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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5139
CENTRAL MAINE POWER COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Maine 01-0042740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
83 Edison Drive, Augusta, Maine 04336
(Address of principal executive offices) (Zip Code)
207-623-3521
(Registrant's telephone number including area code)
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Shares Outstanding
as of October 31, 1997
Common Stock, $5 Par Value 32,442,752
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Central Maine Power Company
INDEX
Page No.
Part I. Financial Information
Consolidated Statement of Earnings for the Three Months
Ended September 30, 1997 and 1996 1
Consolidated Statement of Earnings for the Nine Months
Ended September 30, 1997, and 1996 2
Consolidated Balance Sheet - September 30, 1997 and December 31, 1996:
Assets 3
Stockholders' Investment and Liabilities 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II. Other Information 26
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
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For the Three Months
Ended September 30,
1997 1996
ELECTRIC OPERATING REVENUES $ 226,134 $ 228,987
------------ ------------
OPERATING EXPENSES
Fuel Used for Company Generation 10,105 5,177
Purchased Power
Energy 100,656 101,892
Capacity 29,300 28,471
Other Operation 51,634 49,073
Maintenance 8,721 9,760
Depreciation and Amortization 13,536 13,287
Federal and State Income Taxes (1,382) 1,790
Taxes Other Than Income Taxes 7,210 6,910
------------ ------------
Total Operating Expenses 219,780 216,360
------------ ------------
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 1,040 2,040
------------ ------------
OPERATING INCOME 7,394 14,667
------------ ------------
OTHER INCOME (EXPENSE)
Allowance for Equity Funds Used During Construction 309 232
Other, Net 252 1,218
Income Taxes Applicable to Other Income (Expense) (183) (446)
------------ ------------
Total Other Income (Expense) 378 1,004
------------ ------------
INCOME BEFORE INTEREST CHARGES 7,772 15,671
------------ ------------
INTEREST CHARGES
Long-Term Debt 10,930 11,530
Other Interest 2,892 926
Allowance for Borrowed Funds Used During Construction (205) (177)
------------ ------------
Total Interest Charges 13,617 12,279
------------ ------------
NET INCOME (LOSS) (5,845) 3,392
DIVIDENDS ON PREFERRED STOCK 1,897 2,207
------------ ------------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (7,742) $ 1,185
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
32,442,752 32,442,752
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ (0.24) $ 0.04
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.225 $ 0.225
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Nine Months
Ended September 30,
1997 1996
ELECTRIC OPERATING REVENUES $ 704,575 $ 719,484
------------ ------------
OPERATING EXPENSES
Fuel Used for Company Generation 22,631 12,657
Purchased Power
Energy 319,430 314,873
Capacity 89,244 77,524
Other Operation 144,901 131,767
Maintenance 23,344 25,282
Depreciation and Amortization 40,530 41,306
Federal and State Income Taxes 4,495 25,726
Taxes Other Than Income Taxes 21,296 20,725
------------ ------------
Total Operating Expenses 665,871 649,860
------------ ------------
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 5,084 5,139
------------ ------------
OPERATING INCOME 43,788 74,763
------------ ------------
OTHER INCOME (EXPENSE)
Allowance for Equity Funds Used During Construction 811 616
Other, Net 1,696 4,558
Income Taxes Applicable to Other Income (Expense) (754) (1,651)
------------ ------------
Total Other Income (Expense) 1,753 3,523
------------ ------------
INCOME BEFORE INTEREST CHARGES 45,541 78,286
------------ ------------
INTEREST CHARGES
Long-Term Debt 33,272 35,544
Other Interest 5,193 2,874
Allowance for Borrowed Funds Used During Construction (567) (477)
------------ ------------
Total Interest Charges 37,898 37,941
------------ ------------
NET INCOME 7,643 40,345
DIVIDENDS ON PREFERRED STOCK 6,312 7,244
------------ ------------
EARNINGS APPLICABLE TO COMMON STOCK $ 1,331 $ 33,101
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
32,442,752 32,442,752
EARNINGS PER SHARE OF COMMON STOCK $ 0.04 $ 1.02
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ 0.675 $ 0.675
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The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
Sept. 30, Dec. 31,
1997 1996
(Unaudited)
ASSETS
ELECTRIC PROPERTY, at Original Cost $1,658,496 $1,644,434
Less: Accumulated Depreciation 626,152 598,415
----------- -----------
Electric Property in Service 1,032,344 1,046,019
Construction Work in Progress 24,846 20,007
Net Nuclear Fuel 1,157 1,157
------------- -------------
Net Electric Property and Nuclear Fuel 1,058,347 1,067,183
--------- ---------
INVESTMENTS IN ASSOCIATED COMPANIES, at Equity 76,148 67,809
------------ ------------
Net Electric Property, Net Nuclear Fuel and Investments in
Associated Companies 1,134,495 1,134,992
--------- ---------
CURRENT ASSETS
Cash and Temporary Cash Investments 12,693 8,307
Accounts Receivable, Less Allowance for Uncollectible Accounts of $2,450
in 1997 and $4,177 in 1996
Service - Billed 70,018 84,396
- Unbilled 37,987 45,721
Other Accounts Receivable 11,447 17,517
Prepaid Income Taxes 3,254 264
Inventories, at Average Cost
Fuel Oil 3,130 9,256
Materials and Supplies 11,803 12,172
Funds on Deposit With Trustee 61,694 59,512
Prepayments and Other Current Assets 14,451 9,500
------------ -------------
Total Current Assets 226,477 246,645
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Recoverable Costs of Seabrook 1 and Abandoned Projects, Net 85,398 89,551
Regulatory Assets-Deferred Taxes 241,248 239,291
Yankee Atomic Purchase Power Contract 12,794 16,463
Connecticut Yankee Purchase Power Contract 38,587 45,769
Maine Yankee Purchase Power Contract 345,075 -
Other Deferred Charges and Other Assets 214,007 238,203
----------- -----------
Deferred Charges and Other Assets, Net 937,109 629,277
----------- -----------
TOTAL ASSETS $2,298,081 $2,010,914
========= =========
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
Sept. 30, Dec. 31,
1997 1996
(Unaudited)
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common Stock Investment $ 491,011 $ 511,578
Preferred Stock 65,571 65,571
Redeemable Preferred Stock 39,528 53,528
Long-Term Obligations 476,397 587,987
---------- ----------
Total Capitalization 1,072,507 1,218,664
---------- ----------
CURRENT LIABILITIES AND INTERIM FINANCING
Interim Financing 153,000 32,500
Sinking-Fund Requirements 16,210 9,375
Accounts Payable 80,551 93,197
Dividends Payable 9,202 9,512
Accrued Interest 9,423 11,610
Miscellaneous Current Liabilities 11,059 21,342
---------- ----------
Total Current Liabilities and Interim Financing 279,445 177,536
---------- ----------
COMMITMENTS AND CONTINGENCIES
RESERVES AND DEFERRED CREDITS
Accumulated Deferred Income Taxes 362,633 357,994
Unamortized Investment Tax Credits 30,901 31,988
Regulatory Liabilities-Deferred Taxes 53,026 52,616
Yankee Atomic Purchased Power Contract 12,794 16,463
Connecticut Yankee Purchased Power Contract 38,587 45,769
Maine Yankee Purchase Power Contract 345,075 --
Other Reserves and Deferred Credits 103,113 109,884
---------- ----------
Total Reserves and Deferred Credits 946,129 614,714
---------- ----------
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $2,298,081 $2,010,914
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The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (Dollars in Thousands)
(Note 1)
For the Nine Months
Ended September 30,
1997 1996
CASH FROM OPERATIONS
Net Income $ 7,643 $ 40,345
Items Not Requiring (Not Providing) Cash:
Depreciation 33,078 32,978
Amortization 25,631 26,597
Deferred Income Taxes and Investment Tax Credits, Net 871 4,524
Allowance for Equity Funds Used During Construction (811) (616)
Changes in Certain Assets and Liabilities:
Accounts Receivable 28,182 26,120
Accrued Income Taxes (2,990) (4,628)
Other Current Assets (4,951) (4,531)
Inventories 6,495 (235)
Accounts Payable (7,991) (27,792)
Accrued Interest (2,187) (3,032)
Miscellaneous Current Liabilities (10,283) 3,512
Deferred Energy-Management Costs (497) (3,497)
Maine Yankee Outage Accrual (10,350) 6,210
Purchased-Power Contracts -- (75)
Other, Net 9,621 4,480
--------- ---------
Net Cash Provided By Operating Activities 71,461 100,360
--------- ---------
INVESTING ACTIVITIES
Construction Expenditures (29,690) (31,217)
Changes in Accounts Payable - Investing Activities (4,655) (869)
Investments in Associated Companies (4,915) (12,026)
--------- ---------
Net Cash Used by Investing Activities (39,260) (44,112)
--------- ---------
FINANCING ACTIVITIES
Issuances:
Medium-Term Notes 10,000
Short Term Revolving Credit Agreement 42,500
Redemptions:
Preferred Stock (14,000) (14,000)
Mortgage Bonds (11,500)
Medium Term Notes (25,000) (29,000)
Other Long-Term Obligations, net (595) (860)
Dividends:
Common Stock (21,915) (21,916)
Preferred Stock (6,623) (7,556)
Funds on Deposit With Trustee (2,182) (29,669)
--------- ---------
Net Cash Used by Financing Activities (27,815) (104,501)
--------- ---------
Net Increase (Decrease) In Cash 4,386 (48,253)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,307 57,677
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,693 $ 9,424
========= =========
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The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Certain information in footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the disclosures
herein should be read with the Annual Report on Form 10-K for the year ended
December 31, 1996 ("Form 10-K"), and are adequate to make the information
presented herein not misleading.
The consolidated financial statements include the accounts of Central Maine
Power Company (the "Company") and its 78 percent-owned subsidiary, Maine
Electric Power Company, Inc. ("MEPCO"). The Company accounts for its investments
in associated companies not subject to consolidation using the equity method.
The Company's significant accounting policies are contained in Note 1 of Notes
to Consolidated Financial Statements in the Company's Form 10-K. For interim
accounting periods the policies are the same. The interim financial statements
reflect all adjustments that are, in the opinion of management, necessary for a
fair statement of results for the interim periods presented. All such
adjustments are of a normal recurring nature.
The adoption of the Alternative Rate Plan ("ARP"), effective January 1, 1995,
eliminated the reconcilable fuel clause used under traditional rate-of-return
regulation to account for and collect fuel and purchased-power energy costs.
Fuel revenues are now recorded as they are billed rather than deferred and
reflected in revenues over time periods established by the Maine Public
Utilities Commission ("MPUC"). The elimination of the fuel-clause results in
higher revenues in the winter months.
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having maturities of three months or less to be
cash equivalents.
Supplemental Cash Flow Disclosure - Cash paid for the nine months ended
September 30, 1997 and 1996 for interest, net of amounts capitalized, amounted
to $37.6 million and $38.4 million, respectively. Income taxes paid, net of
amounts refunded, amounted to $7.4 million and $27.5 million for the nine months
ended September 30, 1997 and 1996. The Company incurred no new capital lease
obligations in either period.
Nuclear Plant Shutdown Costs - When a nuclear plant is shut down and the amount
of future liabilities is determined, the resulting liability is established on
the Company books with an offsetting Regulatory Asset if the payment of the
liability is provided for in rates. The liability is subsequently reduced as
costs are paid, which is generally over the remaining life of the plant but
could be another period based upon Federal Energy Regulatory Commission ("FERC")
determination.
2. Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share." This statement, which is effective for fiscal years ending after
December 15, 1997, establishes simplified standards for computing and presenting
earnings per share ("EPS"). It requires dual presentation of basic and diluted
EPS on the face of the income statement for entities with complex capital
structures and disclosure of the calculation of each EPS amount. The Company
anticipates that adoption of the standard will not have a significant impact on
its reported EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement, which is also effective for fiscal years beginning after
December 15, 1997, establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Company anticipates
that adoption of the standard will not have a significant impact on its
financial statements.
3. Commitments and Contingencies
The Company has ownership interests in five nuclear generating plants in New
England. The largest is a 38-percent equity interest in Maine Yankee Atomic
Power Company ("Maine Yankee"), which, as discussed below, has permanently shut
down its plant located in Wiscasset, Maine. In addition, the Company owns a 9.5
percent equity interest in Yankee Atomic Electric Company ("Yankee Atomic"),
which has permanently shut down its plant located in Rowe, Massachusetts, a 6
percent equity interest in Connecticut Yankee Atomic Power Company ("Connecticut
Yankee"), discussed below, which has permanently shut down its plant in Haddam,
Connecticut, and a 4 percent equity interest in Vermont Yankee Nuclear Power
Corporation ("Vermont Yankee"), which owns an operating plant in Vernon,
Vermont. In addition, pursuant to a joint ownership agreement, the Company has a
2.5 percent direct ownership interest in the Millstone 3 nuclear unit
("Millstone 3") in Waterford, Connecticut, which has been off-line for
regulatory reasons since March 31, 1996.
Maine Yankee Atomic Power Company - As previously reported, the Maine Yankee
nuclear generating plant at Wiscasset, Maine (the "Plant") was shut down
December 6, 1996, and was expected to remain off-line at least until August
1997. However, on May 27, 1997, the Board of Directors of Maine Yankee voted to
reduce maintenance-and-repair spending at the Plant and announced that Maine
Yankee was considering permanent closure based on economic concerns and
uncertainty about operation of the Plant; and on the same day the Maine Yankee
Board indicated that it had also been exploring a sale of the Plant to PECO
Energy Company ("PECO"). On August 6, 1997, the Board of Directors of Maine
Yankee voted to permanently cease power operations at the Plant and begin the
process of decommissioning the Plant. The formal vote followed an announcement
by the Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO, after
months of negotiations, had been unable to arrive at "a mutually beneficial
framework for agreement" on a sale of the Plant to PECO. The decision to shut
down the Plant 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 the Plant. For a detailed discussion of the
background of the permanent shutdown, including events leading to the Plant's
being placed on the "watch list" by the Nuclear Regulatory Commission ("NRC")
and other significant regulatory and operational issues, management changes, and
investigations of Maine Yankee by the NRC and the United States Department of
Justice, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, its Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1997 and June 30, 1997, and its Current Report on Form 8-K dated
September 2, 1997.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $29.0 million as of September 30, 1997, and under its Power Contract
and Additional Power Contract with Maine Yankee the Company is responsible for
38 percent of the costs of decommissioning the Plant. Maine Yankee's most recent
estimate of the cost of decommissioning is $380.4 million, based on a 1997 study
by an independent engineering consultant, plus estimated costs of interim
spent-fuel storage of $127.6 million, for a total estimated cost of $508 million
(in 1997 dollars). The previous estimate for decommissioning, by the same
consultant, was $316.6 million (in 1993 dollars), which resulted in
approximately $14.9 million being collected annually from Maine Yankee's
sponsors pursuant to a 1994 FERC rate order. Through September 30, 1997 Maine
Yankee had collected approximately $194.4 million for its decommissioning
obligations.
On November 5, 1997, Maine Yankee submitted the new cost estimate to the FERC as
part of a rate case reflecting the fact that the Plant is no longer operating
and has entered the decommissioning phase. If the FERC accepts the new estimate,
the amount of Maine Yankee's collections for decommissioning would rise from the
$14.9 million previously allowed by the FERC to approximately $36 million per
year. The Company expects several interested parties to intervene in the FERC
proceeding, including state regulators, and cannot predict the result of the
FERC case.
As of September 1, 1997, Maine Yankee has estimated the sum of the future
payments for the closing, decommissioning and recovery of the remaining
investment in Maine Yankee to be approximately $930 million, of which the
Company's 38-percent share would be approximately $353 million. Legislation
enacted in Maine this year calling for restructuring the electric utility
industry provides for recovery of decommissioning costs, to the extent allowed
by federal regulation through the rates charged by the
transmission-and-distribution companies. Based on the legislation and regulatory
precedent established with Yankee Atomic, which was similarly shut down, the
Company believes that it is entitled to recover substantially all of its share
of such costs from its customers and therefore has recorded a regulatory asset
and liability in the amount of $345 million on its consolidated balance sheet,
which is the $353 million discussed above net of the September cost-of-service
payment to Maine Yankee. The Company's current annual revenues include recovery
of approximately $75 million in Maine Yankee costs predicated on an operating
Maine Yankee Plant.
On September 2, 1997, the MPUC released the report of a consultant it had
retained to perform a management audit of Maine Yankee for the period January 1,
1994 to June 30, 1997. The report contained both positive and negative
conclusions, the latter including: that Maine Yankee's decision in December 1996
to proceed with the steps necessary to restart the Plant was "imprudent"; that
Maine Yankee's May 27, 1997 decision to reduce restart expenses while exploring
a possible sale of the Plant was "inappropriate," based on the consultant's
finding that a more objective and comprehensive competitive analysis at that
time "might have indicated a benefit for restarting" the Plant; and that those
decisions resulted in Maine Yankee incurring $95.9 million in "unreasonable"
costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating
an investigation of the prudence of the Maine Yankee shutdown decision and of
the operation of Maine Yankee prior to the shutdown, and announced that it had
directed its consultant to extend its review to include those areas. The Company
does not know how the MPUC plans to use the consultant's report or any negative
conclusions of its investigation, but believes the report's negative conclusions
are unfounded and may be contradictory. The Company has been charging its share
of the Maine Yankee expenses to income and believes it would have substantial
constitutional and jurisdictional grounds to challenge any effort in an MPUC
proceeding to alter wholesale Maine Yankee rates made effective by the FERC. On
November 7, 1997, Maine Yankee initiated a legal challenge to the MPUC
investigation in the Maine Supreme Judicial Court alleging that such an
investigation falls exclusively within the jurisdiction of the FERC, and that
the MPUC's investigation is therefore barred on constitutional grounds. The
Company filed a similar legal challenge on the same day.
The Company has been incurring substantial costs as its 38-percent share of
Maine Yankee costs, as well as additional costs for replacement power with the
Plant out of service. For the nine months ended September 30, 1997 such costs
amounted to approximately $102.3 million for the Company, as follows: $50.7
million due to basic operations and maintenance costs, $39.2 million for
replacement power costs and $12.4 million associated with incremental costs of
operations and maintenance. The Maine Yankee Board's decision to close the Plant
should mitigate the costs the Company would otherwise incur in 1997 through a
phasing down of Maine Yankee's operations and maintenance costs, with Maine
Yankee's workforce having been reduced from approximately 475 to 239 employees
as of October 31, 1997, but it will not reduce the need to buy replacement
energy and capacity. The amount of cost for replacement power and energy will
vary during the year based on the Company's power requirements and market
conditions, but the Company expects such costs to be within a range of
approximately $5.0 million to $6.0 million per month during the remainder of
1997, based on current energy and capacity needs and market conditions. Under
the electric-utility restructuring legislation enacted by the Maine Legislature
in May 1997 the Company's obligation to provide replacement power will terminate
on March 1, 2000, with its other power-supply obligations. In the interim, the
previously reported termination of a major non-utility generator contract should
result in savings to the Company at an annual rate of approximately $25 million
commencing November 1, 1997.
The impact of the nuclear-related costs on the Company will be a major obstacle
to achieving satisfactory results in 1997, despite the approximately $75 million
in annual Maine Yankee-related costs imbedded in the current determination of
the Company's required revenues for ratemaking purposes and despite success in
controlling other operating costs. The higher costs incurred to date associated
with nuclear plant investments and the costs anticipated to replace energy and
capacity needs for the remainder of the year, as a result of the permanent
shutdown of the Maine Yankee Plant, will reduce current year earnings to a level
that will trigger the low-earnings bandwidth provision of the Company's ARP.
That provision is activated if actual earnings for 1997 are outside a bandwidth
of 350 basis points above or below a 10.68-percent rate-of-return allowance. A
return below the low end of the range provides for additional revenue through
rates equal to one-half the difference between the actual earned rate of return
and the 7.18-percent (10.68 minus 350 basis points) low end of the bandwidth.
While the Company believes the mechanism will be triggered in 1997, it cannot
predict the amount of additional revenues that may ultimately result. In any
case, under the ARP the Company would not be likely to start to receive any
additional revenues before July 1, 1998. In addition, the Company has affirmed
its public statements that it would strive to limit its electricity price
increases under the ARP to a level at or below the rate of inflation through
1999, the last year of the term of the ARP, in order to attain its goal of price
stability. The Company believes stable prices are essential to its ability to
retain and promote electricity sales.
Maine Yankee has entered into agreements with the holders of its outstanding
First Mortgage Bonds and its lender banks under which the bondholders and banks
agreed that they would not assert that the voluntary shutdown of the Plant
constituted a covenant violation under the Company's First Mortgage Indenture or
its two bank credit agreements and agreed to continue to maintain Maine Yankee's
level of bank borrowings at $67 million, out of aggregate commitments of $85
million, which Maine Yankee considers adequate for its foreseeable needs. The
agreements, as extended in October 1997, terminate January 15, 1998, by which
date Maine Yankee must reach agreement on restructured debt arrangements
reflecting its decommissioning status. At the same time, Maine Yankee and its
sponsors, including the Company, extended their agreement to amend Maine
Yankee's Power Contracts and Additional Power Contracts, effective upon approval
by the FERC, to clarify and confirm the sponsors' obligations to continue to pay
their shares of Maine Yankee's costs during the decommissioning process. Maine
Yankee filed the contract amendments with the FERC as part of its rate
proceeding requesting an effective date of January 15, 1998.
Higher nuclear-related costs are affecting other stockholders of Maine Yankee in
varying degrees. Bangor Hydro-Electric Company, a Maine-based 7-percent
stockholder, has cited its "deteriorating" financial condition, suspended its
common-stock dividend, and is pursuing rate relief. Maine Public Service
Company, a 5-percent stockholder, cited problems in satisfying financial
covenants in loan documents and reduced its common-stock dividend substantially
in early March 1997. Northeast Utilities (20-percent stock ownership through
three subsidiaries), which is adversely affected by the substantial additional
costs associated with the three shut-down Millstone nuclear units and the
permanently shut-down Connecticut Yankee unit, as well as an unfavorable utility
deregulation plan in New Hampshire currently under appeal, has implemented an
indefinite suspension of its quarterly common-stock dividends. A default by a
Maine Yankee stockholder in making payments under its Power Contract or Capital
Funds Agreement could have a material adverse effect on Maine Yankee, depending
on the magnitude of the default, and would constitute a default under Maine
Yankee's bond indenture and its two major credit agreements unless cured within
applicable grace periods by the defaulting stockholder or other stockholders.
The Company cannot predict, however, what effect, if any, the financial
difficulties being experienced by some Maine Yankee stockholders will have on
Maine Yankee or the Company.
Connecticut Yankee - On December 4, 1996, the Board of Directors of Connecticut
Yankee Atomic Power Company voted to permanently shut down the Connecticut
Yankee plant, for economic reasons, and to decommission the unit, which had not
operated since July of 1996. The Company has a 6-percent equity interest in
Connecticut Yankee, totaling approximately $7.0 million at September 30, 1997.
The Company incurred replacement power costs of approximately $3.6 million
during the nine months ended September 30, 1997. Based on cost estimates
provided by Connecticut Yankee the Company determined its share of the cost of
Connecticut Yankee's continued compliance with regulatory requirements, recovery
of its plant investments, decommissioning and closing the plant to be
approximately $38.6 million and has recorded a regulatory asset and
corresponding liability in that amount on its consolidated balance sheet. The
Company is currently recovering through rates an amount adequate to recover
these expenses.
Millstone Unit No. 3 - The Company has a 2.5 percent direct ownership interest
in Millstone Unit No. 3, which is operated by Northeast Utilities. This facility
has been off-line since April 1996 due to NRC concerns regarding license
requirements and the Company cannot predict when it will return to service.
Millstone Unit No. 3, along with two other units at the same site owned by
Northeast Utilities, is on the NRC's "watch list" in "Category 3," which
requires formal NRC action before a unit can be restarted. The Company incurred
replacement power costs related to Millstone Unit No. 3 of approximately $3.6
million during the nine months ended September 30, 1997. For a discussion of a
lawsuit and arbitration claim filed by the Company and other minority owners of
Millstone Unit No. 3 against the operators of the unit, see "Millstone Unit No.
3 Litigation," below.
Legal and Environmental Matters - The Company is subject to regulation by
federal and state authorities with respect to air and water quality, the
handling and disposal of toxic substances and hazardous and solid wastes, and
the handling and use of chemical products. Electric utility companies generally
use or generate in their operations a range of potentially hazardous products
and by-products that are the focus of such regulation. The Company believes that
its current practices and operations are in compliance with all existing
environmental laws except for such non-compliance as would not have a material
adverse effect on the Company's financial position. The Company reviews its
overall compliance and measures the liability quarterly by assessing a range of
reasonably likely costs for each identified site using currently available
information, including existing technology, presently enacted laws and
regulations, experience gained at similar sites, and the probable level of
involvement and financial condition of other potentially responsible parties.
These estimates include costs for site investigations, remediation, operation
and maintenance, monitoring and site closure.
New and changing environmental requirements could hinder the construction and/or
modification of generating units, transmission and distribution lines,
substations and other facilities, and could raise operating costs significantly.
As a result, the Company may incur significant additional environmental costs,
greater than amounts reserved, in connection with the generation and
transmission of electricity and the storage, transportation and disposal of
by-products and wastes. The Company may also encounter significantly increased
costs to remedy the environmental effects of prior waste handling activities.
The cumulative long-term cost impact of increasingly stringent environmental
requirements cannot accurately be estimated.
On October 10, 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities"
("SOP"). The principal objective of the SOP is to improve the manner in which
existing authoritative accounting literature is applied by entities to specific
situations of recognizing, measuring and disclosing environmental remediation
liabilities. The SOP became effective January 1, 1997. This SOP has not had a
material impact on the company's financial position or results of operations.
The Company has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that the Company expects to incur for identified waste disposal sites. In
most cases, additional future environmental cleanup costs are not reasonably
estimatable due to a number of factors, including the unknown magnitude of
possible contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible effects of
technological changes. At September 30, 1997, the liability recorded by the
Company for its estimated environmental remediation costs amounted to $2.2
million, which management has determined to be the most probable amount within
the range of $2.2 million to $10 million. Such costs may be higher if the
Company is found to be responsible for cleanup costs at additional sites or
identifiable possible outcomes change.
As discussed in Note 4 of Notes to Consolidated Financial Statements in the
Company's Form 10-K, in connection with one such proceeding, the Company has
been named a PRP and has been incurring costs to determine the best method of
cleaning up an Augusta, Maine, site formerly owned by a salvage company and
identified by the Environmental Protection Agency as containing soil
contaminated by polychlorinated biphenyls from equipment originally owned by the
Company. The Company believes its share of the remaining costs of the cleanup of
that site could total approximately $1.0 million to $2.3 million. This estimate
is net of an agreed partial insurance recovery and a 1993 court-ordered
contribution of 41 percent from Westinghouse Electric Corp., but does not
reflect any possible contributions from other insurance carriers the Company has
sued or from other parties. The Company has recorded an estimated liability of
$1.0 million for that site, which is included in the total $2.2 million reserve
discussed above, and an equal regulatory asset, reflecting an accounting order
to defer such costs and the anticipated ratemaking recovery of such costs when
ultimately paid. In addition, the Company has deferred, as a regulatory asset,
$8.6 million of costs incurred in connection with that site through September
30, 1997.
Millstone Unit No. 3 Litigation - On August 7, 1997, the Company and other
minority owners of Millstone Unit No. 3 filed suit in Massachusetts Superior
Court and initiated an arbitration claim against Northeast Utilities, its
trustees, and two of its subsidiaries, alleging mismanagement of the unit by the
defendants. The minority owners are seeking to recover their additional costs
resulting from such mismanagement, including their replacement power costs. The
Company cannot predict the outcome of the litigation and arbitration.
Proposed Federal Income Tax Adjustments - On September 3, 1997, the Company
received from the Internal Revenue Service ("IRS") a Revenue Agent's Report
summarizing all adjustments proposed by the IRS as a result of its audit of the
Company's federal income tax returns for the years 1992 through 1994, and the
Company has received a notice of deficiency relating to the proposed
disallowances. There are two significant disallowances among those proposed by
the IRS. The first is a disallowance of the Company's write-off of the
under-collected balance of fuel and purchased-power costs and the unrecovered
balance of its unbilled Electric Revenue Adjustment Mechanism ("ERAM") revenues,
both as of December 31, 1994, which were charged to income in 1994 in connection
with the adoption of the ARP effective January 1, 1995. The second major
adjustment would disallow the Company's 1994 deduction of the cost of the buyout
of the Fairfield Energy Venture purchased-power contract by the Company in 1994.
The aggregate tax impact, including both federal and state taxes, of the
unresolved issues amounts to approximately $39.0 million, over 90 percent of
which is associated with the two major disallowances. The two major
disallowances relate largely to the timing of the deductions and would not
affect income except for the cumulative interest impact which, through September
30, 1997, amounted to $11.7 million, or a decrease in net income of $7.0
million, and which is expected to increase interest expense approximately $433.3
thousand per month until either the tax deficiency is paid or the issues are
resolved in favor of the Company, in which case no interest is due. If the IRS
were to prevail, the Company believes the deductions would be amortized over
periods of up to twenty, post-1994, tax years. The Company believes its tax
treatment of the unresolved issues was proper and intends to contest the
proposed adjustments vigorously, and as a result the potential interest has not
been accrued. The Company cannot predict the results of its planned appeals. In
addition, the Company incurred $1.1 million of income tax expense related to
settlements of uncontested items in connection with the 1992-1994 IRS audits,
and amended return adjustments for 1995 and 1996.
4. Regulatory and Legislative Matters
Alternative Rate Plan - The MPUC approved the Company's Alternative Rate Plan
("ARP") effective January 1, 1995. Please refer to Note 3 of Notes to
Consolidated Financial Statements included in the Company's Form 10-K for the
year ended December 31, 1996 for a detailed description. The ARP was established
in response to an order by the MPUC to develop a five-year plan containing
price-cap, profit-sharing, and pricing-flexibility components. Although the ARP
is a major reform, the MPUC is continuing to regulate the Company's operations
and prices, provide for continued recovery of deferred costs and specify a range
for its rate of return.
The Company believes, as stated in the MPUC's order approving the ARP, that
operation under the ARP continues to meet the criteria of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" ("SFAS No. 71"). In its order, the MPUC reaffirmed the applicability
of previous accounting orders allowing the Company to reflect amounts as
deferred charges and regulatory assets. As a result, the Company will continue
to apply the provisions of SFAS No. 71 to its accounting transactions and in its
future financial statements. See "Meeting the Requirements of SFAS No. 71",
below, in this Note 4.
The ARP contains a mechanism that provides price-caps on the Company's retail
rates to increase annually on July 1, commencing July 1, 1995, by a percentage
combining (1) a price index, (2) a productivity offset, (3) a sharing mechanism,
and (4) flow-through items and mandated costs. The price cap applies to all of
the Company's retail rates, including the Company's fuel-and-purchased power
cost, which previously had been treated separately. Under the ARP, fuel expense
is no longer subject to reconciliation or specific rate recovery, but is subject
to the annual indexed price-cap changes.
The Company believes the ARP provides the benefits of needed pricing flexibility
to set prices between defined floor and ceiling levels in three service
categories (1) existing customer classes, (2) new customer classes for optional
targeted services, and (3) special-rate contracts. The Company believes that the
added flexibility is positioning it more favorably to meet the competition from
other energy sources that has eroded segments of its customer base. Some price
adjustments can be implemented upon 30-days' notice by the Company, while
certain others are subject to expedited review by the MPUC. The Company has
utilized this feature in providing new rates to approximately 25,000 customers
representing approximately 40 percent of annual kilowatt-hour sales and 27
percent of service-area revenues. These reductions in rates were offered to
customers after consideration of associated NUG cost reductions, savings from
further NUG consolidations and other general cost reductions.
The ARP also contains provisions to protect the Company and ratepayers against
unforeseen adverse results from its operation. These include review by the MPUC
if the Company's actual return on equity falls outside a designated range, a
mid-period review of the ARP by the MPUC in 1997 (including possible
modification or termination), and a "final" review by the MPUC in 1999 to
determine whether or with what changes the ARP should continue after 1999. The
Company's 1997 compliance filing and mid-period review filing submitted in March
1997 proposed no significant change to the ARP. On June 25, the MPUC approved a
partial stipulation which allowed a 1.1% increase in price caps effective July
1, 1997, made minor modifications in the parameters for pricing flexibility, and
increased the midpoint return on equity for the earnings sharing calculation to
11.5% for 1998. No other significant changes were made to the ARP as a result of
the 1997 review.
While the ARP provides the Company with an expanded opportunity to be rewarded
for efficiency, it also presents the risk of reduced rates of return if costs
rise unexpectedly, like those that have resulted from the recent outages and
shutdown of the Maine Yankee plant, or if revenues from sales decline or are not
adequate to fund costs. The Company believes the ARP continues to be a
competitive advantage for the Company.
Restructuring Legislation and Divestiture of Generation Assets - On May 29,
1997, the Governor of Maine signed into law a bill enacted by the Maine
Legislature that will restructure the electric utility industry in Maine by
March 1, 2000. The principal restructuring provisions of the legislation provide
for customers to have direct retail access to generation services and for
deregulation of competitive electricity providers commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts; and (2) ownership interests in nuclear power
plants. However, the MPUC can require the Company to divest its interest in
Maine Yankee on or after January 1, 2009. The Company has submitted its plan to
divest its generation assets to the MPUC, as required by the legislation, and is
proceeding on a schedule calling for a purchase-and-sale agreement to be
executed with the successful bidder or bidders in the first quarter of 1998 and
a closing in September 1998. The bill also requires investor-owned utilities,
after February 28, 2000, to sell their rights to the capacity and energy from
all generation assets, including the purchased-power contracts that had not
previously been divested pursuant to the legislation, with certain minor
exceptions. The undepreciated book value for the Company's generation plant
assets at December 31, 1996 was approximately $502 million.
Meeting the Requirements of SFAS No. 71
The Company continues to meet the requirements of SFAS No. 71. The standard
provides specialized accounting for regulated enterprises, which requires
recognition of "regulatory" assets and liabilities that enterprises in general
could not record. Examples of regulatory assets include deferred income taxes
associated with previously flowed through items, NUG buyout costs, losses on
abandoned plants, deferral of postemployment benefit costs, and losses on debt
refinancing. If an entity no longer meets the requirements of SFAS No. 71, then
regulatory assets and liabilities must be written off.
The ARP provides incentive-based rates intended to recover the cost of service
plus a rate of return on the Company's investment together with a sharing of the
costs or earnings between ratepayers and the shareholders should the earnings be
less than or exceed a target rate of return. The Company has received
recognition from the MPUC that the rates implemented as a result of the ARP
continue to provide specific recovery of costs deferred in prior periods.
The recent legislation enacted in Maine associated with industry restructuring
specifically addressed the issue of cost recovery of regulatory assets stranded
as a result of industry restructuring. Specifically, the legislation requires
the MPUC, when retail access begins, to provide a "reasonable opportunity" for
the recovery of stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. As provided for in EITF 97-4, "Deregulation of the Pricing of
Electricity," the Company will continue to record regulatory assets in a manner
consistent with SFAS No. 71 as long as future recovery is probable since the
Maine legislation provides the opportunity to recover regulatory assets
including stranded costs through the rates of the transmission and distribution
company. The Company anticipates that once a detailed plan for deregulation of
generation is known, the application of SFAS No. 71 to the unregulated
generation segment will no longer apply and the Company will be required to
discontinue SFAS No. 71 for any remaining generation segment of its business.
The Company further anticipates, based on current generally accepted accounting
principles, that SFAS No. 71 will continue to apply to the regulated
distribution and transmission segments of its business.
5. Debt Financing
At the annual meeting of the stockholders of the Company on May 15, 1997, the
holders of the Company's outstanding preferred stock consented to the issuance
of $350 million in principal amount of the Company's Medium-Term Notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the Medium-Term Note program is being implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased competition. As of September 30, 1997, $43 million of Medium-Term
Notes were outstanding which, under the terms of the program, will permit
issuance of an additional $457 million of such notes. The Company also had $50
million outstanding as of September 30, 1997 under the 364-day revolving credit
facility with a group of banks.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion contains forecast information items that are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to republish
revised forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the facts which affect the
Company's business.
Factors that could cause actual results to differ materially include, among
other matters, the permanent closure and decommissioning of the Maine Yankee
nuclear generating plant and resulting regulatory proceedings; the actual costs
of decommissioning the Maine Yankee plant; outages at the other generating units
in which the Company holds interests; electric utility restructuring, including
the ongoing state and federal activities; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which the Company
operates; and other circumstances that could affect anticipated revenues and
costs, such as unscheduled maintenance or repair requirements at nuclear plants
and other facilities, and compliance with laws and regulations.
Operating Results
The third quarter of 1997 generated a net loss of $5.8 million compared to net
income of $3.4 million for the corresponding period in 1996. Year-to-date net
income was $7.6 million versus $40.3 million for the 1996 period. The loss
applicable to common stock was $7.7 million or $0.24 per share for the third
quarter of 1997 compared to earnings of $1.2 million or $0.04 per share for the
comparable period in 1996. Year-to-date earnings applicable to common stock were
$1.3 million or $0.04 per share and $33.1 million or $1.02 per share in 1996.
Net income for the third quarter of 1997 was significantly impacted ($12.0
million) by increases in repair costs and replacement-power expenses relating to
the Maine Yankee plant and other New England nuclear units in which the Company
holds interests. The costs associated with replacement power will continue and
are expected to be in the range of $6.0 million to $7.0 million per month in the
near term. Additionally, a $1.1 million impact to net income occurred due to an
increase in income tax expense based on partial Internal Revenue Service audit
settlements for the years 1992 - 1994 and amended return adjustments filed for
1995 and 1996. Partially offsetting the replacement power costs in the future
are expected reductions in Maine Yankee operations and maintenance costs
associated with the phase-in of the permanent closure of that facility.
Operating revenues in the third quarter of 1997 totaled $226 million, a decrease
of 1.3 percent from $229 million in the third quarter of 1996. Operating
revenues decreased by $14.9 or 2.1 percent to $705 million in the nine-month
period ended September 30, 1997. The decline in revenues is a consequence of the
continuing outage of Maine Yankee and other nuclear generating units in which
the Company holds interests, since energy produced or purchased from other
Company sources was used to satisfy service territory needs and, as a result,
significantly less was available for sales outside the service territory.
Compared to the nine-month period ended September 30, 1996, non-territorial
sales were down $32 million. In contrast, Industrial sales increased by
approximately $11.0 million or 6 percent compared to the nine months ended
September 30, 1996, due to the paper industry rebounding from weak market
conditions in 1996 and a facility expansion by an electrical machinery
manufacturer.
Service-area sales for the third quarter of 1997 totaled approximately 2.35
billion kilowatt-hours, down 0.3 percent from the third quarter of 1996.
Service-area sales of electricity for the first nine months of 1997 totaled
approximately 7.02 billion kilowatt-hours, for an increase of 1.0 percent
compared to the first nine months of 1996.
<TABLE>
<S> <C> <C>
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended September 30,
Three Months Nine Months
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
Residential 651.5 657.2 (0.9)% 2,116.5 2,139.8 (1.1)%
Commercial 660.3 651.9 1.3 1,897.2 1,886.3 0.6
Industrial 983.9 993.4 (1.0) 2,841.2 2,763.9 2.8
Other 52.7 54.1 (2.6) 164.4 161.4 1.9
--------- --------- -------- --------
2,348.4 2,356.6 (0.3) 7,019.3 6,951.4 1.0
======= ======= ======= =======
</TABLE>
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers decreased by 0.9 percent in
the third quarter and decreased by 1.1 percent for the nine months ended
September 30, 1997 compared to 1996; usage per customer was down 2.1
percent for the nine months ended September 30, 1997. Warmer temperatures
during the first quarter of 1997 versus the first quarter of 1996 were
primarily responsible for the nine-month overall decrease in residential
sales.
Commercial sales increased by 1.3 percent in the third quarter and 0.6
percent for the nine months ended September 30, 1997 as compared to 1996.
The increase in the third quarter was due primarily to strong sales in the
retail trade and service sectors. The increase was offset by decreased
sales to Maine Yankee as compared to the third quarter of 1996.
Industrial kilowatt-hour sales decreased by 1.0 percent in the third
quarter due primarily to no excess power being available for sale. The 2.8
percent increase for the nine months ended September 30, 1997 compared to
1996 is due primarily to an increase in the paper industry, rebounding
from weak market conditions in 1996, and the expansion of facilities by an
electrical machinery manufacturer.
MEPCO's electrical sales and transmission revenues from New England utilities
other than the Company amounted to $1.0 and $4.3 million in the third quarter of
1997 and 1996, respectively. The totals for the nine months ended September 30,
1997 and 1996 were $9.5 million and $8.4 million, respectively. Under a
Participation Agreement that terminated July 9, 1996, all of MEPCO's costs,
including a return on invested capital, were paid by the participating utilities
("Participants"), which included the Company and most of the larger New England
electric companies. The level of MEPCO's revenues and expenses changes depending
upon the level of energy purchases. Effective July 9, 1996, MEPCO and the
Company filed with FERC under FERC Order 888 for new tariff rates. Refer to
"Open-Access Transmission Service Rule" below for further discussion of this
matter.
Purchased Power-Energy expense increased $4.6 million compared to 1996,
reflecting increased replacement power cost due to the Maine Yankee and other
nuclear-plant outages which continued through the entire nine months of 1997.
Purchased Power-Capacity expense increased $11.7 million compared to 1996,
principally due to the Maine Yankee outage throughout the entire nine months of
1997 and increased maintenance expense prior to the permanent shutdown.
Other operation expense increased by approximately $13.1 million for the nine
months ended September 30, 1997 compared to 1996. The increase is due primarily
to a reversal in 1996 of a reserve established in 1995 and the expense
recognition of post-retirement benefits being collected in rates under the ARP.
Previously post-retirement benefits were deferred for future recovery.
Maintenance expense decreased by $1.9 million through September primarily due to
decreased storm activity in 1997 versus 1996.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense decreased by $21.2
million as a result of lower pre-tax earnings for the nine months ended
September 30, 1997, when compared to 1996. In the third quarter of 1997 $1.1
million of expense was incurred as a result of a partial audit settlement,
relating to 1992 through 1994, and amended tax returns filed for 1995 and 1996.
Interest on long-term debt and other interest expense decreased during the third
quarter and year to date 1997 compared to 1996. The decrease reflects a lower
level of Medium-Term Notes outstanding than in the first nine months of 1996.
"Year 2000" Computer Issues - In the next two-and-one-half years, most large
companies will face a potentially serious information systems (computer) problem
because most software application and operational programs written in the past
will not properly recognize calendar dates beginning in the year 2000. This
could force computers to either shut down or lead to incorrect calculations. The
Company began the process of identifying the changes required to their computer
programs and hardware during the year 1996. The majority of the necessary
modifications to the Company's centralized financial, customer, and operational
information systems are expected to be completed by the end of 1998. The Company
believes it will incur approximately $3.0 million of costs between now and March
31, 2000, associated with making the necessary modifications identified to date
to the centralized systems. Noncentralized systems are currently being reviewed
for Year 2000 problems. The Company is unable to predict the costs to be
incurred for correction of such noncentralized systems, but expects the scope
and schedule for such work to be less complex than for its centralized
information systems.
Liquidity and Capital Resources
Approximately $66.4 million of cash was provided during the first nine months of
1997 from net income before non-cash items, primarily depreciation and
amortization. During that period, approximately $5.0 million of cash was
generated from fluctuations in certain assets and liabilities and from other
operating activities.
During the first nine months of 1997, dividends paid on common stock were $21.9
million, while preferred-stock dividends utilized $6.6 million of cash.
Investing activities, primarily construction expenditures, utilized $39.3
million in cash during the first nine months of 1997 for generation,
transmission, distribution, and general construction expenditures and includes
$4.9 million the Company invested primarily in its associated companies.
In order to accommodate existing and future loads on its electric system the
Company is engaged in a continuing construction program. The Company's plans for
improvements and expansions, its load forecast and its power-supply sources are
under a process of continuing review. Actual construction expenditures depend
upon the availability of capital and other resources, load forecasts, the timing
of its divestiture of its generating assets, customer growth and general
business conditions. The ultimate nature, timing and amount of financing for the
Company's total construction programs, refinancing and energy-management capital
requirements will be determined in light of market conditions, earnings and
other relevant factors.
The total of cash on deposit with the trustee under the Company's General and
Refunding Mortgage Indenture as of September 30, 1997, was approximately $61.7
million. Under the Indenture such cash may be applied, at any time at the
direction of the Company, to the redemption of bonds outstanding under the
Indenture at a price equal to the principal amount of the bonds being redeemed,
without premium, plus accrued interest to the date fixed for redemption on the
principal amount of the bonds being redeemed. Such cash may also be withdrawn by
the Company by substitution of allocated property additions or available bonds.
At the annual meeting of the stockholders of the Company on May 15, 1997, the
holders of the Company's outstanding preferred stock consented to the issuance
of $350 million in principal amount of the Company's Medium-Term Notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the Medium-Term Note program is being implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased competition. As of September 30, 1997, $43 million of Medium-Term
Notes were outstanding which, under the terms of the program, will permit
issuance of an additional $457 million of such notes.
To support its short-term capital requirements, on October 23, 1996, the Company
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement has two credit facilities: a $75 million, 364-day revolving credit
facility that currently matures on October 21, 1998, and a $50-million, 3-year
revolving credit facility that matures on October 22, 1999. Both credit
facilities require annual fees on the total credit lines. The fees are based on
the Company's credit ratings and allow for various borrowing options including
LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to
commercial paper markets has been substantially precluded, as a result of
downgrading of the Company's credit ratings. The amount of outstanding
short-term borrowing will fluctuate with day-to-day operational needs, the
timing of long-term financing, and market conditions. The Company had $50
million outstanding as of September 30, 1997 under the 364-day revolving credit
facility.
Rating Agency Actions
On May 1, 1997, Moody's Investor Service announced that it had downgraded the
Company's credit ratings. The ratings downgraded were: General and Refunding
Mortgage Bonds to "Baa3" from "Baa2"; unsecured medium-term notes, unsecured
pollution-control revenues bonds, and counterparty rating to "Ba1" from "Baa3";
and preferred stock to "ba1" from "baa3." The Company's short-term rating for
commercial paper was also downgraded to "Prime-3" from "Prime-2." Moody's said
the downgrades reflected "adverse financial pressures linked to prolonged
nuclear plant outages, especially at the Maine Yankee plant as well as
uncertainty surrounding the timing and extent of recovery of the Company's
sizable potential stranded costs."
Industry Restructuring and Strandable Costs
As discussed in the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's 1996 Form 10-K, the
enactment by Congress of the Energy Policy Act of 1992 accelerated planning by
electric utilities, including the Company, for a transition to a more
competitive industry. Significant legislative and regulatory steps have been
taken toward competition in generation and non-discriminatory transmission
access as discussed below. A departure from traditional regulation, however,
could have substantial impacts on the value of utility assets and on electric
utilities' abilities to recover their costs through rates. In the absence of
full recovery, utilities would find their above-market costs to be "stranded,"
or unrecoverable, in the new competitive setting.
The Company has substantial exposure to cost stranding relative to its size. In
its January 1996 filing, the Company estimated its net-present-value strandable
costs could be approximately $2 billion as of January 1, 1996. These costs
represented the excess costs of purchased-power obligations and the Company's
own generating costs over the market value of the power, and the costs of
deferred charges and other regulatory assets. Of the $2 billion, approximately
$1.3 billion was related to above-market costs of purchased-power obligations
arising largely from the Company's long-term, noncancelable contracts for the
purchase of capacity and energy from non-utility generators, approximately $200
million was related to estimated net above-market cost of the Company's own
generation, and the remaining $500 million was related to deferred regulatory
assets.
The MPUC also provided estimates of strandable costs for the Company, which they
found to be within a wide range of a negative $445 million to a positive $965
million. These estimates were prepared using assumptions that differ from those
used by the Company, particularly a starting date for measurement of January 1,
2000 versus the measurement starting date of January 1, 1996 utilized by the
Company. The MPUC concluded that there is a high degree of uncertainty that
surrounds stranded costs estimates, resulting from having to rely on projections
and assumptions about future conditions. Given the inherent uncertainty and
volatility of these projections, the Company believes that an annual estimation
of stranded costs could serve to prevent significant over or under-collection
beginning in the year 2000. For a discussion of an MPUC proceeding that will
determine the Company's stranded costs, see "Restructuring Legislation", below.
Estimated strandable costs are highly dependent on estimates of the future
market for power. Higher market rates lower stranded cost exposure, while lower
market rates increase it. In addition to market-related impacts, any estimate of
the ultimate level of strandable costs depends on state and federal regulations,
the extent, timing and form that competition for electric service will take; the
ongoing level of the Company's costs of operations; regional and national
economic conditions; growth of the Company's sales; timing of any changes that
may occur from state and federal initiatives on restructuring; and the extent to
which regulatory policies and proceedings ultimately address recovery of
strandable costs.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and the Company's generating costs reflects the
underlying costs of those sources of generation in place today, with reductions
for contract expirations and continuing depreciation. Deferred regulatory asset
totals include the current uncollected balances and existing amortization
schedules for purchased-power contract restructuring and buyouts negotiated by
the Company to lessen the impact of these obligations, energy management costs,
financing costs, and other regulatory promises. The Company expects its
strandable-cost exposure to decline over time as the market price of power
increases, NUG contracts expire, and regulatory assets, including
decommissioning at nuclear power plants, are recovered.
Restructuring Legislation
On May 29, 1997, the Governor of Maine signed into law a bill enacted by the
Maine Legislature that will restructure the electric utility industry in Maine
by March 1, 2000. With respect to the ability of the Company to recover stranded
costs, the legislation requires the MPUC, when retail access begins, to provide
a "reasonable opportunity" to recover stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. Stranded costs are defined as the legitimate, verifiable and
unmitigatable costs made unrecoverable as a result of the restructuring required
by the legislation and would be determined by the MPUC as provided in the
legislation. The MPUC must conduct separate adjudicatory proceedings to
determine the stranded costs for each utility and the corresponding revenue
requirements and stranded-cost charges to be charged by each transmission and
distribution utility. Those proceedings must be completed by July 1, 1999. The
MPUC has initiated the proceeding that will determine the Company's stranded
costs, corresponding revenue requirements and stranded-cost charges to be
charged by it when it becomes a transmission-and-distribution utility and has
scheduled completion of the proceeding for the second half of 1998.
In addition, the legislation requires utilities to use all reasonable means to
reduce their potential stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded costs in determining the amount of the utility's stranded costs.
Stranded costs and the related rates charged to customers will be prospectively
adjusted as necessary to correct substantial inaccuracies in the year 2003 and
at least every three years thereafter.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electricity providers, commencing March 1, 2000, with transmission
and distribution companies continuing to be regulated by the MPUC. By that date,
subject to possible extensions of time granted by the MPUC to improve the sale
value of generation assets, investor-owned utilities are required to divest all
generation assets and generation-related business activities, with two major
exceptions: (1) non-utility generator contracts with qualifying facilities and
contracts with demand-side management or conservation providers, brokers or
hosts, and (2) ownership interests in nuclear power plants. However, the MPUC
can require the Company to divest its interest in Maine Yankee Atomic Power
Company on or after January 1, 2009. The Company has submitted its plan to
divest its generation assets to the MPUC as required by the legislation and is
proceeding with its previously reported plan to sell its generation assets in
1998. See "Divestiture of Generation Assets," below. The bill also requires
investor-owned utilities, after February 28, 2000, to sell their rights to the
capacity and energy from all generation assets, including the purchased-power
contracts that had not previously been divested pursuant to the legislation,
with certain minor exceptions.
Upon the commencement of retail access on March 1, 2000, the Company, as a
transmission and distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with the Company would be allowed to sell electricity outside the
Company's service territory without limitation as to amount, but within the
Company's service territory the affiliate would be limited to providing not more
than 33 percent of the total kilowatt-hours sold within the Company's service
territory, as determined by the MPUC.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases 10
percent or more of the stock of a distribution utility, including the Company,
the purchasing entity and any related entity would be prohibited from selling
generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider affiliated
with the Company would be limited to providing such service for only up to 20
percent of the electric load in the Company's service territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in any
form for such reduction or elimination of consumption or for the
re-establishment of service with a transmission-and-distribution utility.
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation, research and development on renewable
resources, assistance for utility employees laid off as a result of the
legislation, and recovery of nuclear-plant decommissioning costs "[a]s required
by federal law, rule or order", all funded through transmission-and-distribution
utility rates and charges.
The Company has stated that it supports the legislation ultimately enacted,
which reflects protracted negotiations and compromises among the interested
constituencies and is evaluating means of mitigating its strandable costs
through the financing of stranded assets. The Company believes, however, that
some of the limitations imposed on transmission-and-distribution utilities in
the legislation are unnecessary and inappropriate in the contemplated
competitive environment.
Environmental Matters
The Company assesses on an ongoing basis, compliance with laws and regulations
related to hazardous substance remediation. At September 30, 1997, the Company
had an accrued liability of $2.2 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 3,
"Commitments and Contingencies." - "Legal and Environmental Matters" for further
discussion of this matter.
Divestiture of Generation Assets
On April 28, 1997, the Company announced a plan to seek proposals to purchase
its generation assets, including interests in nuclear plants and rights to power
under NUG contracts. The Company believes that current market conditions may
offer advantages to seeking proposals before divestiture is required by
legislation. Several other utilities, including New England Electric System
("NEES") in Massachusetts, are in the process of divestiture of their generation
assets with a large number of prospective purchasers expressing interest in
acquiring the facilities. On August 6, 1997, NEES announced that it had agreed
to sell its non-nuclear generating business to an affiliate of PG&E Corp. (U.S.
Generating Company).
In early June, the Company, working with its investment advisors, developed and
contacted a group of approximately 150 potential bidders that were believed to
be interested in the Company's generation assets and financially qualified to
bid. Non-binding bids were submitted to the Company in early September and,
based on those bids, the Company began a process of working with a smaller group
of qualified buyers. On November 3, 1997, the Company sent bid documents to the
selected qualified buyers and requested final binding bids by December 10, 1997.
Upon receipt of such bids the Company will evaluate the bids and negotiate a
definitive purchase-and-sale agreement with the successful bidder or bidders.
The consummation of a sale will extend into late 1998 and is subject to
regulatory approvals and contractual consents. The Company does not intend to
sell its generation assets if terms satisfactory to the Company cannot be
arranged. The Company cannot predict whether such a sale will occur, whether it
will receive satisfactory proposals, or whether the necessary approvals and
consents will be obtained.
Other Activities
On July 21, 1997 the Company and New York State Electric and Gas Corp. signed a
memorandum of understanding that could lead to formation of a new natural-gas
distribution company to serve Maine customers. The Company has asked the MPUC
for permission to offer natural-gas distribution service to Maine customers in
areas not currently served by a natural-gas provider. Various regulatory
approvals would be required before the Company or a jointly owned company could
operate a new gas distribution service.
Open-Access Transmission Service Rule
On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Order
No. 888, which requires all public utilities that own, control or operate
facilities used for transmitting electric energy in interstate commerce to file
open access non-discriminatory transmission tariffs that offer both load-based,
network and contract-based, point-to-point service, including ancillary service
to eligible customers containing minimum terms and conditions of
non-discriminatory service. This service must be comparable to the service they
provide themselves at the wholesale level; in fact, these utilities must take
wholesale transmission service they provide themselves under the filed tariffs.
The order also permits public utilities and transmitting utilities the
opportunity to recover legitimate, prudent and verifiable wholesale stranded
costs associated with providing open access and certain other transmission
services. It further requires public utilities to functionally separate
transmission from generation marketing functions and communications. The intent
of this order is to promote the transition of the electric utility industry to
open competition. Order No. 888 also clarifies federal and state jurisdiction
over transmission in interstate commerce and local distribution and provides for
deference of certain issues to state recommendations.
On July 9, 1996, the Company and MEPCO submitted compliance filings to meet the
new pro forma tariff non-price minimum terms and conditions of
non-discriminatory transmission. Since July 9, 1996, the Company and MEPCO have
been transmitting energy pursuant to their filed tariffs, subject to refund.
FERC subsequently issued Order No.
888-A, which generally reaffirmed Order No. 888 and clarified certain terms.
Also on April 24, 1996, FERC issued Order No. 889, which requires public
utilities to functionally separate their wholesale power marketing and
transmission operation functions and to obtain information about their
transmission system for their own wholesale power transactions in the same way
their competitors do through the Open Access Same-time Information System
("OASIS"). The rule also prescribed standards of conduct and protocols for
obtaining the information. The standards of conduct are designed to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential information. The Company participated in efforts to develop a
regional OASIS, which was operational January 3, 1997. FERC subsequently
approved a New England Power Pool-wide Open Access Tariff, subject to refund and
issuance of further orders. The Company also participated in revising the New
England Power Pool Agreement.
On April 23, 1997, a representative of Kennebunk Light and Power District and
Fox Islands Electric Cooperative, two wholesale customers of the Company,
notified the Company that the two customers were terminating their power supply
contracts with the Company, effective May 1, 1999, and would begin purchasing
power from another supplier on that date. The two customers currently account
for less than 0.5 percent of the Company's annual revenues.
Impact of New Accounting Standards
In February 1997, FASB issued SFAS No. 128, "Earnings per Share." This
statement, which is effective for fiscal years beginning after December 15,
1997, establishes simplified standards for computing and presenting earnings per
share ("EPS"). It requires dual presentation of basic and diluted EPS on the
face of the income statement for entities with complex capital structures and
disclosure of the calculation of each EPS amount. The Company anticipates that
adoption of the standard will not have a significant impact on reported EPS.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement, which is effective for fiscal years beginning after December 15,
1997, establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Company anticipates that adoption
of the standard will not have a significant impact on its financial statements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder Suit. On September 25, 1997, a lawsuit was filed in the United
States District Court for the Southern District of New York by a New Jersey
resident claiming to be a shareholder of the Company against the current members
of the Company's Board of Directors, including the President and Chief Executive
Officer of the Company, and three former directors. The complaint contains a
derivative claim that the defendants recklessly mismanaged the oversight and
operation of the Maine Yankee Plant and an individual claim that the defendants
failed to make timely and adequate disclosures of information in connection with
issues surrounding the Plant. The complaint does not seek damages against the
Company, but requests that the defendants disgorge the compensation they
received during the period of alleged mismanagement, pay to the Company costs
incurred allegedly as a result of the claimed actions, and cause the Company to
take steps to prevent such actions.
The Board and the Company believe the complaint is without merit. The Board will
contest the complaint.
Regulatory Matters. For a discussion of certain significant regulatory matters
affecting the Company, including those leading to a decision by the Maine Yankee
Board of Directors to permanently shut down the Maine Yankee Plant,
electric-utility restructuring, and stranded costs, including an MPUC proceeding
that will determine the Company's stranded costs and an MPUC investigation of
the prudence of the Maine Yankee shutdown decision and related matters, see Note
2, "Commitments and Contingencies" - "Maine Yankee Atomic Power Company," and
Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition
and Results of Operation" - "Industry Restructuring and Strandable Costs," which
are incorporated herein by reference.
Tax Appeal. For a discussion of the Company's appeal of two significant
federal income tax adjustments proposed by the Internal Revenue Service ("IRS")
see Note 3, "Commitments and Contingencies" - "Proposed Federal Income Tax
Adjustments."
Environmental Matters. For a discussion of administrative and judicial
proceedings concerning cleanup of hazardous waste sites see Note 2, "Commitments
and Contingencies," "Legal and Environmental Matters," which is incorporated
herein by reference.
Item 2. Through Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b)Reports on Form 8-K. The Company filed the following reports on Form
8-K during the third quarter of 1997 and thereafter to date:
Date of Report Items Reported
August 1, 1997 Item 5
a) The Board of Directors of Maine Yankee voted to permanently cease power
operations at the Plant and begin the process of decommissioning the Plant.
Date of Report Items Reported
September 2, 1997 Item 5
a) The MPUC released the report of a consultant it had retained to perform a
management audit of Maine Yankee for the period January 1, 1994 to June 30,
1997.
b) The Company received from the IRS a Revenue Agent's Report summarizing all
adjustments proposed by the IRS as a result of its audit of the Company's
federal income tax returns for the years 1992 through 1994.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL MAINE POWER COMPANY
(Registrant)
Date: November 14, 1997 By
----------------------------
Michael W. Caron, Comptroller
(Chief Accounting Officer)
By
----------------------------
David E. Marsh, Chief
Financial Officer (Principal
Financial Officer and duly
authorized officer)
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Central
Maine Power Company's Consolidated Statement of Earnings, Consolidated Balance
Sheet and Consolidated Statement of Cash Flows and is qualified in its entiirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
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<PERIOD-TYPE> 9-mos
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<TOTAL-ASSETS> 2,298,081
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65,571
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<OTHER-OPERATING-EXPENSES> 661,376
<TOTAL-OPERATING-EXPENSES> 665,871
<OPERATING-INCOME-LOSS> 43,788
<OTHER-INCOME-NET> 1,753
<INCOME-BEFORE-INTEREST-EXPEN> 45,541
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<EARNINGS-AVAILABLE-FOR-COMM> 1,331
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