471 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) $1.25 $0.52
Dividends Declared Per Share Of Common Stock $0.585 $0.450
The accompanying notes are an integral part of these financial statements
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Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
ASSETS June 30, December 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents $ 314,097 $ 22,628
Accounts receivable, less allowance for
uncollectible accounts of
$2,953 in 1999 and $3,136 in 1998
Service - billed 68,676 81,082
- unbilled 44,918 53,110
Other accounts receivable 19,504 12,698
Inventories, at average cost
Fuel oil 100 5,879
Materials and supplies 8,431 12,755
Funds on deposit with trustee 1 1
Prepayments and other current assets 4,136 10,161
Total Current Assets 459,863 198,314
Electric Property, at original cost 1,321,024 1,750,777
Less: Accumulated depreciation 540,565 694,463
Net electric property in service 780,459 1,056,314
Property, Non-Utility 12,838 15,895
Less: Accumulated Depreciation 3,603 4,150
Non-Utility Property 9,235 11,745
Construction work in progress 14,092 19,483
Nuclear fuel 1,830 1,147
Total net property 805,616 1,088,689
Investments In Associated Companies, at equity 40,472 48,406
Total Net Property and Investments in
Associated Companies 846,088 1,137,095
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned
projects, net 75,795 78,539
Yankee Atomic purchased-power contract 5,466 7,761
Connecticut Yankee purchased-power contract 27,927 29,913
Maine Yankee purchased-power contract 256,410 273,895
Regulatory assets-nuclear impairment 82,982 -
Regulatory assets - deferred taxes 212,045 235,451
Other deferred charges and other assets 249,081 262,512
Deferred Charges and Other Assets, Net 909,706 888,071
Total Assets $2,215,657 $2,223,480
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES June 30, December 31,
1999 1998
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 101,383 $ 298,183
Sinking-fund requirements 18,716 11,455
Accounts payable 69,230 93,012
Dividends payable 943 5
Accrued interest 3,579 7,491
Income taxes payable to parent company 154,502 20,822
Miscellaneous current liabilities 17,423 15,455
Total Current Liabilities and Interim Financing 365,776 446,423
Commitments and Contingencies (Note 4)
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 65,281 372,243
Unamortized investment tax credits 14,347 29,064
Yankee Atomic purchased-power contract 5,466 7,761
Connecticut Yankee purchased-power contract 27,927 29,913
Maine Yankee purchased-power contract 256,410 273,895
Regulatory liabilities-nuclear impairment 16,642 -
Regulatory liabilities - deferred taxes 60,504 58,376
Deferred gain on generation asset sale 520,861 -
Other reserves and deferred credits 189,370 111,506
Total Other Liabilities and Deferred Credits 1,156,808 882,758
Long-Term Debt
Mortgage debt - 117,683
Other long-term obligations 121,803 226,151
Total Long-Term Obligations 121,803 343,834
Redeemable Preferred Stock 18,910 18,910
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 276,572 276,422
Reacquired common stock (19,000) (19,000)
Retained earnings 97,004 76,349
Preferred stock 35,571 35,571
Total Stockholders' Equity 552,360 531,555
Total Stockholders' Equity and Liabilities $2,215,657 $2,223,480
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The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Six Months
Ended June 30,
1999 1998
CASH FROM OPERATIONS
Net income $ 40,901 $ 19,941
Items not requiring (not providing) cash:
Depreciation 21,161 22,566
Amortization 19,262 19,062
Deferred income taxes and investment tax credits, net (14,407) 24,676
Allowance for equity funds used during construction (307) (289)
Gain on Sale of Investments and Properties (7,034) -
Incremental power supply (13,903) -
Changes in certain assets and liabilities:
Accounts receivable 13,792 27,262
Other current assets 4,669 2,827
Inventories 1,552 (2,523)
Accounts payable (18,989) (25,424)
Accrued taxes and interest 3,316 (12,528)
Miscellaneous current liabilities 1,695 7,767
Deferred Ice storm costs - (51,323)
Deferred energy-management costs (631) (1,428)
Restructuring of purchased power contract - (22,500)
Carrying cost 4,631 -
Other, net 36 5,954
Net Cash Provided by Operating Activities 55,744 14,040
INVESTING ACTIVITIES
Construction expenditures (20,786) (21,059)
Investments in and loans to affiliates - (18,120)
Central Maine sale of assets 850,629 -
Tax payments related to sale of assets (153,650) -
Selling expense for sale of generation assets (11,697) -
Proceeds from sale of investments and properties 7,813 -
Changes in accounts payable - investing activities (4,793) (2,090)
Net Cash Provided (Used) by Investing Activities 667,516 (41,269)
FINANCING ACTIVITIES
Issuances:
Revolving credit agreement - 18,500
Medium-term notes - 117,000
Redemptions:
Mortgage bonds (118,717) (117,283)
Preferred stock - (41,618)
Medium term notes (217,000) (10,000)
Revolving Credit Agreement (50,000) -
Other long-term obligations (11,887) (575)
Short-term obligations (15,000) -
Funds on deposit with trustee - 61,694
Dividends:
Common stock (18,268) (14,609)
Preferred stock (919) (3,794)
Net Cash Provided (Used) by Financing Activities (431,791) 9,315
Net Increase (Decrease) in Cash 291,469 (17,914)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,628 20,841
CASH AND CASH EQUIVALENTS, END OF PERIOD $314,097 $ 2,927
</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
CMP Group and
Central Maine Power Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General Description - CMP Group was organized effective September 1, 1998,
at which time all of the shares of common stock of Central Maine were
converted into an equal number of shares of common stock of CMP Group. CMP
Group owns all of the shares of common stock of Central Maine and the
former non-utility subsidiaries of Central Maine (TeleSmart, MaineCom, CNEX
and Union Water Power Company) in addition to New England Gas Development
Corporation, a subsidiary organized in 1998.
Central Maine is a public utility primarily engaged in the sale,
transmission, and distribution of electric energy at the wholesale and
retail levels to residential, commercial, industrial, and other classes of
customers in the State of Maine.
Basis of Presentation - This Quarterly Report on Form 10-Q is a combined
report of CMP Group and Central Maine, a regulated electric-utility
subsidiary of CMP Group. The Notes to Consolidated Financial Statements
apply to both CMP Group and Central Maine. CMP Group's consolidated
financial statements include the accounts of CMP Group and its wholly owned
and controlled subsidiaries, including Central Maine. Central Maine's
consolidated financial statements include its accounts as well as those of
its wholly owned and controlled subsidiaries. Certain immaterial majority
owned subsidiaries, which were previously accounted for on the equity
method, were consolidated in September 1998. For all periods prior to
September 1, 1998, the historic financial position and results of
operations of CMP Group reflect the activity of Central Maine.
Central Maine's financial position and results of operations account for
substantially all of CMP Group's consolidated financial position and
results of operations. This quarterly report should be read in conjunction
with CMP Group's and Central Maine's Annual Report on Form 10-K for the
year ended December 31, 1998.
CMP Group and Central Maine believe that the accompanying statements
reflect all adjustments necessary to present a fair statement of the
consolidated financial position and results of operations for the interim
periods. All material adjustments are of a normal recurring nature unless
otherwise disclosed in this Form 10-Q. All significant intercompany
transactions have been eliminated from the consolidated financial
statements.
Results shown for the respective interim periods being reported herein are
not necessarily indicative of results to be expected for the fiscal years
due to seasonal factors which are inherent in electric utilities in New
England. A greater proportionate amount of revenues is earned in the first
and fourth quarters (winter season) of most years because more electricity
is sold due to weather conditions, fewer day-light hours, and related
factors.
For purposes of the statement of cash flows, CMP Group and Central Maine
consider all highly liquid instruments purchased having maturities of three
months or less to be cash equivalents.
Supplemental Cash Flow Disclosure - Cash paid for the six months ended June
30, 1999 and 1998:
(In Millions)
1999 1998
CMP Group
Interest, net of amounts capitalized $ 26.9 $24.0
Income taxes 195.6 2.6
Central Maine
Interest, net of amounts capitalized 26.8 24.0
Income Taxes 193.4 2.6
Stock-Based Compensation - Under CMP Group's Long-Term Incentive Plan,
options on CMP Group common stock were granted in 1998 and 1999 with an
exercise price equal to the fair market value on the date of the grants.
The term of all options granted is seven (7) years. One third of the
options vest annually, commencing on the first anniversary of the option
grant date, except for 1998 options which were entirely vested in 1999.
Upon vesting, the stock options are exercisable during periods of active
employment or within thirty (30) days after termination of employment,
provided termination did not occur due to cause. Upon the effectiveness of
the proposed merger of CMP Group with Energy East all such stock options
will be cancelled and the holders of the options will be entitled to
payment by CMP Group of the excess of $29.50 per share over the exercise
price per share of the options.
Performance shares are granted at the beginning of a 3-year performance
cycle. Performance shares were granted in 1997, 1998 and 1999. All three
grants have a three-year cycle and are being accrued accordingly; in the
event performance goals for a performance cycle are achieved, common stock
is awarded at the end of that performance cycle. If performance goals are
not achieved, the performance shares are forfeited. As of the effective
date of the proposed merger, it is intended that performance shares for
cycles that are not completed will vest and grantees will be entitled to
payment of $29.50 for each performance share that vests.
1997 1998 1999
---- ---- ----
Options granted - 233,359 254,304
Performance Shares* 59,125 64,518 67,150
*Accrue over a 3-year cycle.
Earnings per Share - Stock options and performance shares granted to date
under CMP Group's Long-Term Incentive Plan resulted in incremental shares
of common stock outstanding for purposes of computing both basic and
diluted earnings per share for the three and six month periods ended June
30, 1999. The incremental number of shares for the three months ending June
30, 1999 is 216,524 and 173,487 for the six months ending June 30, 1999.
Reclassification - Certain amounts from prior years financial statements
have been reclassified to conform to the current year presentation.
Impact of New Accounting Standards - In June 1998, the FASB issued SFAS No.
133, Accounting for Derivatives and Hedging Activities. It requires
companies to record derivatives on the balance sheet at their fair value
depending on the intended use of the derivative. The new standard applies
to all entities and the original effective date was June 15, 1999. On May
19, 1999 the FASB determined that the statement should be delayed for one
year. Based on CMP Group and Central Maine's current business practices the
adoption of this standard is not anticipated to have a significant impact
on their financial statements.
2. Merger Agreement With Energy East
On June 14, 1999, CMP Group, Energy East and EE Merger Corp., a
wholly-owned subsidiary of Energy East, entered into an Agreement and Plan
of Merger ("Merger Agreement"). Pursuant to the Merger Agreement, EE Merger
Corp. will merge into CMP Group, with CMP Group becoming the surviving
company and becoming a wholly-owned subsidiary of Energy East. CMP Group
shareholders will receive $29.50 per share in cash if the merger is
consummated.
The merger is subject to certain customary closing conditions, including
without limitation the receipt of the required approvals of CMP Group's
shareholders and a number of governmental agencies, including the MPUC,
Connecticut DPUC, SEC, FERC, NRC and the FCC, and the making of all other
necessary governmental filings. It is anticipated that the shareholder vote
will take place in the fall of 1999 and that all regulatory approvals can
be obtained by June of 2000.
3. Accounting for the Effects of Certain Types of Regulation
Central Maine prepares its financial statements in accordance with SFAS No.
71 "Accounting for the Effects of Certain Types of Regulation," which
requires rate regulated companies to reflect the effects of regulatory
decisions in their financial statements. Central Maine has deferred certain
costs pursuant to rate actions of the MPUC and FERC and is recovering, or
expects to recover, such costs in electric, transmission and distribution
rates charged to customers.
The FASB's EITF has addressed the appropriateness of continued application
of SFAS No. 71 by entities in states that have enacted restructuring
legislation similar to Maine's. The EITF issued its statement No. 97-4
"Deregulation of Pricing Electricity Issues Related to the Application of
FASB Statements 71 and 101", which concluded that an entity should cease to
apply SFAS 71 when a deregulation plan is in place and its terms are known.
With respect to the generation portion of Central Maine's business, this
occurred during the second quarter of 1999 with the completion of the sale
of most of its generation assets to FPL and the subsequent development of a
compliance filing with the MPUC in Phase II of the ongoing MPUC proceeding
on stranded costs, revenue requirements and rate design. Effective June
30,1999, Central Maine adopted SFAS 101 for the generation segment of its
business. SFAS No. 101 "Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71," requires a
determination of impairment of plant assets under SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the elimination of all effects of rate regulation that
have been recognized as assets and liabilities under SFAS 71.
Central Maine performed impairment tests on its two operating nuclear
generation facilities, Millstone 3 and Vermont Yankee, on a plant specific
basis and determined that $82.9 million was impaired as of June 30,1999.
Impaired plant is the excess of net plant investment at June 30, 1999 over
the value of net cash flows during the remaining lives of the investments.
Annual net cash flows were determined by subtracting estimated generation
sustenance costs from the estimated market value of power from the plants.
The MPUC in its Phase I order dated March 19,1999 in the ongoing proceeding
provided for future recovery of nuclear generation and other generation
related stranded costs. Central Maine has established a regulatory asset as
of June 30, 1999 for $82.9 million consistent with that order associated
with the two operating nuclear investments. As a result there is no income
impact from these impairment tests but rather recognition of the impairment
and a corresponding regulatory asset.
Central Maine has long term power purchase contracts with NUGs which
require payments above anticipated market rates. The estimate of
above-market payment is approximately $800 million. The costs associated
with these NUG contracts remain a regulated obligation of the transmission
and distribution company as a statutory requirement and have been provided
for by the MPUC in its revenue requirement determination in Phase I of the
above mentioned proceeding.
Central Maine believes that its electric transmission and distribution
operations continue to meet the requirements of SFAS 71 and that regulatory
assets associated with those operations as well as any generation-related
costs that the MPUC has determined to be recoverable from ratepayers also
meet the criteria. At June 30,1999, $958.7 million of regulatory assets
remain on Central Maine's books. Approximately $214.4 million will be
charged against the estimated deferred gain and associated carrying costs
through March 1, 2000 of $548.6 million resulting from the generation asset
sale while the remainder will be amortized over periods to be determined by
the MPUC in Phase II of the above mentioned proceeding.
4. Commitments and Contingencies
Permanent Shutdown of Maine Yankee Plant - In August 1997 the board of
directors of Maine Yankee voted to permanently cease power operations at
the Maine Yankee plant at Wiscasset, Maine (the "Plant") and to
decommission the Plant. In November 1997 Maine Yankee submitted to FERC
revised rates reflecting the decision to shut down the Plant, including
amendments to its Power Contracts. On January 14, 1998, FERC accepted the
new rates for filing, subject to refund, and set the new rates, the Power
Contract amendments, and issues concerning the prudence of the
Plant-shutdown decision for hearing.
Since the filing of the rate request, Maine Yankee and the active
intervenors, including among others the MPUC Staff, the Maine Office of the
Public Advocate ("OPA"), Central Maine and other owners, municipal and
cooperative purchasers of Maine Yankee Power (the "Secondary Purchasers"),
and a Maine environmental group (the "Settling Parties"), engaged in
extensive discovery and negotiations which resulted in a settlement
agreement filed by those parties with the FERC on January 19, 1999. A
separately negotiated settlement filed with the FERC on February 5, 1999,
resolved the issues raised by the Secondary Purchasers by limiting the
amounts they will pay for decommissioning the Plant and by settling other
points of contention affecting individual Secondary Purchasers. Both
settlements were found to be in the public interest and approved by the
FERC on June 1, 1999. The settlement constitutes a full settlement of all
issues raised in the consolidated FERC proceeding, including
decommissioning-cost issues and issues pertaining to the prudence of the
management, operation, and decision to permanently cease operation of the
Plant.
The primary settlement provides for Maine Yankee to collect $33.1 million
in the aggregate annually, effective August 1, 1999, including both
decommissioning costs and ISFSI-related costs. The original filing with
FERC on November 6, 1997, called for an aggregate annual collection rate of
$36.4 million for decommissioning and the ISFSI, based on a 1997 estimate.
Under the approved settlement the amount collected annually is to be
reduced to approximately $24.4 million as a result of legislation allowing
Maine Yankee to (1) use for construction of the ISFSI funds held in trust
under Maine law for spent-fuel disposal, and (2) access approximately $6.8
million held by the State of Maine for eventual payment to the State of
Texas pursuant to a compact for low-level nuclear waste disposal, the
future of which is in question after rejection of the selected disposal
site in west Texas by a Texas regulatory agency. Both required authorizing
legislation in Maine, which was adopted on May 13, 1999.
The settlement also provides for recovery of the unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50
percent, effective January 15, 1998, on equity balances up to maximum
allowed equity amounts, which resulted in a pro-rata refund of $9.3 million
(including tax impacts) to the sponsors on July 15, 1999. The Settling
Parties also agreed in the settlement not to contest the effectiveness of
the Amendatory Agreements submitted to FERC as part of the original filing,
subject to certain limitations including the right to challenge any
accelerated recovery of unamortized investment under the terms of the
Amendatory Agreements after a required informational filing with the FERC
by Maine Yankee. In addition, the settlement contains incentives for Maine
Yankee to achieve further savings in its decommissioning and ISFSI-related
costs and resolves issues concerning restoration and future use of the
Plant site and environmental matters of concern to certain of the
intervenors in the proceeding.
As a separate part of the settlement, Central Maine, the other two Maine
utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other
issues specific to the Maine parties, including those that had been raised
concerning the prudence of the operation and shutdown of the Plant (the
"Maine Agreement"). Under the Maine Agreement Central Maine will continue
to recover its Maine Yankee costs in accordance with its most recent ARP
order from the MPUC without any adjustment reflecting the outcome of the
FERC proceeding. To the extent that Central Maine has collected from its
retail customers a return on equity in excess of the 6.50 percent
contemplated by the settlement, no refunds would be required, but such
excess amounts would be credited to the customers to the extent required by
the ARP.
Finally, a major provision of the Maine Agreement requires the Maine
owners, for the period from March 1, 2000, through December 1, 2004, to
hold their Maine retail ratepayers harmless from the amounts by which the
replacement power costs for Maine Yankee exceed the replacement power costs
assumed in the report to the Maine Yankee Board of Directors that served as
a basis for the Plant shutdown decision, up to a maximum cumulative amount
of $41.0 million. Central Maine's share of that amount would be $31.16
million for the period. The Maine Agreement, which was approved by the MPUC
on December 22, 1998, also sets forth the methodology for calculating such
replacement power costs.
CMP Group and Central Maine believe that the approved settlement, including
the Maine Agreement, constitutes a reasonable resolution of the issues
raised in the Maine Yankee FERC proceeding, and should eliminate
significant uncertainties concerning CMP Group's and Central Maine's future
financial performance.
Legal and Environmental Matters - Central Maine and certain of its
affiliates are subject to regulation by federal and state authorities with
respect to air and water quality, the handling and disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. Electric utility companies generally use or generate in
their operations a range of potentially hazardous products and by-products
that are the focus of such regulation. Central Maine believes that its
current practices and operations are in compliance with all existing
environmental laws except for such non-compliance as would not have a
material adverse effect on Central Maine's financial position. Central
Maine reviews its overall compliance and measures the liability quarterly
by assessing a range of reasonably likely costs for each identified site
using currently available information, including existing technology,
presently enacted laws and regulations, experience gained at similar sites,
and the probable level of involvement and financial condition of other
potentially responsible parties. These estimates include costs for site
investigations, remediation, operation and maintenance, monitoring and site
closure.
New and changing environmental requirements could hinder the construction
and/or modification of transmission and distribution lines, substations and
other facilities, and could raise operating costs significantly. As a
result, Central Maine may incur significant additional environmental costs,
greater than amounts reserved, in connection with the generation and
transmission of electricity and the storage, transportation and disposal of
by-products and wastes. Central Maine may also encounter significantly
increased costs to remedy the environmental effects of prior waste handling
activities. The cumulative long-term cost impact of increasingly stringent
environmental requirements cannot accurately be estimated.
Central Maine has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental
remediation costs that it expects to incur for identified waste disposal
sites. In most cases, additional future environmental cleanup costs are not
reasonably estimable due to a number of factors, including the unknown
magnitude of possible contamination, the appropriate remediation methods,
the possible effects of future legislation or regulation and the possible
effects of technological changes. Central Maine cannot predict the schedule
or scope of remediation due to the regulatory process and involvement of
non-governmental parties. At June 30, 1999, the liability recorded by
Central Maine for its estimated environmental remediation costs amounted to
$3.0 million, which management has determined to be the most probable
amount within the range of $3.0 million to $10.3 million. Such costs may be
higher if Central Maine is found to be responsible for cleanup costs at
additional sites or identifiable possible outcomes change.
Wyman No. 4 Arbitration - By notice of claim dated June 24, 1999, the
non-operator owners of the Wyman No. 4 oil-fired generating unit in
Yarmouth, Maine, which was approximately 60-percent owned by Central Maine,
served notice on Central Maine that they believe they are entitled to a
portion of the proceeds of the sale of Central Maine's interest in the unit
as part of the April 1999 sale of its non-nuclear generation assets to FPL
Energy. The claimants contend that certain sections of the joint ownership
agreement under which they share in the output of the unit require a
pro-rata distribution to them of part of those proceeds as a result of
Central Maine's sale of its interest in the unit. The joint ownership
agreement provides for arbitration of claims arising under the agreement.
Central Maine believes that although the amount of the claim is substantial
($62 million), the claimants have suffered no loss and are not entitled to
any part of the generation-asset sale proceeds. Central Maine intends to
contest any such claim vigorously, but cannot predict the result of any
arbitration proceeding that the non-operator owners may initiate.
Millstone Unit No. 3 Litigation - On August 7, 1997, Central Maine and the
other minority owners of Millstone Unit No. 3 filed suit in Massachusetts
Superior Court against Northeast Utilities and its trustees, and initiated
an arbitration claim against two of its subsidiaries, alleging
mismanagement of the unit by the defendants. The minority owners are
seeking to recover their additional costs resulting from such
mismanagement, including their replacement power costs. The parties have
been engaged in resolving preliminary issues and in extensive pre-hearing
discovery on a schedule calling for an arbitration hearing in November of
1999. Central Maine cannot predict the outcome of the litigation and
arbitration or whether the current schedule will be maintained.
Tax Settlement - On September 12, 1997, Central Maine received a notice of
deficiency from the Internal Revenue Service ("IRS") as a result of its
audit of Central Maine's federal income tax returns for the years 1992
through 1994. There were two significant adjustments among those proposed
by the IRS. The first was a disallowance of Central Maine's write-off of
the under-collected balance of fuel and purchased-power costs and the
unrecovered balance of its unbilled Electric Revenue Adjustment Mechanism
("ERAM") revenues, both as of December 31, 1994, which had been charged to
income in 1994 in connection with the adoption of the ARP effective January
1, 1995. The second major adjustment disallowed Central Maine's 1994
deduction of the cost of the buyout of the Fairfield Energy Venture ("FEV")
purchased-power contract.
On December 10, 1997 Central Maine filed a petition in the United States
Tax Court contesting the entire amount of the deficiencies. Subsequently,
Central Maine sought review of the asserted deficiencies by an IRS Appeals
Officer to determine whether all or part of the dispute could be resolved
in advance of a court determination.
In June 1999, the IRS Appeals Officer and Central Maine reached agreement
resolving all issues. Under the proposed agreement the ERAM component was
allowed as fully deductible in 1994, while $24 million of the fuel and
purchased-power costs were deemed to be deductible in 1994 and the
remaining $30 million deductible in 1995. The parties also agreed to
increase the tax basis of the FEV plant from $2 million to $11 million, to
be depreciated over 20 years, and that the remaining FEV contract buyout
costs would be fully deductible in 1994.
As a result of the settlement, Central Maine made payments to the IRS and
the State of Maine totaling $11.8 million for the 1992 to 1994 tax
deficiencies, as well as $6.0 million in associated interest. Substantially
all of the tax impacts were normalized, as Central Maine will be deducting
any disallowed costs for tax purposes in future years. The net impact of
the tax and interest true-up for all the years under consideration reduced
net income in the second quarter of 1999 by $0.6 million due primarily to
interest expense. Of the $6.0 million interest payment, approximately $1.0
million was previously accrued, $1.8 million associated with the FEV
facility was deferred consistent with regulatory practice, and $2.0 million
of interest income was accrued for the years 1995 through June 1999.
Due to the materiality of the amounts involved, approval of the settlement
from the Congress's Joint Committee on Taxation is required and is being
sought by the IRS.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries,
have entered into a joint-venture agreement to pursue opportunities to
distribute natural gas at retail in many Maine communities. They would
offer natural-gas service in several areas of Maine, primarily the Augusta,
Bangor, Bath-Brunswick, Bethel, Windham and Waterville areas, none of which
had a natural-gas distribution system in place. The gas is to be drawn from
two new gas-pipeline projects that will carry Canadian gas through Maine
and into the regional energy market using substantial portions of electric
transmission-line corridors owned by Central Maine and MEPCO. On July 24,
1998, the MPUC authorized the joint venture to serve the areas it had
applied to serve. The new company, CMP Natural Gas could face competition
from new or existing gas utilities in some of the areas it has targeted.
CMP Natural Gas began construction of its first local distribution system
in Windham, Maine, in early 1999 and began serving its first customer in
May. On July 8, 1999, CMP Natural Gas and Calpine Corporation, a
California-based independent power company, announced the signing of a
20-year contract for CMP Natural Gas to provide natural gas delivery
service to Calpine's proposed 540-megawatt natural gas-fired power plant
under construction in Westbrook, Maine. CMP Natural Gas expects to commence
service to the plant by June 1, 2000, after MPUC approval and construction
of a two-mile lateral pipeline along an existing Central Maine right of way
that would interconnect with the new interstate pipeline facilities. Upon
completion of the proposed merger of Energy East and CMP Group, Energy East
will hold all of the interests in CMP Natural Gas.
5. Regulatory Matters and Electric-Utility Industry Restructuring
Alternative Rate Plan - On March 15, 1999, Central Maine submitted its 1999
ARP compliance filing to the MPUC. In the filing Central Maine recommended
that rates remain unchanged for the period July 1, 1999 to February 29,
2000. On July 13, 1999, the MPUC issued an order which provided for no
increase in rates effective July 1, 1999. In a related matter, on August 2,
1999, the MPUC issued an order regarding the treatment of gains on the sale
of easements by Central Maine in late 1998 and early 1999. The order
allocated 90 percent of the proceeds from the sale of easements to
ratepayers and 10 percent to shareholders. Further the ratepayer portion
must be amortized over a 5 year period. Central Maine believes that both
under Maine Law Court precedent and under the terms of the ARP these gains
should be recognized when the property was sold and accrue to the benefit
of shareholders; accordingly, Central Maine will vigorously work to
overturn the decision through reconsideration by the Commission and/or
appeal to Maine's Law Court. As of June 30, 1999, approximately $9.9
million of the gain would be deferred and net income reduced accordingly,
if the MPUC position prevails. The design and levels of Central Maine's
rates as a transmission-and-distribution company, effective March 1, 2000,
will be determined in Phase II of the MPUC proceeding discussed below in
this note under "MPUC Proceeding on Stranded Costs, Revenue Requirements,
and Rate Design."
Stranded Costs - The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry on March 1, 2000, was enacted by
the Maine Legislature in May 1997, and is discussed in detail below. Such a
departure from traditional regulation, however, could have a substantial
impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full
recovery, utilities would find their above-market costs to be "stranded",
or unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its
size. In general, its stranded costs reflect the excess costs of Central
Maine's purchased-power obligations over the market value of the power, and
the costs of deferred charges and other regulatory assets. The major
portion of Central Maine's stranded costs is related to above-market costs
of purchased-power obligations arising from Central Maine's long-term,
noncancelable contracts for the purchase of capacity and energy from NUGs
estimated at $800 million, with lesser estimated amounts related to Central
Maine's deferred regulatory assets.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1,
2000, to provide a "reasonable opportunity" to recover stranded costs
through the rates of the transmission-and-distribution company, comparable
to the utility's opportunity to recover stranded costs before the
implementation of retail access under the legislation. Stranded costs are
defined as the legitimate, verifiable and unmitigable costs made
unrecoverable as a result of the restructuring required by the legislation.
Central Maine's recoverable amount and timing of recovery will be
determined by the MPUC in the second phase of the ongoing proceeding
discussed under the heading "MPUC Proceeding on Stranded Costs, Revenue
Requirements, and Rate Design," below.
The principal restructuring provisions of the legislation provide for
customers to have direct retail access to generation services and for
deregulation of competitive electric providers, commencing March 1, 2000,
with transmission-and-distribution companies continuing to be regulated by
the MPUC. By that date, subject to possible extensions of time granted by
the MPUC to improve the sale value of generation assets, investor-owned
utilities are required to divest all generation assets and
generation-related business activities, with two major exceptions: (1)
non-utility generator contracts with qualifying facilities and contracts
with demand-side management or conservation providers, brokers or hosts,
and (2) ownership interests in nuclear power plants. As discussed below
under "Sale of Generation Assets," Central Maine completed the sale of its
non-nuclear generating assets on April 7, 1999.
The legislation also requires investor-owned utilities, after February 29,
2000, to sell their rights to the capacity and energy from all generation
assets, including the purchased-power contracts that had not previously
been divested pursuant to the legislation, with certain immaterial
exceptions. On July 30, 1998, Central Maine offered its rights to the
capacity and energy from its nuclear generation assets and its NUG
contracts to prospective bidders.
Upon the commencement of retail access on March 1, 2000, Central Maine, as
a transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider
that is affiliated with Central Maine would be allowed to sell electricity
outside Central Maine's service territory without limitation as to amount,
but within Central Maine's service territory the affiliate would be limited
to providing not more than 33 percent of the total kilowatt-hours sold
within Central Maine's service territory, as determined by the MPUC. CMP
Group does not now intend to engage in the sale of electric energy after
March 1, 2000.
For a summary of other provisions of the 1997 legislation, see the Annual
Report on Form 10-K of CMP Group and Central Maine for the twelve months
ended December 31, 1998.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design.
By order dated March 19, 1999, the MPUC completed the first phase of the
proceeding contemplated by Maine's restructuring legislation that will
ultimately determine the recovery of Central Maine's stranded costs, its
revenue requirements, and the design of its rates to be effective when
Central Maine becomes a transmission-and-distribution utility at the time
retail access to generation begins in Maine on March 1, 2000. The MPUC
stressed in its Phase I order that it was deciding the "principles" by
which it would set Central Maine's transmission-and-distribution rates,
effective March 1, 2000, but was deferring calculating the rates themselves
until Phase II of the proceeding because such calculations at that time
would rely excessively on estimates.
With respect to stranded costs, the MPUC indicated that it would set the
amount of recoverable stranded costs for Central Maine in Phase II of the
proceeding pursuant to its mandate under the restructuring statute to
provide transmission-and-distribution utilities a reasonable opportunity to
recover such costs that is equivalent to the utility's opportunity to
recover those costs prior to the commencement of retail access. The MPUC
also reviewed the prescribed methodology for determining the amount of a
utility's stranded costs, including among other factors the application of
excess value from Central Maine's divested generation assets to offset
stranded costs.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the
appropriate cost of common equity for Central Maine as a
transmission-and-distribution company beginning March 1, 2000. Central
Maine had recommended a 12-percent cost of common equity with a 55-percent
common equity component in the capital structure. The MPUC approved a
common-equity cost of 10.50 percent with a common-equity component of 47
percent, and an overall weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of
the proceeding primarily to establishing principles that would guide it in
designing Central Maine's rates to be effective March 1, 2000.
Central Maine submitted its Phase II filing to the MPUC on July 1, 1999.
The filing is organized into sections covering revenue requirements, a
sales forecast, stranded costs, and rate design, with updated information
provided in each area. As with Phase I, some of the calculations submitted
in the Phase II filing are still estimates, since some of the information
that will provide the basis for the MPUC's decisions in the proceeding is
not yet available. This information will include the results of the
auctioning of Central Maine's energy and capacity of undivested
generation-related assets and NUG contracts and the market prices for
electricity, including the standard-offer price, all of which Central Maine
expects to be able to provide the MPUC in an updated filing in December
1999.
Central Maine's requested revenue requirement amount, together with its
interim assumption for market electricity prices, would result in an
average 10.4-percent price decrease for its core rate customers effective
March 1, 2000. This amount will change, however, depending on the
information to be submitted in the December filing and the MPUC's decision
on Central Maine's revenue requirements.
Sale of Generation Assets
On April 7, 1999, Central Maine completed the sale of all of its hydro,
fossil and biomass power plants with a combined generating capacity of
1,185 megawatts for $846 million in cash, including approximately $18
million for assets of Union Water, to affiliates of Florida-based FPL
Group. The related book value for these assets was approximately $217.8
million. In addition, as part of its agreement with FPL Group, Central
Maine entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000.
Subsequently, an agreement was reached to sell related storage facilities
to FPL Group for an additional $4.6 million ($1.5 million for the assets
and $3.1 million estimated for lease revenue associated with the properties
that CMP will retain), including $2.0 million for Union Water assets. The
related book value of these assets was approximately $11.9 million.
Central Maine recorded a pre-tax deferred gain of $515.7 million net of
selling costs and certain non-normalized income tax impacts from the sale
of generation assets by establishing a regulatory liability in the second
quarter of 1999 eliminating any income recognition. Central Maine also
recorded curtailment and special termination deferred charges of $8.1
million associated with pension and postretirement benefit costs of
employees leaving the company as a result of the generation asset sale.
These deferred charges will be amortized over a three year period beginning
March 1, 2000 as required by the MPUC. In Phase II of the above described
"MPUC Proceeding on Stranded Costs, Revenue Requirements and Rate Design,"
the MPUC will determine the amount of the regulatory liability that will be
used to reduce stranded costs and the utilization and timing of the
recognition of any remaining regulatory liability.
Central Maine also recorded a pre-tax deferred gain amounting to $30.8
million to offset the income impact of the flow-through of unamortized
investment tax credits and excess deferred taxes associated with the assets
sold. Central Maine has requested a private letter ruling from the IRS
regarding the appropriate treatment of these items based on directives from
the MPUC. Central Maine is of the opinion, based on its review of the rules
and regulation and IRS rulings in similar situations, that any unamortized
investment tax credits and excess deferred taxes relating to the property
sold become nonregulated property at the point of sale. Central Maine
believes that regulatory agencies, therefore, are precluded from
considering these unamortized investment tax credits and excess deferred
tax reserves in establishing regulated rates because they would constitute
a violation of the normalization requirement of the Internal Revenue Code.
The MPUC has directed Central Maine to seek the private ruling to be
absolutely clear in this particular case whether ratepayers can continue to
benefit from these excess reserves. Central Maine does not know when the
IRS will rule on its requests, but expects a ruling before the end of 1999.
Union Water's net income reflects a $3.7 million increase during the second
quarter of 1999 due to its portion of the proceeds of the sale of
generation assets as determined by the MPUC. Central Maine is appealing to
the Maine Supreme Judicial Court the imputation of $13.2 million of value
of the Union Water assets to Central Maine. The $13.2 million imputation is
included in the Central Maine deferred gain of $515.7 million.
With the cash proceeds of the sale Central Maine redeemed the remaining
$118.7 million of its outstanding General and Refunding Mortgage Bonds on
May 10, 1999, and paid at maturity $47 million of its medium-term notes on
May 4, 1999. On June 1, 1999, Central Maine redeemed $180 million of its
medium-term notes, as well as all of the outstanding $10 million Town of
Yarmouth Pollution Control Revenue Bonds, which had been issued in 1977 and
1978. Approximately $294.5 million of the proceeds will be required for
federal and state income taxes resulting from the sale and, after providing
for closing costs and energy purchases to meet power-supply obligations
until the start of retail competition on March 1, 2000, Central Maine
expects to transfer the balance to its parent, CMP Group. Proceeds that
have not been applied have been invested in accordance with Central Maine's
cash investment policy. Uses of the balance of the proceeds are under
consideration by CMP Group.
Storm Damage to Company's System - In January 1998, an ice storm of
unprecedented breadth and severity struck Central Maine's service
territory, causing power outages for approximately 280,000 of Central
Maine's 528,000 customers, and substantial widespread damage to Central
Maine's transmission and distribution system. To restore its electrical
system, Central Maine supplemented its own crews with utility and
tree-service crews from throughout the northeastern United States and the
Canadian maritime provinces, with assistance from the Maine national guard.
On January 15, 1998, the MPUC issued an order allowing Central Maine to
defer on its books the incremental non-capital costs associated with
Central Maine's efforts to restore service in response to the damage
resulting from the storm. Based on the MPUC order, Central Maine has
deferred $52.7 million in storm related costs as of June 30, 1999,
including $2.8 million of carrying costs. In October 1998, the MPUC staff
issued a report of its summary investigation of the Maine utilities'
response to the ice storm. The report found no basis for formal
adjudicatory investigation into the response and supported the utilities'
actions.
On May 1, 1998, President Clinton signed a Congressional appropriation bill
that included $130 million for Presidentially declared disasters in 1998,
including storm-damage cost reimburse- ment for electric utilities. On
November 5, 1998 the United States Department of Housing and Urban
Development ("HUD") announced that of those funds, $2.2 million had been
awarded to Maine, with none designated for utility infrastructure, which
Central Maine and the Maine Congressional delegation protested as
inadequate and inconsistent with Congressional intent. On March 23, 1999,
HUD announced that Maine would receive an additional $2.15 million, and
later announced that another $17 million would be available for Maine. The
MPUC has stated its belief that Central Maine's prudently incurred
ice-storm costs should be recovered through rates commencing March 1, 2000,
but has deferred action pending the determination of the amount of federal
reimbursement. Central Maine believes that it will receive a substantial
portion of the funds now designated for Maine, but cannot predict with
certainty what portion of its ice storm-related costs it will recover
through federal assistance, or from its customers, or when any such
recovery will take place.
6. Income Taxes
The CMP Group effective tax rate is higher than the statutory rate and the
prior year's effective tax rate primarily due to losses associated with a
CMP Group equity investment in a subsidiary.
7. Transactions with Affiliated Companies
Central Maine provides certain services to CMP Group and its subsidiaries,
including administrative support services and pension and employee benefit
arrangements. Charges related to those services have been determined based
on a combination of direct charges and allocations designed to recover
Central Maine's cost. These assessments are reflected as an offset to
Central Maine's expenses and totaled approximately $3.1 million for the six
months ended June 30, 1999.
CMP Group provides certain managerial services to its subsidiaries. Charges
related to those services have been determined based on a combination of
direct charges and allocation in order to recover the majority of their
expenses. These assessments are reflected as an offset to CMP Group's
expenses and totaled approximately $5.0 million for the six months ended
June 30, 1999.
In addition, a subsidiary of CMP Group has been providing certain real
estate and river management services charged to Central Maine at cost and
environmental, engineering, utility locator and construction services based
on a contracted rate. These expenses amounted to $3.5 million for the six
months ended June 30, 1999.
Central Maine provides services to CMP Group and its subsidiaries as well
as non-affiliated parties. As of June 30, 1999, Central Maine's accounts
receivable and accounts payable included the following:
(Dollars in thousands)
Accounts Accounts
Receivable Payable
CMP Group $ 373 $1,681
CNEX 275 10
MaineCom 40 6
Telesmart 29 57
Union Water 13,908 999
------ ------
$14,625 $2,753
====== =====
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations of CMP Group and Central Maine Power Company
This is a combined Quarterly Report on Form 10-Q of CMP Group and Central Maine.
Therefore, our Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) applies to both CMP Group and Central Maine. CMP
Group's consolidated financial statements include the accounts of CMP Group and
its wholly owned and controlled subsidiaries, including Central Maine
(collectively, the CMP Group System). Central Maine's consolidated financial
statements include its accounts as well as those of its wholly owned and
controlled subsidiaries. The MD&A should be read in conjunction with the
consolidated financial statements included in this report.
Note re Forward-Looking Statements
This Report on Form 10-Q contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. CMP Group
and Central Maine undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events. Readers are urged to
carefully review and consider the factors in the succeeding paragraph.
Factors that could cause actual results to differ materially include, among
other matters, the outcome of the shareholder vote and the regulatory
proceedings involving the proposed acquisition of CMP Group by Energy East; the
costs of decommissioning the Maine Yankee plant; failure to resolve any
significant aspect of the "Year 2000 problem"; electric utility industry
restructuring, including the ongoing state and federal activities that will
determine Central Maine's ability to recover its stranded costs and establish
its revenue requirements and rate design as a transmission-and-distribution
utility commencing March 1, 2000; Central Maine's ability to recover its costs
resulting from the January 1998 ice storms that damaged its transmission and
distribution system; future economic conditions; earnings-retention and
dividend-payout policies; developments in the legislative, regulatory, and
competitive environments in which CMP Group and Central Maine operate; CMP
Group's investments in unregulated businesses; 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.
Corporate Organization
General. CMP Group is a holding company organized effective September 1, 1998,
which owns all of the common stock of Central Maine and the former non-utility
subsidiaries of Central Maine. As part of the reorganization, all of the shares
of Central Maine's common stock were converted into an equal number of shares of
CMP Group common stock, which are listed on the New York Stock Exchange under
the symbol CTP. The reorganization was approved by Central Maine's shareholders
on May 21, 1998, and on various dates in 1998 by the appropriate state and
federal regulatory agencies. On June 14, 1999, CMP Group and Energy East entered
into an Agreement and Plan of Merger. See "Proposed Merger" below, for a
discussion of this matter.
Operating Results
CMP
Group Central Maine
(dollars in millions)
Net income Six months ended:
June 30, 1999 $37.3 $1.15/share $40.9
June 30, 1998 17.0 $.52/share 19.9
---- ----
Increase $20.3 $21.0
Earnings applicable to common stock Six months ended:
June 30, 1999 N/A $39.1 $1.25/share
June 30, 1998 N/A $17.0 $.52/share
The increase in net income of $20.3 million for the six months ended June 30,
1999 versus the same period last year is driven primarily by improvements in
operations, particularly electric service revenues, while operation expenses
have remained relatively flat year to year. Revenues increased $43.0 million for
the first six months of 1999 and when adjusted to exclude approximately $15
million of subsidiary operations revenue not consolidated in 1998, the basic
electric business revenues show an increase of $28 million, or 6.1 percent. The
residential and commercial sectors have seen the strongest growth in Kwh sales
year-to-date, rising 3.3 percent and 2.8 percent, respectively. The improvement
in electric revenues is due to higher sales volume attributed to colder weather
in the first quarter of 1999 as compared to the same period in 1998. Also, in
1998 Central Maine lost sales due to the unprecedented ice storm. Overall growth
in electric sales was up 0.5 percent for the period ended June 1999 over June
1998.
Operating expenses were $16.1 million higher than 1998 for the six months ended
June 1999. Similar to the revenues, subsidiary operations not consolidated in
1998 account for approximately $15 million of the increase, resulting in
essentially flat expense growth year to year. While operation expenses
associated with generation are expected to decrease year over year due to the
sale of generation assets on April 7, 1999, purchased-power costs are expected
to increase due to Central Maine's interim purchase power agreements entered
into with FPL to provide power until March 1, 2000. The MPUC has segregated $49
million of sales proceeds to offset these costs.
Service Area Kwh Sales - Central Maine's service area sales of electricity
totaled approximately 2.16 billion kilowatt-hours in the second quarter of 1999,
down 1.3 percent from the 2.19 billion kilowatt-hour level of a year ago, as
follows:
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended June 30,
Three Months Six Months
1999 1998 % Change 1999 1998 % Change
Residential 644.2 648.1 (0.6)% 1,436.9 1,391.3 3.3 %
Commercial 622.9 615.5 1.2 1,270.8 1,236.5 2.8
Industrial 875.0 868.2 0.8 1,708.4 1,714.2 (0.3)
Other 17.6 57.2 (69.2) 65.0 117.8 (44.8)
2,159.7 2,189.0 (1.3)% 4,481.1 4,459.8 0.5%
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers decreased by 0.6 percent in the
second quarter, but increased 3.3 percent when compared to the same six-month
period in 1998. The decrease for the quarter related primarily to June 1999
having 1.2 fewer meter-reading days than June 1998. Most of the overall growth
for the first six months in 1999 is due to the absence of an ice-storm in 1999
of the kind that caused widespread customer outages in January 1998. Another
contributor was the return to colder winter weather, with the temperatures
through April being 6.6 percent colder than the same period last year. There was
also an increase in the number of new residential customers added to Central
Maine's system.
Commercial kilowatt-hour sales increased by 1.2 percent in the second quarter
and by 2.8 percent for the six months ended June 30, 1999. The increase sales in
the retail trade and service sectors, which comprise the largest percentage of
commercial sales, were due primarily to the absence of widespread storm-caused
outages in 1999 and the return to colder winter weather conditions in 1999.
Industrial kilowatt-hour sales increased by 0.8 percent in the second quarter
and were slightly lower for the six months ended June 30, 1999 as compared to
the same period in 1998. Decreased sales of 28.5 million kwh to the paper
industry more than offset the positive sales growth of 22.7 million kwh
experienced in the other industrial sector. The primary factors contributing to
the 3.0 percent drop in sales to the paper industry were 1) the shutdown of two
of the four paper machines at one mill in November of 1998 to balance production
with demand. The same mill had internal generation problems that boosted
purchases by about 5 million kwh for that period; and 2) the closure of another
mill in 1998, continued to impact 1999 results. The absence of sales to that
mill in 1999, compared to the same time period in 1998 amounted to a decrease of
6.1 million kwh. The pulp-and-paper sector of the industrial class accounts for
approximately 55 percent of the industrial sales category.
Wholesale kilowatt-hour sales, which is included under `Other' in the chart
above, decreased by 52.2 percent through June 1999 compared to 1998 due to the
expected loss through contract expirations with three wholesale companies - one
ending in February, and the other two ending in May of 1999.
Operating Expenses
Central Maine's fuel used for company generation decreased by approximately $6.6
million in the second quarter of 1999 compared to 1998 due to the sale of its
generation assets.
Central Maine's purchased power-capacity expense increased $10.1 million in the
second quarter and $8.5 million year-to-date compared to 1998. The increase is
due primarily to increased capacity costs associated with the restructuring of a
NUG contract and the FPL contract for increased power, partially offset by the
effects of the permanent shutdown of the Maine Yankee plant in August 1997 and
the resulting decline in operating costs.
CMP Group's maintenance expense decreased $2.4 million for the six months ended
June 30, 1999 compared to 1998. This decrease was due primarily to the temporary
increase in costs in 1998 caused by Central Maine's operations personnel working
in a maintenance capacity and to subsequent cleanup efforts that resulted from
the 1998 ice storm.
CMP Group's other operations expense increased by $12.6 million in the second
quarter of 1999 and $20 million year-to-date as compared to 1998. The increase
is due primarily to the consolidation of its subsidiaries in 1999 which accounts
for approximately $14.6 million of the increase year-to-date.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense increased by $2.3
million and $16.5 million, respectively, for the second quarter ended June 30,
1999, and year to date compared to the same period in 1998, as a result of
higher pre-tax earnings.
Other Income and Expense
Equity in Earnings of Associated Companies for CMP Group decreased by $4.4
million in the first half of 1999 compared to 1998.This decrease is due
primarily to losses associated with NEON, which is an equity investment of
MaineCom, a CMP Group subsidiary.
The increase in gain on sale of investments and properties of $6.0 million and
$13.0 million for the three and six month periods ending June 30, 1999,
respectively, is due primarily to the sale of Union Water's generation assets to
FPL and the sale of transmission line right-of-way access to a gas-pipeline
project.
Long-term debt interest expense has decreased by $3.0 million and $3.4 million,
respectively, for the second quarter of 1999 and year-to-date, as compared to
1998. The decrease is due to the repurchase of mortgage bonds with asset sale
proceeds.
Other Interest Expense increased by $9.6 million during the second quarter of
1999 and $9.3 million year-to-date as compared to 1998. The increase was due
primarily to interest accruing to ratepayers of $5.1 million associated with the
deferred gain of $515.0 million relating to Central Maine's generation asset
sale to FPL and $4.5 million due to the interest expense on the settlement of
tax years 1992 - 1994 with the IRS.
Other income increased $6.0 million in the second quarter of 1999 and $6.6
million year-to-date over the same period in 1998 due primarily to interest
income associated with sales proceeds from the generation asset sale.
For the quarter ended June 30, 1999, Central Maine reduced preferred-stock
dividends by $155 thousand as a result of the earlier redemption of its 8 7/8%
Series Preferred Stock at par, under the mandatory and optional sinking-fund
provisions of that series. Year-to-date preferred stock dividends were reduced
by $1.1 million as compared to 1998 due to redemptions in several series of
preferred stock.
Liquidity and Capital Resources
Increases in Central Maine's retail rates are limited by Central Maine's ARP.
For a discussion of the ARP, see Note 3, "Regulatory Matters," "Alternative Rate
Plan" of CMP Group and Central Maine's Form 10-K for the year ended December 31,
1998.
Approximately $63.1 million of cash was provided during the six months ended
June 30, 1999, from net income before non-cash items, primarily depreciation,
amortization and deferred income taxes. During that period approximately $17.6
million of cash was used for fluctuations in certain assets and liabilities and
from other operating activities. In addition $13.9 million of incremental power
costs were incurred due to the sale of generation assets and $13.0 million was
provided due to the gain on sale of investments of properties.
Investing activities provided approximately $677.1 million for the six months
ended June 30, 1999. The $677.1 million is comprised of the following; proceeds
of $850.6 million for generation assets sale, utilization of $153.7 for tax
payments and $11.7 for selling expenses associated with the generation asset
sale, proceeds of $18.1 million for sale of investments and properties, along
with construction expenditures, which utilized $26.2 million in cash during
second half of 1999 for generation, transmission, distribution, and general
construction expenditures. In order to accommodate existing and future loads on
its electric system Central Maine is engaged in a continuing construction
program. Central Maine's plans for improvements and expansions, its load
forecast and its power-supply sources are under a process of continuing review.
Actual construction expenditures depend upon the availability of capital and
other resources, load forecasts, the timing of its divestiture of its generating
assets, customer growth and general business conditions. The ultimate nature,
timing and amount of financing for Central Maine's total construction programs,
refinancing and energy-management capital requirements will be determined in
light of market conditions, earnings and other relevant factors.
During the six months ended June 30, 1999, CMP Group paid dividends on common
stock of $14.6 million and preferred-stock dividends of $.9 million.
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program was implemented to
increase Central Maine's financing flexibility in anticipation of restructuring
and increased competition. On June 30, 1999, Central Maine had $110 million of
its medium-term notes outstanding.
To support its short-term capital requirements, in October 1996, Central Maine
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility.
Effective December 15, 1998, the banks' commitments under the 364-day facility
were reduced from $75 million to $25 million by agreement of the parties, and
other provisions were amended to reflect the reorganization of Central Maine
into a holding-company structure and recognize other changed circumstances. Both
credit facilities require annual fees on the total credit lines. The fees are
based on Central Maine's credit ratings and allow for various borrowing options
including LIBOR-priced, base-rate-priced and competitive-bid-priced loans. The
amount of outstanding short-term borrowing will fluctuate with day-to-day
operational needs, the timing of long-term financing, and market conditions.
Central Maine had no outstanding notes as of June 30, 1999 under the credit
facilities.
On May 10, 1999, Central Maine redeemed its last two series of General and
Refunding Mortgage Bonds. On July 27, 1999, Central Maine discharged its General
and Refunding Mortgage Indenture, leaving no class of secured debt outstanding.
On August 5, 1998, the MPUC approved Central Maine's application to purchase up
to 11 million shares of its outstanding common stock over a three-year period.
The amount of any stock purchases and their timing by Central Maine or CMP Group
would depend on the need for equity in the respective company's capital
structure, investment opportunities and other considerations and, in the case of
CMP Group, would require the consent of Energy East under the Merger Agreement.
Neither Central Maine nor CMP Group has adopted a formal stock-purchase plan.
On February 12, 1999, Central Maine restructured a power-purchase contract with
a NUG in Livermore, Maine, which it expects will save its customers the
equivalent of $21 million in net present value..
Securities Ratings
The current ratings assigned Central Maine's securities by the three major
securities-rating agencies on April 7, 1999, coincident with the completion of
the sale of its non-nuclear generation assets to FPL Energy, Inc., are shown
below:
Mortgage Unsecured Commercial Preferred
Bonds Notes Paper Stock
S&P A A- A-2 BBB
Moody's A3 Baa1 P2 Baa2
D&P A- A- D1 BBB+
Proposed Merger
On June 14, 1999, CMP Group and Energy East, a New York holding company which is
an energy delivery, products and services company doing business in New York,
Massachusetts, Maine and New Hampshire and EE Merger Corp., a Maine corporation
that is a wholly-owned subsidiary of Energy East, entered into an Agreement and
Plan of Merger, dated as of June 14, 1999 (the "Merger Agreement"), providing
for a merger transaction among CMP Group, Energy East and EE Merger Corp.
Pursuant to the Merger Agreement, EE Merger Corp. will merge with and into CMP
Group (the "Merger"), with CMP Group being the surviving corporation and
becoming a wholly-owned subsidiary of Energy East. The Merger, which was
unanimously approved by the respective boards of directors of CMP Group, Energy
East and EE Merger Corp., is expected to occur shortly after all of the
conditions to the consummation of the Merger, including the receipt of required
regulatory and shareholder approvals, are satisfied. CMP Group expects that
decisions of regulatory agencies can be obtained within 12 months. CMP Group
filed its petition for approval of the merger with the MPUC on July 1, 1999, and
requested expedited consideration to assure receipt of approval on or before
December 31, 1999.
Under the terms of the Merger Agreement, each outstanding share of CMP Group
common stock, $5.00 par value per share (the "CMP Group Common Stock"), other
than any treasury shares or shares owned by Energy East or any subsidiary of CMP
Group or Energy East, will be converted into the right to receive $29.50 in cash
(the "Merger Consideration"). Pursuant to the Merger Agreement, approximately
$957 million in cash will be paid to holders of shares of CMP Group Common
Stock, with additional payments being made to holders of stock options and
performance shares awarded under CMP Group's performance incentive plans.
The Board of Directors of CMP Group received an opinion from its financial
advisor, Warburg Dillon Read LLC, to the effect that as of the date of the
Merger Agreement, the Merger Consideration to be received was fair from a
financial point of view to the holders of CMP Group Common Stock.
The Merger is subject to certain customary closing conditions, including without
limitation, the receipt of the required approval of CMP Group's shareholders and
of all necessary governmental approvals and the making of all necessary
governmental filings. Approvals of the MPUC, the Connecticut DPUC, the SEC under
the Public Utility Holding Company Act of 1935, as amended, FERC, the NRC and
the FCC are necessary. Filings of the requisite notifications with the Federal
Trade Commission and the Department of Justice under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the expiration of the
associated waiting period are also required. A meeting of CMP Group's
shareholders to vote on the Merger will be convened as soon as practicable and
is expected to be held in the fall of 1999.
The Merger Agreement contains certain covenants of the parties pending the
consummation of the Merger. Generally, unless the parties have otherwise agreed
with respect to specified business activities, CMP Group and its subsidiaries
must carry on their respective businesses in the ordinary course consistent with
past practice and use all commercially reasonable efforts to preserve intact
their present business organizations and goodwill. CMP Group is permitted to
declare and pay its regular quarterly dividends, but may not increase dividends
or issue or repurchase any capital stock. The Merger Agreement contains other
restrictions or limitations on CMP Group's activities, including amendments of
its Articles of Incorporation or bylaws, acquisitions and dispositions of
assets, capital expenditures, incurrence of indebtedness, modification of
employee compensation and benefits, changes in accounting methods, discharge of
liabilities, and matters relating to CMP Group's investment in NEON.
The Merger Agreement prevents CMP Group and its subsidiaries from initiating,
soliciting or encouraging any inquiry or offer that constitutes or may
reasonably be expected to lead to any alternative business combination proposal,
or engaging in discussions or negotiations with or providing any confidential
information to any third party relating to an alternative proposal. CMP Group
must notify Energy East of any such inquiry, offer or proposal. Prior to the
time of any approval by CMP Group's shareholders of the Merger Agreement, CMP
Group may enter into discussions or negotiations with a third party that were
not initiated, solicited or encouraged by CMP Group and furnish confidential
business information to such third party if (i) CMP Group gives Energy East at
least two business days' prior notice, (ii) the third party has made an
alternative proposal that is financially superior to the terms of the Merger and
the proposal can be financed, (iii) CMP Group's Board of Directors concludes,
based on the advice of outside counsel, that failure to engage in such
discussions or negotiations or provide such information could constitute a
breach of fiduciary duty, (iv) CMP Group provides Energy East a reasonable
opportunity to respond to the alternative proposal, and (v) CMP Group executes a
confidentiality agreement with the third party. Upon five days' prior notice to
Energy East, CMP Group may terminate the Merger Agreement to accept a superior
alternative proposal upon paying a termination fee of $33.5 million plus
expenses, except that prior to any such termination, CMP Group must negotiate
with Energy East to attempt to make adjustments in the terms and conditions of
the Merger Agreement that would enable the transactions contemplated therein to
proceed.
On the consummation of the Merger, CMP Group's President and Chief Executive
Officer, David T. Flanagan, and two current directors of CMP Group will be
elected as members of the Board of Directors of Energy East. At that time, Mr.
Flanagan will become President of Energy East, and Arthur W. Adelberg, who
serves as Executive Vice President of CMP Group, will become Senior Vice
President and Chief Financial Officer of Energy East.
Sara J. Burns, who currently serves as President of Central Maine, will continue
serving as President of Central Maine after consummation of the Merger. F.
Michael McClain, CMP Group's Vice President, Corporate Development, will serve
as the President of one or more subsidiaries after the Merger becomes effective.
In addition to the circumstances described above, the Merger Agreement may be
terminated by mutual consent of the parties; by either party if the Merger is
not consummated by June 14, 2000, with an automatic six-month extension if all
required statutory approvals have not been obtained by June 14, 2000 but all
other conditions to closing have been satisfied; by either party if the approval
of CMP Group's shareholders is not obtained at a special meeting of the
shareholders; by either party if any state or federal law, regulation or order
that is adopted or issued has the effect of prohibiting the Merger, or by a
non-breaching party for an uncured material breach of any representation,
warranty, covenant or agreement contained in the Merger Agreement. Upon
termination of the Merger Agreement by a party for a non-willful breach, the
breaching party must reimburse the non-breaching party up to $10 million of
out-of-pocket fees and expenses incurred in connection with the Merger Agreement
or the Merger. In addition to recovery of such out-of-pocket fees and expenses,
a non-breaching party may pursue all available legal remedies in the event of a
willful breach of the Merger Agreement by the other party.
"Year 2000" Computer Issues
The "Year 2000 problem" arose because many computer programs have used only the
last two digits to refer to a year. Therefore those computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results, with potentially serious and widespread adverse consequences.
CMP Group, through Central Maine, began its Year 2000 problem remediation
efforts in 1996, and since that time has developed a broad-based and
comprehensive project plan for addressing Year 2000 issues. The plan includes
both Information Technology ("IT") and non-IT systems, addresses both
centralized and distributed systems, and encompasses systems critical to the
transmission and distribution of electric energy as well as the traditional
business systems necessary to the CMP Group System.
CMP Group has met the target date for systems critical to the delivery of
electric power. CMP Group reported to the North American Electric Reliability
Council (NERC) at the end of June 1999 that all "mission critical" systems
(those systems essential to the delivery of power to customers) had been made
Year 2000 ready. This target had been established at the direction of the
Department of Energy. Utility progress in achieving this goal has been tracked
by NERC. CMP Group has been reporting to NERC on a monthly basis since August
1998.
CMP Group has also completed remediation efforts for most of its internal
technology infrastructure systems. All components and systems required to
support telephone, radio, microwave and fiber optics communications have been
readied for Year 2000. In addition, Year 2000 readiness is complete for all
hardware in the company's mainframe, client server, and local and wide area
network environments. Additional work on non-critical systems and components is
scheduled for completion during the third quarter of 1999.
In addition to the internal Year 2000 readiness activities discussed above, CMP
Group is actively participating in a joint ISO/NEPOOL initiative designed to
assess, and assure, power reliability within the NEPOOL area. This initiative
encompasses all participants, including Central Maine, within the New England
area.
CMP Group also has an active program in place to identify and address issues
associated with third-party providers. The program addresses business
relationships with all third-party providers, but focuses on those suppliers
deemed critical to CMP Group's business. At this time CMP Group has no
indication that any third-party with which CMP Group has a material relationship
is expecting a Year 2000-related business interruption, although some vendors
are reporting increased lead time as a result of inventory build up within the
industry. CMP Group will continue to monitor and assess its third-party
relationships.
CMP Group estimates it will incur approximately $4.1 million of costs associated
with making the necessary modifications identified to date to both the
centralized and non-centralized systems. As of June 30, 1999, approximately $3.7
million of such costs has been incurred. Some of these costs are associated with
the generation facilities sold to FPL Energy on April 7, 1999.
CMP Group recognizes that failure to correct problems associated with Year 2000
issues has the potential to result in material operational and financial risks
if the affected systems either cease to function or produce erroneous results.
Such risks could include disruptions in the operation of Central Maine's
transmission and distribution systems, an inability to access interconnections
with other utilities, and disruptions to Central Maine's major business systems
(customer information and service, administrative, financial).
Central Maine believes, however, that the most likely worst-case scenario
resulting from these risks would be a temporary, and short-term, disruption of
electric service. This could occur either as a failure on the part of Central
Maine to successfully address all critical Year 2000 issues, as a failure on the
part of a critical third-party provider, or as a failure on the part of other
entities, including ISO-New England, to successfully maintain the short-term
reliability of power supply and delivery on a regional basis. Central Maine does
not expect that any such short-term service disruption would have a material
impact on its operations, liquidity, or financial condition.
In order to minimize these risks, and the potential recovery time, from Year
2000 problems, CMP Group is actively involved in contingency planning. Although
CMP Group has extensive knowledge and specific experience in disaster/recovery
planning and execution, CMP Group recognizes the importance of Year 2000
specific contingency planning. Accordingly, Central Maine is participating in
the integrated contingency planning effort headed by NERC and the Northeast
Power Coordinating Council. Further, Central Maine has completed a comprehensive
Year 2000 specific contingency plan for its own independent operations. This
plan includes provisions for additional staffing during the date change at
critical substations, operations centers, and other key locations throughout the
company. Central Maine will be positioned to respond rapidly to any situation
that might occur, and will have staff prepared to confirm functionality of
systems after the date has changed.
CMP Group believes its plans are adequate to attain Year 2000 readiness, and
that the contingency plans currently under development both internally and at a
regional level should substantially mitigate the risks discussed above.
Storm Damage to Company's System - In January 1998, an ice storm of
unprecedented breadth and severity struck Central Maine's service territory,
causing power outages for approximately 280,000 of Central Maine's 528,000
customers, and substantial widespread damage to Central Maine's transmission and
distribution system. To restore its electrical system, Central Maine
supplemented its own crews with utility and tree-service crews from throughout
the northeastern United States and the Canadian maritime provinces, with
assistance from the Maine national guard.
On January 15, 1998, the MPUC issued an order allowing Central Maine to defer on
its books the incremental non-capital costs associated with Central Maine's
efforts to restore service in response to the damage resulting from the storm.
Based on the MPUC order, Central Maine has deferred $52.7 million in storm
related costs as of June 30, 1999, including $2.8 million of carrying costs. In
October 1998, the MPUC staff issued a report of its summary investigation of the
Maine utilities' response to the ice storm. The report found no basis for formal
adjudicatory investigation into the response and supported the utilities'
actions.
On May 1, 1998, President Clinton signed a Congressional appropriation bill
that included $130 million for Presidentially declared disasters in 1998,
including storm-damage cost reimbursement for electric utilities. On November 5,
1998 the United States Department of Housing and Urban Development ("HUD")
announced that of those funds, $2.2 million had been awarded to Maine, with none
designated for utility infrastructure, which Central Maine and the Maine
Congressional delegation protested as inadequate and inconsistent with
Congressional intent. On March 23, 1999, HUD announced that Maine would receive
an additional $2.15 million, and later announced that another $17 million would
be available for Maine. The MPUC has stated its belief that Central Maine's
prudently incurred ice-storm costs should be recovered through rates commencing
March 1, 2000, but has deferred action pending the determination of the amount
of federal reimbursement. Central Maine believes that it will receive a
substantial portion of the funds now designated for Maine, but cannot predict
with certainty what portion of its ice storm-related costs it will recover
through federal assistance, or from its customers, or when any such recovery
will take place.
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in
Central Maine's Annual Report on Form 10-K for the year ended December 31, 1998,
the Plant had experienced a number of operational and regulatory problems and
did not operate after December 6, 1996. The decision to close the Plant
permanently was based on an economic analysis of the costs, risks and
uncertainties associated with operating the Plant compared to those associated
with closing and decommissioning it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for filing
certain amendments to the Power Contracts (the "Amendatory Agreements") and
revised rates to reflect the decision to shut down the Plant and to request
approval of an increase in the decommissioning component of its formula rates.
Maine Yankee's submittal also requested certain other rate changes, including
recovery of unamortized investment (including fuel) and certain changes to its
billing formula, consistent with the non-operating status of the Plant. By Order
dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing,
subject to refund after a minimum suspension period, and set Maine Yankee's
Amendatory Agreements, rates and issues concerning the prudence of the
Plant-shutdown decision for hearing.
Since the filing of the rate request, Maine Yankee and the active intervenors,
including among others the MPUC Staff, the Maine Office of the Public Advocate
("OPA"), Central Maine and other owners, municipal and cooperative purchasers of
Maine Yankee Power (the "Secondary Purchasers"), and a Maine environmental group
(the "Settling Parties"), engaged in extensive discovery and negotiations which
resulted in a settlement agreement filed by those parties with the FERC on
January 19, 1999. A separately negotiated settlement filed with the FERC on
February 5, 1999, resolved the issues raised by the Secondary Purchasers by
limiting the amounts they will pay for decommissioning the Plant and by settling
other points of contention affecting individual Secondary Purchasers. Both
settlements were found to be in the public interest and approved by the FERC on
June 1, 1999. The settlement constitutes a full settlement of all issues raised
in the consolidated FERC proceeding, including decommissioning-cost issues and
issues pertaining to the prudence of the management, operation, and decision to
permanently cease operation of the Plant.
The primary settlement provides for Maine Yankee to collect $33.1 million in the
aggregate annually, effective August 1, 1999, including both decommissioning
costs and ISFSI-related costs. The original filing with FERC on November 6,
1997, called for an aggregate annual collection rate of $36.4 million for
decommissioning and the ISFSI, based on a 1997 estimate. Under the approved
settlement the amount collected annually is to be reduced to approximately $24.4
million as a result of legislation allowing Maine Yankee to (1) use for
construction of the ISFSI funds held in trust under Maine law for spent-fuel
disposal, and (2) access approximately $6.8 million held by the State of Maine
for eventual payment to the State of Texas pursuant to a compact for low-level
nuclear waste disposal, the future of which is in question after rejection of
the selected disposal site in west Texas by a Texas regulatory agency. Both
required authorizing legislation in Maine, which was adopted on May 13, 1999.
The settlement also provides for recovery of the unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50 percent,
effective January 15, 1998, on equity balances up to maximum allowed equity
amounts, which resulted in a pro-rata refund of $9.3 million (including tax
impacts) to the sponsors on July 15, 1999. The Settling Parties also agreed in
the settlement not to contest the effectiveness of the Amendatory Agreements
submitted to FERC as part of the original filing, subject to certain limitations
including the right to challenge any accelerated recovery of unamortized
investment under the terms of the Amendatory Agreements after a required
informational filing with the FERC by Maine Yankee. In addition, the settlement
contains incentives for Maine Yankee to achieve further savings in its
decommissioning and ISFSI-related costs and resolves issues concerning
restoration and future use of the Plant site and environmental matters of
concern to certain of the intervenors in the proceeding.
As a separate part of the settlement, Central Maine, the other two Maine
utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other issues
specific to the Maine parties, including those that had been raised concerning
the prudence of the operation and shutdown of the Plant (the "Maine Agreement").
Under the Maine Agreement Central Maine will continue to recover its Maine
Yankee costs in accordance with its most recent ARP order from the MPUC without
any adjustment reflecting the outcome of the FERC proceeding. To the extent that
Central Maine has collected from its retail customers a return on equity in
excess of the 6.50 percent contemplated by the settlement, no refunds would be
required, but such excess amounts would be credited to the customers to the
extent required by the ARP.
Finally, a major provision of the Maine Agreement requires the Maine owners, for
the period from March 1, 2000, through December 1, 2004, to hold their Maine
retail ratepayers harmless from the amounts by which the replacement power costs
for Maine Yankee exceed the replacement power costs assumed in the report to the
Maine Yankee Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. Central Maine's
share of that amount would be $31.16 million for the period. The Maine
Agreement, which was approved by the MPUC on December 22, 1998, also sets forth
the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the approved settlement, including the
Maine Agreement, constitutes a reasonable resolution of the issues raised in the
Maine Yankee FERC proceeding, and should eliminate significant uncertainties
concerning CMP Group's and Central Maine's future financial performance.
Other Maine Yankee Shareholders. Periodically-higher nuclear-related costs have
affected the financial condition of other stockholders of Maine Yankee in
varying degrees. A default by a Maine Yankee stockholder in making payments
under its Power Contract or Capital Funds Agreement could have a material
adverse effect on Maine Yankee, depending on the magnitude of the default. CMP
Group and Central Maine cannot predict, however, what effect, if any, the
financial and regulatory difficulties experienced by some Maine Yankee
stockholders might have on Maine Yankee or Central Maine.
Regulatory Matters and Electric-Utility Industry Restructuring
Alternative Rate Plan - On March 15, 1999, Central Maine submitted its 1999 ARP
compliance filing to the MPUC. In the filing Central Maine recommended that
rates remain unchanged for the period July 1, 1999 to February 29, 2000. On July
13, 1999, the MPUC issued an order which provided for no increase in rates
effective July 1, 1999. In a related matter, on August 2, 1999, the MPUC issued
an order regarding the treatment of gains on the sale of easements by Central
Maine in late 1998 and early 1999. The order allocated 90 percent of the
proceeds from the sale of easements to ratepayers and 10 percent to
shareholders. Further the ratepayer portion must be amortized over a 5 year
period. Central Maine believes that both under Maine Law Court precedent and
under the terms of the ARP these gains should be recognized when the property
was sold and accrue to the benefit of shareholders; accordingly, Central Maine
will vigorously work to overturn the decision through reconsideration by the
Commission and/or appeal to Maine's Law Court. As of June 30, 1999,
approximately $9.9 million of the gain would be deferred and net income reduced
accordingly, if the MPUC position prevails. The design and levels of Central
Maine's rates as a transmission-and-distribution company, effective March 1,
2000, will be determined in Phase II of the MPUC proceeding discussed below in
this note under "MPUC Proceeding on Stranded Costs, Revenue Requirements, and
Rate Design."
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry on March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such a departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of Central Maine's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of Central
Maine's stranded costs is related to above-market costs of purchased-power
obligations arising from Central Maine's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, with lesser estimated amounts
related to Central Maine's deferred regulatory assets.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000, to
provide a "reasonable opportunity" to recover stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail access
under the legislation. Stranded costs are defined as the legitimate, verifiable
and unmitigable costs made unrecoverable as a result of the restructuring
required by the legislation. Central Maine's recoverable amount and timing of
recovery will be determined by the MPUC in the second phase of the ongoing
proceeding discussed under the heading "MPUC Proceeding on Stranded Costs,
Revenue Requirements, and Rate Design," below.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts, and (2) ownership interests in nuclear power
plants. As discussed below under "Sale of Generation Assets," Central Maine
completed the sale of its non-nuclear generating assets on April 7, 1999.
The legislation also requires investor-owned utilities, after February 29, 2000,
to sell their rights to the capacity and energy from all generation assets,
including the purchased-power contracts that had not previously been divested
pursuant to the legislation, with certain immaterial exceptions. On July 30,
1999, Central Maine offered its rights to the capacity and energy from its
nuclear generation assets and its NUG to prospective bidders.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. CMP Group does not now intend to
engage in the sale of electric energy after March 1, 2000.
For a summary of other provisions of the 1997 legislation, see the Annual Report
on Form 10-K of CMP Group and Central Maine for the twelve months ended December
31, 1998.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. By
order dated March 19, 1999, the MPUC completed the first phase of the proceeding
contemplated by Maine's restructuring legislation that will ultimately determine
the recovery of Central Maine's stranded costs, its revenue requirements, and
the design of its rates to be effective when Central Maine becomes a
transmission-and-distribution utility at the time retail access to generation
begins in Maine on March 1, 2000. The MPUC stressed in its Phase I order that it
was deciding the "principles" by which it would set Central Maine's
transmission-and-distribution rates, effective March 1, 2000, but was deferring
calculating the rates themselves until Phase II of the proceeding because such
calculations at that time would rely excessively on estimates.
With respect to stranded costs, the MPUC indicated that it would set the amount
of recoverable stranded costs for Central Maine in Phase II of the proceeding
pursuant to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover such
costs that is equivalent to the utility's opportunity to recover those costs
prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded costs,
including among other factors the application of excess value from Central
Maine's divested generation assets to offset stranded costs.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the appropriate
cost of common equity for Central Maine as a transmission-and-distribution
company beginning March 1, 2000. Central Maine had recommended a 12-percent cost
of common equity with a 55-percent common equity component in the capital
structure. The MPUC approved a common-equity cost of 10.50 percent with a
common-equity component of 47 percent, and an overall weighted-average cost of
capital of 8.68 percent. In dealing with rate design, the MPUC limited itself in
the first phase of the proceeding primarily to establishing principles that
would guide it in designing Central Maine's rates to be effective March 1, 2000.
Central Maine submitted its Phase II filing to the MPUC on July 1, 1999. The
filing is organized into sections covering revenue requirements, a sales
forecast, stranded costs, and rate design, with updated information provided in
each area. As with Phase I, some of the calculations submitted in the Phase II
filing are still estimates, since some of the information that will provide the
basis for the MPUC's decisions in the proceeding is not yet available. This
information will include the results of the auctioning of Central Maine's energy
and capacity of undivested generation-related assets and NUG contracts and the
market prices for electricity, including the standard-offer price, all of which
Central Maine expects to be able to provide the MPUC in an updated filing in
December 1999.
Central Maine's requested revenue requirement amount, together with its interim
assumption for market electricity prices, would result in an average
10.4-percent price decrease for its core rate customers effective March 1, 2000.
This amount will change, however, depending on the information to be submitted
in the December filing and the MPUC's decision on Central Maine's revenue
requirements.
Sale of Generation Assets
On April 7, 1999, Central Maine completed the sale of all of its hydro, fossil
and biomass power plants with a combined generating capacity of 1,185 megawatts
for $846 million in cash, including approximately $18 million for assets of
Union Water, to affiliates of Florida-based FPL Group. The related book value
for these assets was approximately $217.8 million. In addition, as part of its
agreement with FPL Group, Central Maine entered into energy buy-back agreements
to assist in fulfilling its obligation to supply its customers with power until
March 1, 2000. Subsequently, an agreement was reached to sell related storage
facilities to FPL Group for an additional $4.6 million ($1.5 million for the
assets and $3.1 million estimated for lease revenue associated with the
properties that CMP will retain), including $2.0 million for Union Water assets.
The related book value of these assets was approximately $11.9 million.
Central Maine recorded a pre-tax deferred gain of $515.7 million net of selling
costs and certain non-normalized income tax impacts from the sale of generation
assets by establishing a regulatory liability in the second quarter of 1999
eliminating any income recognition. Central Maine also recorded curtailment and
special termination deferred charges of $8.1 million associated with pension and
postretirement benefit costs of employees leaving the company as a result of the
generation asset sale. These deferred charges will be amortized over a three
year period beginning March 1, 2000 as required by the MPUC. In Phase II of the
above described "MPUC Proceeding on Stranded Costs, Revenue Requirements and
Rate Design," the MPUC will determine the amount of the regulatory liability
that will be used to reduce stranded costs and the utilization and timing of the
recognition of any remaining regulatory liability.
Central Maine also recorded a pre-tax deferred gain amounting to $30.8 million
to offset the income impact of the flow-through of unamortized investment tax
credits and excess deferred taxes associated with the assets sold. Central Maine
has requested a private letter ruling from the IRS regarding the appropriate
treatment of these items based on directives from the MPUC. Central Maine is of
the opinion, based on its review of the rules and regulation and IRS rulings in
similar situations, that any unamortized investment tax credits and excess
deferred taxes relating to the property sold become nonregulated property at the
point of sale. Central Maine believes that regulatory agencies, therefore, are
precluded from considering these unamortized investment tax credits and excess
deferred tax reserves in establishing regulated rates because they would
constitute a violation of the normalization requirement of the Internal Revenue
Code. The MPUC has directed Central Maine to seek the private ruling to be
absolutely clear in this particular case whether ratepayers can continue to
benefit from these excess reserves. Central Maine does not know when the IRS
will rule on its requests, but expects a ruling before the end of 1999.
Union Water's net income reflects a $3.7 million increase during the second
quarter of 1999 due to its portion of the proceeds of the sale of generation
assets as determined by the MPUC. Central Maine is appealing to the Maine
Supreme Judicial Court the imputation of $13.2 million of value of the Union
Water assets to Central Maine. The $13.2 million imputation is included in the
Central Maine deferred gain of $515.7 million.
With the cash proceeds of the sale Central Maine redeemed the remaining $118.7
million of its outstanding General and Refunding Mortgage Bonds on May 10, 1999,
and paid at maturity $47 million of its medium-term notes on May 4, 1999. On
June 1, 1999, Central Maine redeemed $180 million of its medium-term notes, as
well as all of the outstanding $10 million Town of Yarmouth Pollution Control
Revenue Bonds, which had been issued in 1977 and 1978. Approximately $294.5
million of the proceeds will be required for federal and state income taxes
resulting from the sale and, after providing for closing costs and energy
purchases to meet power-supply obligations until the start of retail competition
on March 1, 2000, Central Maine expects to transfer the balance to its parent,
CMP Group. Proceeds that have not been applied have been invested in accordance
with Central Maine's cash investment policy. Uses of the balance of the proceeds
are under consideration by CMP Group.
Accounting for the Effects of Certain Types of Regulation
Central Maine prepares its financial statements in accordance with SFAS No. 71,
which requires rate regulated companies to reflect the effects of regulatory
decisions in their financial statements. Central Maine has deferred certain
costs pursuant to rate actions of the MPUC and FERC and is recovering, or
expects to recover, such costs in electric, transmission and distribution rates
charged to customers.
The FASB's EITF has addressed the appropriateness of continued application of
SFAS No. 71 by entities in states that have enacted restructuring legislation
similar to Maine's. The EITF issued its statement No. 97-4 "Deregulation of
Pricing Electricity - Issues Related to the Application of FASB Statements 71
and 101", which concluded that an entity should cease to apply SFAS 71 when a
deregulation plan is in place and its terms are known. With respect to the
generation portion of Central Maine's business, this occurred during the second
quarter of 1999 with the completion of the sale of most of its generation assets
to FPL and the subsequent development of a compliance filing with the MPUC in
Phase II of the ongoing MPUC proceeding on stranded costs, revenue requirements
and rate design. Effective June 30,1999, Central Maine adopted SFAS 101 for the
generation segment of its business. SFAS 101 requires a determination of
impairment of plant assets under SFAS 121, and the elimination of all effects of
rate regulation that have been recognized as assets and liabilities under SFAS
71.
Central Maine performed impairment tests on its two operating nuclear generation
facilities, Millstone 3 and Vermont Yankee, on a plant specific basis and
determined that $82.9 million was impaired as of June 30,1999. Impaired plant is
the excess of net plant investment at June 30,1999 over the value of net cash
flows during the remaining lives of the investments. Annual net cash flows were
determined by subtracting estimated generation sustenance costs from the
estimated market value of power from the plants. The MPUC in its decision in
Phase I order dated March 19,1999 of the "Investigation of Stranded Cost,
Transmission and Distribution Utility Revenue Requirements and Rate Design"
provided for future recovery of nuclear generation and other generation related
stranded costs. Central Maine has established a regulatory asset as of June 30,
1999 for $82.9 million consistent with that order associated with the two
operating nuclear investments. As a result there is no income impact from these
impairment test but rather recognition of the future obligation and regulatory
asset on the balance sheet.
Central Maine has long term power purchase contracts requiring payment of above
anticipated market rates from NUGs. The estimate of above-market payment is
approximately $800 million. The costs associated with these NUG contracts remain
a regulated obligation of the transmission and distribution company as a
statutory requirement and have been provided for by the MPUC in its revenue
requirement determination in Phase I of the above mentioned proceeding.
Central Maine believes that its electric transmission and distribution
operations continue to meet the requirements of SFAS 71 and that regulatory
assets associated with those operations as well as any generation-related costs
that the MPUC has determined to be recoverable from ratepayers also meet the
criteria. At June 30,1999 $958.7 million of regulatory assets remain on Central
Maine's books. Approximately $214.4 million will be charged against the
estimated deferred gain and associated carrying costs through March 1, 2000 of
$548.6 million resulting from the generation asset sale while the remainder will
be amortized over periods to be determined by the MPUC in Phase II of the above
mentioned proceeding.
Tax Settlement
On September 12, 1997, Central Maine received a notice of deficiency from the
Internal Revenue Service ("IRS") as a result of its audit of Central Maine's
federal income tax returns for the years 1992 through 1994. There were two
significant adjustments among those proposed by the IRS. The first was a
disallowance of Central Maine's write-off of the under-collected balance of fuel
and purchased-power costs and the unrecovered balance of its unbilled Electric
Revenue Adjustment Mechanism ("ERAM") revenues, both as of December 31, 1994,
which had been charged to income in 1994 in connection with the adoption of the
ARP effective January 1, 1995. The second major adjustment disallowed Central
Maine's 1994 deduction of the cost of the buyout of the Fairfield Energy Venture
("FEV") purchased-power contract.
On December 10, 1997 Central Maine filed a petition in the United States Tax
Court contesting the entire amount of the deficiencies. Subsequently, Central
Maine sought review of the asserted deficiencies by an IRS Appeals Officer to
determine whether all or part of the dispute could be resolved in advance of a
court determination.
In June 1999, the IRS Appeals Officer and Central Maine reached agreement
resolving all issues. Under the proposed agreement the ERAM component was
allowed as fully deductible in 1994, while $24 million of the fuel and
purchased-power costs were deemed to be deductible in 1994 and the remaining $30
million deductible in 1995. The parties also agreed to increase the tax basis of
the FEV plant from $2 million to $11 million, to be depreciated over 20 years,
and that the remaining FEV contract buyout costs would be fully deductible in
1994.
As a result of the settlement, Central Maine made payments to the IRS and the
State of Maine totaling $11.8 million for the 1992 to 1994 tax deficiencies, as
well as $6.0 million in associated interest. Substantially all of the tax
impacts were normalized, as Central Maine will be deducting any disallowed costs
for tax purposes in future years. The net impact of the tax and interest true-up
for all the years under consideration reduced net income in the second quarter
of 1999 by $0.6 million due primarily to interest expense. Of the $6.0 million
interest payment, approximately $1 million was previously accrued, $1.8 million
associated with the FEV facility was deferred consistent with regulatory
practice, and $2.0 million of interest income was accrued for the years 1995
through June 1999.
Due to the materiality of the amounts involved, approval of the settlement from
the Congress's Joint Committee on Taxation is required and is being sought by
the IRS.
Expansion of Lines of Business
General. CMP Group is also preparing for competition by expanding its business
opportunities through investments that capitalize on core competencies. MaineCom
Services is a subsidiary that arranges, through other investments fiber-optic
data service for bulk carriers, offering support for cable television or
"super-cellular" personal communication vendors, and providing other
telecommunications consulting services. TeleSmart is a wholly-owned accounts
receivable management subsidiary. Another wholly-owned subsidiary, CNEX,
formerly CMP International Consultants, provides utility consulting (domestic
and international) and research. The wholly-owned Union Water Power Company
provides locating of underground utility facilities and thermovision (infrared)
detection services, real estate brokerage and management, modular housing,
energy-efficiency contracting, and utility construction services. Union Water's
operating divisions include On Target Utility Services, UnionLand Services,
Maine HomeCrafters, and Combined Energies(TM). These subsidiaries often utilize
skills of former Central Maine employees and regularly compete for business with
other companies.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to pursue opportunities to distribute
natural gas at retail in many Maine communities. They would offer natural-gas
service in several areas of Maine, primarily the Augusta, Bangor,
Bath-Brunswick, Bethel, Windham and Waterville areas, none of which had a
natural-gas distribution system in place. The gas is to be drawn from two new
gas-pipeline projects that will carry Canadian gas through Maine and into the
regional energy market using substantial portions of electric transmission-line
corridors owned by Central Maine and MEPCO. On July 24, 1998, the MPUC
authorized the joint venture to serve the areas it had applied to serve. The new
company, CMP Natural Gas could face competition from new or existing gas
utilities in some of the areas it has targeted.
CMP Natural Gas began construction of its first local distribution system in
Windham, Maine, in early 1999 and began serving its first customer in May. On
July 8, 1999, CMP Natural Gas and Calpine Corporation, a California-based
independent power company, announced the signing of a 20-year contract for CMP
Natural Gas to provide natural gas delivery service to Calpine's proposed
540-megawatt natural gas-fired power plant under construction in Westbrook,
Maine. CMP Natural Gas expects to commence service to the plant by June 1, 2000,
after MPUC approval and construction of a two-mile lateral pipeline along an
existing Central Maine right of way that would interconnect with the new
interstate pipeline facilities. Upon completion of the proposed merger of Energy
East and CMP Group, Energy East will hold all of the interests in CMP Natural
Gas.
Fiber Optic Network. CMP Group, through its wholly-owned subsidiary MaineCom
Services, owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), which is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. NEON is currently expanding
its fiber optic network in New England and New York, utilizing primarily
electric-utility rights-of-way, including some of Central Maine's in Maine and
some owned by other electric utilities including Northeast Utilities, another
substantial minority stockholder. NEON is creating a continuous fiber optic link
between New York City and Portland, Maine, with access into and around Boston
and numerous other major service areas in the Northeast. On July 13, 1999, NEON
announced that it had activated its first high-capacity carrier circuit into the
borough of Manhattan, which NEON said fulfilled its goal of providing carrier
customers with such high-capacity facilities into the New York City market
before the end of 1999.
On August 5, 1998, NEON completed initial public offerings of $48.0 million of
common stock and $180.0 million of senior notes, and Central Maine, as part of
the common-stock offering, sold some of the shares in NEON it then owned for
proceeds of approximately $3.1 million. In addition, with some of the proceeds
of the offering NEON repaid approximately $18 million Central Maine had advanced
under an earlier construction loan agreement. CMP Group believes there is a
growing need for such a fiber optic network in the Northeast and that NEON's
outside financing will provide substantial assistance in completing construction
of the network, but cannot predict the results of this venture.
Environmental Matters
CMP Group and its subsidiaries assess compliance with laws and regulations
related to hazardous substance remediation on an ongoing basis. At June 30,
1999, Central Maine had an accrued liability of $3.0 million for remediation
costs at various sites. The costs at identified sites may be significantly
higher if, among other things, other potentially responsible parties are not
financially able to contribute to these costs or identified possible outcomes
change. See Note 2, "Commitments and Contingencies." - "Legal and Environmental
Matters" for further discussion of this subject.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Central Maine is exposed to interest rate risk through the use of fixed-rate and
variable-rate debt and preferred stock as sources of capital. As of June 30,
1999, Central Maine had $110 million of medium-term notes outstanding, $10
million of which bear floating, LIBOR-based rates.
Variable Long Term Fixed Long Term
(dollars in thousands)
Weighted Average Rates 9.12% 6.82%
Balance at June 30, 1999 34,593 236,224
Maturity Period 1999 - 2019 1999 - 2021
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Claim Against Central Maine - By notice of claim dated June 24, 1999, the
non-operator owners of the Wyman No. 4 oil-fired generating unit in Yarmouth,
Maine, which was approximately 60-percent owned by Central Maine, served notice
on Central Maine that they believe they are entitled to a portion of the
proceeds of the sale of Central Maine's interest in the unit as part of the
April 1999 sale of its non-nuclear generation assets to FPL Energy. The
claimants contend that certain sections of the joint ownership agreement under
which they share in the output of the unit require a pro-rata distribution to
them of part of those proceeds as a result of Central Maine's sale of its
interest in the unit. The joint ownership agreement provides for arbitration of
claims arising under the agreement.
Central Maine believes that although the amount that may be claimed could be
substantial, the claimants have suffered no loss and are not entitled to any
part of the generation-asset sale proceeds. Central Maine intends to contest any
such claim vigorously, but cannot predict the result of any arbitration
proceeding that the non-operator owners may initiate.
Regulatory Matters - For a discussion of certain significant regulatory matters
affecting CMP Group and Central Maine, including those related to the permanent
shutdown of the Maine Yankee Plant, the proposed merger with Energy East, and an
MPUC proceeding that will determine Central Maine's stranded costs and related
matters, see Item 2 of Part I, "Management's Discussion and Analysis of
Financial Condition and Results of Operation" - "Permanent Shutdown of Maine
Yankee Plant", "Proposed Merger," and "MPUC Proceeding on Stranded Costs,
Revenue Requirements and Rate Design," which are incorporated herein by
reference.
Tax Settlement - For a discussion of Central Maine's settlement of significant
federal income tax adjustments see Note 4, "Commitments and Contingencies" -
"Tax Settlement."
Environmental Matters - For a discussion of administrative and judicial
proceedings concerning cleanup of hazardous waste sites, see Note 2,
"Commitments and Contingencies," "Legal and Environmental Matters," which is
incorporated herein by reference.
Item 2. and Item 3. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The annual meetings of the stockholders of CMP Group and Central Maine were held
concurrently on May 20, 1999. Proxies for the meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the managements' nominees as listed in the proxy
statement, and all of such nominees were elected.
Two matters were voted on at the CMP Group annual meeting and one matter was
voted on at the Central Maine meeting. The first was the election of four
directors to Class I of the Board of Directors of CMP Group for a three-year
term. The following are the vote tabulations for the four nominees:
Charleen M. Chase
Votes for -26,606,143
Votes withheld -754,431
David T. Flanagan
Votes for -26,619,205
Votes withheld -741,369
Robert H. Gardiner
Votes for -26,605,923
Votes withheld -754,651
Peter J. Moynihan
Votes for -26,615,468
Votes withheld -745,106
The second matter voted on at the CMP Group meeting was approval of the
appointment of PricewaterhouseCoopers LLP as auditors for CMP Group for 1999.
The appointment was approved, with the following vote tabulations:
Votes for -27,151,514
Votes against -65,814
Abstentions -143,246
The only matter voted on at the Central Maine meeting was the election of four
directors to Class III of the Board of Directors of Central Maine for a
three-year term. The four nominees were elected, with the following vote
tabulations:
Charleen M. Chase
Votes for -3,125,192
Votes withheld -96
David T. Flanagan
Votes for -3,125,192
Votes withheld -96
Robert H. Gardiner
Votes for -3,125,192
Votes withheld -96
Peter J. Moynihan
Votes for -3,125,192
Votes withheld -96
Item 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. CMP Group and Central Maine filed one report on
Form 8-K during the second quarter of 1999 and thereafter to date:
Date of Report Items Reported
June 14, 1999 Item 5
The registrants reported that CMP Group and Energy East had entered into an
Agreement and Plan of Merger.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their respective
behalfs by the undersigned thereunto duly authorized.
CMP GROUP, INC.
Date: August 10, 1999 By _____________________________________
-----------------
David E. Marsh, Chief Financial Officer
(Principal Financial Officer and duly
authorized officer)
CENTRAL MAINE POWER COMPANY
Date: August 10, 1999 By _____________________________________
-----------------
Michael W. Caron, Comptroller (Chief Accounting
Officer and duly authorized officer)
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This schedule contains summary financial information extracted from CMP
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