UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended September 30, 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 Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
(Number applied for) CMP GROUP, INC. 01-0519429
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
1-5139 CENTRAL MAINE POWER COMPANY 01-0042740
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
the filing requirements for at least the past 90 days.
CMP Group, Inc.: Yes as to (1); No as to (2)
Central Maine Power Company: Yes X No
This combined Form 10-Q is separately filed by CMP Group, Inc., and Central
Maine Power Company. Information contained herein relating to either individual
registrant is filed by such registrant on its own behalf. Each registrant makes
no representation as to information relating to the other registrant.
As of November 9, 1998, the number of shares of Common Stock outstanding for
each registrant were as follows:
Registrant Shares
CMP Group, Inc., Common Stock, $5 Par Value 32,442,552
Central Maine Power Company, Common Stock, $5 Par Value (All
held by CMP Group, Inc.) 31,211,461
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Table of Contents
Page
Number
Glossary 1
Part I. Financial Information
Item 1 - Consolidated Financial Statements
CMP Group, Inc.
Consolidated Statement of Earnings for the Three Months
Ended September 30, 1998 and 1997 4
Consolidated Statement of Earnings for the Nine Months
Ended September 30, 1998 and 1997 5
Consolidated Balance Sheet - September 30, 1998 and December 31, 1997:
Assets 6
Stockholders' Investment and Liabilities 7
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 8
Central Maine Power Company
Consolidated Statement of Earnings for the Three Months
Ended September 30, 1998 and 1997 9
Consolidated Statement of Earnings for the Nine Months
Ended September 30, 1998 and 1997 10
Consolidated Balance Sheet - September 30, 1998 and December 31, 1997:
Assets 11
Stockholders' Investment and Liabilities 12
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 13
Notes to Consolidated Financial Statements 14
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 43
Part II. Other Information 44
Signatures 46
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GLOSSARY
The following abbreviations or acronyms are used in the text of this Form 10-Q
as defined below:
Term Definition
Form 10-K Annual Report on Form 10-K
ARP Alternative Rate Plan
APB Accounting Principles Board
Assigned Agreements Maine Yankee's Power Contracts,
Additional Power Contracts and Capital Funds
Agreements, as amended, with its Sponsors.
Central Maine Central Maine Power Company, a regulated electric
utility and subsidiary of CMP Group.
Central Securities Central Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
CMP Group CMP Group, Inc., is the newly formed
holding company which owns all of the common
stock of Central Maine Power Company, Union Water
Power Company, MaineCom Services, CNEX,
MainePower, TeleSmart and New England Gas
Development.
CMP Group System CMP Group and its wholly-owned and directly
and indirectly controlled subsidiaries.
CMP Natural Gas CMP Natural Gas, L.L.C., a
limited-liability corporation owned by a
subsidiary of CMP Group and Energy East to
distribute natural gas in Maine.
CNEX A wholly owned subsidiary of CMP Group,
(previously called CMP International
Consultants), which provides utility consulting
(domestic and international) and research.
Cumberland Securities Cumberland Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
Connecticut Yankee Connecticut Yankee Atomic Power Company
D&P Duff & Phelps Credit Rating Co.
DOJ United States Department of Justice
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Glossary (continued)
Term Definition
EITF Emerging Issues Task Force
Energy East Energy East Corporation, the parent company of NYSEG effective
May 1, 1998
EPS Earnings per share
ERAM Electric Revenue Adjustment Mechanism
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Indenture General and Refunding Mortgage Indenture between Central Maine
and State Street Bank and Trust Company, Trustee, dated as of
April 15, 1976, as amended and supplemented.
IPO Initial Public Offering
IRS United States Internal Revenue Service
ISA Independent Safety Assessment conducted by the NRC
ISO Independent System Operator
Kwh Kilowatt-hour
MaineCom MaineCom Services, a CMP Group subsidiary which
arranges fiber-optic data service for bulk
carriers.
MainePower A wholly owned energy-marketing subsidiary of CMP Group
created in September 1998.
MEPCO Maine Electric Power Company, Inc., a 78-percent
owned subsidiary of Central Maine which owns a
345-KV transmission line from Wiscasset, Maine,
to New Brunswick, Canada.
Moody's Moody's Investors Service
MPUC Maine Public Utilities Commission
Maine Yankee Maine Yankee Atomic Power Company, a 38-percent owned subsidiary
of Central Maine.
<PAGE>
Glossary (continued)
Term Definition
NEON Northeast Optic Network, Inc., a 38.5-percent
owned subsidiary of MaineCom that is building a
fiber optic network in New England and New York.
NEPOOL New England Power Pool
NERC North American Electric Reliability Council
NPCC Northeast Power Coordinating Council
NRC United States Nuclear Regulatory Commission
NYSEG New York State Electric & Gas Corporation, a utility
subsidiary of Energy East.
NUG Non-utility generator
New England Gas Development New England Gas
Development Corporation, a wholly owned
subsidiary of CMP Group created in September 1998
to hold a 50-percent ownership interest in CMP
Natural Gas.
OI Nuclear Regulatory Commission's Office of Investigations
OPA Maine Office of the Public Advocate
Plant Maine Yankee nuclear generating plant at Wiscasset, Maine
S&P Standard & Poor's Corp.
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Standstill Agreements Agreements initially entered into in
August 1997 by Maine Yankee with the holders of
its outstanding First Mortgage Bonds and its
lender banks.
Telesmart A wholly owned subsidiary of CMP Group which
provides accounts receivable management.
Union Water Union Water Power Company, a wholly owned subsidiary of CMP
Group.
Yankee Atomic Yankee Atomic Electric Company
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of CMP Group, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheet as of September 30, 1998, and the Consolidated Statement of Income and
Consolidated Cash Flows for the periods ended September 30, 1998 and 1997. CMP
Group is the parent holding company of Central Maine, Union Water, MainePower,
MaineCom and CNEX. Central Maine constitutes substantially all of CMP Group's
assets, revenues and expenses. All nonutility operating transactions are
included in other revenues and operating expenses in CMP Group's Consolidated
Statement of Income.
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CMP Group, Inc.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Three Months
Ended September 30,
1998 1997
Electric Operating Revenues ................................. $ 234,056 $ 226,134
Other Non-Utility Revenues .................................. 2,875 202
Total Revenues ...................................... 236,931 226,336
Operating Expenses
Fuel used for company generation ....................... 10,393 10,105
Purchased power - energy ............................... 89,238 100,656
Purchased power - capacity ............................. 22,617 29,300
Other operation ........................................ 55,037 52,268
Maintenance ............................................ 11,441 8,729
Depreciation and amortization .......................... 14,057 13,536
Federal and state income taxes ......................... 6,295 (1,562)
Taxes other than income taxes .......................... 7,680 7,210
Total Operating Expenses .................................... 216,758 220,242
Equity In Earnings Of Associated Companies .................. (741) 1,040
Operating Income ............................................ 19,432 7,134
Other Income (Expense)
Allowance for equity funds used during construction .... 179 309
Other, net ............................................. 18,774 692
Income taxes ........................................... (7,299) (363)
Total Other Income .................................. 11,654 638
Income Before Interest Charges .............................. 31,086 7,772
Interest Charges
Long-term debt ......................................... 10,247 10,930
Other interest ......................................... 2,612 2,892
Allowance for borrowed funds used during construction .. (132) (205)
Total Interest Charges .............................. 12,727 13,617
Dividends On Preferred Stock of Subsidiary .................. 919 1,897
Net Income (Loss) ........................................... $ 17,440 $ (7,742)
Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,687 32,442,752
Earnings (Loss) Per Share Of Common Stock (Basic and Diluted) $ 0.54 $ (0.24)
Dividends Declared Per Share Of Common Stock ................ $ 0.225 $ 0.225
The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc.
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Nine Months
Ended September 30,
1998 1997
Electric Operating Revenues ................................. $ 691,017 $ 704,575
Other Non-Utility Revenues .................................. 4,586 1,363
Total Revenues ...................................... 695,603 705,938
Operating Expenses
Fuel used for company generation ....................... 22,374 22,631
Purchased power - energy ............................... 279,002 319,430
Purchased power - capacity ............................. 68,079 89,244
Other operation ........................................ 152,990 147,010
Maintenance ............................................ 30,120 23,373
Depreciation and amortization .......................... 41,687 40,530
Federal and state income taxes ......................... 18,593 4,179
Taxes other than income taxes .......................... 20,721 21,296
Total Operating Expenses .................................... 633,566 667,693
Equity In Earnings Of Associated Companies .................. 1,007 5,084
Operating Income ............................................ 63,044 43,329
Other Income (Expense)
Allowance for equity funds used during construction .... 468 811
Other, net ............................................. 20,380 2,471
Income taxes ........................................... (7,538) (1,070)
Total Other Income .................................. 13,310 2,212
Income Before Interest Charges .............................. 76,354 45,541
Interest Charges
Long-term debt ......................................... 31,746 33,272
Other interest ......................................... 6,639 5,193
Allowance for borrowed funds used during construction .. (331) (567)
Total Interest Charges .............................. 38,054 37,898
Dividends On Preferred Stock of Subsidiary .................. 3,890 6,312
Net Income .................................................. $ 34,410 $ 1,331
Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,730 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) ...... $ 1.06 $ 0.04
Dividends Declared Per Share Of Common Stock ................ $ 0.675 $ 0.675
The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Electric Property, at original cost ............................................ $1,729,061 $1,674,876
Less: Accumulated Depreciation ............................................. 672,310 634,384
Net electric property in service ..................................... 1,056,751 1,040,492
Construction work in progress .............................................. 17,385 15,105
Net nuclear fuel ........................................................... 1,009 1,157
Net electric property and nuclear fuel ............................... 1,075,145 1,056,754
Investments In and Loans to Associated Companies, at equity .................... 76,864 76,509
Total Net Electric Property and Investments in Associated Companies
1,152,009 1,133,263
Current Assets
Cash and cash equivalents .................................................. 19,298 20,841
Accounts receivable, less allowances for uncollectible accounts of $3,067 in
1998 and $2,450 in 1997:
Service - billed ........................................................ 69,172 84,323
Service - unbilled ...................................................... 43,636 46,807
Other accounts receivable ............................................... 20,455 15,247
Prepaid income taxes ....................................................... 444 --
Fuel oil inventory, at average cost ........................................ 7,111 5,390
Materials and supplies, at average cost .................................... 13,078 11,779
Funds on deposit with trustee .............................................. -- 61,694
Prepayments and other current assets ....................................... 16,827 9,110
Total Current Assets ................................................. 190,021 255,191
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net ................ 79,911 84,026
Yankee Atomic purchased-power contract ..................................... 9,970 13,056
Connecticut Yankee purchased-power contract ................................ 33,115 36,877
Maine Yankee purchased-power contract ...................................... 297,406 329,206
Regulatory assets - deferred taxes ......................................... 235,826 236,632
Deferred charges and other assets .......................................... 273,663 210,715
Total Deferred Charges and Other Assets .............................. 929,891 910,512
TOTAL ASSETS .................................................... $2,271,921 $2,298,966
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The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, December 31,
1998 1997
(Unaudited)
STOCKHOLDERS' INVESTMENTS AND LIABILITIES
Capitalization
Common-stock investment ................................. $ 507,705 $ 487,594
Preferred stock of subsidiary ........................... 35,571 65,571
Redeemable preferred stock of subsidiary ................ 27,910 39,528
Long-term obligations ................................... 297,198 400,923
Total Capitalization ................................. 868,384 993,616
Current Liabilities and Interim Financing
Interim financing ....................................... 363,374 238,000
Sinking-fund requirements ............................... 9,852 9,411
Accounts payable ........................................ 72,718 97,080
Dividends payable ....................................... 8,224 9,202
Accrued interest ........................................ 7,344 11,201
Accrued income taxes .................................... 6,035 3,001
Miscellaneous current liabilities ....................... 25,792 15,762
Total Current Liabilities and Interim Financing ...... 493,339 383,657
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes ....................... 379,940 350,912
Unamortized investment tax credits ...................... 29,431 30,533
Yankee Atomic purchased-power contract .................. 9,970 13,056
Connecticut Yankee purchased-power contract ............. 33,115 36,877
Maine Yankee purchased-power contract ................... 297,406 329,206
Regulatory liabilities - deferred taxes ................. 56,951 56,852
Other reserves and deferred credits ..................... 103,385 104,257
Total Reserves and Deferred Credits .................. 910,198 921,693
Total Stockholders' Investment and Liabilities ....... $2,271,921 $2,298,966
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The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
For the Nine Months
Ended September 30,
1998 1997
Operating Activities
Net income $34,410 $ 1,331
Items not requiring (providing) cash:
Depreciation 34,957 33,078
Amortization 28,907 25,631
Deferred income taxes and investment tax credits, net 20,107 871
Allowance for equity funds used during construction (468) (811)
Preferred stock dividends of subsidiary 3,890 6,312
Gain on sale of investments and properties (19,108) -
Changes in certain assets and liabilities:
Accounts receivable 13,114 28,182
Inventories (3,020) 6,495
Other current assets (7,717) (4,951)
Accounts payable (22,240) (7,991)
Accrued/prepaid taxes and interest (1,267) (5,177)
Miscellaneous current liabilities 10,030 (10,283)
Deferred energy-management costs (1,583) (497)
Maine Yankee outage accrual - (10,350)
Deferred ice storm costs (51,923) -
Restructuring of purchased power contracts (22,500) -
Other, net 7,169 9,621
Net Cash Provided by Operating Activities 22,758 71,461
Investing Activities
Construction expenditures (27,700) (29,690)
Investments in and loans to affiliates (17,800) (4,915)
Repayment of loan by affiliate 17,800 -
Changes in accounts payable - investing activities (2,122) (4,655)
Proceeds from sale of investments and properties 21,347 -
Net Cash Used by Investing Activities (8,475) (39,260)
Financing Activities
Issuances:
Revolving credit agreement 10,100 42,500
Medium-term notes 187,000 -
Redemptions:
Preferred stock (48,619) (14,000)
Medium-term notes (18,000) (25,000)
Mortgage bonds (177,283) -
Short-term obligations (154) -
Other long-term obligations (2,970) (595)
Funds on deposit with trustee 61,694 (2,182)
Treasury Stock (811) -
Dividends:
Common stock (21,915) (21,915)
Preferred stock of subsidiary (4,868) (6,623)
Net Cash Used by Financing Activities (15,826) (27,815)
Net Increase (Decrease) in Cash (1,543) 4,386
Cash and cash equivalents, beginning of period 20,841 8,307
Cash and cash equivalents, end of period $19,298 $12,693
The accompanying notes are an integral part of these financial statements.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of Central Maine, the unaudited financial statements included
herein reflect all adjustments necessary to present fairly the Consolidated
Balance Sheet as of September 30, 1998, and the Consolidated Statement of Income
and Consolidated Cash Flows for the periods ended September 30, 1998 and 1997.
Central Maine's consolidated financial statements include the accounts of
Central Maine and its wholly owned and controlled subsidiaries. All nonutility
operating transactions are included in other revenues and operating expenses in
Central Maine's Consolidated Statement of Income.
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Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Three Months
Ended September 30,
1998 1997
Electric Operating Revenues ................................. $ 234,027 $ 226,134
Other Non-Utility Revenues .................................. 711 202
Total Revenues ...................................... 234,738 226,336
Operating Expenses
Fuel used for company generation ....................... 10,393 10,105
Purchased power - energy ............................... 89,238 100,656
Purchased power - capacity ............................. 22,617 29,300
Other operation ........................................ 53,565 52,268
Maintenance ............................................ 11,421 8,729
Depreciation and amortization .......................... 13,985 13,536
Federal and state income taxes ......................... 6,073 (1,562)
Taxes other than income taxes .......................... 7,668 7,210
Total Operating Expenses .................................... 214,960 220,242
Equity In Earnings Of Associated Companies .................. 67 1,040
Operating Income ............................................ 19,845 7,134
Other Income (Expense)
Allowance for equity funds used during construction .... 179 309
Other, net ............................................. 9,244 692
Income taxes ........................................... (3,417) (363)
Total Other Income .................................. 6,006 638
Income Before Interest Charges .............................. 25,851 7,772
Interest Charges
Long-term debt ......................................... 10,237 10,930
Other interest ......................................... 2,611 2,892
Allowance for borrowed funds used during construction .. (132) (205)
Total Interest Charges .............................. 12,716 13,617
Net Income (Loss) ........................................... 13,135 (5,845)
Dividends On Preferred Stock ................................ 919 1,897
Earnings (Loss) Applicable To Common Stock .................. $ 12,216 $ (7,742)
Weighted Average Number Of Shares Of Common Stock Outstanding 32,367,201 32,442,752
Earnings (Loss) Per Share Of Common Stock (Basic and Diluted) $ 0.38 $ (0.24)
Dividends Declared Per Share Of Common Stock ................ $ 0.000 $ 0.225
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
For the Nine Months
Ended September 30,
1998 1997
Electric Operating Revenues ................................. $ 690,988 $ 704,575
Other Non-Utility Revenues .................................. 2,422 1,363
Total Revenues ...................................... 693,410 705,938
Operating Expenses
Fuel used for company generation ....................... 22,374 22,631
Purchased power - energy ............................... 279,002 319,430
Purchased power - capacity ............................. 68,079 89,244
Other operation ........................................ 151,518 147,010
Maintenance ............................................ 30,100 23,373
Depreciation and amortization .......................... 41,615 40,530
Federal and state income taxes ......................... 18,371 4,179
Taxes other than income taxes .......................... 20,709 21,296
Total Operating Expenses .................................... 631,768 667,693
Equity In Earnings Of Associated Companies .................. 1,815 5,084
Operating Income ............................................ 63,457 43,329
Other Income (Expense)
Allowance for equity funds used during construction .... 468 811
Other, net ............................................. 10,850 2,471
Income taxes ........................................... (3,656) (1,070)
Total Other Income .................................. 7,662 2,212
Income Before Interest Charges .............................. 71,119 45,541
Interest Charges
Long-term debt ......................................... 31,736 33,272
Other interest ......................................... 6,638 5,193
Allowance for borrowed funds used during construction .. (331) (567)
Total Interest Charges .............................. 38,043 37,898
Net Income .................................................. 33,076 7,643
Dividends On Preferred Stock ................................ 3,890 6,312
Earnings Applicable To Common Stock ......................... $ 29,186 $ 1,331
Weighted Average Number Of Shares Of Common Stock Outstanding 32,417,292 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) ...... $ 0.90 $ 0.04
Dividends Declared Per Share Of Common Stock ................ $ 0.450 $ 0.675
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Electric Property, at original cost ............................................ $1,729,032 $1,674,876
Less: Accumulated Depreciation ............................................. 672,304 634,384
Net electric property in service ..................................... 1,056,728 1,040,492
Construction work in progress .............................................. 16,397 15,105
Net nuclear fuel ........................................................... 1,009 1,157
Net electric property and nuclear fuel ............................... 1,074,134 1,056,754
Investments In and Loans to Associated Companies, at equity .................... 52,291 76,509
Total Net Electric Property and Investments in Associated Companies
1,126,425 1,133,263
Current Assets
Cash and cash equivalents .................................................. 6,232 20,841
Accounts receivable, less allowances for uncollectible accounts of $3,067 in
1998 and $2,450 in 1997:
Service - billed ........................................................ 69,123 84,323
Service - unbilled ...................................................... 43,451 46,807
Other accounts receivable ............................................... 15,853 15,247
Prepaid income taxes ....................................................... 411 --
Fuel oil inventory, at average cost ........................................ 7,111 5,390
Materials and supplies, at average cost .................................... 12,761 11,779
Funds on deposit with trustee .............................................. -- 61,694
Prepayments and other current assets ....................................... 16,890 9,110
Total Current Assets ................................................. 171,832 255,191
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net ................ 79,911 84,026
Yankee Atomic purchased-power contract ..................................... 9,970 13,056
Connecticut Yankee purchased-power contract ................................ 33,115 36,877
Maine Yankee purchased-power contract ...................................... 297,406 329,206
Regulatory assets - deferred taxes ......................................... 235,826 236,632
Deferred charges and other assets .......................................... 269,745 210,715
Total Deferred Charges and Other Assets .............................. 925,973 910,512
TOTAL ASSETS .................................................... $2,224,230 $2,298,966
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The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
September 30, December 31,
1998 1997
(Unaudited)
STOCKHOLDERS' INVESTMENTS AND LIABILITIES
Capitalization
Common-stock investment ................................. $ 482,178 $ 487,594
Preferred stock ......................................... 35,571 65,571
Redeemable preferred stock .............................. 27,910 39,528
Long-term obligations ................................... 294,645 400,923
Total Capitalization ................................. 840,304 993,616
Current Liabilities and Interim Financing
Interim financing ....................................... 363,183 238,000
Sinking-fund requirements ............................... 9,852 9,411
Accounts payable ........................................ 73,276 97,080
Dividends payable ....................................... 924 9,202
Accrued interest ........................................ 7,344 11,201
Accrued income taxes .................................... 3,054 3,001
Miscellaneous current liabilities ....................... 25,354 15,762
Total Current Liabilities and Interim Financing ...... 482,987 383,657
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes ....................... 375,670 350,912
Unamortized investment tax credits ...................... 29,431 30,533
Yankee Atomic purchased-power contract .................. 9,970 13,056
Connecticut Yankee purchased-power contract ............. 33,115 36,877
Maine Yankee purchased-power contract ................... 297,406 329,206
Regulatory liabilities - deferred taxes ................. 56,951 56,852
Other reserves and deferred credits ..................... 98,396 104,257
Total Reserves and Deferred Credits .................. 900,939 921,693
Total Stockholders' Investment and Liabilities ....... $2,224,230 $2,298,966
</TABLE>
The accompanying notes are an integral part of these financial statements.
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Central Maine Power Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in Thousands
For the Nine Months
Ended September 30,
1998 1997
Operating Activities
Net income .............................................. $ 33,076 $ 7,643
Items not requiring (providing) cash:
Depreciation ........................................ 34,957 33,078
Amortization ........................................ 28,903 25,631
Deferred income taxes and investment tax credits, net 21,883 871
Allowance for equity funds used during construction . (468) (811)
Gain on Sale of Investments and Properties .............. (9,545) --
Changes in certain assets and liabilities:
Accounts receivable ................................. 17,950 28,182
Inventories ......................................... (2,703) 6,495
Other current assets ................................ (7,780) (4,951)
Accounts payable .................................... (21,682) (7,991)
Accrued/prepaid taxes and interest .................. (4,215) (5,177)
Miscellaneous current liabilities ................... 9,592 (10,283)
Deferred energy-management costs .................... (1,583) (497)
Maine Yankee outage accrual ......................... -- (10,350)
Deferred ice storm costs ............................ (51,923) --
Restructuring of purchased power contracts .......... (22,500) --
Other, net .......................................... (5,367) 9,621
Net Cash Provided by Operating Activities 18,595 71,461
Investing Activities
Construction expenditures ............................... (26,857) (29,690)
Investments in and loans to affiliates .................. (18,661) (4,915)
Repayment of loan by affiliate .......................... 17,800 --
Sale of subsidiaries to CMP Group, Inc. ................. 20,093 --
Changes in accounts payable - investing activities ...... (2,122) (4,655)
Proceeds from Sale of Investments and Properties ........ 10,347 --
Net Cash Used by Investing Activities ................... 600 (39,260)
Financing Activities
Issuances:
Revolving credit agreement .......................... 10,000 42,500
Medium-term notes ................................... 187,000 --
Redemptions:
Preferred stock ..................................... (48,619) (14,000)
Medium-term notes ................................... (18,000) (25,000)
Mortgage bonds ...................................... (177,283) --
Other long-term obligations ............................. (2,813) (595)
Funds on deposit with trustee ........................... 61,694 (2,182)
Treasury Stock .......................................... (19,000) --
Dividends:
Common stock ........................................ (21,915) (21,915)
Preferred stock ..................................... (4,868) (6,623)
Net Cash Used by Financing Activities ................... (33,804) (27,815)
Net Increase (Decrease) in Cash ......................... (14,609) 4,386
Cash and cash equivalents, beginning of period .......... 20,841 8,307
Cash and cash equivalents, end of period ................ $ 6,232 $ 12,693
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
CMP Group and
Central Maine Power Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Formation of Holding Company - On May 1, 1998, on application of Central
Maine, the MPUC approved the creation of a holding company (now "CMP
Group"), the conversion and exchange of all the outstanding shares of
Central Maine's common stock into an equal number of shares of CMP Group's
common stock, the transfer of the stock of certain wholly-owned non-utility
subsidiaries of Central Maine to CMP Group, and other related requests of
Central Maine necessary to carry out the reorganization. The MPUC granted
the approvals subject to several conditions that Central Maine and CMP
Group believe are reasonable. Central Maine's shareholders approved the
reorganization on May 21, 1998. On June 30, 1998 the MPUC approved the
creation of the energy marketing affiliate of Central Maine (MainePower)
and resolved related issues that had been deferred earlier in the
proceeding. The FERC approved the reorganization on July 16, 1998, the
Connecticut Department of Public Utility Control on August 5, 1998, and the
SEC on August 12, 1998, and the reorganization into the CMP Group System
was implemented effective September 1, 1998.
Basis of Presentation - This Quarterly Report on Form 10-Q is a combined
report of CMP Group and Central Maine, a regulated electric-utility
subsidiary of CMP Group. The Notes to Consolidated Financial Statements
apply to both CMP Group and Central Maine. CMP Group's consolidated
financial statements include the accounts of CMP Group and its wholly owned
and controlled subsidiaries, including Central Maine. Central Maine's
consolidated financial statements include its accounts as well as those of
its wholly owned and controlled subsidiaries. Certain immaterial majority
owned subsidiaries, which were previously accounted for on the equity
method, were consolidated in September 1998.
Central Maine's financial position and results of operations account for
substantially all of CMP Group's consolidated financial position and
results of operations. This quarterly report should be read in conjunction
with Central Maine's Annual Report on Form 10-K for the year ended December
31, 1997.
CMP Group and Central Maine believe that the accompanying statements
reflect all adjustments necessary to present a fair statement of the
consolidated financial position and results of operations for the interim
periods. All material adjustments are of a normal recurring nature unless
otherwise disclosed in this Form 10-Q. All significant intercompany
transactions have been eliminated from the consolidated financial
statements.
Results shown for the respective interim periods being reported herein are
not necessarily indicative of results to be expected for the fiscal years
due to seasonal factors which are inherent in electric utilities in New
England. A greater proportionate amount of revenues is earned in the first
and fourth quarters (winter season) of most years because more electricity
is sold due to weather conditions, fewer day-light hours, and related
factors.
For purposes of the statement of cash flows, the CMP Group and Central
Maine consider all highly liquid instruments purchased having maturities of
three months or less to be cash equivalents.
Recognition of Increase in Subsidiary Equity
MaineCom is a wholly owned subsidiary of CMP Group. In July 1998,
MaineCom's equity investments, FiveCom, Inc., and FiveCom of Maine, LLC
reorganized along with other related companies to form a new company,
Northeast Optic Network, Inc. ("NEON"). MaineCom's ownership interest of
53.5-percent in the new company was equal to its combined ownership
interest in FiveCom and FiveCom of Maine.
In August 1998 NEON issued 4 million new shares of common stock at $12.00
per share on the open market in an initial public offering ("IPO"). NEON's
IPO had the effect of decreasing MaineCom's ownership interest from
53.5-percent to approximately 40-percent. The shares were issued at an
amount greater than MaineCom's per share investment, resulting in an
increase in MaineCom's investment in NEON of $15.9 million. In accordance
with the SEC's Staff Accounting Bulletins ("SAB") 51 and 84 MaineCom
increased additional paid in capital by $9.4 million and deferred tax
reserve liability by $6.5 million. The Company's accounting policy for such
transactions is to recognize gain unless otherwise required by the SEC
staff's Accounting Bulletins. No gain has been recognized at this point.
In conjunction with the IPO, Central Maine sold 282,023 NEON shares,
resulting in a net after tax gain of approximately $1.9 million and further
reducing its ownership percentage to 38.5-percent of the outstanding common
shares.
Supplemental Cash Flow Disclosure - Cash paid for the nine months ended
September 30, 1998 and 1997:
(In Millions)
1998 1997
CMP Group
Interest, net of amounts capitalized $40.8 $37.6
Income taxes 2.5* 7.4
Central Maine
Interest, net of amounts capitalized 40.7 37.6
Income Taxes 2.5 7.4
Non-cash investing activities include the increase investment in NEON
detailed above.
*Central Maine is currently processing all tax payments for the CMP Group
System.
Stock-Based Compensation - CMP Group accounts for employee stock-based
compensation in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans, such as
stock purchase plans, stock options, restricted stock, and stock
appreciation rights. The statement defines the methods of determining the
fair value of stock-based compensation and recommends the recognition of
compensation expense for book purposes. However, the statement allows
entities to continue to measure compensation expense in accordance with the
prior authoritative literature, APB No. 25, "Accounting for Stock Issued to
Employees", but requires that pro forma net income and earnings per share
be disclosed for each year for which an income statement is presented as if
SFAS No. 123 had been applied. CMP Group has not elected to adopt the
expense recognition provisions of SFAS No. 123. Under CMP Group's Long-Term
Incentive Plan, stock options were granted in the second quarter of 1998
with an exercise price equal to the fair market value on the date of the
grant; therefore, no expense recognition is required. Contingently issuable
performance shares were granted in 1997 and 1998. Both have a three-year
cycle and are being accrued accordingly.
1997 1998
Options granted - 253,925
Performance Shares* 64,762 70,204
*Accrue over a 3-year cycle.
Earnings per Share - Stock options and performance shares granted to date
under CMP Group's long-term incentive plan resulted in potential
incremental shares of common stock outstanding for purposes of computing
both basic and diluted earnings per share for the three and nine months
ended September 30, 1998 and 1997. These incremental shares were not
material in the periods presented and did not cause diluted earnings per
share to differ from basic earnings per share.
Impact of New Accounting Standards - In June 1998, the FASB issued SFAS No.
133, Accounting for Derivatives and Hedging Activities. The new standard
applies to all entities and is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, with earlier adoption encouraged. It
requires companies to record derivatives on the balance sheet at their fair
value depending on the intended use of the derivative. CMP Group and
Central Maine anticipate that adoption of this standards will not have a
significant impact on their 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 Central Maine's Annual Report on Form 10-K for the
year ended December 31, 1997.
Central Maine's 38-percent ownership interest in Maine Yankee's common
equity amounted to $32.2 million as of September 30, 1998, and under its
Power Contract and Additional Power Contract with Maine Yankee, Central
Maine is responsible for 38 percent of the costs of decommissioning the
Plant. Maine Yankee's most recent comprehensive 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 September 30, 1998,
Maine Yankee had collected approximately $214.9 million for its
decommissioning obligations.
On November 6, 1997, Maine Yankee submitted its 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 prudence issue
is being 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 in May of 1999. Central Maine
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 Central Maine'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, Central Maine believes that it is entitled to recover
substantially all of its share of such costs from its customers and as of
September 30, 1998, is carrying on its consolidated balance sheet a
regulatory asset and corresponding liability in the amount of $297.4
million, which is the $353 million discussed above net of Central Maine'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, Central Maine expects the second
phase of the report would recommend additional disallowances. Central Maine
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 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 Central Maine, 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. Central Maine has a 6-percent equity interest in Connecticut Yankee,
totaling approximately $6.1 million at September 30, 1998. Based on cost
estimates provided by Connecticut Yankee, Central Maine 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 $33.1 million and has recorded a
regulatory asset and corresponding liability in that amount on its
consolidated balance sheet. Central Maine is currently recovering through
rates an amount adequate to recover these expenses.
In a FERC rate proceeding involving the Connecticut Yankee plant a FERC
administrative law judge issued an initial decision on August 31, 1998. The
law judges found that Connecticut Yankee had failed to meet its burden of
proof in supporting additional decommissioning cost collections and ordered
that Connecticut Yankee recover decommissioning costs at the lower rate
approved in its previous rate case. In addition, the law judge found
imprudent management to be a factor contributing to the Connecticut Yankee
shutdown decision and reached other conclusions that were partially
unfavorable to Connecticut Yankee with respect to some issues that are
similar to those being litigated in the Maine Yankee proceeding. Although
the Maine Yankee and Connecticut Yankee plants were operated by different
entities and the factual operating histories as well as present
decommissioning operations, of the two plants are different in many
respects, a final decision by the FERC in the Connecticut Yankee proceeding
on issues also being litigated in the Maine Yankee case could have some
precedential effect in the Maine Yankee FERC proceeding. Central Maine
cannot predict what the FERC's final determination of those issues will be
in the Connecticut Yankee proceeding or any effect it might have on the
Maine Yankee proceeding.
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. Central Maine 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 $10.0 million. This estimate has been recorded by Central
Maine as a regulatory asset and a liability on Central Maine's balance
sheet. As part of the MPUC's decision in Central Maine's 1993 base-rate
case, Central Maine's current share of costs related to the deactivation of
Yankee Atomic is being recovered through rates.
Millstone Unit No. 3 - Central Maine has a 2.5 percent direct ownership
interest in Millstone Unit No. 3, which is operated by Northeast Utilities.
This facility was off-line from April 1996 to July 1998 due to NRC concerns
regarding license requirements. For a discussion of a lawsuit and
arbitration claim filed by Central Maine 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 - Central Maine and certain of its
affiliates are subject to regulation by federal and state authorities with
respect to air and water quality, the handling and disposal of toxic
substances and hazardous and solid wastes, and the handling and use of
chemical products. Electric utility companies generally use or generate in
their operations a range of potentially hazardous products and by-products
that are the focus of such regulation. Central Maine believes that its
current practices and operations are in compliance with all existing
environmental laws except for such non-compliance as would not have a
material adverse effect on Central Maine's financial position. Central
Maine reviews its overall compliance and measures the liability quarterly
by assessing a range of reasonably likely costs for each identified site
using currently available information, including existing technology,
presently enacted laws and regulations, experience gained at similar sites,
and the probable level of involvement and financial condition of other
potentially responsible parties. These estimates include costs for site
investigations, remediation, operation and maintenance, monitoring and site
closure.
New and changing environmental requirements could hinder the construction
and/or modification of generating units, transmission and distribution
lines, substations and other facilities, and could raise operating costs
significantly. As a result, Central Maine may incur significant additional
environmental costs, greater than amounts reserved, in connection with the
generation and transmission of electricity and the storage, transportation
and disposal of by-products and wastes. Central Maine may also encounter
significantly increased costs to remedy the environmental effects of prior
waste handling activities. The cumulative long-term cost impact of
increasingly stringent environmental requirements cannot accurately be
estimated.
Central Maine has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental
remediation costs that it expects to incur for identified waste disposal
sites. In most cases, additional future environmental cleanup costs are not
reasonably 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. Central Maine cannot predict the schedule
or scope of remediation due to the regulatory process and involvement of
non-governmental parties. At September 30, 1998, the liability recorded by
Central Maine for its estimated environmental remediation costs amounted to
$2.6 million, which management has determined to be the most probable
amount within the range of $2.6 million to $8.5 million. Such costs may be
higher if Central Maine is found to be responsible for cleanup costs at
additional sites or identifiable possible outcomes change.
Millstone Unit No. 3 Litigation - On August 7, 1997, Central Maine and
other minority owners of Millstone Unit No. 3 filed suit in Massachusetts
Superior Court against Northeast Utilities and its trustees, and initiated
an arbitration claim against two of its subsidiaries, alleging
mismanagement of the unit by the defendants. The minority owners are
seeking to recover their additional costs resulting from such
mismanagement, including their replacement power costs. Central Maine
cannot predict the outcome of the litigation and arbitration.
Proposed Federal Income Tax Adjustments - On September 3, 1997, Central
Maine 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 Central Maine's federal income tax returns for the years 1992
through 1994, and on September 12, 1997, Central Maine 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 Central Maine's write-off of the under-collected balance of
fuel and purchased-power costs and the unrecovered balance of its unbilled
Electric Revenue Adjustment Mechanism ("ERAM") revenues, both as of
December 31, 1994, which 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 Central Maine's 1994
deduction of the cost of the buyout of the Fairfield Energy Venture
purchased-power contract by Central Maine in 1994. The aggregate tax
impact, including both federal and state taxes, of the unresolved issues
amounts to approximately $39.0 million, over 90 percent of which is
associated with the two major disallowances. The two major disallowances
relate largely to the timing of the deductions and would not affect income
except for the cumulative interest impact which, through September 30,
1998, amounted to $17.3 million, or a decrease in net income of $10.2
million, and which could increase interest expense by approximately
$500,000 per month until either the tax deficiency is paid or the issues
are resolved in favor of Central Maine, in which case no interest would be
due. If the IRS were to prevail, Central Maine believes the deductions
would be amortized over periods of up to twenty, post-1994, tax years.
Central Maine 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, Central Maine filed a petition in the United States Tax
Court contesting the entire amount of the deficiencies. Central Maine is
seeking 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, Central Maine plans to
pursue vigorously the Tax Court litigation, but cannot predict the result.
Joint Venture - CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to distribute natural gas to many
Maine communities that are not now served with that fuel. On July 24, 1998,
the MPUC authorized the provision of such service by the joint venture. CMP
Group's level of investment is dependent on the overall economic
feasibility of natural gas as a competitive energy option in Maine, a
sufficient expression of customer interest in gas service from CMP Natural
Gas, and the prospects for achieving an acceptable return on investment.
CMP Natural Gas, L.L.C., which is owned equally by subsidiaries of CMP
Group and Energy East, is positioning itself to offer gas in the Augusta
and Bangor areas, and in other communities including Bath, Bethel,
Brunswick, Windham, Rumford, and Waterville.
3. Regulatory and Legislative Matters
Alternative Rate Plan - On January 1, 1995, Central Maine's ARP was put
into effect. 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 Central Maine's rates, with no separate
reconciliation and recovery of fuel and purchased-power costs. Under the
ARP, the MPUC is continuing to regulate Central Maine'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, Central Maine 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 Central Maine'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 Central Maine'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 Central Maine'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 Central Maine's earnings are outside a range of 350
basis points above or below Central Maine's allowed return on equity
(starting at the 10.55% allowed return in 1995) and indexed annually for
changes in capital costs. Outside that range, profits and losses could be
shared equally by Central Maine and its customers in computing the
price-cap adjustment. This feature commenced with the price-cap change of
July 1, 1996. 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 Central Maine
notwithstanding the index-based price cap. To receive such treatment, the
annual revenue requirement related to a mandated cost must exceed $3
million and have a disproportionate effect on Central Maine or the
electric-power industry.
On May 13, 1998, Central Maine submitted its final 1998 ARP compliance
filing to the MPUC. In keeping with its pledge of limiting increases to the
inflation index, Central Maine voluntarily limited its request to 1.78%,
which was the inflation rate for 1997 under the ARP. Central Maine also
proposed a rate reduction of approximately ten percent contingent on the
consummation of, and ratemaking associated with, Central Maine's planned
sale of generating assets. The filing also contained information on the
costs of restoring service to Central Maine's customers after the January
ice storm, as required by an earlier MPUC order allowing Central Maine to
defer those costs. Subsequent to the May 13 filing, Central Maine
stipulated, and the MPUC subsequently approved, effective July 11, 1998, a
1.33% increase. The amount of the increase could change, based on the
outcome of the pending FERC proceeding related to the permanent shutdown of
the Maine Yankee plant. Depending on FERC's decision, the price increase
could increase or decrease, ranging from a ceiling of 1.78% to a floor of
0.22%.
The components of the last three ARP price increase approved by the MPUC
are as follows:
1998 1997 1996
---- ---- ----
Inflation Index 1.78% 2.12% 2.55%
Productivity Offset (1.00) (1.00) (1.00)
Qualifying Facility Offset (.29) (.42) -
Earnings Sharing 1.12 - .32
Flowthrough and Mandated Items (.28) .40 (.61)
---- ----- -----
1.33% 1.10% 1.26%
==== ==== ====
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. A departure from traditional
regulation, however, could have a substantial impact on the value of
utility assets and on the ability of electric utilities to recover their
costs through rates. In the absence of full recovery, utilities would find
their above-market costs to be "stranded", or unrecoverable, in the new
competitive setting.
Central Maine has substantial exposure to cost stranding relative to its
size. The major portion of Central Maine's strandable costs is related to
above-market costs of purchased-power obligations arising from Central
Maine's long-term, noncancelable contracts for the purchase of capacity and
energy from 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 utility (Central Maine),
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 is conducting the proceeding that will ultimately determine
Central Maine's stranded costs and corresponding revenue requirements and
has scheduled completion of the current phase of the proceeding for the
first quarter of 1999. On December 5, 1997, Central Maine 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. Central Maine estimated its strandable costs at
approximately $1.3 billion, net present value. On February 10, 1998,
Central Maine reduced its estimate of strandable costs to $0.8 billion to
reflect the anticipated sale of its generating assets. Central Maine cannot
predict the results of the MPUC proceeding, which is scheduled to conclude
in January 1999, subject to later updating prior to March 1, 2000.
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 any substantial inaccuracies at least every three years.
Upon the commencement of retail access on March 1, 2000, Central Maine, as
a transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider
that is affiliated with Central Maine would be allowed to sell electricity
outside Central Maine's service territory, without limitation as to amount,
but within Central Maine's service territory, the affiliate would be
limited to providing not more than 33 percent of the total kilowatt-hours
sold within Central Maine's service territory, as determined by the MPUC.
On June 30, 1998, the MPUC approved the creation of such an affiliated
energy provider (MainePower, a wholly-owned subsidiary of CMP Group),
subject to certain conditions designed to eliminate any market advantage
MainePower might gain through its affiliation with Central Maine.
Agreement for Sale of Generation Assets - On January 6, 1998, Central Maine
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 approximately $18 million for
assets of Union Water Power, to Florida-based FPL Group. The related book
value for these assets are approximately $221 million at December 31, 1997.
In addition, as part of its agreement with FPL Group, Central Maine entered
into energy buy-back agreements to assist in fulfilling its obligation to
supply its customers with power until March 1, 2000. Subsequently, an
agreement was reached to sell related storage facilities to FPL Group for
an additional $4.4 million, including $1.7 million for Union Water assets.
The related book value of these assets are approximately $11.9 million.
Central Maine'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. Central Maine will continue to seek buyers for those assets.
Central Maine 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 Central Maine'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
Central Maine 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. Central Maine 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 Central Maine'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, Central Maine 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 sale is subject to various closing conditions, including the approval
of state and federal regulatory agencies, which Central Maine expects will
extend into the first quarter of 1999, and is subject to consents or
covenant waivers from certain of Central Maine's lenders. Central Maine is
pursuing the necessary regulatory approvals, consents and waivers, but
cannot predict whether or in what form they will be obtained.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice
storm of unprecedented breadth and severity struck Central Maine's service
territory, causing power outages for approximately 280,000 of Central
Maine's 528,000 customers, and substantial widespread damage to Central
Maine's transmission and distribution system. To restore its electrical
system, Central Maine supplemented its own crews with utility and
tree-service crews from throughout the northeastern United States and the
Canadian maritime provinces, with assistance from the Maine national guard.
The incremental non-capital costs of the repair effort totaled
approximately $51 million, most of which is labor-related.
On January 15, 1998, the MPUC issued an order allowing Central Maine to
defer on its books the incremental non-capital costs associated with
Central Maine's efforts to restore service in response to the damage
resulting from the storm. The order requires Central Maine, 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 Central
Maine stated that once the final cost of the storm was determined and the
status of federal assistance was finalized Central Maine would propose a
plan for recovery of its costs. Based on the MPUC order, potential federal
assistance and/or collection in rates, Central Maine has deferred
approximately $51 million in storm-related costs as of September 30, 1998.
Meeting the Requirements of SFAS No. 71 - Central Maine 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 Central Maine'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. Central
Maine 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," Central Maine 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. Central Maine
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 Central Maine will be required to discontinue SFAS
No. 71 for any remaining generation segment of its business. Central Maine
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 SFAS No. 71 to
be discontinued, which could result in a non-cash write-off of previously
established regulatory assets.
4. Financing
At the annual meeting of the stockholders of Central Maine on May 15, 1997,
the holders of Central Maine's outstanding preferred stock consented to the
issuance of $350 million in principal amount of Central Maine's medium-term
notes in addition to the $150 million in principal amount to which they had
previously consented. This expansion of the medium-term note program is
being implemented to increase Central Maine's financing flexibility in
anticipation of restructuring and increased competition. During the third
quarter, Central Maine issued variable-rate medium-term notes totaling $70
million in principal amount. Notes in the amount of $8 million matured
during the quarter. As of September 30, 1998, $212 million of medium-term
notes were outstanding. On July 1, 1998, Central Maine redeemed the final
$7 million of its 8-7/8% Preferred Stock through the mandatory sinking fund
provision. On August 15, 1998, Central Maine paid at maturity the
outstanding $60 million of its Series S 6.03% General and Refunding
Mortgage Bonds, and on September 15 paid $8 million of maturing medium-term
notes. In addition, Central Maine reacquired 1.2 million shares of stock
from CMP Group for $19 million following the holding company formation.
5. Other Transactions
Three non-recurring events had a significant impact on earnings: 1) In
September 1998, MaineCom, a subsidiary of CMP Group, sold its 40-percent
interest in New England Fibre Communications. The sale resulted in a net
after-tax gain of approximately $5.7 million. 2) In August 1998, Central
Maine sold shares then owned directly in NEON, now a 38.5-percent-owned
equity investment of MaineCom, as part of the initial public offering of
NEON common stock. The net after-tax gain was approximately $1.9 million.
3) In September 1998 Central Maine finalized the sale of transmission-line
easements to a gas-pipeline contractor. The net after-tax gain of
approximately $3.8 million resulted in increased earnings.
6. Transactions with Affiliated Companies
Central Maine provides services to CMP Group and its subsidiaries as well
as non-affiliated parties. As of September 30, 1998, Central Maine's
accounts receivables included the following:
CMP Group $ 84,751
MainePower 97,715
CMPI 99,553
MaineCom 625,402
Telesmart 42,754
Union Water 910,812
Central Maine receives services from CMP Group and its subsidiaries in
addition to non-affiliated parties. Central Maine's accounts payables on
September 30, 1998 included the following:
CMP Group $492,735
MainePower 180,449
CMPI 134,724
MaineCom -
Telesmart 47,177
Union Water 985,750
7. Fiber Optic Network
CMP Group, largely through its wholly-owned subsidiary MaineCom Services,
owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), which is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications
carriers on local loop, inter-city and interstate facilities. NEON is
currently expanding its fiber optic network to encompass over 900 route
miles, or more than 60,000 fiber miles, in New England and New York,
utilizing primarily electric-utility rights-of-way, including some of
Central Maine's in Maine and some owned by other electric utilities
including Northeast Utilities, another substantial minority stockholder, in
Connecticut, Massachusetts and New Hampshire. As of September 30, 1998,
NEON had completed construction of approximately 450 route miles, or 31,000
fiber miles, of its planned system and is currently engineering,
constructing, or acquiring additional routes with a goal of creating a
continuous fiber optic link between New York City and Portland, Maine, with
access into and around Boston and numerous other major service areas in the
Northeast.
On August 5, 1998, NEON completed initial public offerings of $48.0 million
of common stock and $180.0 million of senior notes, and Central Maine, as
part of the common-stock offering, sold some of its then-owned shares in
NEON for proceeds of approximately $3.4 million. In addition, with some of
the proceeds of the offering NEON repaid approximately $18 million Central
Maine had advanced under an earlier construction loan agreement. CMP Group
believes there is a growing need for such a fiber optic network in the
Northeast and that NEON's outside financing will provide substantial
assistance in completing construction of the network, but cannot predict
the results of this venture. The common stock of NEON is listed on The
Nasdaq Stock Market's National Market under the symbol "NOPT".
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations of CMP Group and Central Maine Power Company
This is a combined Quarterly Report on Form 10-Q of CMP Group and Central Maine.
Therefore, our Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) applies to both CMP Group and Central Maine. CMP
Group's consolidated financial statements include the accounts of CMP Group and
its wholly owned and controlled subsidiaries, including Central Maine
(collectively, the CMP Group System). Central Maine's consolidated financial
statements include its accounts as well as those of its wholly owned and
controlled subsidiaries. The MD&A should be read in conjunction with the
consolidated financial statements included herein.
Note re Forward-Looking Statements
This Report on Form 10-Q contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. CMP Group
and Central Maine undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers are also urged to
carefully review and consider the various disclosures made by CMP Group or
Central Maine which attempt to advise interested parties of the facts which
affect CMP Group or Central Maine'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 Central Maine holds interests; failure to resolve any significant
aspect of the "Year 2000 problem"; electric utility industry restructuring,
including the ongoing state and federal activities; the results of Central
Maine's planned sale of its generating assets; Central Maine'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 Central Maine
operates, including regulatory treatment of stranded costs; CMP Group'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.
<PAGE>
Operating Results
<TABLE>
<S> <C> <C>
CMP
Group Central Maine
(dollars in millions)
Net income (loss) Three months ended:
September 30, 1998 $17.4 $0.54/share $13.1
September 30, 1997 (7.7) $(0.24)/share (5.8)
----- -----
Increase $25.1 $18.9
Nine months ended:
September 30, 1998 $34.4 $1.06/share $33.1
September 30, 1997 1.3 $0.04/share 7.6
----- -----
Increase $33.1 $25.5
Earnings (loss) applicable to common
stock
Three months ended:
September 30, 1998 N/A $12.2 $0.38/share
September 30, 1997 N/A (7.7) $(0.24)/share
Nine months ended:
September 30, 1998 N/A $29.2 $0.90/share
September 30, 1997 N/A 1.3 $0.04/share
</TABLE>
The 1998 results have benefited significantly from reduced operating cost of
$6.7 million in the third quarter and $21.2 million nine months to date, for
Central Maine's 38-percent share of Maine Yankee, and lower fuel costs of $11.4
million and $40.4 million for the third quarter and nine months to date, due to
the expiration of a high-cost contract for non-utility energy. In addition,
three non-recurring events had a significant impact on earnings: 1) In September
1998, MaineCom, a subsidiary of CMP Group, sold its 40-percent interest in New
England Fibre Communications. The sale resulted in a net after-tax gain of
approximately $5.7 million or $0.18 per share. 2) In August 1998, Central Maine
sold shares then owned directly in NEON, now a 38.5-percent-owned equity
investment of MaineCom, as part of the initial public offering of NEON common
stock. The net after-tax gain was approximately $1.9 million, or $0.06 per
share. 3) In September 1998 Central Maine finalized the sale of
transmission-line easements to a gas-pipeline contractor. The net after-tax gain
of approximately $3.8 million resulted in increased earnings of approximately
$0.12 per share.
<PAGE>
Service Area Kwh Sales - Central Maine's service area sales of electricity
totaled approximately 2.32 billion kilowatt-hours in the third quarter of 1998,
down slightly from the 2.35 billion kilowatt-hour level of a year ago, as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended September 30,
Three Nine
Months Months
1998 1997 % Change 1998 1997 % Change
---- ---- -------- ---- ---- --------
Residential 676.5 651.5 3.8% 2,067.8 2,116.5 (2.3)%
Commercial 689.1 660.3 4.4 1,925.6 1,897.2 1.5
Industrial 892.7 983.9 (9.3) 2,606.9 2,841.2 (8.2)
Other 60.7 52.7 15.3 178.5 164.4 8.5
--------- --------- -------- --------
2,319.0 2,348.4 (1.3)% 6,778.8 7,019.3 (3.4)%
======= ======= ======= =======
</TABLE>
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers increased by 3.8 percent in
the third quarter of 1998 primarily due to warmer weather than in 1997,
which increased air conditioning usage, and also to the fact that the 1998
period contained one additional meter-reading day than the comparable
period in 1997. The decrease of 2.3 percent for the 1998 nine-month period
compared to 1997 was due primarily to milder temperatures in the first part
of 1998, and the loss of sales resulting from the January 1998 ice storm
customer outages.
Commercial kilowatt-hour sales increased by 4.4 percent in the third
quarter, and 1.5 percent for the nine months ended September 30, 1998, as
compared to 1997. The increased sales in the retail and service sectors
were due to the relatively healthy economy and a strong tourist season in
Central Maine's service territory.
Industrial kilowatt-hour sales decreased by 9.3 percent in the third
quarter and by 8.2 percent for the nine months ended September 30, 1998,
compared to 1997. The decrease was due primarily to the closing of two pulp
and paper mills and the expiration of a buy/sell contract with a third
paper mill which, as noted below, similarly reduced purchased power energy
expenses for the same period. The pulp-and-paper sector of the industrial
class accounts for approximately 56 percent of the industrial sales
category. In addition, the weakness in Asian economies has been
progressively impacting Maine's manufacturing sector in 1998, resulting in
lower than expected kwh sales in the industrial sector.
Operating Expenses
Central Maine's purchased power-energy expense decreased by $11.4 million and
$40.4 million in the third quarter and year to date, respectively, compared to
1997. The decrease is due primarily to the expiration of a contract with a major
non-utility generator in October of 1997.
Central Maine's purchased power-capacity expense decreased $6.7 million and
$21.2 million in the third quarter and nine months, respectively, of 1998
compared to 1997, due primarily to the permanent shutdown of the Maine Yankee
plant in August 1997.
Maintenance expense increased $2.7 million and $6.7 million for the third
quarter and nine months ended September 30, 1998 compared to 1997. This increase
was due primarily to Central Maine's operations personnel working in a
maintenance capacity as a result of the ice storm in the first quarter, and to
subsequent cleanup efforts.
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 $7.9
million and $14.4 million for the third quarter and nine-month period ended
September 30, 1998 compared to 1997, as a result of higher pre-tax earnings for
the nine months ended September 30, 1998.
Other Income and Expense
Equity in Earnings of Associated Companies for the CMP Group decreased by $1.8
million in the third quarter of 1998 and $4.1 million for the nine months ended
September 30, 1998 compared to 1997. The decrease is due primarily to losses
recognized due to start-up costs of NEON. See "Expansion of Lines of Business"
below for further discussion.
Other Income increased by $18.1 million and $17.9 million for the third quarter
and nine months ended September 30, 1998 as compared to 1997. The third quarter
increase is due primarily to gains associated with the sale of stock of NEON
then owned by Central Maine, the sale of easements to two gas-pipeline
developers and the sale of certain telecommunication holdings of CMP Group's,
MaineCom subsidiary. As a result there was an increase in income tax expense on
other income of $6.9 million and $6.5 million for the third quarter and nine
months ended September 30, 1998.
Other Interest Expense increased by $1.4 million during the first nine months of
1998 as compared to 1997. The increase was due primarily to higher levels of
borrowing on Central Maine's revolving credit facility to meet working capital
needs.
In July 1997, Central Maine 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 $777 thousand in 1998 compared
to 1997. On April 1, 1998 Central Maine redeemed all of its 7 7/8% Preferred
Stock ($30 million), reducing dividends by approximately $591 thousand and $1.2
million in the third quarter and nine months ended September 30, 1998 compared
to 1997. On June 8, 1998, $11.6 million of the outstanding 7.99% Preferred Stock
was repurchased, further reducing dividends by approximately $232 thousand and
$465 thousand in the third quarter and nine months ended September 30, 1998
compared to 1997. On July 1, 1998, Central Maine redeemed the final $7 million
of its 8 7/8% Preferred Stock under the mandatory sinking-fund provision,
reducing dividends by approximately $155 thousand in the third quarter of 1998
compared to 1997.
"Year 2000" Computer Issues
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore those computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results, with potentially serious and widespread adverse consequences.
CMP Group, through Central Maine, began its Year 2000 problem remediation
efforts in 1996, and since that time has developed a broad-based and
comprehensive project plan for addressing Year 2000 issues. The plan includes
both Information Technology ("IT") and non-IT systems, addresses both
centralized and distributed systems, and encompasses systems critical to the
generation, transmission, and distribution of electric energy as well as the
traditional business systems necessary to the CMP Group System.
One primary goal of CMP Group has been to achieve Year 2000 readiness for IT
infrastructure and centralized business systems by the end of 1998. CMP Group
expects to meet that goal with a few minor exceptions related primarily to
delayed availability of certain vendor products. Those vendors, however, have
indicated a scheduled product availability that should permit Central Maine to
be Year-2000 ready in those areas by June 1999.
CMP Group's target completion date for Year 2000 power generation and delivery
systems is also June 1999, consistent with the DOE's published request in May
1998 and the overall electric-utility industry guidelines prepared by the North
American Electric Reliability Council ("NERC"). CMP Group believes it is on
schedule to meet this target.
Overall, CMP Group estimates the current completion status of its comprehensive
plan by phase as follows: inventory, 92-percent complete; assessment, 92-percent
complete; remediation, 62-percent complete.
In addition to the internal Year 2000 readiness activities discussed above, CMP
Group is actively participating in a joint ISO/NEPOOL initiative designed to
assess, and assure, power reliability within the NEPOOL area. This initiative
encompasses all participants, including Central Maine, within the New England
area.
CMP Group also has an active program in place to identify and address issues
associated with third-party providers. The program addresses business
relationships with all third-party providers, but focuses on those suppliers
deemed critical to CMP Group's business. At this time CMP Group has no
indication that any third-party with which CMP Group has a material relationship
is expecting a Year 2000-related business interruption. CMP Group will continue
to monitor and assess its third-party relationships.
CMP Group estimates it will incur approximately $4.0 million of costs associated
with making the necessary modifications identified to date to both the
centralized and non-centralized systems. As of September 30, 1998, approximately
$2.5 million of such costs have been incurred.
CMP Group recognizes that failure to correct problems associated with year 2000
issues could result in material operational and financial risks if the affected
systems either cease to function or produce erroneous results. Such risks could
include inability to operate fossil-fueled and hydro-electric generating
facilities, disruptions in the operation of transmission and distribution
systems, an inability to access interconnections with other utilities, and
disruptions to major business systems (customer information and service,
administrative, and financial). CMP Group cannot at this time quantify the
effect of these potential events on CMP Group's or Central Maine's operations,
liquidity, or financial condition.
In order to minimize the risk, and the potential recovery time, from Year 2000
problems, CMP Group is actively involved in contingency planning. Although CMP
Group has knowledge and experience in disaster/recovery planning and execution,
it recognizes the importance of year 2000-specific contingency planning and,
accordingly, is participating in the integrated contingency planning effort
headed by NERC and the Northeast Power Coordinating Council ("NPCC"). In
addition, CMP Group is in the process of developing comprehensive Year
2000-specific contingency plans for its own independent operations.
CMP Group believes its plans are adequate to attain Year 2000 readiness, but
cannot predict what effect, if any, the Year 2000 problem will have on its
business operations or financial results.
Liquidity and Capital Resources
Increases in Central Maine's retail rates are limited by Central Maine's ARP.
For a discussion of the ARP, including a 1.33-percent rate increase effective
July 11, 1998, and a proposed rate reduction of approximately ten percent
contingent on the consummation of Central Maine's planned sale of generating
assets in the first quarter of 1999, see Note 3, "Regulatory and Legislative
Matters" - "Alternative Rate Plan."
Approximately $117.9 million of cash was provided during the nine months ended
September 30, 1998, from net income before non-cash items, primarily
depreciation, amortization and deferred income taxes. During that period
approximately $79.9 million of cash was used for fluctuations in certain assets
and liabilities and from other operating activities.
Included in net income is $19.1 million for CMP Group and $9.5 million for
Central Maine, of gains associated with the sale of investments and properties.
Investing activities, primarily construction expenditures, utilized $29.8
million in cash during the first nine months of 1998 for generation,
transmission, distribution, and general construction expenditures. In order to
accommodate existing and future loads on its electric system Central Maine is
engaged in a continuing construction program. Central Maine's plans for
improvements and expansions, its load forecast and its power-supply sources are
under a process of continuing review. Actual construction expenditures depend
upon the availability of capital and other resources, load forecasts, the timing
of its divestiture of its generating assets, customer growth and general
business conditions. The ultimate nature, timing and amount of financing for
Central Maine's total construction programs, refinancing and energy-management
capital requirements will be determined in light of market conditions, earnings
and other relevant factors.
CMP Group received proceeds of approximately $21.3 million from the sale of
investments and properties. In addition, Central Maine received approximately
$20.1 million resulting from the sale of several subsidiaries to CMP Group.
During the nine months ended September 30, 1998, CMP Group paid dividends on
common stock of $21.9 million, while preferred-stock dividends, paid by Central
Maine, utilized $4.9 million of cash. In addition, Central Maine reacquired 1.2
million shares of stock from CMP Group for $19 million following holding company
formation.
During the third quarter Central Maine issued a total of $70 million of
callable, one-year, floating-rate, medium-term notes. In addition, on October
22, 1998, Central Maine issued $50 million, and on October 31 $25 million, of
such medium-term notes, making a total of $287 million of Central Maine's
medium-term notes outstanding at November 3, 1998.
On July 1, 1998, Central Maine redeemed the final $7 million of its 8-7/8%
Preferred Stock through the mandatory sinking fund provision. On August 15,
1998, Central Maine paid at maturity the outstanding $60 million of its Series S
6.03% General and Refunding Mortgage Bonds, and on September 15 paid $8 million
of maturing medium-term notes. In addition, on November 2, Central Maine paid at
maturity its outstanding $75 million of 6.25% General and Refunding Mortgage
Bonds.
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program was implemented to
increase Central Maine's financing flexibility in anticipation of restructuring
and increased competition.
To support its short-term capital requirements, in October 1996, Central Maine
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement had two credit facilities: a $75 million, 364-day revolving credit
facility and a $50-million, 3-year revolving credit facility. Both credit
facilities require annual fees on the total credit lines. The fees are based on
Central Maine's credit ratings and allow for various borrowing options including
LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to
commercial paper markets has been substantially precluded based upon of Central
Maine's past 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. Central Maine had $70 million in outstanding notes as of
September 30, 1998 under the credit facilities. The facilities are being amended
to reduce the banks' aggregate commitments to $75 million, revise the banks'
fees, and amend certain other provisions to reflect the reorganization of
Central Maine into a holding company structure and other changed circumstances.
On August 5, 1998, the MPUC approved Central Maine's application to purchase up
to 11 million shares of its outstanding common stock over a three-year period,
with a limitation of three million shares that may be repurchased prior to the
closing of the sale of Central Maine's generating assets. The amount of any
stock purchases and their timing by Central Maine or CMP Group will depend on
the need for equity in the respective Company's capital structure, investment
opportunities and other considerations. Neither Central Maine nor CMP Group has
adopted a formal stock-purchase plan.
Purchased Power Contract - Effective July 28, 1998, Central Maine replaced a
purchased-power contract for energy from a wood-fired plant in Stratton, Maine.
The old contract was terminated and a new agreement for 45 megawatts at lower
rates was entered into, which is estimated to save Central Maine over $28
million in net present value over the contract's term through August 2009.
Storm Damage to Company's System - On January 7 through 9, 1998, an ice storm of
unprecedented breadth and severity struck Central Maine's service territory,
causing power outages for approximately 280,000 of Central Maine's 528,000
customers, and substantial widespread damage to Central Maine's transmission and
distribution system. To restore its electrical system, Central Maine
supplemented its own crews with utility and tree-service crews from throughout
the northeastern United States and the Canadian maritime provinces, with
assistance from the Maine national guard. Central Maine's incremental
non-capital costs of the repair effort totaled approximately $51 million, most
of which is labor-related.
On January 15, 1998, the MPUC issued an order allowing Central Maine to defer on
its books the incremental non-capital costs associated with Central Maine's
efforts to restore service in response to the damage resulting from the storm.
The order requires Central Maine, 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 Central Maine stated that once the final cost of the
storm was determined and the status of federal assistance was finalized Central
Maine would propose a plan for recovery of its costs. Based on the MPUC order,
potential federal assistance and/or collection in rates, Central Maine has
deferred approximately $51 million in storm related costs as of September 30,
1998. In October, the MPUC staff issued its draft report of its summary
investigation of Maine utilities response to the January ice storm. This report
finds no basis for further formal adjudicatory investigation into Maine
utilities response to the January ice storm and supports the utilities actions.
On May 1, 1998, President Clinton signed a Congressional appropriation bill that
included $130 million for Presidentially declared disasters in 1998, including
storm-damage cost reimbursement for electric utilities. On November 5, 1998 the
United States Department of Housing and Urban Development announced that of
those funds, $2.2 million had been awarded to Maine, with none designated for
utility infrastructure, which Central Maine and the Maine Congressional
delegation protested as inadequate and inconsistent with congressional intent.
Central Maine cannot predict what portion of its ice storm-related costs it will
ultimately recover from the Congressional appropriation or from its customers,
or when any such recovery will take place.
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in
Central Maine's Annual Report on Form 10-K for the year ended December 31, 1997,
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
24, 1997, the DOJ, through the United States Attorney for Maine, announced that
its review had revealed insufficient grounds for criminal prosecution. On
October 8, 1998, the NRC issued a notice of violation for the pre-shutdown
violations, but announced that it was imposing no civil penalties for those
violations.
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. 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.
Costs - Central Maine has incurred substantial costs in connection with its
38-percent share of Maine Yankee costs. In 1997 such costs amounted to
approximately $132.3 million for Central Maine: $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 Central Maine 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, but did not reduce the need to
buy replacement energy and capacity. Central Maine expects its share of Maine
Yankee operations and maintenance costs to be approximately $45 million in 1998,
based on information provided by Maine Yankee. The amount of costs for
replacement energy and capacity varies based on Central Maine's power
requirements and market conditions. The impact of the nuclear-related costs on
Central Maine was the major obstacle to achieving satisfactory results in 1997,
despite the approximately $75 million in annual Maine Yankee-related costs
embedded in the determination of Central Maine's required revenues for
ratemaking purposes and despite success in controlling other operating costs.
Central Maine's 38-percent ownership interest in Maine Yankee's common equity
amounted to $32.2 million as of September 30, 1998, and under Maine Yankee's
Power Contracts and Additional Power Contracts, Central Maine is responsible for
38 percent of the costs of decommissioning the Plant. Maine Yankee's most recent
comprehensive 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 September 30, 1998, the balance
in the Maine Yankee decommissioning fund was $214.9 million. On November 6,
1997, Maine Yankee submitted the new estimate (adjusted to $507.2 million) to
the FERC as part of its rate case reflecting the fact that the Plant was no
longer operating and had entered the decommissioning phase. If the FERC accepts
the filed 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. Maine Yankee has indicated that it plans
to further update its decommissioning cost estimate through supplemental
testimony before final consideration by the FERC.
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 Central Maine'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,
Central Maine believes that it is entitled to recover substantially all of its
share of such costs from its customers and as of September 30, 1998, is carrying
on its consolidated balance sheet a regulatory asset and a corresponding
liability in the amount of $297.4 million, which is the $353 million discussed
above net of Central Maine'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. Central Maine believes
the report's negative conclusions are unfounded and may be contradictory.
Central Maine 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. Central Maine 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, Central
Maine expects the consultant's recommendations resulting from its extended
review would call for additional disallowances, which Maine Yankee has said it
would expect 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 accepted for filing the rates associated with the
amended Power Contracts and made them effective January 15, 1998, subject to
refund. The FERC also 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. Those issues are
being pursued vigorously by several intervenors, including the MPUC and the OPA,
and the parties have been discussing proposals to resolve those issues. The
hearing in the FERC rate proceeding is currently scheduled to begin in May of
1999. Central Maine cannot predict the outcome of the FERC proceeding.
In a FERC rate proceeding involving the Connecticut Yankee plant a FERC
administrative law judge issued an initial decision on August 31, 1998. The law
judges found that Connecticut Yankee had failed to meet its burden of proof in
supporting additional decommissioning cost collections and ordered that
Connecticut Yankee recover decommissioning costs at the lower rate approved in
its previous rate case. In addition, the law judge found imprudent management to
be a factor contributing to the Connecticut Yankee shutdown decision and reached
other conclusions that were partially unfavorable to Connecticut Yankee with
respect to some issues that are similar to those being litigated in the Maine
Yankee proceeding. Although the Maine Yankee and Connecticut Yankee plants were
operated by different entities and the factual operating histories as well as
present decommissioning operations, of the two plants are different in many
respects, a final decision by the FERC in the Connecticut Yankee proceeding on
issues also being litigated in the Maine Yankee case could have some
precedential effect in the Maine Yankee FERC proceeding. Central Maine cannot
predict what the FERC's final determination of those issues will be in the
Connecticut Yankee proceeding or any effect it might have on the Maine Yankee
proceeding.
On January 15, 1998, Maine Yankee, its former 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, and were reduced to $50
million in June 1998. 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 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 Central Maine, 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 have been
affecting the financial condition of other stockholders of Maine Yankee in
varying degrees. A default by a Maine Yankee stockholder in making payments
under its Power Contract or Capital Funds Agreement could have a material
adverse effect on Maine Yankee, depending on the magnitude of the default.
Central Maine cannot predict, however, what effect, if any, the financial and
regulatory difficulties being experienced by some Maine Yankee stockholders will
have on Maine Yankee or Central Maine.
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 utility (Central Maine),
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 is
conducting the proceeding that will ultimately determine Central Maine's
stranded costs and corresponding revenue requirements, and has scheduled
completion of the current phase of the proceeding for the first quarter of 1999.
On December 5, 1997, Central Maine 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. Central Maine estimated its
strandable costs at approximately $1.3 billion, net present value, and explained
the assumptions underlying the estimate. On February 10, 1998, Central Maine
reduced its estimate of strandable costs to $0.8 billion to reflect the
anticipated sale of its generating assets. Central Maine cannot predict the
results of the MPUC proceeding, which is scheduled to conclude in January 1999,
subject to later updating prior to March 1, 2000.
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 any substantial inaccuracies in
the year 2003 and at least every three years thereafter.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. On June 30, 1998, the MPUC
approved the creation of such an affiliated energy provider, subject to certain
conditions designed to eliminate any market advantage the new company might gain
through its affiliation with Central Maine, and the new company, "MainePower",
has been organized as a wholly-owned subsidiary of CMP Group.
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine 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
approximately $18 million for assets for Union Water Power, to Florida-based FPL
Group. The related book value for these assets was approximately $221 million at
December 31, 1997. In addition, as part of its agreement with FPL Group, Central
Maine entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000. Subsequently,
an agreement was reached to sell related storage facilities to FPL Group for an
additional $4.4 million, including $1.7 million for Union Water assets. The
related book value of these assets are approximately $11.9 million.
Central Maine'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. Central
Maine will continue to seek buyers for those assets. Central Maine 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 Central Maine'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 Central Maine 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. Central Maine
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 Central Maine'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, Central Maine 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. Central Maine
believes that the reduction in stranded and other costs could permit a reduction
in rates for Central Maine's customers.
The sale is subject to various closing conditions, including the approval of the
MPUC and the FERC, which Central Maine expects will extend into the first
quarter of 1999, and is subject to consents or covenant waivers from certain of
Central Maine's lenders. On November 9, 1998, the MPUC Hearing Examiner issued
his report, in the form of a recommended decision, approving the
generation-asset sale as being in the public interest. The Hearing Examiner also
found that the benefits of the sale outweighed the "detriments" of a letter
agreement between Central Maine and FPL Group which raised certain
transmission-access issues that will ultimately be resolved by the FERC.
Finally, in a separate appendix to the report that was not publicly released
with the report, the Hearing Examiner recommended a ratemaking adjustment that
would require Central Maine to bear the risk of energy market price changes with
respect to its energy-buyback agreements between the date of closing of the
asset sale and March 1, 2000. Central Maine is planning to oppose the Hearing
Examiner's ratemaking adjustment in comments to be filed before final MPUC
action on the asset sale, which is scheduled for November 23. Central Maine
cannot predict the final MPUC decision or whether or in what form the necessary
regulatory approvals, consents and waivers will be obtained.
Central Maine 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 Central Maine's or CMP
Group'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
Central Maine to recover its stranded costs from that contemplated by existing
law.
Expansion of Lines of Business
General - CMP Group is also preparing for competition by expanding its business
opportunities through investments that capitalize on core competencies. MaineCom
Services is a subsidiary that arranges fiber-optic data service for bulk
carriers, offering support for cable television or "super-cellular" personal
communication vendors, and providing other telecommunications consulting
services. TeleSmart is a wholly-owned accounts receivable management subsidiary.
Another wholly-owned subsidiary, CNEX, formerly CMP International Consultants,
provides utility consulting (domestic and international) and research. The
wholly-owned Union Water Power Company provides management of rivers and
recreational facilities, locating of underground utility facilities and infrared
photography, real estate brokerage and management, modular housing, engineering
and environmental services, and utility construction services. These
subsidiaries often utilize skills of former Central Maine employees and
regularly compete for business with other companies. Two additional areas of
business opportunity being pursued by CMP Group through its subsidiaries are
discussed in the following two paragraphs.
Natural Gas Distribution - CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to pursue opportunities to distribute
natural gas at retail in many Maine communities that are not currently served
with that fuel. They would offer natural-gas service in several areas of Maine,
primarily the Augusta, Bangor, Bath-Brunswick, Bethel, Windham 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 through Maine and into the regional energy market using substantial portions
of electric transmission-line corridors owned by Central Maine and MEPCO. On
July 24, 1998, the MPUC authorized the joint venture to serve the areas it had
applied to serve. The new company (now "CMP Natural Gas, L.L.C.", equally owned
by subsidiaries of CMP Group and Energy East) would face competition from a new
gas utility affiliated with Bangor Hydro-Electric Company in the Bangor area and
in the Bath-Brunswick area, from an existing gas utility, Northern Utilities,
Inc., which has been serving other areas of Maine, including the Portland and
Lewiston-Auburn areas. CMP Group's level of investment is dependent on the
overall economic feasibility of natural gas as a competitive energy option in
Maine, a sufficient expression of customer interest in gas service from CMP
Natural Gas, and the prospects for achieving an acceptable return on investment.
CMP Natural Gas, L.L.C., which is owned equally by subsidiaries of CMP Group and
Energy East, is positioning itself to offer gas in the Augusta and Bangor areas,
and in other communities including Bath, Bethel, Brunswick, Windham, Rumford,
and Waterville.
Fiber Optic Network - CMP Group, largely through its wholly-owned subsidiary
MaineCom Services, owns 38.5 percent of the common stock of Northeast Optic
Network, Inc. ("NEON"), which is a facilities-based provider of technologically
advanced, high-bandwidth, fiber optic transmission capacity for communications
carriers on local loop, inter-city and interstate facilities. NEON is currently
expanding its fiber optic network to encompass over 900 route miles, or more
than 60,000 fiber miles, in New England and New York, utilizing primarily
electric-utility rights-of-way, including some of Central Maine's in Maine and
some owned by other electric utilities including Northeast Utilities, another
substantial minority stockholder, in Connecticut, Massachusetts and New
Hampshire. As of September 30, 1998, NEON had completed construction of
approximately 450 route miles, or 31,000 fiber miles, of its planned system and
is currently engineering, constructing, or acquiring additional routes with a
goal of creating a continuous fiber optic link between New York City and
Portland, Maine, with access into and around Boston and numerous other major
service areas in the Northeast.
On August 5, 1998, NEON completed initial public offerings of $54.0 million of
common stock and $180.0 million of senior notes, and Central Maine, as part of
the common-stock offering, sold some of the shares in NEON it then owned for
proceeds of approximately $3.4 million. In addition, with some of the proceeds
of the offering NEON repaid approximately $18 million Central Maine had advanced
under an earlier construction loan agreement. CMP Group believes there is a
growing need for such a fiber optic network in the Northeast and that NEON's
outside financing will provide substantial assistance in completing construction
of the network, but cannot predict the results of this venture. The common stock
of NEON is listed on the Nasdaq Stock Market's National Market under the symbol
"NOPT".
Environmental Matters
CMP Group and its subsidiaries assess compliance with laws and regulations
related to hazardous substance remediation on an ongoing basis. At September 30,
1998, Central Maine had an accrued liability of $2.6 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Central Maine is exposed to interest rate risk through the use of fixed-rate and
variable-rate debt and preferred stock as sources of capital. Its exposure to
changes in applicable interest rates has increased during 1998, due to its
issuance of $262 million of medium-term notes during the year, $202 million of
which bear floating, LIBOR-based, rates. Most of the floating-rate medium-term
notes issued during 1998 replaced fixed-rate mortgage bonds or other fixed-rate
securities.
<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 Central Maine against the current
members of Central Maine's board of directors, including the then President and
Chief Executive Officer, 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
Central Maine, but requests that the defendants disgorge the compensation they
received during the period of alleged mismanagement, pay to Central Maine costs
incurred allegedly as a result of the claimed actions, and cause Central Maine
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 Central Maine's board of directors, as required by Maine law,
and on February 18, 1998, the suit was dismissed. On April 2, 1998, Central
Maine received such a demand from the plaintiff, which is under consideration by
the board.
Central Maine believes the plaintiff's claim is without merit.
Regulatory Matters - For a discussion of certain significant regulatory matters
affecting Central Maine, including those related to the permanent shutdown of
the Maine Yankee Plant, as well as electric-utility restructuring, an MPUC
proceeding that will determine Central Maine's stranded costs and related
matters, and the sale of its generation assets, see Item 2 of Part I,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" - "Permanent Shutdown of Maine Yankee Plant", "Restructuring
Legislation and MPUC Proceeding," and "Agreement for Sale of Generation Assets,"
which are incorporated herein by reference.
Tax Appeal - For a discussion of Central Maine's appeal of two significant
federal income tax adjustments proposed by the Internal Revenue Service 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 4. Not applicable
Item 5. Other Information
Shareholder Proposals, Nomination of Directors by Shareholders - The CMP Group
charter provides that in order for a shareholder to properly bring a proposal
before the CMP Group annual meeting, such proposal must be received by CMP Group
not less than 60 days nor more than 90 days prior to the first anniversary of
the preceding year's annual meeting. If the date of such annual meeting is
advanced by more than 30 days or delayed by more than 60 days, or in the case of
CMP Group's first annual meeting after September 1, 1998, notice by the
shareholder to be timely must be received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (I) the sixtieth day prior to such annual meeting or (ii) the tenth day
following the date on which notice of the date of the annual meeting was given.
This requirement is in addition to, and does not otherwise affect, the
provisions of the Securities Exchange Act that will govern the submission of
proposals by shareholders for inclusion in CMP Group's proxy statement. The
Central Maine charter and Central Maine by-laws do not contain similar
provisions. The CMP Group charter also requires that shareholder nominations of
candidates for election to the Board of Directors of CMP Group be in writing and
be received not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting. If the date of such annual
meeting is advanced by more than 30 days or delayed by more than 60 days, or in
the case of CMP Group's first annual meeting after September 1, 1998, the
nomination must be received not earlier than the ninetieth day prior to such
annual meeting and not later than the close of business on the later of (I) the
sixtieth day prior to such annual meeting or (ii) the tenth day following the
date on which notice of the date of the annual meeting was given. The Central
Maine charter and Central Maine by-laws do not contain similar provisions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b)Reports on Form 8-K. CMP Group filed a report on Form 8-K on September
1, 1998, reporting the implementation of the re-organization of Central
Maine and its affiliates into the CMP Group holding company structure.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their respective
behalfs by the undersigned thereunto duly authorized.
CMP GROUP, INC.
Date: November 16, 1998 By /s/ David E. Marsh_____________________
--------------------
David E. Marsh, Chief Financial Officer
(Principal Financial Officer and duly
authorized officer)
CENTRAL MAINE POWER COMPANY
Date: November 16, 1998 By /s/ Curtis I. Call______________________
--------------------
Curtis I. Call, Treasurer (duly authorized
officer)
By /s/ Michael W. Caron___________________
Michael W. Caron, Comptroller (Chief
Accounting 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 2
<BOOK-VALUE> Per-Book
<TOTAL-NET-UTILITY-PLANT> $1,074,134
<OTHER-PROPERTY-AND-INVEST> $52,291
<TOTAL-CURRENT-ASSETS> $171,832
<TOTAL-DEFERRED-CHARGES> $907,427
<OTHER-ASSETS> $18,546
<TOTAL-ASSETS> $2,224,230
<COMMON> $162,213
<CAPITAL-SURPLUS-PAID-IN> $257,338
<RETAINED-EARNINGS> $62,627
<TOTAL-COMMON-STOCKHOLDERS-EQ> $482,178
$27,910
$35,571
<LONG-TERM-DEBT-NET> $263,172
<SHORT-TERM-NOTES> $80,000
<LONG-TERM-NOTES-PAYABLE> $0
<COMMERCIAL-PAPER-OBLIGATIONS> $0
<LONG-TERM-DEBT-CURRENT-PORT> $291,293
$0
<CAPITAL-LEASE-OBLIGATIONS> $31,473
<LEASES-CURRENT> $1,742
<OTHER-ITEMS-CAPITAL-AND-LIAB> $1,010,891
<TOT-CAPITALIZATION-AND-LIAB> $2,224,230
<GROSS-OPERATING-REVENUE> $693,410
<INCOME-TAX-EXPENSE> $18,371
<OTHER-OPERATING-EXPENSES> $613,397
<TOTAL-OPERATING-EXPENSES> $631,768
<OPERATING-INCOME-LOSS> $63,457
<OTHER-INCOME-NET> $7,662
<INCOME-BEFORE-INTEREST-EXPEN> $71,119
<TOTAL-INTEREST-EXPENSE> $38,043
<NET-INCOME> $33,076
$3,890
<EARNINGS-AVAILABLE-FOR-COMM> $29,186
<COMMON-STOCK-DIVIDENDS> $21,915
<TOTAL-INTEREST-ON-BONDS> $17,866
<CASH-FLOW-OPERATIONS> $18,595
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
