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 September 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 November 8, 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
<PAGE>
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 5
September 30, 1999 and 1998
Consolidated Statement of Earnings for the Nine Months Ended 6
September 30, 1999 and 1998
Consolidated Balance Sheet - September 30, 1999 and December 31,
1998:
Assets 7
Stockholders' Equity and Liabilities 8
Consolidated Statement of Cash Flows for the Nine Months Ended 9
September 30, 1999 and 1998
Central Maine Power Company
Consolidated Statement of Earnings for the Three Months Ended 10
September 30, 1999 and 1998
Consolidated Statement of Earnings for the Nine Months Ended 11
September 30, 1999 and 1998
Consolidated Balance Sheet - September 30, 1999 and December 31,
1998:
Assets 12
Stockholders' Equity and Liabilities 13
Consolidated Statement of Cash Flows for the Nine Months Ended 14
September 30, 1999 and 1998
Notes to Consolidated Financial Statements 15
Item 2 - Management's Discussion and Analysis of Financial Condition 31
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 49
Part II. Other Information 50
Signatures 51
<PAGE>
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
ARP 2000 The proposed rate plan filed by Central Maine with the MPUC
on September 30, 1999.
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 management,
planning, consulting, and research and
information services to foreign and domestic
utilities and government agencies.
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, formed
for the sole purpose of completing the merger
with CMP Group.
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 wholly owned CMP Group
subsidiary which provides telecommunications
services.
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 services
for utility clients.
Union Water The Union Water Power Company, a diversified 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
<PAGE>
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 September 30, 1999 and 1998, and the Consolidated Statement of
Income and Consolidated Cash Flows for the periods ended September 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 September 30,
1999 1998
Revenues
Electric operating revenues $238,898 $ 234,056
Other non-utility revenues 10,292 2,875
------- -------
Total Revenues 249,190 236,931
------- -------
Operating Expenses
Fuel used for company generation 281 10,393
Purchased power
Energy 107,667 89,238
Other (capacity) 28,766 22,617
Other operation 57,705 55,037
Maintenance 7,331 11,441
Depreciation and amortization 11,996 14,057
Taxes other than income taxes 5,027 7,680
------- -------
Total Operating Expenses 218,773 210,463
------- -------
Operating Income 30,417 26,468
------- -------
Other Income (Expense)
Equity in earnings of associated companies (1,747) (741)
Allowance for equity funds used during construction 172 179
Minority interest in consolidated net income (6) (64)
Gain on sale of investments and properties (793) 19,108
Other, net 1,938 (270)
------- -------
Total Other Income (Expense) (436) 18,212
------- -------
Interest Charges
Long-term debt 4,372 10,247
Other interest 7,331 2,612
Allowance for borrowed funds used during construction (46) (132)
------- -------
Total Interest Charges 11,657 12,727
------- -------
Income Before Income Taxes and Preferred Dividends 18,324 31,953
Income taxes 8,703 13,594
Dividends on Preferred Stock of Subsidiary 918 919
------- -------
Net Income $ 8,703 $ 17,440
======= =======
Weighted Average Number of Shares of Common
Stock Outstanding 32,442,552 32,442,687
Earnings Per Share of Common Stock (Basic and Diluted) $0.27 $.54
Dividends Declared Per Share of Common Stock $.225 $.225
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
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CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Nine Months
Ended September 30,
1999 1998
Revenue
Electric operating revenues $724,278 $691,017
Other non-utility revenues 26,713 4,586
------- -------
Total Revenues 750,991 695,603
------- -------
Operating Expenses
Fuel used for company generation 10,488 22,374
Purchased power
Energy 290,984 279,002
Other (capacity) 82,754 68,079
Other operation 175,656 152,990
Maintenance 23,630 30,120
Depreciation and amortization 38,673 41,687
Taxes other than income taxes 17,180 20,721
------- -------
Total Operating Expenses 639,365 614,973
------- -------
Operating Income 111,626 80,630
------- -------
Other Income (Expense)
Equity in earnings of associated companies (4,406) 1,007
Allowance for equity funds used during construction 479 468
Minority interest in consolidated net income (700) (178)
Gain on sale of investments and properties 12,240 19,108
Other, net 10,134 1,450
------- -------
Total Other Income (Expense) 17,747 21,855
------- -------
Interest Charges
Long-term debt 22,504 31,746
Other interest 20,661 6,639
Allowance for borrowed funds used during construction (260) (331)
------- -------
Total Interest Charges 42,905 38,054
------- -------
Income Before Income Taxes and Preferred Dividends 86,468 64,431
Income taxes 37,711 26,131
Dividends on Preferred Stock of Subsidiary 2,756 3,890
------- -------
Net Income $ 46,001 $ 34,410
======= =======
Weighted Average Number of Shares of Common
Stock Outstanding 32,442,552 32,442,730
Earnings Per Share of Common Stock - Basic $1.42 $1.06
Earnings Per Share of Common Stock - Diluted $1.41 $1.06
Dividends Declared Per Share of Common Stock $.675 $.675
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE>
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CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
Assets September 30, December 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents $ 224,792 $ 30,540
Accounts receivable, less allowance for uncollectible accounts of
$2,915 in 1999 and $3,136 in 1998
Service - billed 75,538 81,169
- unbilled 45,755 53,296
Other accounts receivable 10,912 13,753
Inventories, at average cost
Fuel oil 94 5,879
Materials and supplies 9,728 13,126
Funds on deposit with trustee 1 1
Prepayments and other current assets 12,341 10,268
---------- ----------
Total Current Assets 379,161 208,032
---------- ----------
Electric Property, at original cost 1,328,731 1,750,837
Less: Accumulated depreciation 545,915 694,410
---------- ---------
Net electric property in service 782,816 1,056,427
---------- ---------
Property, non utility 20,004 23,244
Less: Accumulated Depreciation 5,897 6,802
---------- ---------
Net Non-Utility property 14,107 16,442
Construction work in progress 23,154 19,538
Nuclear fuel 1,626 1,147
---------- ---------
Total net property 821,703 1,093,554
Investments In Associated Companies, at Equity 55,257 71,880
---------- ---------
Total Net Property and Investments in Associated Companies 876,960 1,165,434
---------- ---------
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net 74,424 78,539
Yankee Atomic purchased-power contract 4,297 7,761
Connecticut Yankee purchased-power contract 26,969 29,913
Maine Yankee purchased-power contract 248,689 273,895
Regulatory assets-nuclear impairment 78,867 -
Regulatory assets-deferred taxes 209,442 235,451
Other deferred charges and other assets 247,371 263,859
---------- ---------
Deferred Charges and Other Assets, Net 890,059 889,418
---------- ---------
Total Assets $2,146,180 $2,262,884
========= =========
The accompanying notes are an integral part of these financial statements
</TABLE>
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CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
Stockholders' Equity and Liabilities
September 30, December 31,
1999 1998
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 61,450 $ 298,356
Sinking-fund requirements 27,696 11,455
Accounts payable 74,138 90,960
Dividends payable 8,266 7,304
Accrued interest 2,196 7,524
Accrued income taxes 74,083 19,911
Miscellaneous current liabilities 20,041 15,909
---------- ----------
Total Current Liabilities and Interim Financing 267,870 451,419
---------- ----------
Commitments and Contingencies (Note 4)
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 71,751 376,043
Unamortized investment tax credits 14,108 29,064
Yankee Atomic purchased-power contract 4,297 7,761
Connecticut Yankee purchased-power contract 26,969 29,913
Maine Yankee purchased-power contract 248,689 273,895
Regulatory liabilities-nuclear impairment 15,892 -
Regulatory liabilities-deferred taxes 61,054 58,376
Deferred gain on generation asset sale 530,131 -
Other reserves and deferred credits 193,766 116,805
--------- ----------
Total Other Liabilities and Deferred Credits 1,166,657 891,857
--------- ----------
Long-Term Debt
Mortgage debt - 117,683
Other long-term obligations 123,422 228,598
--------- ----------
Total Long-Term Obligations 123,422 346,281
--------- ----------
Redeemable Preferred Stock 9,910 18,910
---------- ----------
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 286,056 285,835
Reacquired common stock (1,028) (827)
Retained earnings 95,552 71,668
Preferred stock 35,528 35,528
--------- ----------
Total Stockholders' Equity 578,321 554,417
--------- ----------
Total Stockholders' Equity and Liabilities $2,146,180 $2,262,884
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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CMP Group, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Nine Months
Ended September 30,
1999 1998
Cash From Operations
Net income $ 46,001 $ 34,410
Items not requiring (not providing) cash:
Depreciation 30,446 34,957
Amortization 29,568 28,907
Deferred income taxes and investment tax credits, net (8,632) 20,107
Allowance for equity funds used during construction (479) (468)
Preferred stock dividends of subsidiary 2,756 3,890
Gain on sale of investments and properties (12,240) (19,108)
Incremental power supply (23,111) -
Changes in certain assets and liabilities:
Accounts receivable 16,013 13,114
Other current assets (3,429) (7,717)
Inventories 632 (3,020)
Accounts payable (13,034) (22,240)
Accrued taxes and interest 17,994 (1,267)
Miscellaneous current liabilities 3,859 10,030
Deferred ice storm cost (793) (51,923)
Deferred energy-management costs 985 (1,583)
Restructuring of purchased power contract - (22,500)
Accrued carrying costs on deferred gain and other items 10,493 -
MaineCom equity losses in NEON 7,719 -
Union Water Power Co. unearned revenues 2,575 -
Other, net 8,182 7,169
------- -------
Net Cash Provided by Operating Activities 115,505 22,758
------- -------
Investing Activities
Construction expenditures (37,880) (27,700)
Investments in and loans to affiliates - (17,800)
Repayment of loan by affiliates - 17,800
Central Maine sale of assets 850,987 -
Tax payments related to sale of assets (249,250) -
Selling expense for sale of generation assets (17,886) -
Proceeds from sale of investments and properties 14,018 21,347
Changes in accounts payable - investing activities (3,788) (2,122)
------- ------
Net Cash Provided (Used) by Investing Activities 556,201 (8,475)
------- ------
Financing Activities
Issuances:
Revolving credit agreement - 10,100
Medium-term notes - 187,000
Redemptions:
Mortgage bonds (118,717) (177,283)
Preferred stock - (48,619)
Medium-term note (257,000) (18,000)
Revolving credit agreement (50,000) -
Other long-term obligations (12,841) (2,970)
Short-term obligations, net (15,000) (154)
Funds on deposit with trustee - 61,694
Purchase of treasury stock (160) (811)
Dividends:
Common stock (21,899) (21,915)
Preferred stock of subsidiary (1,837) (4,868)
------ -------
Net Cash Used by Financing Activities (477,454) (15,826)
------- -------
Net Increase (Decrease) in Cash 194,252 (1,543)
Cash and Cash Equivalents, Beginning of Year 30,540 20,841
------- -------
Cash and Cash Equivalents, End of Year $224,792 $ 19,298
======= =======
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.
</TABLE>
<PAGE>
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 September 30, 1999 and 1998, and the Consolidated Statement
of Income and Consolidated Cash Flows for the periods ended September 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.
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Central Maine Power Company and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Three Months
Ended September 30,
1999 1998
Revenues
Electric operating revenues $238,887 $234,027
Other non-utility revenues (408) 711
------- -------
Total Revenues 238,479 234,738
------- -------
Operating Expenses
Fuel used for company generation 281 10,393
Purchased power
Energy 107,667 89,238
Other (capacity) 28,766 22,617
Other operation 48,251 53,565
Maintenance 7,096 11,421
Depreciation and amortization 11,706 13,985
Taxes other than income taxes 5,021 7,668
------- -------
Total Operating Expenses 208,788 208,887
------- -------
Operating Income 29,691 25,851
------- -------
Other Income (Expense)
Equity in earnings of associated companies 368 67
Allowance for equity funds used during construction 172 179
Other, net 4,010 (237)
Minority interest in consolidated net income (6) (64)
Gain on sale of investments and properties 27 9,545
------- -------
Total Other Income (Expense) 4,571 9,490
------- -------
Interest Charges
Long-term debt 4,324 10,237
Other interest 7,250 2,611
Allowance for borrowed funds used during construction (46) (132)
------- -------
Total Interest Charges 11,528 12,716
------- -------
Income Before Income Taxes 22,734 22,625
Income taxes 9,806 9,490
------- -------
Net Income 12,928 13,135
Dividends on Preferred Stock 918 919
------- -------
Earnings Applicable to Common Stock $ 12,010 $ 12,216
======= =======
Weighted Average Number of Shares of Common
Stock Outstanding 31,211,471 32,367,201
Earnings Per Share of Common Stock - Basic and Diluted $0.38 $0.38
Dividends Declared Per Share of Common Stock $0.360 $0.000
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 Nine Months
Ended September 30,
1999 1998
Revenues
Electric operating revenues $724,194 $690,988
Other non-utility revenues 702 2,422
------- -------
Total Revenues 724,896 693,410
------- -------
Operating Expenses
Fuel used for company generation 10,488 22,374
Purchased power
Energy 290,984 279,002
Other (capacity) 82,754 68,079
Other operation 151,618 151,518
Maintenance 23,135 30,100
Depreciation and amortization 37,912 41,615
Taxes other than income taxes 17,117 20,709
------- -------
Total Operating Expenses 614,008 613,397
------- -------
Operating Income 110,888 80,013
------- -------
Other Income (Expense)
Equity in earnings of associated companies 4,051 1,815
Allowance for equity funds used during construction 479 468
Other, net 10,809 1,483
Minority interest in consolidated net income (700) (178)
Gain on sale of investments and properties 7,061 9,545
------- -------
Total Other Income (Expense) 21,700 13,133
------- -------
Interest Charges
Long-term debt 22,362 31,736
Other interest 20,416 6,638
Allowance for borrowed funds used during construction (260) (331)
------- -------
Total Interest Charges 42,518 38,043
------- -------
Income Before Income Taxes 90,070 55,103
Income taxes 36,241 22,027
------- -------
Net Income 53,829 33,076
Dividends on Preferred Stock 2,756 3,890
------- -------
Earnings Applicable to Common Stock $ 51,073 $ 29,186
======= =======
Weighted Average Number of Shares of Common
Stock Outstanding 31,211,471 32,417,292
Earnings Per Share of Common Stock (Basic and Diluted) $1.64 $0.90
Dividends Declared Per Share of Common Stock $0.945 $0.450
The accompanying notes are an integral part of these financial statements
</TABLE>
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Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
Assets September 30, December 31,
1999 1998
---- ----
(Unaudited)
Current Assets
Cash and cash equivalents $ 205,914 $ 22,628
Accounts receivable, less allowance for uncollectible accounts of
$2,915 in 1999 and $3,136 in 1998
Service - billed 75,418 81,082
- unbilled 45,755 53,110
Other accounts receivable 4,377 12,698
Inventories, at average cost
Fuel oil 94 5,879
Materials and supplies 9,263 12,755
Funds on deposit with trustee 1 1
Prepayments and other current assets 11,837 10,161
---------- ----------
Total Current Assets 352,659 198,314
---------- ----------
Electric Property, at original cost 1,328,702 1,750,777
Less: Accumulated depreciation 545,892 694,463
---------- ----------
Net electric property in service 782,810 1,056,314
---------- ---------
Property, Non-Utility 12,829 15,895
Less: Accumulated Depreciation 3,642 4,150
---------- ----------
Non-Utility Property 9,187 11,745
Construction work in progress 21,308 19,483
Nuclear fuel 1,626 1,147
---------- ----------
Total net property 814,931 1,088,689
Investments In Associated Companies, at Equity 39,614 48,406
---------- ----------
Total Net Property and Investments in Associated Companies
854,545 1,137,095
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net 74,424 78,539
Yankee Atomic purchased-power contract 4,297 7,761
Connecticut Yankee purchased-power contract 26,969 29,913
Maine Yankee purchased-power contract 248,689 273,895
Regulatory assets-nuclear impairment 78,867 -
Regulatory assets - deferred taxes 209,442 235,451
Other deferred charges and other assets 243,258 262,512
--------- ---------
Deferred Charges and Other Assets, Net 885,946 888,071
--------- ---------
Total Assets $2,093,150 $2,223,480
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
Stockholders' Equity and Liabilities
September 30, December 31,
1999 1998
----- ----
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 61,383 $ 298,183
Sinking-fund requirements 27,696 11,455
Accounts payable 73,746 93,012
Dividends payable 967 5
Accrued interest 2,169 7,491
Income taxes payable to parent company 74,320 20,822
Miscellaneous current liabilities 18,532 15,455
---------- ----------
Total Current Liabilities and Interim Financing 258,813 446,423
---------- ----------
Commitments and Contingencies (Note 4)
Other Liabilities and Deferred Credits
Accumulated deferred income taxes 68,274 372,243
Unamortized investment tax credits 14,108 29,064
Yankee Atomic purchased-power contract 4,297 7,761
Connecticut Yankee purchased-power contract 26,969 29,913
Maine Yankee purchased-power contract 248,689 273,895
Regulatory liabilities-nuclear impairment 15,892 -
Regulatory liabilities - deferred taxes 61,054 58,376
Deferred gain on generation asset sale 530,131 -
Other reserves and deferred credits 180,836 111,506
--------- ---------
Total Other Liabilities and Deferred Credits 1,150,250 882,758
--------- ---------
Long-Term Debt
Mortgage debt - 117,683
Other long-term obligations 121,042 226,151
--------- ---------
Total Long-Term Obligations 121,042 343,834
--------- ---------
Redeemable Preferred Stock 9,910 18,910
--------- ---------
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 276,641 276,422
Reacquired common stock (19,000) (19,000)
Retained earnings 97,710 76,349
Preferred stock 35,571 35,571
--------- ---------
Total Stockholders' Equity 553,135 531,555
--------- ---------
Total Stockholders' Equity and Liabilities $2,093,150 $2,223,480
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Central Maine Power Company and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Nine Months
Ended September 30,
1999 1998
Cash From Operations
Net income $ 53,829 $ 33,076
Items not requiring (not providing) cash:
Depreciation 29,697 34,957
Amortization 29,558 28,903
Deferred income taxes and investment tax credits, net (8,310) 21,883
Allowance for equity funds used during construction (479) (468)
Gain on sale of investments and properties (7,061) (9,545)
Incremental power supply (23,111) -
Changes in certain assets and liabilities:
Accounts receivable 21,340 17,950
Other current assets (3,032) (7,780)
Inventories 727 (2,703)
Accounts payable (15,509) (21,682)
Accrued taxes and interest 2,485 (4,215)
Miscellaneous current liabilities 2,804 9,592
Deferred ice storm costs (793) (51,923)
Deferred energy-management costs 985 (1,583)
Restructuring of purchased power contract - (22,500)
Accrued carrying costs on deferred gain and other items 10,493 -
Other, net 8,821 (5,367)
------- --------
Net Cash Provided by Operating Activities 102,444 18,595
------- --------
Investing Activities
Construction expenditures (37,286) (26,857)
Investments in and loans to affiliates - (18,661)
Central Maine sale of assets 850,987 -
Tax payments related to sale of assets (234,409) -
Selling expense for sale of generation assets (17,778) -
Repayment of loan by affiliate - 17,800
Sale of subsidiaries to CMP Group, Inc. - 20,093
Proceeds from sale of investments and properties 7,813 10,347
Changes in accounts payable - investing activities (3,757) (2,122)
------- --------
Net Cash Provided by Investing Activities 565,570 600
------- --------
Financing Activities
Issuances:
Revolving credit agreement - 10,000
Medium-term notes - 187,000
Redemptions:
Mortgage bonds (118,717) (177,283)
Preferred stock - (48,619)
Medium term notes (257,000) (18,000)
Revolving credit agreement (50,000) -
Other long-term obligations (12,668) (2,813)
Short-term obligations (15,000) -
Funds on deposit with trustee - 61,694
Treasury stock - (19,000)
Dividends:
Common stock (29,506) (21,915)
Preferred stock (1,837) (4,868)
------- -------
Net Cash Used by Financing Activities (484,728) (33,804)
------- -------
Net Increase (Decrease) in Cash 183,286 (14,609)
Cash and Cash Equivalents, Beginning of Period 22,628 20,841
------- -------
Cash and Cash Equivalents, End of Period $205,914 $ 6,232
======= =======
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
</TABLE>
<PAGE>
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 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.
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 the operations of 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.
<PAGE>
Supplemental Cash Flow Disclosure - Cash paid for the nine months ended
September 30, 1999 and 1998:
(In Millions)
1999 1998
CMP Group
Interest, net of amounts capitalized $ 32.8 $40.8
Income taxes 271.4 2.5
Central Maine
Interest, net of amounts capitalized 32.6 40.7
Income Taxes 273.7 2.5
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 fully 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. In accordance with the
plan document, the performance shares could be awarded at 150 percent if
certain targets are met. 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 (100%) - 233,359 254,304
Performance Shares* (100%) 59,125 64,518 67,150
Performance Shares (150%) 88,688 96,777 100,725
*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 nine month periods ended
September 30, 1999. The number of incremental shares for the three months
ended September 30, 1999 was 346,647 and for the nine months ended
September 30, 1999 was 279,105.
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's 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 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.
The shareholders of CMP Group approved the Merger Agreement on October 7,
1999. It is anticipated that all regulatory approvals can be obtained by
mid-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 Group 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. The amount determined to be impaired as of September 30,1999 is
approximately $78.9 million. Impaired value is the excess of net plant
investment at September 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 September 30, 1999
for $78.9 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 payments 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 their
recovery has 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 No. 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 September 30,1999, $853.5
million of regulatory assets remain on Central Maine's books. Approximately
$214.4 million will be charged on March 1, 2000 against the estimated
deferred gain 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.
After 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.
Pursuant to the approved settlement the amount collected annually has been
reduced to approximately $25.6 million, effective October 1, 1999, as a
result of 1999 Maine 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.
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. Central Maine
received $3.5 million. 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 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 set 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 has eliminated 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 September 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. Since the filing of
the suit and arbitration claim, the parties have been engaged in resolving
preliminary issues and in extensive pre-hearing discovery. The arbitration
hearing is scheduled to begin on November 16, 1999. Central Maine cannot
predict the outcome of the litigation and arbitration.
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 was 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, and $1.8 million associated with the FEV
facility was deferred consistent with regulatory practice. Interest income
of $2.5 million was accrued for the years 1995 through September 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. New England Gas Development Corporation ("New
England Gas"), which is a wholly owned subsidiary of CMP Group, holds
approximately a twenty-two percent interest in CMP Natural Gas, L.L.C.
("CMP Natural Gas"). CMP Natural Gas is a joint venture of New England Gas
and Energy East Enterprises, a wholly owned subsidiary of Energy East. CMP
Natural Gas was formed to construct, own and operate a natural gas
distribution system to serve certain areas of Maine that did not have gas
service, and began providing service to customers in May 1999, utilizing
natural gas delivered to Maine through new interstate pipeline facilities.
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. In a
report dated November 2, 1999, the MPUC hearing examiner recommended that
CMP Natural Gas be authorized to provide service to the Calpine plant, as
well as the unserved areas in the municipalities of Westbrook and Gorham,
which would increase the number of municipalities in Maine in which CMP
Natural Gas is authorized to serve to 37. The decision by the MPUC is
scheduled for November 15, 1999.
If the merger of CMP Group and Energy East is completed, CMP Natural Gas
will become a wholly owned subsidiary of Energy East Enterprises, and New
England Gas will cease to exist. In April and June, 1999, Energy East also
agreed to business combinations with two established natural gas
distribution companies in Connecticut, subject to closing conditions,
including shareholder votes and regulatory approvals.
<PAGE>
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 benefit of the proceeds from the sale of the
easements to ratepayers and 10 percent to shareholders, with the ratepayer
portion being amortized over a five-year period. Central Maine requested
reconsideration of the order. As of September 30, 1999, approximately $9.4
million of the previously recognized gain would be deferred and net income
reduced accordingly, if the MPUC position should prevail. Central Maine
believes that both under Maine legal precedent and under the terms of the
ARP these gains should be recognized as of the time the property was sold
and should accrue to the benefit of shareholders, and intends to contest
the order vigorously.
On September 30, 1999, Central Maine submitted to the MPUC a proposed
seven-year rate plan ("ARP2000") to take effect after completion of the
merger with Energy East. The formula for ARP2000 is substantially similar
to that of the ARP, except that the one-percent productivity offset of the
ARP would escalate in annual increments of 0.25 percent from 1.00 percent
for the 2001 price change to 1.75 percent in 2004 to 2007. The purpose of
the proposed escalation is to assure that Central Maine's customers benefit
from the increased savings expected from the Energy East merger whether or
not such savings are achieved. In addition, in the mandated-costs exclusion
in ARP2000 only mandated costs over $50,000 would be recognized and only
the excess over $3 million of accumulated mandated costs would be
recoverable, not the entire $3 million non-cumulative cost recoverable
under the current ARP. Also, the rate of return on equity of 10.5 percent
already established by the MPUC would be the basis for the earnings-sharing
bandwidth, and not the 11.5 percent under the ARP. ARP2000 is subject to
MPUC approval. For a detailed description of the current ARP, see our Form
10-K for the twelve months ended December 31, 1998.
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 the 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 does, however, require investor-owned utilities, after
February 29, 2000, to sell their rights to the capacity and energy from all
undivested generation assets, including nuclear generation assets and 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
undivested generation assets and generation-related business to prospective
bidders, and the bids were received by October 1, 1999. The proposed
successful bids were submitted to the MPUC for approval on November 8,
1999.
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 has stated that it does not 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 again 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 was 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 were still estimates, since some of the information
that will provide the basis for the MPUC's decisions in the proceeding was
not yet available. This information will include the results of the
auctioning of Central Maine's energy and capacity of nuclear generation
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.
In a "bench analysis" issued on September 28, 1999, the MPUC Staff took no
final position on revenue requirements, stranded costs or rate design, due
to the continued unavailability of the NUG-contract-entitlement and
standard-offer auction results, but did recommend disallowance of certain
of Central Maine's proposed expenses, particularly in the operations and
maintenance category. The challenged costs fell largely in the areas of
employee transition costs, payroll and medical costs, and certain nuclear
stranded costs. On October 12, 1999, Central Maine filed comments
responsive to the bench analysis and to other issues raised by intervenors
in the proceeding, asserting that such costs should be recovered in rates
and that disallowance by the MPUC would deprive Central Maine of any
reasonable opportunity to earn its 10.5-percent allowed rate of return on
equity.
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 is likely to change, however, as a result of the
information to be submitted in the December filing and the MPUC's decision
on Central Maine's revenue requirements.
On October 25, 1999, the MPUC issued an order rejecting all the bids for
standard-offer service in Central Maine's and Bangor Hydro-Electric
Company's service territories, finding them to be "unreasonably high." In
its order, the MPUC initiated a new selection process and indicated that it
expected to announce the results of the process by December 1, 1999.
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 Central Maine 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 $519.4 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, which eliminated 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, in the amount finally allowed by the MPUC, 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 as a result of
directives from the MPUC. Central Maine is of the opinion, based on its
review of the rules and regulations 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 time 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 directed Central Maine to seek the private
ruling to be certain in this 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 $519.4 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. 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. Based on the MPUC order,
Central Maine has deferred $53.3 million in storm related costs as of
September 30, 1999, including $3.4 million of carrying costs..
In the spring of 1998 Congress appropriated $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 HUD subsequently announced that another $17 million would be
available for Maine. On October 6, 1999 Central Maine received payment in
the amount of $19.6 million from HUD and reduced the regulatory asset by
that amount. 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 deferred final action pending the determination of the amount
of federal reimbursement.
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. The effective tax rate for the
quarter ended September 30, 1999 was 47.5 percent and 43.6 percent year to
date. The increase for the quarter is due to the reversal of book interest
expense related to carrying costs on the deferred gain on sale of
generating assets, which is not deductible for tax purposes.
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 costs. These assessments are reflected as an offset to
Central Maine's expenses and totaled approximately $4.6 million for the
nine months ended September 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 allocations in order to recover the majority of their
expenses. These assessments are reflected as an offset to CMP Group's
expenses and totaled approximately $7.9 million for the nine months ended
September 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 $4.3 million for the nine
months ended September 30, 1999.
Central Maine provides services to CMP Group and its subsidiaries as well
as non-affiliated parties. As of September 30, 1999, Central Maine's
accounts receivable and accounts payable included the following:
<PAGE>
(Dollars in thousands)
Accounts Accounts
Receivable Payable
CMP Group $1,446 $4,232
CNEX 90 45
MaineCom 125 2
Telesmart 12 50
Union Water 498 253
------ ------
$2,171 $4,582
===== =====
<PAGE>
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. We caution readers not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We 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. We urge readers 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 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, which was approved by CMP Group's
shareholders on October 7, 1999, but remains subject to a number of regulatory
approvals.
See "Proposed Merger" below, for further discussion.
Operating Results
CMP
Group Central Maine
(dollars in millions)
Net income Three months ended:
September 30, 1999 $8.7 $0.27/share $12.9
September 30, 1998 17.4 $0.54/share 13.1
---- ----
Decrease $(8.7) $ (0.2)
Nine months ended:
September 30, 1999 $46.0 $1.42/share $53.8
September 30, 1998 34.4 $1.06/share 33.1
---- ----
Increase $11.6 $20.7
Earnings applicable to common
stock Three months ended:
September 30, 1999 N/A $12.0 $0.38/share
September 30, 1998 N/A 12.2 $0.38/share
Nine months ended:
September 30, 1999 N/A $51.1 $1.64/share
September 30, 1998 N/A $29.2 $.90/share
The decrease in net income of $8.7 million for the three months ended September
30, 1999 versus the same period last year is driven primarily by nonrecurring
revenues from sales of financial interests and easements in 1998. For the nine
months ended September 30, 1999, net income increased $11.6 million due to a
combination of robust year over year revenue growth in the electric business and
essentially flat expenses. Revenues increased $55.4 million for the first nine
months of 1999 and when adjusted to exclude approximately $26 million of
subsidiary operations revenue not consolidated in 1998, the basic electric
business revenues show an increase of $29.4 million, or 4.2 percent. The
residential and commercial sectors have seen the strongest growth in kwh sales
year-to-date, rising 4.0 percent and 5.1 percent, respectively. The improvement
in electric revenues is due to higher sales volume attributed to colder winter
weather, a warmer, drier summer and increased production by the paper mills.
Also, in 1998 Central Maine lost sales due to the unprecedented ice storm.
Overall growth in electric sales was up 2.2 percent for the period ended
September 1999 over September 1998.
Operating expenses were $24.4 million higher than 1998 for the nine months ended
September 30, 1999. Similar to the revenues, subsidiary operations not
consolidated in 1998 account for approximately $25.4 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. Central Maine and
the MPUC agreed to segregate approximately $41 million of sales proceeds to
offset these costs. A true-up will occur in the first quarter of the year 2000.
Service Area Kwh Sales - Central Maine's service area sales of electricity
totaled approximately 2.45 billion kilowatt-hours in the third quarter of 1999,
up 5.5 percent from the 2.32 billion kilowatt-hour level of a year ago, as
follows:
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended September 30,
Three Nine
Months Months
1999 1998 % Change 1999 1998 % Change
---- ---- ------ ---- ---- ------
Residential 714.7 676.5 5.6% 2,151.5 2,067.8 4.0%
Commercial 752.3 689.1 9.2 2,023.1 1,925.6 5.1
Industrial 971.0 892.7 8.8 2,679.4 2,606.9 2.8
Other 8.7 60.7 (85.7) 73.8 178.5 (58.7)
---------- --------- --------- --------
2,446.7 2,319.0 5.5% 6,927.8 6,778.8 2.2%
======= ======= ======= =======
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers increased by 5.6 percent in the
third quarter, and 4.0 percent when compared to the same nine-month period in
1998. The increase for the quarter related primarily to much warmer weather in
the summer of 1999 than in the summer of 1998. Most of the overall growth for
the nine months ended September 30, 1999, was due to 1) the absence of an
ice-storm in 1999 of the kind that caused widespread customer outages in January
1998 (approximately 44.8 million kwh, of which approximately 30 million kwh is
residential), 2) an unusually warm summer (approximately 59.2 million kwh) and
3) a colder winter (approximately 15.0 million kwh).
Commercial kilowatt-hour sales increased by 9.2 percent in the third quarter and
by 5.1 percent for the nine months ended September 30, 1999. The increased sales
in the retail trade and service sectors, which comprise the largest percentage
of commercial sales, were also primarily weather related.
Industrial kilowatt-hour sales increased by 8.8 percent in the third quarter and
2.8 percent for the nine months ended September 30, 1999 as compared to the same
period in 1998. An exceptionally strong third quarter helped kwh sales to the
paper industry to rebound from a negative 28.5 million kwh at the end of the
second quarter to a positive variance of 27.0 million kwh as of September 30,
1999. Low water conditions and increased production levels resulted in all of
the large paper mills in Central Maine's service territory purchasing
approximately 55.5 million more kwh in the third quarter of 1999 compared to the
same period in 1998. The pulp-and-paper sector of the industrial class accounts
for approximately 56 percent of the industrial sales category.
Wholesale kilowatt-hour sales, which is included under `Other' in the chart
above, decreased by 68.8 percent through September 1999 compared to 1998 due to
the expected loss through contract expirations with three wholesale customers -
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
$11.9 million in the third quarter of 1999 compared to 1998 due to the sale of
its generation assets.
Central Maine's purchased power-capacity expense increased $6.1 million in the
third quarter and $14.7 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 power-purchase contracts with FPL, 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 $6.5 million for the nine months ended
September 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. In addition, hydro maintenance decreased
$1.3 million due to the sale of generation assets.
CMP Group's other operations expense increased by $2.7 million in the third
quarter of 1999 and $22.7 million year-to-date as compared to 1998. The increase
is due primarily to the consolidation of its subsidiaries as of September 1,
1998, which accounts for approximately $24.0 million of the increase
year-to-date. The majority of the increase ($21.4 million) is associated with
Union Water-Power Company.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense decreased by $4.9
million and increased by $11.6 million, respectively, for the quarter ended
September 30, 1999, and year to date compared to the same period in 1998, as a
result of lower pre-tax earnings for the third quarter, but higher pre-tax
earnings for the nine-month period. The effective tax rate for the quarter ended
September 30, 1999 was 47.5 percent and 43.6 percent year to date. The increase
for the quarter is due to the reversal of book interest expense related to
carrying costs on the deferred gain on sale of generating assets, which is not
deductible for tax purposes.
Other Income and Expense
Equity in Earnings of Associated Companies for CMP Group decreased by $5.4
million through September 30, 1999 as compared to 1998. This decrease is due
primarily to losses associated with NEON of $7.7 million, which is an equity
investment of MaineCom, a CMP Group subsidiary.
The decrease in gain on sale of investments and properties of $19.9 million and
$6.9 million for the three and nine month periods ended September 30, 1999,
respectively, is due primarily to the sale in 1998 of MaineCom's ownership
interest in New England Fiber and the sale of transmission line right-of-way
access to a gas-pipeline project. Year to date September 1999 gains include $5.1
million of gain associated with Union Water-Power Company's sale of generating
assets, and $6.1 million on total gains on sale of easements for Central Maine
and MEPCO.
Long-term debt interest expense decreased by $5.9 million and $9.2 million,
respectively, for the third 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 $4.7 million during the third quarter of
1999 and $14.0 million year-to-date as compared to 1998. The increase was due
primarily to interest accruing to ratepayers of $10.8 million associated with
the deferred gain of $519.3 million relating to Central Maine's generation asset
sale to FPL and $4.0 million due to the interest expense on the settlement of a
tax liability for tax years 1992 to 1994 with the IRS.
Other income increased $2.2 million in the third quarter of 1999 and $8.7
million year-to-date over the same period in 1998 due primarily to interest
income associated with proceeds from the generation asset sale.
Year-to-date preferred stock dividends were reduced by $1.1 million as compared
to 1998 due to redemptions involving 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 $96.9 million of cash was provided during the nine months ended
September 30, 1999, from net income before non-cash items, primarily
depreciation, amortization and deferred income taxes. During that period
approximately $51.2 million of cash was used for fluctuations in certain assets
and liabilities and from other operating activities. In addition $23.1 million
of incremental power costs was incurred due to the sale of generation assets and
$12.2 million was provided due to the gain on sale of investments of properties.
Investing activities provided approximately $556.2 million for the nine months
ended September 30, 1999. The $556.2 million is comprised of the following:
proceeds of $851 million from the generation assets sale, utilization of $249.2
for tax payments and $17.9 for selling expenses associated with the generation
asset sale, proceeds of $14.0 million from the sale of investments and
properties, along with construction expenditures, which utilized $41.7 million
in cash for the nine months ended September 30, 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 nine months ended September 30, 1999, CMP Group paid dividends on
common stock of $21.9 million and preferred-stock dividends of $1.8 million.
At the 1997 annual meeting of the stockholders of Central Maine 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 September 30, 1999, Central Maine had $70 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.
Central Maine had no outstanding notes as of September 30, 1999 under the credit
facilities, and the facilities were terminated on October 21, 1999.
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 20, 1999, Central Maine restructured a purchased-power contract for
energy and capacity from a wood-fired plant in Athens, Maine. This transaction
is estimated to save Central Maine's customers $9.9 million in net present
value.
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 approvals, are satisfied. CMP Group expects that decisions of
regulatory agencies can be obtained by mid-2000. 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 Merger is subject to certain customary closing conditions, including without
limitation the receipt 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. CMP Group's
shareholders approved the Merger at a special meeting on October 7, 1999. For
further discussion of the Merger Agreement, see our Form 10-Q for the quarterly
period ended June 30, 1999.
"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 and executed 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 reported to NERC on a monthly basis, as required, from August
1998 through the final report delivered at the end of June 1999.
CMP Group has also completed remediation efforts for all 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 and system software in the company's mainframe, client server, and
local and wide area network environments. Remediation and testing of mainframe
and distributed application systems has been completed with the exception of a
few non-critical applications dependent on vendor upgrades. These upgrades have
been received and are in process for implementation. Completion is scheduled for
mid-November 1999.
In addition to the internal Year 2000 readiness activities discussed above, CMP
Group continues to actively participate 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 external suppliers. The program addresses business relationships
with all external suppliers, but focuses on those suppliers deemed critical to
CMP Group's business. At this time CMP Group has no indication that any external
supplier with which CMP Group has a material relationship is expecting a Year
2000-related business interruption. Some vendors are reporting slightly
increased lead times as a result of inventory build up within the industry. CMP
Group will continue to monitor and assess its external supplier 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 September 30, 1999, approximately
$3.8 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 and
execution of those plans. 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.
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. Based on the MPUC order, Central Maine deferred $53.3 million in storm
related costs as of September 30, 1999, including $3.4 million of carrying
costs.
In the spring of 1998 congress appropriated $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 HUD subsequently announced
that another $17 million would be available for Maine. On October 6, 1999,
Central Maine received payment in the amount of $19.6 million from HUD. 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 deferred final
action pending the determination of the amount of federal reimbursement.
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.
After 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. Pursuant to the
approved settlement the amount collected annually has been reduced to
approximately $25.6 million, effective October 1, 1999, as a result of 1999
Maine 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.
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 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 set 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 has eliminated 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 benefit
of the proceeds from the sale of the easements to ratepayers and 10 percent to
shareholders, with the ratepayer portion being amortized over a five-year
period. Central Maine requested reconsideration of the order. As of September
30, 1999, approximately $9.4 million of the gain would be deferred and net
income reduced accordingly, if the MPUC position should prevail. Central Maine
believes that both under Maine legal precedent and under the terms of the ARP
these gains should be recognized as of the time the property was sold and should
accrue to the benefit of shareholders, and intends to contest the order
vigorously.
On September 30, 1999, Central Maine submitted to the MPUC a proposed seven-year
rate plan ("ARP2000") to take effect after completion of the merger with Energy
East. The formula for ARP2000 is substantially similar to that of the ARP,
except that the one-percent productivity offset of the ARP would escalate in
annual increments of 0.25 percent from 1.00 percent for the 2001 price change to
1.75 percent in 2004 to 2007. The purpose of the proposed escalation is to
assure that Central Maine's customers benefit from the increased savings
expected from the Energy East merger whether or not such savings are achieved.
In addition, in the mandated-costs exclusion in ARP2000 only mandated costs over
$50,000 would be recognized and only the excess over $3 million of accumulated
mandated costs would be recoverable, not the entire $3 million non-cumulative
cost recoverable under the current ARP. Also, the rate of return on equity of
10.5 percent already established by the MPUC would be the basis for the
earnings-sharing bandwidth, and not the 11.5 percent under the ARP. ARP2000 is
subject to MPUC approval. For a detailed description of the current ARP, see our
Form 10-K for the twelve months ended December 31, 1998.
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 does, however, require investor-owned utilities, after February
29, 2000, to sell their rights to the capacity and energy from all undivested
generation assets, including nuclear generation assets and 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 undivested generation assets and
generation-related business to prospective bidders, and the bids were received
by October 1, 1999. The proposed successful bids were submitted to the MPUC for
approval on November 8, 1999.
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 has stated that it does
not 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 recoverable amount and timing 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 again 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 was 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 were still estimates, since some of the information that will provide the
basis for the MPUC's decisions in the proceeding was not yet available. This
information will include the results of the auctioning of Central Maine's energy
and capacity of nuclear generation 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.
In a "bench analysis" issued on September 28, 1999, the MPUC Staff took no final
position on revenue requirements, stranded costs or rate design, due to the
continued unavailability of the NUG-contract-entitlement and standard-offer
auction results, but did recommend disallowance of certain of Central Maine's
proposed expenses, particularly in the operations and maintenance category. The
challenged costs fell largely in the areas of employee transition costs, payroll
and medical costs, and certain stranded costs. On October 12, 1999, Central
Maine filed comments responsive to the bench analysis and to other issues raised
by intervenors in the proceeding, asserting that such costs should be recovered
in rates and that disallowance by the MPUC would deprive Central Maine of any
reasonable opportunity to earn its 10.5-percent allowed rate of return on
equity.
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 is likely to change, however, as a result of the information to be
submitted in the December filing and the MPUC's decision on Central Maine's
revenue requirements.
On October 25, 1999, the MPUC issued an order rejecting all the bids for
standard-offer service in Central Maine's and Bangor Hydro-Electric Company's
service territories, finding them to be "unreasonably high." In its order, the
MPUC initiated a new selection process and indicated that it expected to
announce the results of the process by December 1, 1999.
<PAGE>
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 Central Maine 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 $519.4 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,
which eliminated 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, in the amount finally allowed
by the MPUC, 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 as a result of 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 time 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 directed Central Maine to seek the private ruling to be certain
in this 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 $519.4 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 $78.9 million was impaired as of September 30,1999. Impaired
value is the excess of net plant investment at September 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 its ongoing proceeding on stranded costs, revenue
requirements and rate design provided for future recovery of nuclear generation
and other generation-related stranded costs. Central Maine established a
regulatory asset as of September 30, 1999 for $78.9 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
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 payments 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 September 30, 1999 $853.5 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
In September 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.
In December 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 was 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, and $1.8
million associated with the FEV facility was deferred consistent with regulatory
practice. Interest income of $2.5 million was accrued for the years 1995 through
September 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 has been expanding its business opportunities through
investments that capitalize on core competencies. CMP International Consultants
(d/b/a CNEX), a wholly owned subsidiary of CMP Group, provides management,
planning, consulting and research and information services to foreign and
domestic utilities and government agencies.
TeleSmart, a wholly owned subsidiary of CMP Group, provides accounts receivable
management services for utility clients.
The Union Water-Power Company, a wholly owned subsidiary of CMP Group, provides
utility construction and support services (On Target division); energy
efficiency performance contracting and energy use and management services
(Combined Energies division); and commercial and residential real estate
development services (UnionLand Services and Maine HomeCrafters divisions).
Natural Gas Distribution. New England Gas Development Corporation ("New England
Gas"), which is a wholly owned subsidiary of CMP Group, holds approximately a
twenty-two percent interest in CMP Natural Gas, L.L.C. ("CMP Natural Gas"). CMP
Natural Gas is a joint venture of New England Gas and Energy East Enterprises, a
wholly owned subsidiary of Energy East. CMP Natural Gas was formed to construct,
own and operate a natural gas distribution system to serve certain areas of
Maine that did not have gas service, and began providing service to customers in
May 1999, utilizing natural gas delivered to Maine through new interstate
pipeline facilities.
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. In a report dated November 2, 1999, the MPUC
hearing examiner recommended that CMP Natural Gas be authorized to provide
service to the Calpine plant, as well as the unserved areas in the
municipalities of Westbrook and Gorham, which would increase the number of
municipalities in Maine in which CMP Natural Gas is authorized to serve to 37.
The decision by the MPUC is scheduled for November 15, 1999.
If the merger of CMP Group and Energy East is completed, CMP Natural Gas will
become a wholly owned subsidiary of Energy East Enterprises, and New England Gas
will cease to exist. In April and June, 1999, Energy East also agreed to
business combinations with two established natural gas distribution companies in
Connecticut, subject to closing conditions, including shareholder votes and
regulatory approvals.
Telecommunications. MaineCom Services, which is wholly owned by CMP Group,
provides telecommunications services, including point-to-point connections,
private networking, consulting, private voice and data transport, carrier
services, and long-haul transport. MaineCom Services also owns 38.5 percent of
the common stock of NorthEast Optic Network, Inc. ("NEON"), which develops,
constructs, owns and operates a fiber optic telecommunications system in New
England and New York. 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 most major
cities in New England. 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 September 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 4, "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 September
30, 1999, Central Maine had $70 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 9.27% 5.57%
Balance at September 30, 1999 $34,177 $196,205
Maturity Period 2001-2019 2000-2021
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Regulatory Matters - For a discussion of certain significant regulatory matters
affecting CMP Group and Central Maine, including those related to the proposed
merger with Energy East, and an MPUC proceeding that will determine Central
Maine's stranded costs, revenue requirements and related matters, see Item 2 of
Part I, "Management's Discussion and Analysis of Financial Condition and Results
of Operation," "Proposed Merger," and "MPUC Proceeding on Stranded Costs,
Revenue Requirements and Rate Design," which are incorporated herein by
reference.
Arbitration Claim - For a discussion of an arbitration claim by the minority
owners of the Wyman Unit No. 4 generating unit against Central Maine seeking a
share of the proceeds from Central Maine's generating-asset sale, see Note 4,
"Commitments and Contingencies" - "Wyman No. 4 Arbitration," which is
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 4,
"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
A special meeting of the stockholders of CMP Group was held on October 7, 1999.
Proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934. The meeting did not involve the election of
directors.
The only matter voted on at the meeting was approval of the Merger Agreement
among CMP Group, Energy East, and EE Merger Corp. The Merger Agreement was
approved, with the following vote tabulations:
Votes for - 25,305,650
Votes against - 515,291
Abstentions - 209,756
Item 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
<PAGE>
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: November 10, 1999 By _____________________________________
--------------------
David E. Marsh, Chief Financial Officer
(Principal Financial Officer and duly
authorized officer)
CENTRAL MAINE POWER COMPANY
Date: November 10, 1999 By _____________________________________
--------------------
Michael W. Caron, Comptroller (Chief
Accounting Officer and duly authorized officer)
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