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 March 31, 1998
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.
Shares Outstanding
Class as of May 14, 1998
Common Stock, $5 Par Value 32,442,752
<PAGE>
Central Maine Power Company
INDEX
Page No.
Part I. Financial Information
Consolidated Statement of Earnings for the Three Months
Ended March 31, 1998 and 1997 1
Consolidated Balance Sheet - March 31, 1998 and December 31, 1997:
Assets 2
Stockholders' Investment and Liabilities 3
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information 30
<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)
For the Three Months
Ended March 31,
1998 1997
Electric Operating Revenues $248,745 $268,367
------- -------
Operating Expenses
Fuel used for company generation 4,072 5,605
Purchased power - energy 104,295 123,937
Purchased power - capacity 24,376 33,140
Other operation 43,773 43,749
Maintenance 10,091 6,317
Depreciation and amortization 13,822 13,474
Federal and state income taxes 11,966 9,554
Taxes other than income taxes 7,054 6,978
----- -----
Total Operating Expenses 219,449 242,754
------- -------
Equity In Earnings Of Associated Companies 1,591 1,900
----- -----
Operating Income 30,887 27,513
------ ------
Other Income (Expense)
Allowance for equity funds used during construction 174 246
Other, net (741) 620
Income taxes 374 (248)
--- ----
Total Other Income (193) 618
----- ---
Income Before Interest Charges 30,694 28,131
------ ------
Interest Charges
Long-term debt 10,850 11,214
Other interest 1,676 1,068
Allowance for borrowed funds used during
construction (127) (178)
---- ----
Total Interest Charges 12,399 12,104
------ ------
Net Income 18,295 16,027
Dividends On Preferred Stock 1,897 2,208
----- -----
Earnings Applicable To Common Stock $16,398 $ 13,819
====== =======
Weighted Average Number Of Shares Of Common Stock
Outstanding 32,442,752 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) $0.51 $0.43
Dividends Declared Per Share Of Common Stock $0.225 $0.225
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<S> <C> <C>
Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Electric Property, at original cost ..................................................... $1,683,755 $1,647,876
Less: Accumulated Depreciation ...................................................... 644,111 634,384
- ----------------------------------------------------------------------------------------- ---------- ----------
Net electric property in service .............................................. 1,039,644 1,040,492
Construction work in progress ....................................................... 12,786 15,105
Net nuclear fuel .................................................................... 1,157 1,157
- ----------------------------------------------------------------------------------------- ---------- ----------
Net electric property and nuclear fuel ........................................ 1,053,587 1,056,754
----------
Investments In Associated Companies, at equity .......................................... 78,339 76,509
- ----------------------------------------------------------------------------------------- ---------- ----------
Total Net Electric Property and Investments in Associated Companies
1,131,926 1,133,263
---------- ---------
Current Assets
Cash and cash equivalents ........................................................... 19,681 20,841
Accounts receivable, less allowances for uncollectible accounts of $2,507 in
1998 and $2,481 in 1997:
Service - billed ................................................................. 80,858 84,323
Service - unbilled ............................................................... 41,826 46,807
Other accounts receivable ........................................................ 7,357 15,247
Prepaid income taxes ................................................................ 5,937 --
Fuel oil inventory, at average cost ................................................. 9,062 5,390
Materials and supplies, at average cost ............................................. 12,274 11,779
Funds on deposit with trustee ....................................................... 693 61,694
Prepayments and other current assets ................................................ 9,110 7,822
---------- ----------
Total Current Assets .......................................................... 185,510 255,191
- ----------------------------------------------------------------------------------------- ---------- ----------
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net ......................... 82,654 84,026
Yankee Atomic purchased-power contract .............................................. 11,897 13,056
Connecticut Yankee purchased-power contract ......................................... 35,633 36,877
Maine Yankee purchased-power contract ............................................... 320,165 329,206
Regulatory assets - deferred taxes .................................................. 236,632 236,632
Deferred charges and other assets ................................................... 255,395 210,715
- ----------------------------------------------------------------------------------------- ---------- ----------
Total Deferred Charges and Other Assets ....................................... 942,376 910,512
- ----------------------------------------------------------------------------------------- ---------- ----------
TOTAL ASSETS ............................................................. $2,259,812 $2,298,966
========== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
March 31, December 31,
1998 1997
(Unaudited)
STOCKHOLDERS' INVESTMENTS AND LIABILITIES
Capitalization
Common-stock investment $ 496,328 $ 487,594
Preferred stock 65,571 65,571
Redeemable preferred stock 39,528 39,528
Long-term obligations 342,316 400,923
------- -------
Total Capitalization 943,743 993,616
------- -------
Current Liabilities and Interim Financing
Interim financing 228,000 238,000
Sinking-fund requirements 16,813 9,411
Accounts payable 104,874 97,080
Dividends payable 9,202 9,202
Accrued interest 8,084 11,201
Accrued income taxes 3,001
Miscellaneous current liabilities 16,864 15,762
------ ------
Total Current Liabilities and Interim Financing 383,837 383,657
------- -------
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes 370,978 350,912
Unamortized investment tax credits 30,166 30,533
Yankee Atomic purchased-power contract 11,897 13,056
Connecticut Yankee purchased-power contract 35,633 36,877
Maine Yankee purchased-power contract 320,165 329,206
Regulatory liabilities - deferred taxes 56,852 56,852
Other reserves and deferred credits 106,541 104,257
------- -------
Total Reserves and Deferred Credits 932,232 921,693
------- -------
Total Stockholders' Investment and Liabilities $2,259,812 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Central Maine Power Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
For the Three Months
Ended March 31,
1998 1997
Operating Activities
Net income $ 18,295 $16,027
Items not requiring (providing) cash:
Depreciation 11,292 11,000
Amortization 9,033 8,490
Deferred income taxes and investment tax credits, net 19,028 (1,280)
Allowance for equity funds used during construction (174) (246)
Changes in certain assets and liabilities:
Accounts receivable 16,336 5,767
Inventories (4,167) 2,852
Other current assets 1,288 1,671
Accounts payable 9,526 5,650
Accrued/prepaid taxes and interest (12,055) 7,377
Miscellaneous current liabilities 1,102 (4,526)
Deferred energy-management costs (348) (141)
Maine Yankee outage accrual - 2,070
Deferred ice storm costs (52,557) -
Other, net 3,405 3,747
------- -------
Net Cash Provided by Operating Activities 20,004 58,458
------ ------
Investing Activities
Construction expenditures (9,880) (7,145)
Investments in associated companies (300) (5,495)
Changes in accounts payable - investing activities (1,732) (3,587)
------ -------
Net Cash Used by Investing Activities (11,912) (16,227)
------ ------
Financing Activities
Issuances:
Medium-term notes 60,000
Redemptions:
Mortgage bonds (61,000) -
Revolving credit agreement (60,000) (7,500)
Other long-term obligations (50) (50)
Funds on deposit with trustee 61,000 (313)
Dividends:
Common stock (7,305) (7,305)
Preferred stock (1,897) (2,208)
------ ------
Net Cash Used by Financing Activities (9,252) (17,376)
------- -------
Net Decrease (Increase) in Cash (1,160) 24,855
Cash and cash equivalents, beginning of period 20,841 8,307
------ -------
Cash and cash equivalents, end of period $19,681 $33,162
====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
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, 1997 ("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.
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 three months ended March
31, 1998 and 1997 for interest, net of amounts capitalized, amounted to $14.7
million and $13.4 million, respectively. Income taxes paid, amounted to $1.5
million (net of a state tax refund of $735 thousand for years 1992 through 1994)
and $1.6 million for the three months ended March 31, 1998 and 1997. The Company
incurred no new capital lease obligations in either period.
Impact of New Accounting Standards - 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 this standard will not have a significant
impact on its financial statements.
2. Commitments and Contingencies
Maine Yankee Atomic Power Company - On August 6, 1997, the Board of Directors of
Maine Yankee voted to permanently cease power operations at its nuclear
generating plant at Wiscasset, Maine (the "Plant") and to begin decommissioning
the Plant. The Plant experienced a number of operational and regulatory
problems, including being included on the Nuclear Regulatory Commission's
("NRC") Watch List, and had been shut down since December 6, 1996. The decision
to close the Plant permanently was based on an economic analysis of the costs,
risks and uncertainties associated with operating the Plant compared to those
associated with closing and decommissioning it. The Plant's operating license
from the NRC was scheduled to expire on October 21, 2008. For a detailed
discussion of the background of the permanent shutdown, see the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $30.6 million as of March 31, 1998, 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 $380.6 million, based on a 1997 study
by an independent engineering consultant, plus estimated costs of interim
spent-fuel storage of $127.6 million, for a total estimated cost of $508.2
million (in 1997 dollars). The previous estimate for decommissioning, by the
same consultant, was $316.6 million (in 1993 dollars), which resulted in
approximately $14.9 million being collected annually from Maine Yankee's
sponsors pursuant to a 1994 FERC rate order. Through March 31, 1998 Maine Yankee
had collected approximately $211.8 million for its decommissioning obligations.
On November 6, 1997, Maine Yankee submitted a new estimate to the FERC as part
of a rate proceeding reflecting the fact that the Plant is no longer operating
and has entered the decommissioning phase. Under 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. Overall
operations and maintenance expenses have been reduced, however, due to workforce
reductions and other results of the permanent shutdown. On January 14, 1998, the
FERC issued an order accepting for filing the rates associated with the amended
Power Contracts, made them effective January 15, 1998, subject to refund, and
ordered that a public hearing be held on the prudence of the Plant shut-down
decision and on the proposed rate amendments. The Company expects the prudence
issue to be contested vigorously by several intervenors, including the MPUC and
the Maine Office of the Public Advocate. The hearing in the FERC rate proceeding
is currently scheduled to begin on December 1, 1998. The Company cannot predict
the outcome of the proceeding.
On September 1, 1997, Maine Yankee estimated the sum of the future payments for
the closing, decommissioning and recovery of the remaining investment in Maine
Yankee to be approximately $930 million, of which the Company's 38-percent share
would be approximately $353 million. Legislation enacted in Maine in 1997
calling for restructuring the electric utility industry provides for recovery of
decommissioning costs, to the extent allowed by federal regulation, through the
rates charged by the transmission-and-distribution companies. Based on the
legislation and regulatory precedent established by the FERC in its opinion
relating to the decommissioning of the Yankee Atomic Electric Company ("Yankee
Atomic") nuclear plant, the Company believes that it is entitled to recover
substantially all of its share of such costs from its customers and as of March
31, 1998 is carrying on its consolidated balance sheet a regulatory asset and
corresponding liability in the amount of $320.2 million, which is the $353
million discussed above net of the Company's post-September 1, 1997
cost-of-service payments to Maine Yankee.
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. Among the report's conclusions were that Maine Yankee's decision in
December 1996 to proceed with the steps necessary to restart the Plant was
"imprudent" and that Maine Yankee's May 27, 1997 decision to reduce restart
expenses while exploring a possible sale of the Plant was "inappropriate", and
that the decisions resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of
Investigation initiating an investigation of the shutdown decision and of the
operation of the Plant prior to shutdown, and announced that it had directed its
consultant to extend its review to include those areas. Based on preliminary
indications from the consultant, the Company expects the second phase of the
report to recommend additional disallowances. The Company does not know how the
MPUC plans to use the consultant's report, but believes the report's negative
conclusions are unfounded and may be contradictory.
On April 7, 1998, Maine Yankee refunded all of its mortgage bonds and bank debt
by means of a three-year revolving credit facility and a term loan due in 2006.
The new debt obligations are secured by a security interest in Maine Yankee's
rights in its Power Contracts, Additional Power Contracts and Capital Funds
Agreements with its Sponsors (the "Assigned Agreements") and its rights to
certain expected third-party payments, and contain restrictions on the payment
of common-stock dividends based on Maine Yankee's cash position and a
debt-service coverage test. In addition, in connection with the refinancing each
of the Sponsors, including the Company, affirmed its obligations under the
Assigned Agreements and agreed not to take the position that the permanent
shutdown of the Plant gave rise to any right to terminate or reduce payments
under the Assigned Agreements.
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 plant. The Company
has a 6-percent equity interest in Connecticut Yankee, totaling approximately
$6.8 million at March 31, 1998. 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 $35.6
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.
Yankee Atomic. In 1993 the FERC approved a settlement agreement regarding
recovery of decommissioning costs and plant investment, and all issues with
respect to the prudence of the decision to discontinue operation of the Yankee
Atomic plant. The Company estimates its remaining share of the cost of Yankee
Atomic's continued compliance with regulatory requirements, recovery of its
plant investment, decommissioning and closing the plant, to be approximately
$11.9 million. This estimate has been recorded by the Company as a regulatory
asset and a liability on the Company's balance sheet. As part of the MPUC's
decision in the Company's 1993 base-rate case, the Company's current share of
costs related to the deactivation of Yankee Atomic is being recovered through
rates.
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. 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 1, 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities"
("SOP"). The principal objective of the SOP is to improve the manner in which
existing authoritative accounting literature is applied by entities to specific
situations of recognizing, measuring and disclosing environmental remediation
liabilities. The SOP became effective January 1, 1997. This SOP has not had a
material impact on the company's financial position or results of operations.
The Company has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that the Company expects to incur for identified waste disposal sites. In
most cases, additional future environmental cleanup costs are not reasonably
estimatable due to a number of factors, including the unknown magnitude of
possible contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible effects of
technological changes. The Company cannot predict the schedule or scope of
remediation due to the regulatory process and involvement of non-governmental
parties. At March 31, 1998, 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 $8.0 million. Such costs may be higher if the Company is found
to be responsible for cleanup costs at additional sites or identifiable possible
outcomes change.
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 on
September 12, 1997, the Company received a notice of deficiency relating to the
proposed disallowances. There are two significant disallowances among those
proposed by the IRS. The first is a disallowance of the Company's write-off of
the under-collected balance of fuel and purchased-power costs and the
unrecovered balance of its unbilled Electric Revenue Adjustment Mechanism
("ERAM") revenues, both as of December 31, 1994, which were charged to income in
1994 in connection with the adoption of the Alternative Rate Plan ("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 March 31, 1998, amounted to $14.6 million, or a
decrease in net income of $8.6 million, and which could increase interest
expense approximately $475.4 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 would be due. If the IRS were to prevail, the Company believes the
deductions would be amortized over periods of up to twenty, post-1994, tax
years. The Company believes its tax treatment of the unresolved issues was
proper and as a result the potential interest has not been accrued. On December
10, 1997, the Company filed a petition in the United States Tax Court contesting
the entire amount of the deficiencies. The Company plans to seek review of the
asserted deficiencies by an IRS Appeals Officer to determine whether all or part
of the dispute can be resolved in advance of a court determination. Absent such
a resolution, the Company plans to pursue vigorously the Tax Court litigation,
but cannot predict the result.
Joint Venture - The Company and New York State Electric & Gas Corp. have signed
a joint-venture agreement to distribute natural gas to many Maine communities
that are not now served with that fuel. If state regulators approve, a new
company owned equally by CMP and NYSEG would be in a position to offer gas in
the Augusta and Bangor areas, and in other communities including Bath, Bethel,
Brunswick, North Windham, Rumford, and Waterville.
3. Regulatory and Legislative Matters
Alternative Rate Plan - Effective January 1, 1995, rate regulation for the
Company underwent a fundamental change with the implementation of the ARP, which
replaced traditional regulation. Instead of rate changes based on the level of
costs incurred and capital investments, the ARP provides for one annual
adjustment of an inflation-based cap on each of the Company's rates, with no
separate reconciliation and recovery of fuel and purchased-power costs. Under
the ARP, the MPUC is continuing to regulate the Company's operations and prices,
provide for continued recovery of deferred costs, and specify a range for its
rate of return. The MPUC confirmed in its order approving the ARP that the ARP
is intended to comply with the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
As a result, the Company will continue to apply the provisions of SFAS No. 71 to
its accounting transactions and its future financial statements. See "Meeting
the Requirements of SFAS No. 71," below.
The ARP contains a mechanism that provides price-caps on the Company's retail
rates to increase annually on July 1, 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, and includes fuel and purchased power cost that
previously had been treated separately. Under the ARP, fuel expense is no longer
subject to reconciliation or specific rate recovery, but is subject to the
annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity factors, a
general productivity offset of 1.0% (0.5% for 1995), and a second formula-based
offset that started in 1996 intended to reflect the limited effect of inflation
on the Company's purchased-power costs during the proposed five-year initial
term of the ARP.
The sharing mechanism may adjust the subsequent year's July price-cap change in
the event the Company's earnings are outside a range of 350 basis points above
or below the Company's allowed return on equity, starting at the 10.55% allowed
return (1995) and indexed annually for changes in capital costs. Outside that
range, profits and losses may be shared equally by the Company and ratepayers in
computing the price-cap adjustment. This feature commenced with the price-cap
change of July 1, 1996, and reflected 1995 results. The ROE used for earnings
sharing was increased to 11.5% effective with the July 1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost savings
from non-utility generator contract buy-outs and restructuring, recovery of
energy-management costs, and penalties for failure to attain customer-service
and energy-efficiency targets. The ARP also generally defines mandated costs
that would be recoverable by the Company notwithstanding the index-based price
cap. To receive such treatment, a mandated cost's revenue requirement must
exceed $3 million and have a disproportionate effect on the Company or the
electric-power industry.
Pursuant with the annual price-change provision in the ARP, the MPUC approved
the following increases:
1997 1996 1995
---- ---- ----
Inflation Index 2.12% 2.55% 2.92%
Productivity Offset (1.00) (1.00) (.50)
Qualifying Facility Offset (.42) - -
Earnings Sharing - .32 -
Flowthrough and Mandated Items .40 (0.61) .01
----- ------ -----
1.10% 1.26% 2.43%
==== ==== ====
On March 25, 1998, the Company submitted its 1998 ARP compliance filing to the
MPUC. In the filing the Company requested a rate increase of 1.78 percent, which
is equal to the standard inflation rate used under the ARP, to be effective July
11, 1998, and proposed a rate reduction of ten percent contingent on the
consummation of the Company's planned sale of generating assets later in the
year. The filing also contained information on the costs of restoring service to
the Company's customers after the January ice storm, as required by an earlier
MPUC order allowing the Company to defer those costs.
Industry Restructuring and Strandable Costs - Legislation that will restructure
the electric-utility industry in Maine by March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. A departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
The Company has substantial exposure to cost stranding relative to its size. In
general, its stranded costs reflect the excess costs of the Company's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of the Company's
strandable costs is related to above-market costs of purchased-power obligations
arising from the Company's long-term, noncancelable contracts for the purchase
of capacity and energy from non-utility generators ("NUGs"), and deferred
regulatory assets. There is a high degree of uncertainty that surrounds
stranded-cost estimates, resulting from having to rely on projections and
assumptions about future conditions, including, among others, estimates of the
future market for power.
Restructuring Legislation and MPUC Proceeding The 1997 Maine restructuring
legislation requires the MPUC, when retail access begins, to provide a
"reasonable opportunity" to recover stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. 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. The MPUC has initiated the proceeding that will determine the Company's
stranded costs, corresponding revenue requirements and stranded-cost charges to
be charged by it when it becomes a transmission-and-distribution utility and has
scheduled completion of the proceeding for the second half of 1998. On December
5, 1997, the Company filed direct testimony in the proceeding estimating its
future revenue requirements as a transmission-and-distribution utility and
providing an estimate of its strandable costs, which are to be defined by the
MPUC later in the proceeding. The Company estimated its strandable costs at
approximately $1.3 billion and explained the assumptions underlying the
estimate. On February 10, 1998, the Company reduced its estimate of strandable
costs to $0.8 billion to reflect the anticipated sale of its generating assets
later in the year. The Company cannot predict the results of the MPUC
proceeding.
Recovery of nuclear-plant decommissioning costs as required by federal law, rule
or order, will be funded through transmission-and-distribution utility rates and
charges. 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.
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.
The sale is subject to various closing conditions, including the approval of
state and federal regulatory agencies, which approval process the Company
expects could extend into the last quarter of 1998, and is subject to consents
or covenant waivers from certain of the Company's lenders. The Company is
pursuing the necessary regulatory approvals, consents and waivers, but cannot
predict whether or in what form they will be obtained.
Agreement for Sale of Company's Generation Assets - On January 6, 1998, the
Company announced that it had reached agreement to sell all of its hydro-fossil
and biomass power plants with a combined generating capacity of 1,185 megawatts
for $846 million in cash to Florida-based FPL Group. The related book value for
these assets is approximately $221 million at December 31, 1997. In addition, as
part of its agreement with FPL Group, the Company entered into energy buy-back
agreements to assist in fulfilling its obligation to supply its customers with
power until March 1, 2000.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone 3 nuclear generating
unit in Waterford, Connecticut, its 3.59-percent interest in the output of the
Vermont Yankee nuclear generating plant in Vernon, Vermont, and its entitlement
in the NEPOOL Phase II interconnection with Hydro-Quebec all attracted
insufficient interest to be included in the present sale. The Company will
continue to seek buyers for those assets. The Company did not offer for sale its
interests in the Maine Yankee (Wiscasset, Maine), Connecticut Yankee, (Haddam,
Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear generating plants,
all of which are in the process of being decommissioned.
Substantially all of the generating assets included in the sale are subject to
the lien of the Company's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited with the trustee under the Indenture at the closing
of the sale to free the generating assets from the lien of the Indenture.
Proceeds on deposit with the trustee may be used by the Company to redeem or
repurchase bonds under the terms of the Indenture, including the possible
discharge of the Indenture. In addition, the proceeds could provide the
flexibility to redeem or repurchase outstanding equity securities. The Company
must also provide for payment of applicable taxes resulting from the sale. The
manner and timing of the ultimate application of the sale proceeds after closing
are in any event subject to various factors, including Indenture provisions,
market conditions and terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants will
reduce the Company's stranded costs and other costs, which could lower the
amount that would otherwise be collected from customers by nearly half a billion
dollars. However, the Company will incur incremental costs as a result of the
power buy-back arrangements in excess of the pre-sale costs of capacity and
energy from the plants being sold, which will effectively lower the amount of
sale proceeds available to reduce stranded and other costs.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice storm of
unprecedented breadth and severity struck the Company's service territory,
causing power outages for approximately 280,000 of the Company's 528,000
customers, and substantial widespread damage to the Company's transmission and
distribution system. To restore its electrical system, the Company supplemented
its own crews with utility and tree-service crews from throughout the
northeastern United States and the Canadian maritime provinces, with assistance
from the Maine national guard. The Company's current estimate of the incremental
costs of the repair effort is within the range of $50 to $55 million, of which
most of the expense was labor-related.
On January 15, 1998, the MPUC issued an Order (the "Order") allowing the Company
to defer on its books the incremental non-capital costs associated with the
Company's efforts to restore service in response to the damage resulting from
the storm. The Order requires the Company, as part of its annual filing under
its ARP, to file information on the amounts deferred under the Order and to
submit a proposal as to how the costs associated with the Order should be
recovered under the ARP. In the ARP filing the Company stated that once the
final cost of the storm was determined and the status of federal assistance was
finalized the Company would propose a plan for recovery of its costs. Based on
the MPUC order, potential federal assistance and/or collection in rates, the
Company has deferred approximately $52 million in storm related costs as of
March 31, 1998. On May 1, 1998, President Clinton signed a Congressional
appropriation bill that included $130 million in storm-damage cost reimbursement
for electric utilities in the northeastern United States. The Company cannot
predict what portion of its ice storm-related costs it will recover from the
Congressional appropriation or from its customers.
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 1997 legislation enacted in Maine providing for industry restructuring
specifically addressed the issue of cost recovery of regulatory assets stranded
as a result of industry restructuring. Specifically, the legislation requires
the MPUC, when retail access begins, to provide a "reasonable opportunity" for
the recovery of stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. As provided for in EITF 97-4, "Deregulation of the Pricing of
Electricity," 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. Future regulatory rules
or other circumstances could cause the application of FAS 71 to be discontinued,
which could result in a non-cash write-off of previously established regulatory
assets.
4. 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 March 31, 1998, $103 million of Medium-Term
Notes were outstanding.
On February 26, 1998, the Company called for redemption on March 30, 1998, all
of the outstanding $11 million principal amount of its General and Refunding
Mortgage Bonds, Series N 8.50% Due 2001, at a redemption price equal to their
principal amount plus accrued interest to the date fixed for redemption. On the
same day the Company also called for redemption on March 30, 1998, all of the
outstanding $50 million principal amount of its General and Refunding Mortgage
Bonds, Series R 7-7/8% Due 2023, also at a redemption price equal to their
principal amount plus accrued interest. The bond redemptions were funded from
the approximately $61.7 million on deposit with the trustee under the renewal
and replacement fund and release provisions of the Company's General and
Refunding Mortgage Indenture. On February 27, 1998, the Company called for
redemption on April 1, 1998, all of the outstanding 300,000 shares of its
Preferred Stock 7-7/8% Series at a redemption price of $100 per share. No
accrued dividends were paid on the preferred stock since the redemption date was
a regular dividend payment date.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report on Form 10-Q contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. 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 industry restructuring,
including the ongoing state and federal activities; the results of the Company's
planned sale of its generating assets; the Company's ability to recover its
costs resulting from the January 1998 ice storms; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which the Company
operates, including regulatory treatment of stranded costs; the Company's
investment in unregulated businesses; and other circumstances that could affect
anticipated revenues and costs, such as unscheduled maintenance or repair
requirements at nuclear plants and other facilities, and compliance with laws
and regulations.
Operating Results
Operating revenues in the first quarter of 1998 totaled $248.7 million, a
decrease of $19.7 from the first quarter of 1997. The lower revenues were a
result of the following:
Ice storm $ 5.3
Warm weather 2.6
Closing of paper mills 2.4
NUG contract expiration 3.6
MEPCO 3.7
Other 2.1
------
$19.7
Net income was $18.3 million for the first quarter of 1998 compared to $16.0
million for the corresponding period in 1997. The first quarter results
benefited from reduced operating costs for the Company's 38-percent share of the
Maine Yankee Plant and lower fuel costs due to the expiration of a high-cost
contract for non-utility energy and lower demand due to warmer weather. Earnings
applicable to common stock were $16.4 million or $0.51 per share for the first
three months of 1998 compared to $13.8 million or $0.43 per share for the
comparable period in 1997.
Service-area sales of electricity totaled approximately 2.27 billion
kilowatt-hours in the first quarter of 1998, down 7.1 percent from the 2.44
billion kilowatt-hour level of a year ago.
Service Area Kilowatt-hour Sales (Millions of KWHs)
Three Months Ended March 31,
1998 1997 % Change
---- ---- --------
Residential 743.2 807.9 (8.0)
Commercial 621.0 651.7 (4.7)
Industrial 846.0 925.6 (8.6)
Other 60.6 59.4 2.0
--------- --------- ----
2,270.8 2,444.6 (7.1)
======= ======= ====
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers decreased by 8.0 percent in
the first quarter compared to 1997; usage per customer was down 8.8
percent for the three months ended March 31, 1998.
Commercial sales decreased by 4.7 percent in the first quarter compared to
1997.
The decrease in residential and commercial sales was due primarily to
warmer than normal temperatures during the first three months of 1998 and
the January 1998 ice storm. The National Weather Service recently
announced that the 1997/1998 winter season was the warmest in 40 years.
The ice storm resulted in a loss of an estimated 44.8 million
kilowatt-hour-sales.
Industrial kilowatt-hour sales decreased by 8.6 percent in the first
quarter compared to 1997, due primarily to the closure of two pulp and
paper mills. This sector accounts for approximately 57 percent of the
industrial sales category.
MEPCO's electric sales and transmission revenues from New England utilities
other than the Company amounted to $0.5 million and $4.2 million in the first
quarter of 1998 and 1997, respectively. In the earlier period MEPCO recorded
revenue and expense for power sales and purchases on behalf of other utilities,
as well as the related transmission revenues, whereas in 1998 it is recording
only the transmission revenues. Under new transmission rules in effect the
sellers and purchasers of the power transmitted by MEPCO deal directly with each
other and MEPCO provides only the transmission service.
Fuel used for company generation and purchased power-energy expense decreased by
$1.5 million and $19.6 million, respectively, compared to 1997, reflecting
decreased demand due to warmer weather and the outage associated with the ice
storm in January 1998 and a change to a less expensive purchased power energy
mix.
Purchased power-capacity expense decreased $8.8 million compared to 1997, due to
the permanent shutdown of the Maine Yankee plant, in August 1997.
Maintenance expense increased $3.8 million compared to 1997. This increase was
due primarily to operations personnel working in a maintenance capacity during
the ice storm. Operations expense decreased by approximately $3.8 million but
increased costs associated with employee pension and benefits of $1.2 million,
general expenses and outside services of $1.4 million, and transmission expense
of $1.0 million (which is directly offset in transmission revenue) netted the
decrease to reflect a minor variance in operations expense.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense increased by $2.4
million as a result of higher pre-tax earnings for the three months ended March
31, 1998, when compared to 1997.
Other Income decreased by $1.4 million in 1998 as compared to 1997 primarily due
to excess expenses over revenue associated with a non-regulated division of the
Company, which also resulted in a decrease in income tax expense on other
income.
Other interest expense increased during the first quarter of 1998 compared to
1997. The increase was due primarily to higher levels of borrowing on the
revolving credit facility to meet working capital needs.
In July 1997, the Company redeemed $14 million of its 8 7/8% Series Preferred
Stock at par, under the mandatory and optional sinking-fund provisions of that
series. This reduced dividends by approximately $300 thousand in the first
quarter of 1998 compared to 1997.
"Year 2000" Computer Issues - In the next two years, most large companies will
face a potentially serious information systems (computer) problem because most
software application and operational programs written in the past will not
properly recognize calendar dates beginning in the year 2000. This could force
computers to either shut down or lead to incorrect calculations. The Company
began the process of identifying the changes required to their computer programs
and hardware during the year 1996. The majority of the necessary modifications
to the Company's centralized financial, customer, and operational information
systems are expected to be completed by the end of 1998. The Company believes it
will incur approximately $3.0 million of costs between now and March 31, 2000,
associated with making the necessary modifications identified to date to the
centralized systems. As of March 31, 1998, approximately $1.6 million of costs
have been incurred. Noncentralized systems are currently being reviewed for Year
2000 problems. The Company is unable to predict the costs to be incurred for
correction of such noncentralized systems, but expects the scope and schedule
for such work to be less complex than for its centralized information systems.
In addition, the Company cannot predict the extent of its vulnerability to third
parties' noncompliance and their failure to remediate year 2000 issues.
Liquidity and Capital Resources
Increases in the Company's retail rates are limited by the Company's ARP. For a
discussion of the ARP, including a requested 1.78-percent rate increase to be
effective in July 1998 and the possibility of a ten-percent rate reduction
contingent on the consummation of the Company's planned sale of generating
assets later in the year, see Note 3, "Regulatory and Legislative Matters" -
"Alternative Rate Plan."
Approximately $57.5 million of cash was provided during the first quarter of
1997 from net income before non-cash items, primarily depreciation, amortization
and deferred income taxes. During that period approximately $37.5 million of
cash was used for fluctuations in certain assets and liabilities and from other
operating activities.
During the first quarter of 1998, dividends paid on common stock were $7.3
million, while preferred-stock dividends utilized $1.9 million of cash.
Investing activities, primarily construction expenditures, utilized $11.6
million in cash during the first quarter of 1998 for generation, transmission,
distribution, and general construction expenditures and includes $0.3 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 December 31, 1997, was approximately $61.7
million and as of March 31, 1998, approximately $0.7 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. On February 26, 1998, the Company called for redemption on March
30, 1998, all of the outstanding $11 million principal amount of its General and
Refunding Mortgage Bonds, Series N 8.50% Due 2001, at a redemption price equal
to their principal amount plus accrued interest to the date fixed for
redemption. On the same day the Company also called for redemption on March 30,
1998, all of the outstanding $50 million principal amount of its General and
Refunding Mortgage Bonds, Series R 7-7/8% Due 2023, also at a redemption price
equal to their principal amount plus accrued interest. The bond redemptions were
funded from the approximately $61.7 million on deposit with the trustee at
December 31, 1997, under the renewal and replacement fund and release provisions
of the Indenture. On April 30, 1998, the Company deposited $30.6 million with
the trustee under those provisions of the Indenture, making a total of $31.3
million on deposit. 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. On February 24, 1998, the Company issued a two-year
6.38% Medium-Term Note in the principal amount of $30 million, and on March 20,
1998, issued 18-month 6.35% Medium-Term Notes in the aggregate principal amount
of $30 million. As of March 31, 1998, $103 million of Medium-Term Notes were
outstanding. On April 28, 1998, the Company issued a six-month 6.10625%
Medium-Term Note in the principal amount of $47 million, raising the total
outstanding to $150 million, which would permit the issuance of an additional
$350 million of such notes under the program.
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 no
outstanding notes as of March 31, 1998 under the 364-day revolving credit
facility.
On March 25, 1998, the Company filed an application with the MPUC seeking
authorization for the purchase by the Company of up to 11 million shares of its
outstanding common stock over a three-year period. The amount of any stock
purchases and their timing will depend on the need for equity in the Company's
capital structure, investment opportunities and other considerations. The
Company has not yet adopted a formal stock-purchase plan and cannot predict
whether or when the MPUC consent will be obtained.
On April 3, 1998, the Company agreed to buy out a power-purchase contract with
the owner of a non-utility generator who had operated a 20-megawatt wood-fired
generator associated with a paper mill that was being closed. The Company paid
the owner approximately $22.5 million on May 1, 1998, and expects to save
approximately $3.5 million per year to the end of the contract's term in
mid-2004.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice storm of
unprecedented breadth and severity struck the Company's service territory,
causing power outages for approximately 280,000 of the Company's 528,000
customers, and substantial widespread damage to the Company's transmission and
distribution system. To restore its electrical system, the Company supplemented
its own crews with utility and tree-service crews from throughout the
northeastern United States and the Canadian maritime provinces, with assistance
from the Maine national guard. The Company's current estimate of the incremental
costs of the repair effort is within the range of $50 million to $55 million, of
which most of the expense was labor-related.
On January 15, 1998, the MPUC issued an Order (the "Order") allowing the Company
to defer on its books the incremental non-capital costs associated with the
Company's efforts to restore service in response to the damage resulting from
the storm. The Order requires the Company, as part of its annual filing under
the ARP, to file information on the amounts deferred under the Order and to
submit a proposal as to how the costs associated with the Order should be
recovered under the ARP. In the ARP filing the Company stated that once the
final cost of the storm was determined and the status of federal assistance was
finalized the Company would propose a plan for recovery of its costs. On May 1,
1998, President Clinton signed a Congressional appropriation bill that included
$130 million in storm-damage cost reimbursement for electric utilities in the
northeastern United States. The Company cannot predict what portion of its ice
storm-related costs it will recover from the Congressional appropriation or from
its customers.
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
reported in more condensed form below, the Plant had experienced a number of
operational and regulatory problems and has been shut down since December 6,
1996. The decision to close the Plant permanently was based on an economic
analysis of the costs, risks and uncertainties associated with operating the
Plant compared to those associated with closing and decommissioning it. The
Plant's operating license from the NRC was scheduled to expire on October 21,
2008.
Recent Operating History. The Plant provided reliable and low-cost power from
the time it commenced operations in late 1972 to 1995. Beginning in early 1995,
however, Maine Yankee encountered various operational and regulatory
difficulties with the Plant. In 1995, the Plant was shut down for almost the
entire year to repair a large number of steam generator tubes that were
exhibiting defects. Shortly before the Plant was to go back on-line in December
1995, a group with a history of opposing nuclear power released an undated,
unsigned, anonymous letter alleging that in 1988 Yankee Atomic (then an
affiliated consultant of Maine Yankee) and Maine Yankee had used the results of
a faulty computer code as a basis to apply to the NRC for an increase in the
Plant's power output. In response to the allegation, on January 3, 1996, the NRC
issued a Confirmatory Order that restricted the Plant to 90 percent of its
licensed thermal operation level, which restriction was still in effect when the
Plant was permanently shut down.
As a result of the controversy associated with the allegations, the NRC, at the
request of the Governor of Maine, conducted an intensive Independent Safety
Assessment ("ISA") of the Plant in the summer and fall of 1996. On October 7,
1996, the NRC issued its ISA report, which found that while the Plant had been
operated safely and could continue to operate, there were weaknesses that needed
to be addressed, which would require substantial additional spending by Maine
Yankee. On December 10, 1996, Maine Yankee responded to the ISA report,
acknowledged many of the weaknesses, and committed to revising its operations
and procedures to address the NRC's criticisms.
Another result of the controversy associated with the allegations was an
investigation of Maine Yankee initiated by the NRC's Office of Investigations
("OI"), which, in turn, referred certain issues to the United States Department
of Justice ("DOJ") for possible criminal prosecution. Subsequently, on September
27, 1997, the DOJ, through the United States Attorney for Maine, announced that
its review had revealed insufficient grounds for criminal prosecution. The
Company believes that the OI investigation, however, could ultimately result in
the imposition of civil penalties, including fines, on Maine Yankee and expects
resolution of outstanding NRC enforcement action in 1998.
In 1996 the Plant was generally in operation at the 90-percent level from late
January to early December, except for a two-month outage from mid-July to
mid-September. The Plant was shut down again on December 6, 1996, to address
several concerns, and has not operated since then. The precipitating event
causing the shutdown was the need to evaluate and resolve cable-separation
compliance issues, and on December 18, 1996, the NRC issued a Confirmatory
Action Letter requiring the Plant to remain shut down until Maine Yankee's plan
for resolving the cable-separation issues was accepted by the NRC. Subsequently,
Maine Yankee uncovered additional issues, including among others the possibility
of having to replace defective fuel assemblies, address additional
cable-separation issues, and determine the condition of the Plant's steam
generators, which contributed to further operational uncertainty. On January 29,
1997, the Plant was placed on the NRC's Watch List, and on January 30, 1997, the
NRC issued a supplemental Confirmatory Action Letter requiring the resolution of
additional concerns before the Plant could be restarted.
In December 1996 Maine Yankee requested proposals from several utilities with
large and successful nuclear programs to provide a management team, and
ultimately contracted with Entergy Nuclear, Inc., effective February 13, 1997,
for management services that included providing a new president and regulatory
compliance officer. The Entergy-provided management team made progress in
addressing technical issues, but a number of operational and regulatory
uncertainties remained. On May 27, 1997, the Board of Directors of Maine Yankee
voted to minimize spending while preserving the options of restarting the Plant
or conveying ownership interests to a third party. After unsuccessful
negotiations with one prospective purchaser, Maine Yankee found no other
interest in purchasing the Plant and, based on its economic analysis, closed the
Plant permanently.
As required by the NRC, on August 7, 1997, Maine Yankee certified to the NRC
that the Plant had permanently ceased operations and that all fuel assemblies
had been permanently removed from the Plant's reactor vessel. On August 27,
1997, Maine Yankee filed the required Post-Shutdown Activities Report with the
NRC, describing its planned post-shutdown activities and a proposed schedule.
Costs. The Company has been incurring substantial costs in connection with its
38-percent share of Maine Yankee costs, as well as additional costs for
replacement power while the Plant has been out of service. In 1997 such costs
amounted to approximately $132.3 million for the Company: $72.8 million due to
basic operations and maintenance costs, $54.0 million due to replacement power
costs and $5.5 million associated with incremental costs of operations and
maintenance. The Maine Yankee Board's decision to close the Plant mitigated the
costs the Company would otherwise have incurred through a phasing down of Maine
Yankee's operations and maintenance costs, with substantial reductions in Maine
Yankee's workforce having been implemented and further reductions planned, but
did not reduce the need to buy replacement energy and capacity. The Company
expects its share of Maine Yankee operations and maintenance costs to be
approximately $48 million in 1998, based on information provided by Maine
Yankee. The amount of costs for replacement energy and capacity varies based on
the Company's power requirements and market conditions, but the Company expects
such costs to be within a range of approximately $5.0 million to $5.5 million
per month during 1998, based on current energy and capacity needs and market
conditions. Under the electric utility restructuring legislation enacted by the
Maine Legislature in May 1997, the Company's obligations to provide replacement
power will terminate on March 1, 2000, along with its other power-supply
obligations. The impact of the nuclear-related costs on the Company was the
major obstacle to achieving satisfactory results in 1997, despite the
approximately $75 million in annual Maine Yankee-related costs embedded in the
current determination of the Company's required revenues for ratemaking purposes
and despite success in controlling other operating costs.
The Company's 38-percent ownership interest in Maine Yankee's common equity
amounted to $30.6 million as of March 31, 1998, and under Maine Yankee's Power
Contracts and Additional Power Contracts, the Company is responsible for 38
percent of the costs of decommissioning the Plant. Maine Yankee's most recent
estimate of the cost of decommissioning is $380.6 million, based on a 1997 study
by an independent engineering consultant, plus estimated costs of interim
spent-fuel storage of $127.6 million, for an estimated total cost of $508.2
million (in 1997 dollars). The previous estimate for decommissioning, by the
same consultant, was $316.6 million (in 1993 dollars), which resulted in
approximately $14.9 million being collected annually from Maine Yankee's
sponsors pursuant to a 1994 FERC rate order. On March 31, 1998, the balance in
the Maine Yankee decommissioning fund was $211.8 million. On November 6, 1997,
Maine Yankee submitted the new estimate (adjusted to $507.2 million) to the FERC
as part of a rate case reflecting the fact that the Plant was no longer
operating and had 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
$36.4 million per year.
On September 1, 1997, Maine Yankee estimated the sum of the future payments for
the closing, decommissioning and recovery of the remaining investment in Maine
Yankee to be approximately $930 million, of which the Company's 38-percent share
would be approximately $353 million. The legislation enacted in Maine in 1997
calling for restructuring the electric utility industry provides for recovery of
decommissioning costs, to the extent allowed by federal regulation, through the
rates charged by the transmission-and-distribution companies. Based on the
legislation and regulatory precedent established by the FERC in its opinion
relating to the decommissioning of the Yankee Atomic nuclear plant, the Company
believes that it is entitled to recover substantially all of its share of such
costs from its customers and as of March 31, 1998, is carrying on its
consolidated balance sheet a regulatory asset and a corresponding liability in
the amount of $320.2 million, which is the $353 million discussed above net of
the Company's post-September 1, 1997 cost-of-service payments to Maine Yankee.
Management Audit. On September 2, 1997, the MPUC released the report of a
consultant it had retained to perform a management audit of Maine Yankee for the
period January 1, 1994, to June 30, 1997. The report contained both positive and
negative conclusions, the latter including that Maine Yankee's decision in
December 1996 to proceed with the steps necessary to restart the Plant was
"imprudent", that Maine Yankee's May 27, 1997 decision to reduce restart
expenses while exploring a possible sale of the Plant was "inappropriate", based
on the consultant's finding that a more objective and comprehensive competitive
analysis at that time "might have indicated a benefit for restarting" the Plant,
and that those decisions resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of
Investigation initiating an investigation of the shutdown decision and of the
operation of the Plant prior to shutdown, and announced that it had directed its
consultant to extend its review to include those areas. The Company believes the
report's negative conclusions are unfounded and may be contradictory. The
Company has been charging its share of the Maine Yankee expenses to income, and
under the ARP has requested only price increases that were below the applicable
rate of inflation. The Company 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. The MPUC
subsequently stayed its investigation pending the outcome of Maine Yankee's FERC
rate case, in which the MPUC and the Maine Office of the Public Advocate ("OPA")
are actively participating, while indicating that the MPUC's consultant would
continue its extended review. Based on preliminary indications from the
consultant, the Company expects the consultant's recommendations resulting from
its extended review to call for additional disallowances, which Maine Yankee has
said it expects to contest vigorously.
Maine Yankee Debt Restructuring and FERC Rate Proceeding. Maine Yankee entered
into agreements in August 1997 with the holders of its outstanding First
Mortgage Bonds and its lender banks (the "Standstill Agreements") under which
the bondholders and banks agreed that they would not assert that the August 1997
voluntary permanent shutdown of the Plant constituted a covenant violation under
Maine Yankee's First Mortgage Indenture or its two bank credit agreements. Maine
Yankee's rate filing with the FERC requested an effective date of January 15,
1998, for the amendments to Maine Yankee's Power Contracts and Additional Power
Contracts, which revise Maine Yankee's wholesale rates and clarify and confirm
the obligations of Maine Yankee's sponsors to continue to pay their shares of
Maine Yankee's costs during the decommissioning period.
On January 14, 1998, the FERC issued an "Order Accepting for Filing and
Suspending Power Sales Contract Amendment, and Establishing Hearing Procedures"
(the "FERC Order") in which the FERC accepted for filing the rates associated
with the amended Power Contracts and made them effective January 15, 1998,
subject to refund. The FERC also granted intervention requests, denied the
request of an intervenor group to summarily dismiss part of the filing, and
ordered that a public hearing be held concerning the prudence of Maine Yankee's
decision to shut down the Plant and on the justness and reasonableness of Maine
Yankee's proposed rate amendments. The Company expects the prudence issue to be
pursued vigorously by several intervenors, including among others the MPUC and
the OPA. The hearing in the FERC rate proceeding is currently scheduled to begin
on December 1, 1998.
The Company cannot predict the outcome of the FERC proceeding.
On January 15, 1998, Maine Yankee, its bondholders and lender banks revised the
Standstill Agreements and extended their term to April 15, 1998. On April 7,
1998, Maine Yankee refunded all of its mortgage bonds and bank debt by means of
a three-year revolving credit facility with two major banks, which may be
extended by agreement of the parties, and a $48 million term loan due in 2006
from a major institutional investor, and discharged its First Mortgage
Indenture. The banks' revolving credit commitments are scheduled to be reduced
through planned prepayments, structured to conform to Maine Yankee's projected
cash flows, in two decrements from their initial level of $80 million to a
working-capital level of $20 million on March 31, 2000. The new debt obligations
are secured by a security interest in Maine Yankee's rights in its Power
Contracts, Additional Power Contracts and Capital Funds Agreements with its
Sponsors (the "Assigned Agreements") and its rights to certain expected
third-party payments, and contain restrictions on the payment of common-stock
dividends, based on Maine Yankee's cash position and a debt-service coverage
test. In addition, in connection with the refinancing each of the Sponsors,
including the Company, affirmed its obligations under the Assigned Agreements
and agreed not to take the position that the permanent shutdown of the Plant
gave rise to any right to terminate or reduce payments under the Assigned
Agreements.
Other Maine Yankee Shareholders: Higher nuclear-related costs are also affecting
other stockholders of Maine Yankee in varying degrees. Bangor Hydro-Electric
Company, a Maine-based 7-percent stockholder, cited its "deteriorating"
financial condition, suspended its common stock dividend, and eventually
obtained rate relief. Maine Public Service Company, a 5-percent stockholder,
cited problems in satisfying financial covenants in loan documents, reduced its
common stock dividend substantially in early March 1997 and obtained rate
relief. Northeast Utilities (20-percent stockholder through three subsidiaries),
which is also adversely affected by the substantial additional costs associated
with the three shut-down Millstone nuclear units and the permanently shut-down
Connecticut Yankee unit, as well as significant regulatory issues in Connecticut
and New Hampshire, has implemented an indefinite suspension of its quarterly
common stock dividends. 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. 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.
Rating Agency Actions
On February 20, 1998, Duff & Phelps Credit Rating Co. ("D & P") reaffirmed and
placed on Rating Watch - Up the debt ratings of the Company. On January 6, 1998,
Standard & Poor's Corp. ("S & P") placed the Company's credit ratings on Credit
Watch with positive implications. Also on January 6, 1998, Moody's Investors
Service ("Moody's") confirmed the Company's senior secured debt rating, while
also revising the rating outlook to stable from negative. The credit rating
agencies' actions were in response to the Company's announcement of its
agreement to sell its generation assets to FPL Group, Inc. and its plan for
divestiture. The current ratings assigned the Company's securities by the three
major securities-rating agencies are shown below:
Mortgage Unsecured Commercial Preferred
Bonds Notes Paper Stock
S&P BB+ BB B B+
Moody's Baa3 Ba1 P3 Ba1
D&P BBB- BB+ D3 BB
Restructuring Legislation and MPUC Proceeding The 1997 Maine restructuring
legislation requires the MPUC, when retail access begins, to provide a
"reasonable opportunity" to recover stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. 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. The MPUC has initiated the proceeding that will determine the Company's
stranded costs, corresponding revenue requirements and stranded-cost charges to
be charged by it when it becomes a transmission-and-distribution utility, and
has scheduled completion of the proceeding for the second half of 1998. On
December 5, 1997, the Company filed direct testimony in the proceeding
estimating its future revenue requirements as a transmission-and-distribution
utility and providing an estimate of its strandable costs, which are to be
defined by the MPUC later in the proceeding. The Company estimated its
strandable costs at approximately $1.3 billion and explained the assumptions
underlying the estimate. On February 10, 1998, the Company reduced its estimate
of strandable costs to $0.8 billion to reflect the anticipated sale of its
generating assets later in the year. The Company cannot predict the results of
the MPUC proceeding.
Recovery of nuclear-plant decommissioning costs as required by federal law, rule
or order, will be funded through transmission-and-distribution utility rates and
charges. 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.
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.
<PAGE>
Agreement for Sale of Company's Generation Assets
On April 28, 1997, the Company announced a plan to seek proposals to purchase
its generating assets and, as part of an auction process, received final bids on
December 10, 1997. On January 6, 1998, the Company announced that it had reached
agreement to sell all of its hydro, fossil and biomass power plants with a
combined generating capacity of 1,185 megawatts for $846 million in cash,
including $18 million for assets sold by Union Water Power Company, a subsidiary
of the Company, to Florida-based FPL Group, the winning bidder in the auction
process.
The Company's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone Unit No. 3 nuclear
generating unit in Waterford, Connecticut, its 3.59-percent interest in the
output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and
its entitlement in the NEPOOL Phase II interconnection with Hydro-Quebec all
attracted insufficient interest to be included in the present sale. The Company
will continue to seek buyers for those assets. The Company did not offer for
sale its interests in the Maine Yankee (Wiscasset, Maine), Connecticut Yankee
(Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear generating
plants, all of which are in the process of being decommissioned. In addition, as
part of its agreement with FPL Group, the Company entered into energy buy-back
agreements to assist in fulfilling its obligation to supply its customers with
power until March 1, 2000.
Substantially all of the generating assets included in the sale are subject to
the lien of the Company's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited with the trustee under the Indenture at the closing
of the sale to free the generating assets from the lien of the Indenture.
Proceeds on deposit with the trustee may be used by the Company to redeem or
repurchase bonds under the terms of the Indenture, including the possible
discharge of the Indenture. In addition, the proceeds could provide the
flexibility to redeem or repurchase outstanding equity securities. The Company
must also provide for payment of applicable taxes resulting from the sale. The
manner and timing of the ultimate application of the sale proceeds after closing
are in any event subject to various factors, including Indenture provisions,
market conditions and terms of outstanding securities.
The bid value in excess of the remaining investment in the power plants will
reduce the Company's stranded costs and other costs, which could lower the
amount that would otherwise be collected from customers by nearly half a billion
dollars. However, the Company will incur incremental costs as a result of the
power buy-back arrangements in excess of the pre-sale costs of capacity and
energy from the plants being sold, which will effectively lower the amount of
sale proceeds available to reduce stranded and other costs. The Company believes
that the reduction in stranded and other costs could permit a reduction in rates
for the Company's customers.
The sale is subject to various closing conditions, including the approval of
state and federal regulatory agencies, which approval process the Company
expects could extend into the last quarter of 1998, and is subject to consents
or covenant waivers from certain of the Company's lenders. The Company is
pursuing the necessary regulatory approvals, consents and waivers, but cannot
predict whether or in what form they will be obtained.
The Company believes that consummation of the asset sale described above would
constitute significant progress in resolving some of the uncertainties regarding
the effects of electric-utility industry restructuring on the Company's
investors; however, significant risks and uncertainties would remain. These
include, in addition to those enumerated above under "Note Re Forward-Looking
Statements," but are not limited to: (1) the possibility that a state or federal
regulatory agency will impose adverse conditions on its approval of the asset
sale; (2) the possibility that new state or federal legislation will be
implemented that will increase the risks to such investors from those
contemplated by current legislation; and (3) the possibility of legislative,
regulatory or judicial decisions that would reduce the ability of the Company to
recover its stranded costs from that contemplated by existing law.
Proposed Formation of Holding Company
To prepare further for the restructured electric utility industry contemplated
by the legislation, on December 8, 1997, the Company filed an application with
the MPUC for authorization to create a holding company that would have as
subsidiaries the Company, the Company's existing non-utility subsidiaries and
other entities. The Company believes that a holding company structure will
facilitate the Company's transition to a partially deregulated electricity
market that is scheduled to open access to electricity for Maine consumers
beginning on March 1, 2000. Competing as an electric energy provider in that
market as of that date will require the creation of an energy company that is
legally separate from the Company. The Company also proposed the creation of an
energy marketing affiliate in the MPUC filing.
On May 1, 1998, the MPUC approved the creation of the holding company, the
conversion and exchange of all the outstanding shares of the Company's common
stock into an equal number of shares of the holding company's common stock, the
transfer of the stock of certain wholly-owned non-utility subsidiaries of the
Company to the holding company, and other related requests of the Company
necessary to carry out the reorganization. The MPUC granted the approvals
subject to several conditions that the Company believes are reasonable. The
creation of an energy marketing affiliate of the Company and related issues were
deferred earlier in the proceeding to a second phase of the proceeding.
The Company's application to the MPUC also requested approval of the creation of
a limited liability company in which a proposed new subsidiary of the holding
company would hold a fifty percent membership interest to participate in the
natural gas distribution business in Maine, with the remaining fifty percent
interest being held by New York State Electric & Gas Corporation ("NYSEG") or
its affiliate. On May 1, 1998, in a separate proceeding, the MPUC also approved
the creation of the proposed limited-liability company and natural-gas
subsidiary, and associated transactions and arrangements, subject to conditions
that the Company considers reasonable. For further discussion of the NYSEG joint
venture, see "Expansion of Lines of Business," below.
The proposed holding company formation must also be approved by federal
regulators, including the Securities and Exchange Commission and the FERC, and
by the holders of the Company's common stock and 6% Preferred Stock, who will
vote on the reorganization at the Company's annual meeting of shareholders on
May 21, 1998. The Company is pursuing these approvals, but cannot predict the
outcome.
Expansion of Lines of Business
The Company is preparing for competition by expanding its business opportunities
through subsidiaries that capitalize on core competencies. One subsidiary,
MaineCom Services, arranges fiber-optic data service for bulk carriers, offering
support for cable television or "super-cellular" personal communication vendors,
and providing other telecommunications consulting services. TeleSmart is a
wholly-owned credit and collections subsidiary. Another wholly-owned subsidiary,
CMP International Consultants, provides utility consulting (domestic and
international) and research, and engineering and environmental services. The
100-percent owned Union Water Power Company provides management of rivers and
recreational facilities, locating of underground utility facilities and infrared
photography, real estate brokerage and management, modular housing, and utility
construction services. These subsidiaries, which the Company plans to transfer
to the proposed holding company, often utilize skills of former Company
employees and regularly compete for business with other companies. In addition,
a division of the Company is focusing on retail competition by developing
effective marketing techniques and energy-efficient services and products.
As noted above, the Company and NYSEG have signed a joint-venture agreement to
distribute natural gas at retail in many Maine communities that are not
currently served with that fuel. The Company and NYSEG propose to offer
natural-gas service in five areas of Maine, primarily the Augusta, Bangor,
Bath-Brunswick, Rumford and Waterville areas. None of the 60 towns in those
areas currently has a natural-gas distribution system in place. The gas would be
drawn from two new gas-pipeline projects now under development by unrelated
parties that would carry Canadian gas, after receipt of additional regulatory
approvals, through Maine and into the regional energy market using substantial
portions of electric transmission-line corridors owned by the Company and MEPCO
under agreements entered into on March 16, 1998. On March 9, 1998, the MPUC gave
preliminary approval to the Company-NYSEG proposal, subject to final approval
after submission of detailed plans on financing, construction, and other
matters. Competing applications to serve some of the areas have been filed. The
Company cannot predict the outcome of the MPUC proceeding. The Company will
continue to evaluate the opportunity to be a provider of natural gas to Maine
customers, and the economics thereof, including monitoring progress of the
planned pipelines, competitive considerations and relevant regulatory decisions.
FiveCom LLC ("FiveCom"), a majority-owned subsidiary of the Company's
wholly-owned MaineCom Services, is building a fiber-optic cable network
connecting cities in New England and plans to sell capacity on the network to
telephone companies, Internet providers, and other telecommunications
businesses. FiveCom has used transmission-line corridors owned by the Company,
and a substantial part of the expanded network in Connecticut and Massachusetts
will occupy utility corridors of Northeast Utilities, which owns a minority
interest in FiveCom. The Company's equity investment in MaineCom Services as of
March 31, 1998 was $15.6 million. In addition, the Company is providing up to
$30 million to FiveCom through a loan arrangement for the development and
construction of the expanded network, and for working capital, and FiveCom is
considering external funding. The Company believes there is a growing need for
such a fiber-optic network in New England, but cannot predict the results of
this venture.
Environmental Matters
The Company assesses compliance with laws and regulations related to hazardous
substance remediation on an ongoing basis. At March 31, 1998, 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 2, "Commitments and
Contingencies." - "Legal and Environmental Matters" for further discussion of
this matter.
<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 defendants moved to dismiss the suit for failure of the plaintiff to make a
pre-suit demand on the Company's board of directors, as required by Maine law,
and on February 18, 1998, the suit was dismissed. On April 2, 1998, the Company
received such a demand from the plaintiff, which is under consideration by the
board. The Company believes the plaintiff's claim is without merit.
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, as well as
electric-utility restructuring, stranded costs, and an MPUC proceeding that will
determine the Company's stranded costs and related matters , see Item 2 of Part
I, "Management's Discussion and Analysis of Financial Condition and Results of
Operation" - "Permanent Shutdown of Maine Yankee Plant" and "Restructuring
Legislation and MPUC Proceeding," 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
2, "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 first quarter of 1998 and thereafter to date:
Date of Report Items Reported
January 6, 1998 Item 5
a) The Company announced that it had reached agreement to sell all of its
hydro, fossil and biomass power plants with a combined generating capacity
of 1,185 megawatts to Florida-based FPL Group.
Date of Report Items Reported
January 14, 1998 Item 5
a) The Company reported the storm damage due to an ice storm on January 7
through 9, 1998.
b) The Company reported the status of Maine Yankee's standstill agreements
with its lender banks and its bondholders.
Date of Report Items Reported
January 30, 1998 Item 5
a) The Company reported its 1997 financial results.
<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: May 14, 1998 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>
<ARTICLE> UT
<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 entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> Per-Book
<TOTAL-NET-UTILITY-PLANT> 1,053,587
<OTHER-PROPERTY-AND-INVEST> 78,339
<TOTAL-CURRENT-ASSETS> 185,510
<TOTAL-DEFERRED-CHARGES> 925,207
<OTHER-ASSETS> 17,169
<TOTAL-ASSETS> 2,259,812
<COMMON> 161,849
<CAPITAL-SURPLUS-PAID-IN> 277,203
<RETAINED-EARNINGS> 57,276
<TOTAL-COMMON-STOCKHOLDERS-EQ> 496,328
39,528
65,571
<LONG-TERM-DEBT-NET> 309,971
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
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<LONG-TERM-DEBT-CURRENT-PORT> 236,075
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<CAPITAL-LEASE-OBLIGATIONS> 32,345
<LEASES-CURRENT> 1,738
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,071,256
<TOT-CAPITALIZATION-AND-LIAB> 2,259,812
<GROSS-OPERATING-REVENUE> 934,554
<INCOME-TAX-EXPENSE> 9,836
<OTHER-OPERATING-EXPENSES> 864,016
<TOTAL-OPERATING-EXPENSES> 873,852
<OPERATING-INCOME-LOSS> 66,653
<OTHER-INCOME-NET> 899
<INCOME-BEFORE-INTEREST-EXPEN> 67,552
<TOTAL-INTEREST-EXPENSE> 51,862
<NET-INCOME> 15,690
7,898
<EARNINGS-AVAILABLE-FOR-COMM> 7,792
<COMMON-STOCK-DIVIDENDS> 7,305
<TOTAL-INTEREST-ON-BONDS> 7,432
<CASH-FLOW-OPERATIONS> 20,004
<EPS-PRIMARY> .51
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