UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
001-14786 CMP GROUP, INC. 01-0519429
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
1-5139 CENTRAL MAINE POWER COMPANY 01-0042740
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
the filing requirements for at least the past 90 days.
CMP Group, Inc.: Yes X No
Central Maine Power Company: Yes X No
This combined Form 10-Q is separately filed by CMP Group, Inc., and Central
Maine Power Company. Information contained herein relating to either individual
registrant is filed by such registrant on its own behalf. Each registrant makes
no representation as to information relating to the other registrant.
As of May 12, 1999, the number of shares of Common Stock outstanding for each
registrant was as follows:
Registrant Shares
CMP Group, Inc., Common Stock, $5 Par Value 32,442,552
Central Maine Power Company, Common Stock, $5 Par Value (All
held by CMP Group, Inc.) 31,211,471
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 March 31, 1999 and 1998 5
Consolidated Balance Sheet - March 31, 1999 and December 31, 1998:
Assets 6
Stockholders' Equity and Liabilities 7
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 8
Central Maine Power Company
Consolidated Statement of Earnings for the Three Months
Ended March 31, 1999 and 1998 9
Consolidated Balance Sheet - March 31, 1999 and December 31, 1998:
Assets 10
Stockholders' Equity and Liabilities 11
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 12
Notes to Consolidated Financial Statements 13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 39
Part II. Other Information 40
Signatures 42
GLOSSARY
The following abbreviations or acronyms are used in the text of this Form 10-Q
as defined below:
Term Definition
Form 10-K Annual Report on Form 10-K
ARP Alternative Rate Plan
APB Accounting Principles Board
Assigned Agreements Maine Yankee's Power Contracts,
Additional Power Contracts and Capital Funds
Agreements, as amended, with its Sponsors.
Central Maine Central Maine Power Company, a regulated electric
utility and subsidiary of CMP Group.
Central Securities Central Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
CERCLA Comprehensive Environmental Response, Compensa-
tion, and Liability Act.
CMP Group CMP Group, Inc., is the holding company
organized effective September 1, 1998, which owns
all of the common stock of Central Maine Power
Company, Union Water Power Company, MaineCom
Services, CNEX, MainePower, TeleSmart and New
England Gas Development.
CMP Group System CMP Group and its wholly-owned and directly and
indirectly controlled subsidiaries.
CMP Natural Gas CMP Natural Gas, L.L.C., a limited-liability
company owned by subsidiaries of CMP Group and
Energy East to distribute natural gas in Maine.
CNEX A wholly owned subsidiary of CMP Group,
(previously called CMP International
Consultants), which provides utility consulting
(domestic and international) and research.
Cumberland Securities Cumberland Securities Corporation, a wholly
owned subsidiary of Central Maine which owns
and manages real estate.
Connecticut Yankee Connecticut Yankee Atomic Power Company
D&P Duff & Phelps Credit Rating Co.
DOE United States Department of Energy
DOJ United States Department of Justice
EITF Emerging Issues Task Force of FASB
Energy East Energy East Corporation, a New York holding
company and the parent company of NYSEG effective
May 1, 1998
EPA United States Environmental Protection Agency.
EPS Earnings per share
ERAM Electric Revenue Adjustment Mechanism
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FPL FPL Group, Inc.
Indenture General and Refunding Mortgage Indenture between
Central Maine and State Street Bank and Trust
Company, Trustee, dated as of April 15, 1976, as
amended and supplemented.
IPO Initial Public Offering
IRS United States Internal Revenue Service
ISO Independent System Operator
Kwh Kilowatt-hour
MaineCom MaineCom Services, a CMP Group subsidiary which
arranges fiber-optic data service for bulk
carriers.
MainePower A wholly owned 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.
MRS Monitored Retrievable Storage
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.
NB Power New Brunswick Power Corporation.
NEON NorthEast Optic Network, Inc., a corporation of
which MaineCom owns 38.5-percent of the common
stock, which is building a fiber optic network in
New England and New York.
NEPOOL New England Power Pool
NERC North American Electric Reliability Council
NORVARCO A wholly-owned subsidiary of Central Maine.
NORVARCO is one of two general partners with 50%
interests in Chester SVC Partnership, which owns
a static var compensator facility located in
Chester, Maine.
NPCC Northeast Power Coordinating Council
NRC United States Nuclear Regulatory Commission
NYSEG New York State Electric & Gas Corporation, a
utility subsidiary of Energy East.
NUG Non-utility generator
New England Gas Development New England Gas Development Corporation, a
wholly-owned subsidiary of CMP Group created in
September 1998 to hold up to a 50-percent
ownership interest in CMP Natural Gas.
OASIS Open Access Same-time Information System.
OI Nuclear Regulatory Commission's Office of
Investigations
OPA Maine Office of the Public Advocate
Plant Maine Yankee nuclear generating plant at
Wiscasset, Maine
PURPA Public Utility Regulatory Policies Act of 1978.
RCRA Resource Conservation and Recovery Act.
SAB Securities and Exchange Commission's Staff
Accounting Bulletins.
S&P Standard & Poor's Corp.
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Secondary Purchasers 28 municipal and cooperative utilities that had
purchased Maine Yankee power under
identical contracts with Maine Yankee sponsors.
SFAS Statement of Financial Accounting Standards
TeleSmart A wholly owned subsidiary of CMP Group which
provides accounts receivable management.
Union Water The Union Water Power Company, a wholly owned
subsidiary of CMP Group.
Vermont Yankee Vermont Yankee Nuclear Power Corporation.
Waste Act Federal Low-level Radioactive Waste Policy
Amendments Act.
Yankee Atomic Yankee Atomic Electric Company
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of CMP Group, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheet as of March 31, 1999, and the Consolidated Statement of Income and
Consolidated Cash Flows for the periods ended March 31, 1999 and 1998. CMP Group
is the parent holding company of Central Maine, Union Water, MaineCom, CNEX and
New England Gas Development. Central Maine constitutes substantially all of CMP
Group's assets, revenues and expenses. All nonutility operating transactions are
included in other revenues and operating expenses in CMP Group's Consolidated
Statement of Income.
<TABLE>
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CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Three Months
Ended March 31,
1999 1998
Revenues
Electric operating revenues $270,694 $248,745
Other non-utility revenues 5,939 697
------- -------
Total Revenues 276,633 249,442
------- -------
Operating Expenses
Fuel used for company generation 8,947 4,072
Purchased power
Energy 94,475 104,295
Other (capacity) 22,774 24,376
Other operation 53,204 45,774
Maintenance 8,274 10,115
Depreciation and amortization 14,672 13,822
Taxes other than income taxes 7,405 7,054
------- -------
Total Operating Expenses 209,751 209,508
------- -------
Operating Income 66,882 39,934
------ ------
Other Income (Expense)
Equity in earnings of associated companies (2,979) 1,591
Allowance for equity funds used during construction 192 174
Other, net 1,235 636
Minority interest in consolidated net income (625) (48)
Gain on sale of investments and properties 7,011 (1)
------- -------
Total Other Income (Expense) 4,834 2,352
------- -------
Interest Charges
Long-term debt 10,553 10,850
Other interest 1,380 1,676
Allowance for borrowed funds used during construction (137) (127)
------ -----
Total Interest Charges 11,796 12,399
------ ------
Income Before Income Taxes and Preferred Dividends 59,920 29,887
Income taxes 25,744 11,592
Dividends on Preferred Stock of Subsidiary 919 1,897
------- -------
Net Income $ 33,257 $ 16,398
======= =======
Weighted Average Number Of Shares Of Common
Stock Outstanding 32,442,552 32,442,752
Earnings Per Share Of Common Stock - Basic $1.03 $0.51
Earnings Per Share Of Common Stock - Diluted $1.02 $0.51
Dividends Declared Per Share Of Common Stock $0.225 $0.225
The accompanying notes are an integral part of these financial statements.
</TABLE>
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
ASSETS March 31, December 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents $ 33,122 $ 30,540
Accounts receivable, less allowance for
uncollectible accounts of
$2,994 in 1999 and $2,507 in 1998
Service - billed 83,625 81,169
- unbilled 46,649 53,296
Other accounts receivable 14,805 13,753
Inventories, at average cost
Fuel oil 4,894 5,879
Materials and supplies 12,853 13,126
Funds on deposit with trustee 1 1
Prepayments and other current assets 9,774 10,268
---------- ----------
Total Current Assets 205,723 208,032
---------- ----------
Electric Property, at original cost 1,756,311 1,750,837
Less: Accumulated depreciation 704,214 694,410
---------- ----------
Net electric property in service 1,052,097 1,056,427
--------- ---------
Construction work in progress 20,445 19,538
Nuclear fuel 1,833 1,147
---------- ----------
Total net electric property 1,074,375 1,077,112
Investments In Associated Companies, at equity 69,013 71,880
----------- -----------
Total Net Electric Property and Investments
in Associated Companies 1,143,388 1,148,992
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned
projects, net 77,167 78,539
Yankee Atomic purchased-power contract 6,643 7,761
Connecticut Yankee purchased-power contract 28,950 29,913
Maine Yankee purchased-power contract 268,828 273,895
Regulatory assets - deferred taxes 235,451 235,451
Other deferred charges and other assets 271,789 280,301
---------- ----------
Deferred Charges and Other Assets, Net 888,828 905,860
---------- ----------
Total Assets $2,237,939 $2,262,884
========= =========
The accompanying notes are an integral part of these financial statements
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES
March 31, December 31,
1999 1998
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 327,253 $ 298,356
Sinking-fund requirements 19,388 11,455
Accounts payable 76,964 90,960
Dividends payable 8,243 7,304
Accrued interest 4,948 7,524
Accrued income taxes 35,695 19,911
Miscellaneous current liabilities 18,964 15,909
---------- -----------
Total Current Liabilities and
Interim Financing 491,455 451,419
--------- ----------
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes 373,756 376,043
Unamortized investment tax credits 28,695 29,064
Yankee Atomic purchased-power contract 6,643 7,761
Connecticut Yankee purchased-power contract 28,950 29,913
Maine Yankee purchased-power contract 268,828 273,895
Regulatory liabilities - deferred taxes 58,376 58,376
Other reserves and deferred credits 118,329 116,805
--------- ----------
Total Reserves and Deferred Credits 883,577 891,857
--------- ----------
Long-Term Debt
Mortgage debt 73,994 117,683
Other long-term obligations 189,816 228,598
--------- ----------
Total Long-Term Obligations 263,810 346,281
--------- ----------
Redeemable Preferred Stock 18,910 18,910
---------- -----------
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 285,917 285,835
Reacquired common stock (1,014) (827)
Retained earnings 97,543 71,668
Preferred stock 35,528 35,528
---------- -----------
Total Stockholders' Equity 580,187 554,417
--------- ----------
Total Stockholders' Equity and Liabilities $2,237,939 $2,262,884
========= =========
The accompanying notes are an integral part of these financial statements.
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CMP Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Three Months
ended March 31,
1999
1998
CASH FROM OPERATIONS
Net income $33,257 $16,398
Items not requiring (not providing) cash:
Depreciation 12,136 11,292
Amortization 9,179 9,033
Deferred income taxes and investment tax credits, net (2,934) 19,028
Allowance for equity funds used during construction (192) (174)
Preferred stock dividends of subsidiary 919 1,897
Gain on sale of investments and properties (7,060) -
Changes in certain assets and liabilities:
Accounts receivable 3,139 16,336
Other current assets 494 1,288
Inventories 1,258 (4,167)
Accounts payable (9,287) 9,526
Accrued taxes and interest 13,208 (12,055)
Miscellaneous current liabilities 3,055 1,102
Deferred ice storm cost (533) (52,557)
Deferred energy-management costs (201) (348)
Other, net 7,017 3,405
------- -------
Net Cash Provided by Operating Activities 63,455 20,004
------ ------
INVESTING ACTIVITIES
Construction expenditures (11,241) (9,880)
Investments in and loans to affiliates - (300)
Proceeds from sale of investments and properties 7,563 -
Changes in accounts payable - investing activities (4,709) (1,732)
------- --------
Net Cash Used by Investing Activities (8,387) (11,912)
------- -------
FINANCING ACTIVITIES
Issuances:
Medium-term notes - 60,000
Redemptions:
Mortgage bonds - (61,000)
Preferred stock -
Revolving Credit Agreement (40,000) (60,000)
Other long-term obligations - (50)
Short-term obligations, net (5,000) -
Funds on deposit with trustee - 61,000
Purchase of treasury stock (187) -
Dividends:
Common stock (7,299) (7,305)
Preferred stock of subsidiary - (1,897)
------------ ------
Net Cash Used by Financing Activities (52,486) (9,252)
------ ------
Net Increase (Decrease) in Cash 2,582 (1,160)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 30,540 20,841
------- ------
CASH AND CASH EQUIVALENTS, END OF YEAR $33,122 $19,681
====== ======
</TABLE>
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
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 March 31, 1999, and the Consolidated Statement of Income and
Consolidated Cash Flows for the periods ended March 31, 1999 and 1998. Central
Maine's consolidated financial statements include the accounts of Central Maine
and its wholly owned and controlled subsidiaries. All nonutility operating
transactions are included in other revenues and operating expenses in Central
Maine's Consolidated Statement of Income.
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Central Maine Power Company and Subsidiaries
Consolidated Statement Of Earnings
(Unaudited)
(Dollars in thousands, except per-share amounts)
For the Three Months
Ended March 31,
1999 1998
Revenues
Electric operating revenues $270,570 $248,745
Other non-utility revenues 479 697
------- -------
Total Revenues 271,049 249,442
------- -------
Operating Expenses
Fuel used for company generation 8,947 4,072
Purchased power
Energy 94,475 104,295
Other (capacity) 22,774 24,376
Other operation 47,849 45,774
Maintenance 8,061 10,115
Depreciation and amortization 14,449 13,822
Taxes other than income taxes 7,361 7,054
------- -------
Total Operating Expenses 203,916 209,508
------- -------
Operating Income 67,133 39,934
-------- ------
Other Income (Expense)
Equity in earnings of associated companies 971 1,591
Allowance for equity funds used during construction 192 174
Other, net 574 636
Minority interest in consolidated net income (625) (48)
Gain on sale of investments and properties 7,010 (1)
-------- -----
Total Other Income (Expense) 8,122 2,352
-------- -----
Interest Charges
Long-term debt 10,504 10,850
Other interest 1,373 1,676
Allowance for borrowed funds used during construction (137) (127)
---------- -----
Total Interest Charges 11,740 12,399
------- ------
Income Before Income Taxes 63,515 29,887
Income taxes 25,868 11,592
------- ------
Net Income 37,647 18,295
Dividends on Preferred Stock 919 1,897
--------- -----
Earnings Applicable to Common Stock $ 36,728 $ 16,398
======= =======
Weighted Average Number Of Shares Of Common
Stock Outstanding 31,211,471 32,442,752
Earnings Per Share Of Common Stock - Basic and Diluted $1.18 $0.51
Dividends Declared Per Share Of Common Stock $0.225 $0.225
</TABLE>
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
ASSETS March 31, December 31,
1999 1998
(Unaudited)
Current Assets
Cash and cash equivalents $ 25,692 $ 22,628
Accounts receivable, less allowance for
uncollectible accounts of
$2,994 in 1998 and $2,507 in 1997
Service - billed 83,565 81,082
- unbilled 46,579 53,110
Other accounts receivable 11,877 12,698
Inventories, at average cost
Fuel oil 4,894 5,879
Materials and supplies 12,295 12,755
Funds on deposit with trustee 1 1
Prepayments and other current assets 9,614 10,161
---------- -----------
Total Current Assets 194,517 198,314
---------- ----------
Electric Property, at original cost 1,756,282 1,750,777
Less: Accumulated depreciation 704,194 694,463
---------- ----------
Net electric property in service 1,052,088 1,056,314
--------- ---------
Construction work in progress 19,654 19,483
Nuclear fuel 1,833 1,147
---------- ------------
Total net electric property 1,073,575 1,076,944
Investments In Associated Companies, at equity 48,174 48,406
---------- -----------
Total Net Electric Property and Investments
in Associated Companies 1,121,749 1,125,350
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned
projects, net 77,167 78,539
Yankee Atomic purchased-power contract 6,643 7,761
Connecticut Yankee purchased-power contract 28,950 29,913
Maine Yankee purchased-power contract 268,828 273,895
Regulatory assets - deferred taxes 235,451 235,451
Other deferred charges and other assets 265,645 274,257
---------- ----------
Deferred Charges and Other Assets, Net 882,684 899,816
---------- ----------
Total Assets $2,198,950 $2,223,480
========= =========
The accompanying notes are an integral part of these financial statements.
<TABLE>
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Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES
March 31, December 31,
1999 1998
(Unaudited)
Current Liabilities and Interim Financing
Interim financing $ 327,100 $ 298,183
Sinking-fund requirements 19,388 11,455
Accounts payable 77,614 93,012
Dividends payable 943 5
Accrued interest 4,922 7,491
Income taxes payable to parent company 35,572 20,822
Miscellaneous current liabilities 18,150 15,455
----------- -----------
Total Current Liabilities and Interim Financing 483,689 446,423
---------- ----------
Commitments and Contingencies
Reserves and Deferred Credits
Accumulated deferred income taxes 369,879 372,243
Unamortized investment tax credits 28,695 29,064
Yankee Atomic purchased-power contract 6,643 7,761
Connecticut Yankee purchased-power contract 28,950 29,913
Maine Yankee purchased-power contract 268,828 273,895
Regulatory liabilities - deferred taxes 58,376 58,376
Other reserves and deferred credits 112,339 111,506
---------- ----------
Total Reserves and Deferred Credits 873,710 882,758
---------- ----------
Long-Term Debt
Mortgage debt 73,994 117,683
Other long-term obligations 187,388 226,151
---------- ----------
Total Long-Term Obligations 261,382 343,834
---------- ----------
Redeemable Preferred Stock 18,910 18,910
----------- -----------
Stockholders' Equity
Common-stock 162,213 162,213
Other paid in capital 276,504 276,422
Reacquired common stock (19,000) (19,000)
Retained earnings 105,971 76,349
Preferred stock 35,571 35,571
----------- -----------
Total Stockholders' Equity 561,259 531,555
---------- ----------
Total Stockholders' Equity and Liabilities $2,198,950 $2,223,480
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
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Central Maine Power Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the Three Months
Ended March 31,
1999 1998
CASH FROM OPERATIONS
Net income $ 37,647 $ 18,295
Items not requiring (not providing) cash:
Depreciation 11,916 11,292
Amortization 9,179 9,033
Deferred income taxes and investment tax credits, net (2,816) 19,028
Allowance for equity funds used during construction (192) (174)
Gain on Sale of Investments and Properties (7,060) -
Changes in certain assets and liabilities:
Accounts receivable 4,869 16,336
Other current assets 547 1,288
Inventories 1,445 (4,167)
Accounts payable (10,689) 9,526
Accrued taxes and interest 12,181 (12,055)
Miscellaneous current liabilities 2,695 1,102
Deferred Ice storm costs (533) (52,557)
Deferred energy-management costs (201) (348)
Other, net 3,755 3,405
--------- ---------
Net Cash Provided by Operating Activities 62,743 20,004
-------- --------
INVESTING ACTIVITIES
Construction expenditures (10,505) (9,880)
Investments in and loans to affiliates - (300)
Proceeds from sale of investments and properties 7,563 -
Changes in accounts payable - investing activities (4,709) (1,732)
--------- ---------
Net Cash Used by Investing Activities (7,651) (11,912)
--------- --------
FINANCING ACTIVITIES
Issuances:
Medium-term notes - 60,000
Redemptions:
Mortgage bonds - (61,000)
Revolving Credit Agreement (40,000) (60,000)
Other long-term obligations - (50)
Short-term obligations (5,000) -
Funds on deposit with trustee - 61,000
Dividends:
Common stock (7,028) (7,305)
Preferred stock - (1,897)
------- ---------
Net Cash Used by Financing Activities (52,028) (9,252)
-------- ---------
Net Increase (Decrease) in Cash 3,064 (1,160)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,628 20,841
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,692 $ 19,681
======== ========
</TABLE>
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements
CMP Group and
Central Maine Power Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General Description - CMP Group was organized effective September 1, 1998,
at which time all of the shares of common stock of Central Maine were
converted into an equal number of shares of common stock of CMP Group. CMP
Group owns all of the shares of common stock of Central Maine and the
former non-utility subsidiaries of Central Maine (TeleSmart, MaineCom, CNEX
and Union Water Power Company) in addition to New England Gas Development
Corporation, a subsidiary organized in 1998.
Central Maine is a public utility primarily engaged in the sale of electric
energy at the wholesale and retail levels to residential, commercial,
industrial, and other classes of customers in the State of Maine.
Basis of Presentation - This Quarterly Report on Form 10-Q is a combined
report of CMP Group and Central Maine, a regulated electric-utility
subsidiary of CMP Group. The Notes to Consolidated Financial Statements
apply to both CMP Group and Central Maine. CMP Group's consolidated
financial statements include the accounts of CMP Group and its wholly owned
and controlled subsidiaries, including Central Maine. Central Maine's
consolidated financial statements include its accounts as well as those of
its wholly owned and controlled subsidiaries. Certain immaterial majority
owned subsidiaries, which were previously accounted for on the equity
method, were consolidated in September 1998. For all periods prior to
September 1, 1998, the historic financial position and results of
operations of CMP Group reflect the activity of Central Maine.
Central Maine's financial position and results of operations account for
substantially all of CMP Group's consolidated financial position and
results of operations. This quarterly report should be read in conjunction
with CMP Group's and Central Maine's Annual Report on Form 10-K for the
year ended December 31, 1998.
CMP Group and Central Maine believe that the accompanying statements
reflect all adjustments necessary to present a fair statement of the
consolidated financial position and results of operations for the interim
periods. All material adjustments are of a normal recurring nature unless
otherwise disclosed in this Form 10-Q. All significant intercompany
transactions have been eliminated from the consolidated financial
statements.
Results shown for the respective interim periods being reported herein are
not necessarily indicative of results to be expected for the fiscal years
due to seasonal factors which are inherent in electric utilities in New
England. A greater proportionate amount of revenues is earned in the first
and fourth quarters (winter season) of most years because more electricity
is sold due to weather conditions, fewer day-light hours, and related
factors.
For purposes of the statement of cash flows, CMP Group and Central Maine
consider all highly liquid instruments purchased having maturities of three
months or less to be cash equivalents.
Supplemental Cash Flow Disclosure - Cash paid for the three months ended
March 31, 1999 and 1998:
(In Millions)
1999 1998
CMP Group
Interest, net of amounts capitalized $12.5 $14.7
Income taxes 12.0 1.5
Central Maine
Interest, net of amounts capitalized 13.1 14.7
Income Taxes 12.0 1.5
Stock-Based Compensation - Under CMP Group's Long-Term Incentive Plan,
stock options were granted in 1998 and 1999 with an exercise price equal to
the fair market value on the date of the grants. One third of the options
vest annually, commencing on the first anniversary of the option grant
date. Upon vesting stock options are exercisable during periods of active
employment or within thirty (30) days after termination of employment,
provided termination did not occur due to cause. Performance shares are
shares of CMP Group stock granted at the end of a 3-year performance cycle,
based on achievement of performance goals directly linked to increasing
shareholder value. If the goals are not achieved at the end of the 3-year
cycle, the performance shares are forfeited. Performance shares were
granted in 1997, 1998 and 1999. All three grants have a three-year cycle
and are being accrued accordingly; in the event performance goals for a
performance cycle are achieved, common stock is awarded at the end of that
performance cycle.
1997 1998 1999
---- ---- ----
Options granted - 241,996 256,214
Performance Shares* 61,437 66,906 67,654
*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 months ended March
31, 1999.
Reclassification - Certain amounts from prior years financial statements
have been reclassified to conform to the current year presentation.
Impact of New Accounting Standards - In June 1998, the FASB issued SFAS No.
133, Accounting for Derivatives and Hedging Activities. 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. Based on CMP Group
and Central Maine's current business practices the adoption of this
standard is not anticipated to have a significant impact on their financial
statements.
2. Commitments and Contingencies
Permanent Shutdown of Maine Yankee Plant - In August 1997 the board of
directors of Maine Yankee voted to permanently cease power operations at
the Maine Yankee plant at Wiscasset, Maine (the "Plant") and to
decommission the Plant. In November 1997 Maine Yankee submitted to FERC
revised rates reflecting the decision to shut down the Plant, including
amendments to its Power Contracts. On January 14, 1998, FERC accepted the
new rates for filing, subject to refund, and set the new rates, the Power
Contract amendments, and issues concerning the prudence of the
Plant-shutdown decision for hearing.
Since the filing of the rate request, Maine Yankee and the active
intervenors, including among others the MPUC Staff, the OPA, Central Maine
and other owners, the Secondary Purchasers, and a Maine environmental group
(the "Settling Parties"), engaged in extensive discovery and negotiations.
Those parties participated in settlement discussions that resulted in an
Offer of Settlement filed by those parties with the FERC on January 19,
1999. On February 8, 1999, the FERC Trial Staff recommended that the
presiding judge certify the settlement to the FERC and that the FERC
approve it. Upon approval by the FERC, the settlement would constitute a
full settlement of all issues raised in the consolidated FERC proceeding,
including decommissioning-cost issues and issues pertaining to the prudence
of the management, operation, and decision to permanently cease operation
of the Plant. A separately negotiated settlement filed with the FERC on
February 5, 1999, would resolve the issues raised by the Secondary
Purchasers by limiting the amounts they will pay for decommissioning the
Plant and by settling other points of contention affecting individual
Secondary Purchasers. On February 24, 1999, the FERC Trial Staff
recommended certification and approval of the settlement with the Secondary
Purchasers.
The Offer of Settlement provides for Maine Yankee to collect $33.6 million
in the aggregate annually, effective January 15, 1998, consisting of (1)
$26.8 million for estimated decommissioning costs, and (2) $6.8 million for
ISFSI-related costs. The original filing with FERC on November 6, 1997,
called for an aggregate annual collection rate of $36.4 million for
decommissioning and the ISFSI, based on the TLG estimate. Under the
settlement the amount collected annually could be reduced to approximately
$26 million if Maine Yankee is able to (1) use for construction of the
ISFSI funds held in trust under Maine law for spent-fuel disposal, and (2)
access approximately $6.8 million being held by the State of Maine for
eventual payment to the State of Texas pursuant to a compact for low-level
nuclear waste disposal, the future of which is now in question after
rejection of the selected disposal site in west Texas by a Texas regulatory
agency. Both would require authorizing legislation in Maine, which Maine
Yankee is committed to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all unamortized
investment (including fuel) in the Plant, together with a return on equity
of 6.50 percent, effective January 15, 1998, on equity balances up to
maximum allowed equity amounts. The Settling Parties also agreed in the
proposed settlement not to contest the effectiveness of the Amendatory
Agreements submitted to FERC as part of the original filing, subject to
certain limitations including the right to challenge any accelerated
recovery of unamortized investment under the terms of the Amendatory
Agreements after a required informational filing with the FERC by Maine
Yankee. In addition, the settlement contains incentives for Maine Yankee to
achieve further savings in its decommissioning and ISFSI-related costs and
resolves issues concerning restoration and future use of the Plant site and
environmental matters of concern to certain of the intervenors in the
proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and
the OPA entered into a further agreement resolving retail rate issues and
other issues specific to the Maine parties, including those that had been
raised concerning the prudence of the operation and shutdown of the Plant
(the "Maine Agreement"). Under the Maine Agreement Central Maine would
continue to recover its Maine Yankee costs in accordance with its most
recent ARP order from the MPUC without any adjustment reflecting the
outcome of the FERC proceeding. To the extent that Central Maine has
collected from its retail customers a return on equity in excess of the
6.50 percent contemplated by the Offer of Settlement, no refunds would be
required, but such excess amounts would be credited to the customers to the
extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners,
for the period from March 1, 2000, through December 1, 2004, to hold their
Maine retail ratepayers harmless from the amounts by which the replacement
power costs for Maine Yankee exceed the replacement power costs assumed in
the report to the Maine Yankee Board of Directors that served as a basis
for the Plant shutdown decision, up to a maximum cumulative amount of $41
million. Central Maine's share of that amount would be $31.16 million for
the period. The Maine Agreement, which was approved by the MPUC on December
22, 1998, also sets forth the methodology for calculating such replacement
power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including
the Maine Agreement, constitutes a reasonable resolution of the issues
raised in the Maine Yankee FERC proceeding, and that approval of the Offer
of Settlement by the FERC would eliminate significant uncertainties
concerning CMP Group's and Central Maine's future financial performance.
Although all of the active parties to the proceeding, including the FERC
Trial Staff, support or, with respect to certain individual provisions, do
not oppose, the Offer of Settlement, CMP Group and Central Maine cannot
predict with certainty whether or in what form it will be approved by the
FERC.
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 estimable due to a number of factors, including the unknown
magnitude of possible contamination, the appropriate remediation methods,
the possible effects of future legislation or regulation and the possible
effects of technological changes. Central Maine cannot predict the schedule
or scope of remediation due to the regulatory process and involvement of
non-governmental parties. At March 31, 1999, the liability recorded by
Central Maine for its estimated environmental remediation costs amounted to
$2.9 million, which management has determined to be the most probable
amount within the range of $2.9 million to $10.3 million. Such costs may be
higher if Central Maine is found to be responsible for cleanup costs at
additional sites or identifiable possible outcomes change.
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. Since August 1997
the parties have been engaged in resolving preliminary issues and in
extensive pre-hearing discovery on a schedule calling for an arbitration
hearing in the fall of 1999. Central Maine cannot predict the outcome of
the litigation and arbitration or whether the current schedule will be
maintained.
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 March 31, 1999,
amounted to $20.1 million, or a decrease in net income of $11.9 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 and sought review of the asserted deficiencies
by an IRS Appeals Officer to determine whether all or part of the dispute
could be resolved in advance of a court determination. As of March 31,
1999, four of the seven issues in dispute had been resolved, but not the
two major disallowances. Central Maine will continue to work toward
resolving the remaining issues, but a trial may be necessary for one or
more of those issues. 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.
Subsidiaries of CMP Group and Energy East own approximately 40 percent and
60 percent, respectively, of CMP Natural Gas, which is positioning itself
to offer gas in a number of communities in Maine that are not now served
with gas.
3. Regulatory Matters and Electric-Utility Industry Restructuring
Alternative Rate Plan - On March 15, 1999, Central Maine submitted its 1999
ARP compliance filing to the MPUC. In the filing the Company recommended
that rates remain unchanged for the period July 1, 1999 to February 29,
2000. The design and levels of Central Maine's rates as a transmission and
distribution company, effective March 1, 2000, will be determined in Phase
II of the MPUC proceeding discussed below in this note under "MPUC
Proceeding on Stranded Costs, Revenue Requirements, and Rate Design."
Stranded Costs - The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry on March 1, 2000, was enacted by
the Maine Legislature in May 1997, and is discussed in detail below. Such a
departure from traditional regulation, however, could have a substantial
impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full
recovery, utilities would find their above-market costs to be "stranded",
or unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its
size. In general, its stranded costs reflect the excess costs of Central
Maine's purchased-power obligations over the market value of the power, and
the costs of deferred charges and other regulatory assets. The major
portion of Central Maine's stranded costs is related to above-market costs
of purchased-power obligations arising from Central Maine's long-term,
noncancelable contracts for the purchase of capacity and energy from NUGs,
with lesser estimated amounts related to Central Maine's deferred
regulatory assets.
Maine Restructuring Legislation - The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1,
2000, to provide a "reasonable opportunity" to recover stranded costs
through the rates of the transmission-and-distribution company, comparable
to the utility's opportunity to recover stranded costs before the
implementation of retail access under the legislation. Stranded costs are
defined as the legitimate, verifiable and unmitigable costs made
unrecoverable as a result of the restructuring required by the legislation
and will be determined by the MPUC as provided in the legislation. The MPUC
has been conducting separate adjudicatory proceedings to determine the
stranded costs for each Maine utility, along with the corresponding revenue
requirements and stranded-cost charges to be charged by each
transmission-and-distribution utility. The first phase of the Central Maine
proceeding was completed in early 1999 and is discussed in this note under
the heading "MPUC Proceeding on Stranded Costs, Revenue Requirements, and
Rate Design," below.
In addition, the legislation requires utilities to use all reasonable means
to reduce their potential stranded costs and to maximize the value from
generation assets and contracts. The MPUC must consider a utility's efforts
to mitigate its stranded costs in determining the amount of the utility's
stranded costs. Stranded costs and the related rates charged to customers
will be prospectively adjusted as necessary to correct substantial
inaccuracies in the year 2003 and at least every three years thereafter.
The principal restructuring provisions of the legislation provide for
customers to have direct retail access to generation services and for
deregulation of competitive electric providers, commencing March 1, 2000,
with transmission-and-distribution companies continuing to be regulated by
the MPUC. By that date, subject to possible extensions of time granted by
the MPUC to improve the sale value of generation assets, investor-owned
utilities are required to divest all generation assets and
generation-related business activities, with two major exceptions: (1)
non-utility generator contracts with qualifying facilities and contracts
with demand-side management or conservation providers, brokers or hosts,
and (2) ownership interests in nuclear power plants. However, the MPUC can
require the Company to divest its interest in Maine Yankee Atomic Power
Company on or after January 1, 2009. As discussed below under "Sale of
Generation Assets," Central Maine contracted to sell its non-nuclear
generating assets and, after a favorable court decision, completed the sale
on April 7, 1999. The legislation also requires investor-owned utilities,
after February 29, 2000, to sell their rights to the capacity and energy
from all generation assets, including the purchased-power contracts that
had not previously been divested pursuant to the legislation, with certain
immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as
a transmission-and-distribution utility, will be prohibited from selling
electric energy to retail customers. Any competitive electricity provider
that is affiliated with Central Maine would be allowed to sell electricity
outside Central Maine's service territory without limitation as to amount,
but within Central Maine's service territory the affiliate would be limited
to providing not more than 33 percent of the total kilowatt-hours sold
within Central Maine's service territory, as determined by the MPUC. CMP
Group does not now intend to engage in the sale of electric energy after
March 1, 2000.
Legislative bills that would amend certain provisions of the 1997
legislation have been submitted to the 1999 legislative session of the
Maine Legislature. CMP Group and Central Maine cannot predict whether any
changes to the 1997 legislation will be enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. -
The MPUC has completed the first phase of the proceeding contemplated by
Maine's restructuring legislation that will ultimately determine the
recovery of Central Maine's stranded costs, its revenue requirements, and
the design of its rates to be effective when Central Maine becomes a
transmission-and-distribution utility at the time retail access to
generation begins in Maine on March 1, 2000. On December 23, 1998, the MPUC
Hearing Examiners in the proceeding issued their report, in the form of a
recommended decision. Central Maine disagreed with a number of the
individual recommendations in the stranded-costs and revenue-requirements
areas and filed exceptions to those recommendations. The MPUC deliberated
the recommendations on February 10 and 11, 1999, indicated disagreement
with some of the recommendations, and issued its written order on March 19,
1999.
The MPUC stressed in its order that it was deciding the "principles" by
which it would set Central Maine's transmission-and-distribution rates,
effective March 1, 2000, but was not calculating the rates themselves
because such calculations at that time would rely excessively on estimates.
The MPUC pointed out that it would hold a "Phase II" hearing to set the
actual rates and determine the recoverable stranded costs after processing
information expected to become available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the
amount of recoverable stranded costs for Central Maine later in the
proceeding pursuant to its mandate under the restructuring statute to
provide transmission-and-distribution utilities a reasonable opportunity to
recover such costs that is equivalent to the utility's opportunity to
recover these costs prior to the commencement of retail access. The MPUC
also reviewed the prescribed methodology for determining the amount of a
utility's stranded costs, including among other factors the application of
excess value from divested generation assets to offset stranded costs. At
the beginning of the proceeding Central Maine had estimated its total
stranded costs to be approximately $1.3 billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the
appropriate cost of common equity for Central Maine as a
transmission-and-distribution company beginning March 1, 2000. Central
Maine had recommended a 12-percent cost of common equity with a 55-percent
common equity component in the capital structure. The MPUC, after weighing
conflicting recommendations, decided on a common-equity cost of 10.50
percent with a common-equity component of 47 percent, and an overall
weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of
the proceeding primarily to establishing principles that would guide it in
designing Central Maine's rates to be effective March 1, 2000. The MPUC
indicated that it would focus on (1) facilitating the transition to a
competitive market for generation, and (2) implementing a "no-losers"
policy, i.e., that the new rate design would cause no Central Maine
customer's bill to increase on March 1, 2000. Applying the latter
principle, the MPUC rejected a newly designed standby rate for
self-generators proposed by Central Maine in favor of a design generally
similar to Central Maine's current rate for the class. The MPUC stated that
it planned to undertake a comprehensive rate design and alternative rate
plan proceeding for Central Maine prior to March 1, 2002, when it could
consider experience gained with the cost structures of other
transmission-and-distribution utilities after the commencement of retail
access to generation.
The Phase I order resulted from an extended proceeding with many points of
view represented and covers a wide variety of rate-related subjects.
Definitive findings by the MPUC in a number of the subject areas await the
second phase of the proceeding, which must be completed before March 1,
2000. CMP Group and Central Maine cannot predict the definitive amount of
stranded costs the MPUC will determine that Central Maine will be entitled
to recover pursuant to the mandate of the restructuring statute, or the
revenue requirements and rate design that will result from Phase II of the
MPUC proceeding. Central Maine is preparing its Phase II filing, which it
expects to file with the MPUC in June or July of 1999.
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, to Florida-based FPL Group. The related book value for these
assets was approximately $ 218.9 million at December 31, 1998. 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
$3.6 million ($1.5 million for the assets and $2.1 million for lease
revenue associated with the properties that CMP will retain), including
$1.15 million for Union Water assets. The related book value of these
assets was approximately $11.9 million at December 31, 1998.
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
pending 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.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy
Maine, Inc. ("FPL Energy") had filed a civil action in the United States
District Court for the Southern District of New York requesting a
declaratory judgment that Central Maine could not meet essential terms of
the January agreement. FPL Group asserted that based on October 1998 FERC
rulings on transmission access, as well as other issues, it believed that
Central Maine could not comply with the conditions in the purchase contract
and that FPL Energy should not be bound to complete the transaction.
On November 23, 1998, the MPUC granted its approval of the sale to FPL
Energy of the generating assets contemplated by the purchase agreement,
finding the sale to be in the public interest. The MPUC also made the
findings required as a prerequisite to a FERC designation of the generating
facilities as "exempt wholesale generators," which had been requested by
FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine
generating assets to FPL Energy, after making the required finding that the
sale was consistent with the public interest, and accepted certain
implementing agreements for filing. The FERC granted its approval of the
transfer of hydroelectric and water storage licenses on December 28, 1998,
and its approval of exempt-wholesale-generator status for the generating
facilities on February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern
District of New York. On the same day the presiding judge ruled that FPL
Energy was not entitled to the declaratory judgment and entered judgment
for Central Maine and its affiliated defendants on all counts of the
complaint. Thereafter on that day FPL Energy announced that it would not
appeal the decision, but would proceed to a closing of the sale. The sale
was completed on April 7, 1999. The pretax gain of approximately $500 to
$600 million from the divested generation assets will initially be recorded
as a regulatory liability. In Phase II of the above described "MPUC
Proceeding on Stranded Costs, Revenue Requirements and Rate Design," the
MPUC will determine the amount of the regulatory liability that will be
used to reduce stranded costs and the utilization and timing of recognition
of any remaining regulatory liability.
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 were
$50.7 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 required 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 1998 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, Central
Maine has deferred $52.9 million in storm related costs as of March 31,
1999, including $2.2 million of carrying costs. In October 1998, the MPUC
staff issued its draft report of its summary investigation of the Maine
utilities' response to the January ice storm. This report found no basis
for formal adjudicatory investigation into the response 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 ("HUD") announced that of those
funds, $2.2 million had been awarded to Maine, with none designated for
utility infrastructure, which Central Maine and the Maine Congressional
delegation protested as inadequate and inconsistent with Congressional
intent. On March 10, 1999, HUD published a notice in the Federal Register
inviting parties to re-apply for storm-damage cost reimbursement. On March
23, 1999, HUD announced that Maine would receive an additional $2.15
million, and later announced that another $17 million would be available
for Maine. At the same time, however, the Congress is considering a
proposal to shift the responsibility for allocating the disaster-relief
funds from which Maine's $17 million would be taken from HUD to the Federal
Emergency Management Agency. Consequently, Central Maine cannot now
determine whether those funds will be allocated to Maine and, if so, what
portion Central Maine would receive. The MPUC has stated its belief that
Central Maine's prudently incurred ice-storm costs should be recovered
through rates commencing March 1, 2000, but has deferred action pending the
determination of the amount of any federal reimbursement. Therefore,
Central Maine cannot predict what portion of its ice storm-related costs it
will ultimately recover through federal assistance, if any, or from its
customers, or when any such recovery will take place.
Meeting the Requirements of SFAS No. 71 - During the first quarter of 1999
Central Maine continued 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.
The previously described 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. As a result of the
legislation discussed above, Phase I of the "MPUC Proceeding on Stranded
Costs, Revenue Requirements and Rate Design," and the generation asset sale
which was an integral part of the Phase I order, Central Maine anticipates
that it will discontinue the application of SFAS No. 71 for the generation
portion of its business in the second quarter of 1999. Central Maine does
not anticipate that any regulatory assets will be written-off since the
1997 legislation and the Phase I Order continue to provide for the recovery
of stranded costs in the rates of the transmission and distribution
company. 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. Income Taxes
The CMP Group effective tax rate is higher than the statutory rate and the
prior year's effective tax rate primarily due to losses associated with a
CMP Group equity investment in a subsidiary.
5. Transactions with Affiliated Companies
Central Maine provides certain services to CMP Group and its subsidiaries,
including administrative support services and pension and employee benefit
arrangements. Charges related to those services have been determined based
on a combination of direct charges and allocations designed to recover
Central Maine's cost. These assessments are reflected as an offset to
Central Maine's expenses and totaled approximately $1.5 million for the
quarter ended March 31, 1999.
CMP Group provides certain managerial services to its subsidiaries. Charges
related to those services have been determined based on a combination of
direct charges and allocation in order to recover the majority of their
expenses. These assessments are reflected as an offset to CMP Group's
expenses and totaled approximately $2.0 million for the quarter ended March
31, 1999.
In addition, a subsidiary of CMP Group provides certain real estate and
river management services charged to Central Maine at cost and
environmental, engineering, utility locator and construction services based
on a contracted rate. These expenses amounted to $1.8 million for the
quarter ended March 31, 1999.
Central Maine provides services to CMP Group and its subsidiaries as well
as non-affiliated parties. As of March 31, 1999, Central Maine's accounts
receivable and accounts payable included the following:
(Dollars in thousands)
Accounts Accounts
Receivable Payable
CMP Group $ 156 $1,479
CMPI 120 76
MaineCom 82 3
Telesmart 70 67
Union Water 1,070 1,158
----- -----
$1,498 $2,783
===== =====
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 urged to carefully
review and consider the factors in the succeeding paragraph.
Factors that could cause actual results to differ materially include, among
other matters, the outcome of the FERC proceeding involving Maine Yankee's
rates, decommissioning costs and issues related to the closing of the Maine
Yankee nuclear generating plant; the actual costs of decommissioning the Maine
Yankee plant; failure to resolve any significant aspect of the "Year 2000
problem"; electric utility industry restructuring, including the ongoing state
and federal activities that will determine Central Maine's ability to recover
its stranded costs and establish its revenue requirements and rate design as a
transmission-and-distribution utility commencing March 1, 2000; Central Maine's
ability to recover its costs resulting from the January 1998 ice storms that
damaged its transmission and distribution system; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which CMP Group and
Central Maine operate; CMP Group's 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.
Formation of Holding Company
General. CMP Group is a holding company organized effective September 1, 1998,
which owns all of the common stock of Central Maine and the former non-utility
subsidiaries of Central Maine. As part of the reorganization, all of the shares
of Central Maine's common stock were converted into an equal number of shares of
CMP Group common stock, which are listed on the New York Stock Exchange under
the symbol CTP. The reorganization was approved by Central Maine's shareholders
on May 21, 1998, and on various dates in 1998 by the appropriate state and
federal regulatory agencies.
Operating Results
CMP
Group Central Maine
(dollars in millions)
Net income Three months ended:
March 31, 1999 $33.3 $1.03/share $37.6
March 31, 1998 16.4 $0.51/share 18.3
---- ----
Increase $16.9 $19.3
Earnings applicable to common stock Three months ended:
March 31, 1999 N/A $36.7 $1.18/share
March 31, 1998 N/A 16.4 $0.51/share
The 1999 results have benefited significantly from increased sales and favorable
operating cost trends. Colder weather and the absence of an ice storm, which
decreased sales in 1998, contributed to the 2.2 percent gain in kilowatt-hour
sales over the first quarter of 1998. In addition, the sale of transmission line
right-of-way access to a gas pipeline project, and a settlement payment
involving regional transmission tariffs realized a total of $6 million after
taxes.
Service Area Kwh Sales - Central Maine's service area sales of electricity
totaled approximately 2.32 billion kilowatt-hours in the first quarter of 1999,
up 2.2 percent from the 2.27 billion kilowatt-hour level of a year ago, as
follows:
Service Area Kilowatt-hour Sales (Millions of KWHs)
Period Ended March 31,
Three
Months
1999 1998 % Change
Residential 792.7 743.2 6.7%
Commercial 648.0 621.0 4.3
Industrial 833.3 846.0 (1.5)
Other 47.4 60.6 (25.3)
--------- ---------
2,321.4 2,270.8 2.2%
======= =======
The changes in service area kilowatt-hour sales reflect the following:
Kilowatt-hour sales to residential customers increased by 6.7 percent in
the first quarter of 1999 compared to 1998. The bulk of the growth is due
to the absence of an ice-storm in 1999 of the kind that caused widespread
customer outages in January 1998. Another contributor was the colder
weather conditions in 1999, increasing heating requirements, as well as an
increase in new residential customers.
Commercial kilowatt-hour sales increased by 4.3 percent in the first
quarter of 1999 compared to 1998. The increased sales in the retail and
service sectors were due primarily to the absence of widespread
storm-caused outages in 1999 and colder weather in 1999 than in 1998.
Industrial kilowatt-hour sales decreased by 1.5 percent in the first
quarter of 1999 compared to 1998. Decreased sales to the paper industry
(26.3 million kwh) more than offset the positive sales growth (13.5 million
kwh) experienced in the "other industrial" sector. The primary factors
contributing to the 5.4 percent drop in sales to the paper industry were 1)
the shutdown of two of the four paper machines at one of the mills in
November of 1998 to balance production with demand; and 2) the closure of
another mill in 1998, which continues to impact 1999 results, with sales to
the mill down 4.5 million kwh compared to the first quarter of 1998. The
pulp-and-paper sector of the industrial class accounts for approximately 55
percent of the industrial sales category.
Operating Expenses
Central Maine's fuel used for company generation increased by approximately $4.9
million in the first quarter of 1999 compared to 1998 due to higher demand for
company generation.
Central Maine's purchased power-energy expense decreased by $10 million in the
first quarter, compared to 1998. The decrease is due primarily to the buyout,
restructuring and expiration of contracts with non-utility generators during
1998, resulting in lower costs in the first quarter of 1999.
Central Maine's purchased power-capacity expense decreased $1.6 million in the
first quarter compared to 1998. The decrease is due primarily to the permanent
shutdown of the Maine Yankee plant in August 1997 and the resulting decline in
operating costs. This was offset by increased capacity costs associated with the
restructuring of a NUG contract.
CMP Group maintenance expense decreased $1.8 million for the three months ended
March 31, 1999 compared to 1998. This decrease was due primarily to the
temporary increase in costs in 1998 caused by Central Maine's operations
personnel working in a maintenance capacity and to subsequent cleanup efforts
that resulted from the 1998 ice storm.
CMP Group other operations expense increased by $7.4 million in the first
quarter of 1999 as compared to 1998. The primary reasons for this increase are
1) the consolidation of its subsidiaries, including approximately $5 million for
Union Water, and 2) in the first quarter of 1998 Central Maine's operations
personnel worked temporarily in a maintenance capacity during the 1998 ice
storm.
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 $14.2
million for the first quarter ended March 31, 1999 compared to 1998, as a result
of higher pre-tax earnings for the three months ended March 31, 1999.
Other Income and Expense
Equity in Earnings of Associated Companies for CMP Group decreased by $4.6
million in the first quarter of 1999 compared to 1998.This decrease is due
primarily to losses associated with NEON, which is an equity investment of
MaineCom, a CMP Group subsidiary.
The gain on sale of investments and properties is due primarily to the sale of
transmission line right-of-way access to a gas-pipeline project.
Other Interest Expense decreased by $0.3 million during the first three months
of 1999 as compared to 1998. The decrease was due primarily to lower levels of
borrowing under Central Maine's revolving credit facilities.
For the quarter ended March 31, 1999, Central Maine reduced preferred-stock
dividends by $155 thousand as a result of the earlier redemption of its 8 7/8%
Series Preferred Stock at par, under the mandatory and optional sinking-fund
provisions of that series. A reduction of $591 thousand related to the earlier
redemption of Central Maine's 7 7/8 Series Preferred Stock. The remaining
difference relates to an earlier repurchase of 7.99% Series Preferred Stock,
resulting in a total reduction of $978 thousand as compared to the first quarter
of 1998.
Liquidity and Capital Resources
Increases in Central Maine's retail rates are limited by Central Maine's ARP.
For a discussion of the ARP, see Note 3, "Regulatory Matters," "Alternative Rate
Plan" of CMP Group and Central Maine's Form 10-K for the year ended December 31,
1998.
Approximately $51.4 million of cash was provided during the three months ended
March 31, 1999, from net income before non-cash items, primarily depreciation,
amortization and deferred income taxes. During that period approximately $18.2
million of cash was used for fluctuations in certain assets and liabilities and
from other operating activities.
Proceeds of approximately $7.6 million were provided from the sale of easements
and approximately $3.7 million from a settlement payment involving regional
transmission tariffs.
Investing activities, along with construction expenditures, utilized $8.4
million in cash during the first three months of 1999 for generation,
transmission, distribution, and general construction expenditures. In order to
accommodate existing and future loads on its electric system Central Maine is
engaged in a continuing construction program. Central Maine's plans for
improvements and expansions, its load forecast and its power-supply sources are
under a process of continuing review. Actual construction expenditures depend
upon the availability of capital and other resources, load forecasts, the timing
of its divestiture of its generating assets, customer growth and general
business conditions. The ultimate nature, timing and amount of financing for
Central Maine's total construction programs, refinancing and energy-management
capital requirements will be determined in light of market conditions, earnings
and other relevant factors.
During the three months ended March 31, 1999, CMP Group paid dividends on common
stock of $7.3 million.
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program was implemented to
increase Central Maine's financing flexibility in anticipation of restructuring
and increased competition. On March 31, 1999, Central Maine had $337 million of
its medium-term notes outstanding of which $10 million are short-term. On April
30, 1999, Central Maine called $180 million of the medium-term notes for
redemption on June 1, 1999.
To support its short-term capital requirements, in October 1996, Central Maine
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility.
Effective December 15, 1998, the banks' commitments under the 364-day facility
were reduced from $75 million to $25 million by agreement of the parties, and
other provisions were amended to reflect the reorganization of Central Maine
into a holding-company structure and recognize other changed circumstances. Both
credit facilities require annual fees on the total credit lines. The fees are
based on Central Maine's credit ratings and allow for various borrowing options
including LIBOR-priced, base-rate-priced and competitive-bid-priced loans.
Access to commercial paper markets has been substantially precluded based upon
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 $10 million in
outstanding notes as of March 31, 1999 under the credit facilities.
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 could 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.
On February 12, 1999, Central Maine restructured a power-purchase contract with
a NUG in Livermore, Maine, which it expects will save its customers the
equivalent of $20.4 million in net present value.
"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.
As planned, by the end of 1998 CMP Group had completed much of the work
associated with Year 2000 readiness for IT infrastructure and centralized
business systems. The remaining work in those areas is scheduled to be completed
during the first six months of 1999. All vendors associated with this remaining
work have indicated availability of products and services that CMP Group
believes should permit CMP Group to be Year 2000 ready 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 has contracted with
the appropriate vendors to complete critical generation control system
remediation work by June 1999, and believes it is on schedule to meet this
target.
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 $4.1 million of costs associated
with making the necessary modifications identified to date to both the
centralized and non-centralized systems. As of March 31, 1999, approximately
$3.6 million of such costs has been incurred. Some of these costs are associated
with the generation facilities sold to FPL Energy on April 7, 1999. Central
Maine is in the process of competing the Year 2000 readiness work on those
facilities.
CMP Group recognizes that failure to correct problems associated with Year 2000
issues has the potential to result in material operational and financial risks
if the affected systems either cease to function or produce erroneous results.
Such risks could include inability to operate fossil and/or hydro generating
facilities, disruptions in the operation of Central Maine's transmission and
distribution systems, an inability to access interconnections with other
utilities, and disruptions to Central Maine's major business systems (customer
information and service, administrative, financial).
Central Maine believes, however, that the most likely worst case scenario
resulting from these risks would be a temporary, and short-term, disruption of
electric service. This could occur either as a failure on the part of Central
Maine to successfully address all critical Year 2000 issues, as a failure on the
part of a critical third-party provider, or as a failure on the part of other
entities, including ISO-New England, to successfully maintain the short-term
reliability of power supply and delivery on a regional basis. Central Maine does
not expect that any such short-term service disruption would have a material
impact on its operations, liquidity, or financial condition.
In order to minimize these risks, and the potential recovery time, from Year
2000 problems, CMP Group is actively involved in contingency planning. Although
CMP Group has extensive knowledge and specific experience in disaster/recovery
planning and execution, CMP Group recognizes the importance of Year 2000
specific contingency planning. Accordingly, Central Maine is participating in
the integrated contingency planning effort headed by the North American Electric
Reliability Council, and the Northeast Power Coordinating Council. Further,
Central Maine will be developing comprehensive Year 2000 specific contingency
plans for its own independent operations.
CMP Group believes its plans are adequate to attain Year 2000 readiness, and
that the contingency plans currently under development both internally and at a
regional level should substantially mitigate the risks discussed above.
Storm Damage to Company's System - 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 were $50.7 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 required 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 1998 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, Central Maine has deferred $52.9 million in storm related costs as of
March 31, 1999, including $2.2 million of carrying costs. In October 1998, the
MPUC staff issued its draft report of its summary investigation of the Maine
utilities' response to the January ice storm. This report found no basis for
formal adjudicatory investigation into the response 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 ("HUD")
announced that of those funds, $2.2 million had been awarded to Maine, with none
designated for utility infrastructure, which Central Maine and the Maine
Congressional delegation protested as inadequate and inconsistent with
Congressional intent. On March 10, 1999, HUD published a notice in the Federal
Register inviting parties to re-apply for storm-damage cost reimbursement. On
March 23, 1999, HUD announced that Maine would receive an additional $2.15
million, and later announced that another $17 million would be available for
Maine. At the same time, however, the Congress is considering a proposal to
shift the responsibility for allocating the disaster-relief funds from which
Maine's $17 million would be taken from HUD to the Federal Emergency Management
Agency. Consequently, Central Maine cannot now determine whether those funds
will be allocated to Maine and, if so, what portion Central Maine would receive.
The MPUC has stated its belief that Central Maine's prudently incurred ice-storm
costs should be recovered through rates commencing March 1, 2000, but has
deferred action pending the determina-tion of the amount of any federal
reimbursement. Therefore, Central Maine cannot predict what portion of its ice
storm-related costs it will ultimately recover through federal assistance, if
any, 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
did not operate after December 6, 1996. The decision to close the Plant
permanently was based on an economic analysis of the costs, risks and
uncertainties associated with operating the Plant compared to those associated
with closing and decommissioning it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for filing
certain amendments to the Power Contracts (the "Amendatory Agreements") and
revised rates to reflect the decision to shut down the Plant and to request
approval of an increase in the decommissioning component of its formula rates.
Maine Yankee's submittal also requested certain other rate changes, including
recovery of unamortized investment (including fuel) and certain changes to its
billing formula, consistent with the non-operating status of the Plant. By Order
dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing,
subject to refund after a minimum suspension period, and set Maine Yankee's
Amendatory Agreements, rates and issues concerning the prudence of the
Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
In support of its request for an increase in decommissioning collections, Maine
Yankee submitted with its initial FERC filing a 1997 decommissioning cost study
performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee engaged in an
extensive competitive bid process to engage a Decommissioning Operations
Contractor ("DOC") to perform certain major decontamination and dismantlement
activities at the Plant on a fixed-price, turnkey basis. As a result of that
process, a consortium headed by Stone & Webster Engineering Corporation ("Stone
& Webster") was selected to perform such activities under a fixed-price
contract. The contract provides for, among other undertakings, construction of
an independent spent fuel storage installation ("ISFSI") and completion of major
decommissioning activities and site restoration by the end of 2004. The DOC
process resulted in fixing certain costs that had been estimated in the earlier
decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active intervenors,
including among others the MPUC Staff, the OPA, Central Maine and other owners,
the Secondary Purchasers, and a Maine environmental group (the "Settling
Parties"), engaged in extensive discovery and negotiations. Those parties
participated in settlement discussions that resulted in an Offer of Settlement
filed by those parties with the FERC on January 19, 1999. On February 8, 1999,
the FERC Trial Staff recommended that the presiding judge certify the settlement
to the FERC and that the FERC approve it. Upon approval by the FERC, the
settlement would constitute a full settlement of all issues raised in the
consolidated FERC proceeding, including decommissioning-cost issues and issues
pertaining to the prudence of the management, operation, and decision to
permanently cease operation of the Plant. A separately negotiated settlement
filed with the FERC on February 5, 1999, would resolve the issues raised by the
Secondary Purchasers by limiting the amounts they will pay for decommissioning
the Plant and by settling other points of contention affecting individual
Secondary Purchasers. On February 24, 1999, the FERC Trial Staff recommended
certification and approval of the settlement with the Secondary Purchasers. On
March 10, 1999, the presiding judge certified to the FERC that both Offers of
Settlement were uncontested and joined in the Trial Staff's comments that both
were "fair, reasonable and in the public interest."
The Offer of Settlement provides for Maine Yankee to collect $33.6 million in
the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for
ISFSI-related costs. The original filing with FERC on November 6, 1997, called
for an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount collected
annually could be reduced to approximately $26 million if Maine Yankee is able
to (1) use for construction of the ISFSI funds held in trust under Maine law for
spent-fuel disposal, and (2) access approximately $6.8 million being held by the
State of Maine for eventual payment to the State of Texas pursuant to a compact
for low-level nuclear waste disposal, the future of which is now in question
after rejection of the selected disposal site in west Texas by a Texas
regulatory agency. Both would require authorizing legislation in Maine, which
Maine Yankee is committed to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50 percent,
effective January 15, 1998, on equity balances up to maximum allowed equity
amounts. The Settling Parties also agreed in the proposed settlement not to
contest the effectiveness of the Amendatory Agreements submitted to FERC as part
of the original filing, subject to certain limitations including the right to
challenge any accelerated recovery of unamortized investment under the terms of
the Amendatory Agreements after a required informational filing with the FERC by
Maine Yankee. In addition, the settlement contains incentives for Maine Yankee
to achieve further savings in its decommissioning and ISFSI-related costs and
resolves issues concerning restoration and future use of the Plant site and
environmental matters of concern to certain of the intervenors in the
proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other issues
specific to the Maine parties, including those that had been raised concerning
the prudence of the operation and shutdown of the Plant (the "Maine Agreement").
Under the Maine Agreement Central Maine would continue to recover its Maine
Yankee costs in accordance with its most recent ARP order from the MPUC without
any adjustment reflecting the outcome of the FERC proceeding. To the extent that
Central Maine has collected from its retail customers a return on equity in
excess of the 6.50 percent contemplated by the Offer of Settlement, no refunds
would be required, but such excess amounts would be credited to the customers to
the extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners, for
the period from March 1, 2000, through December 1, 2004, to hold their Maine
retail ratepayers harmless from the amounts by which the replacement power costs
for Maine Yankee exceed the replacement power costs assumed in the report to the
Maine Yankee Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. Central Maine's
share of that amount would be $31.16 million for the period. The Maine
Agreement, which was approved by the MPUC on December 22, 1998, also sets forth
the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including the
Maine Agreement, constitutes a reasonable resolution of the issues raised in the
Maine Yankee FERC proceeding, and that approval of the Offer of Settlement by
the FERC would eliminate significant uncertainties concerning CMP Group's and
Central Maine's future financial performance. Although all of the active parties
to the proceeding, including the FERC Trial Staff, support or, with respect to
certain individual provisions, do not oppose, the Offer of Settlement, CMP Group
and Central Maine cannot predict with certainty whether or in what form it will
be approved by the FERC.
Other Maine Yankee Shareholders. Periodically-higher nuclear-related costs have
affected the financial condition of other stockholders of Maine Yankee in
varying degrees. A default by a Maine Yankee stockholder in making payments
under its Power Contract or Capital Funds Agreement could have a material
adverse effect on Maine Yankee, depending on the magnitude of the default. CMP
Group and Central Maine cannot predict, however, what effect, if any, the
financial and regulatory difficulties experienced by some Maine Yankee
stockholders might have on Maine Yankee or Central Maine.
Regulatory Matters and Electric-Utility Industry Restructuring
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry by March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such a departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of Central Maine's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of Central
Maine's stranded costs is related to above-market costs of purchased-power
obligations arising from Central Maine's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, with lesser estimated amounts
related to Central Maine's deferred regulatory assets.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000, to
provide a "reasonable opportunity" to recover stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail access
under the legislation. Stranded costs are defined as the legitimate, verifiable
and unmitigable costs made unrecoverable as a result of the restructuring
required by the legislation and will be determined by the MPUC as provided in
the legislation. The MPUC has been conducting separate adjudicatory proceedings
to determine the stranded costs for each Maine utility, along with the
corresponding revenue requirements and stranded-cost charges to be charged by
each transmission-and-distribution utility. The first phase of the Central Maine
proceeding was completed in early 1999 and is discussed under the heading "MPUC
Proceeding on Stranded Costs, Revenue Requirements, and Rate Design," below.
In addition, the legislation requires utilities to use all reasonable means to
reduce their potential stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded costs in determining the amount of the utility's stranded costs.
Stranded costs and the related rates charged to customers will be prospectively
adjusted as necessary to correct substantial inaccuracies in the year 2003 and
at least every three years thereafter.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts, and (2) ownership interests in nuclear power
plants. However, the MPUC can require Central Maine to divest its interest in
Maine Yankee Atomic Power Company on or after January 1, 2009. As discussed
below under "Sale of Generation Assets," Central Maine contracted to sell its
non-nuclear generating assets and, after a favorable court decision, completed
the sale on April 7, 1999. The legislation also requires investor-owned
utilities, after February 29, 2000, to sell their rights to the capacity and
energy from all generation assets, including the purchased-power contracts that
had not previously been divested pursuant to the legislation, with certain
immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. CMP Group does not now intend to
engage in the sale of electric energy after March 1, 2000.
For a summary of other provisions of the 1997 legislation, see the Annual Report
on Form 10-K of CMP Group and Central Maine for the twelve months ended December
31, 1998.
Legislative bills that would amend certain provisions of the 1997 legislation
have been submitted to the 1999 session of the Maine Legislature. CMP Group and
Central Maine cannot predict whether any changes to the 1997 legislation will be
enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. The
MPUC has completed the first phase of the proceeding contemplated by Maine's
restructuring legislation that will ultimately determine the recovery of Central
Maine's stranded costs, its revenue requirements, and the design of its rates to
be effective when Central Maine becomes a transmission-and-distribution utility
at the time retail access to generation begins in Maine on March 1, 2000. On
December 23, 1998, the MPUC Hearing Examiners in the proceeding issued their
report, in the form of a recommended decision. Central Maine disagreed with a
number of the individual recommendations in the stranded-costs and
revenue-requirements areas and filed exceptions to those recommendations. The
MPUC deliberated the recommendations on February 10 and 11, 1999, indicated
disagreement with some of the recommendations, and issued its written order on
March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by which it
would set Central Maine's transmission-and-distribution rates, effective March
1, 2000, but was not calculating the rates themselves because such calculations
at that time would rely excessively on estimates. The MPUC pointed out that it
would hold a "Phase II" hearing to set the actual rates and determine the
recoverable stranded costs after processing information expected to become
available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the amount
of recoverable stranded costs for Central Maine later in the proceeding pursuant
to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover such
costs that is equivalent to the utility's opportunity to recover these costs
prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded costs,
including among other factors the application of excess value from divested
generation assets to offset stranded costs. At the beginning of the proceeding
Central Maine had estimated its total stranded costs to be approximately $1.3
billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the appropriate
cost of common equity for Central Maine as a transmission-and-distribution
company beginning March 1, 2000. Central Maine had recommended a 12-percent cost
of common equity with a 55-percent common equity component in the capital
structure. The MPUC, after weighing conflicting recommendations, decided on a
common-equity cost of 10.50 percent with a common-equity component of 47
percent, and an overall weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of the
proceeding primarily to establishing principles that would guide it in designing
Central Maine's rates to be effective March 1, 2000. The MPUC indicated that it
would focus on (1) facilitating the transition to a competitive market for
generation, and (2) implementing a "no-losers" policy, i.e., that the new rate
design would cause no Central Maine customer's bill to increase on March 1,
2000. Applying the latter principle, the MPUC rejected a newly designed standby
rate for self-generators proposed by Central Maine in favor of a design
generally similar to Central Maine's current rate for the class. The MPUC stated
that it planned to undertake a comprehensive rate design and alternative rate
plan proceeding for Central Maine prior to March 1, 2002, when it could consider
experience gained with the cost structures of other
transmission-and-distribution utilities after the commencement of retail access
to generation.
The Phase I order resulted from an extended proceeding with many points of view
represented and covers a wide variety of rate-related subjects. Definitive
findings by the MPUC in a number of the subject areas await the second phase of
the proceeding, which must be completed before March 1, 2000. CMP Group and
Central Maine cannot predict the definitive amount of stranded costs the MPUC
will determine that Central Maine will be entitled to recover pursuant to the
mandate of the restructuring statute, or the revenue requirements and rate
design that will result from Phase II of the MPUC proceeding.
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, to Florida-based FPL Group.
The related book value for these assets was approximately $218.9 million at
December 31, 1998. 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 $3.6 million ($1.5 million for the assets and $2.1 million for lease
revenue associated with the properties that CMP will retain), including $1.15
million for Union Water assets. The related book value of these assets was
approximately $11.9 million at December 31, 1998.
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 pending 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.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy Maine,
Inc. ("FPL Energy") had filed a civil action in the United States District Court
for the Southern District of New York requesting a declaratory judgment that
Central Maine could not meet essential terms of the January agreement. FPL Group
asserted that based on October 1998 FERC rulings on transmission access, as well
as other issues, it believed that Central Maine could not comply with the
conditions in the purchase contract and that FPL Energy should not be bound to
complete the transaction.
On November 23, 1998, the MPUC granted its approval of the sale to FPL Energy of
the generating assets contemplated by the purchase agreement, finding the sale
to be in the public interest. The MPUC also made the findings required as a
prerequisite to a FERC designation of the generating facilities as "exempt
wholesale generators," which had been requested by FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine generating
assets to FPL Energy, after making the required finding that the sale was
consistent with the public interest, and accepted certain implementing
agreements for filing. The FERC granted its approval of the transfer of
hydroelectric and water storage licenses on December 28, 1998, and its approval
of exempt-wholesale-generator status for the generating facilities on February
24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern District
of New York. On the same day the presiding judge ruled that FPL Energy was not
entitled to the declaratory judgment and entered judgment for Central Maine and
its affiliated defendants on all counts of the complaint. Thereafter on that day
FPL Energy announced that it would not appeal the decision, but would proceed to
a closing of the sale. The sale was completed on April 7, 1999. The gain of
approximately $500 to $600 million from the divested generation assets will
initially be recorded as a regulatory liability. In Phase II of the above
described "MPUC Proceeding on Stranded Costs, Revenue Requirements and Rate
Design," the MPUC will determine the amount of the regulatory liability that
will be used to reduce stranded costs and the utilization and timing of
recognition of any remaining regulatory liability.
With the proceeds of the sale Central Maine redeemed the remaining $118.7
million of its outstanding General and Refunding Mortgage Bonds on May 10, 1999,
paid at maturity $47 million of its medium-term notes on May 4, 1999, and called
for redemption on June 1, 1999, $180 million of its medium-term notes, and all
of the outstanding $10 million Town of Yarmouth Pollution Control Revenue Bonds,
which were issued in 1977 and 1978. Approximately $300 million of the proceeds
will be required for federal and state taxes resulting from the sale and, after
providing for closing costs and energy purchases to meet power-supply
obligations until the start of retail competition on March 1, 2000, Central
Maine expects to transfer the balance to its parent, CMP Group. Proceeds that
have not been applied have been invested in accordance with Central Maine's cash
investment policy. Uses of the balance of the proceeds are under consideration
by CMP Group and could include repurchases of common and preferred stock.
Expansion of Lines of Business
General. CMP Group is also preparing for competition by expanding its business
opportunities through investments that capitalize on core competencies. MaineCom
Services is a subsidiary that arranges, through other investments fiber-optic
data service for bulk carriers, offering support for cable television or
"super-cellular" personal communication vendors, and providing other
telecommunications consulting services. TeleSmart is a wholly-owned accounts
receivable management subsidiary. Another wholly-owned subsidiary, CNEX,
formerly CMP International Consultants, provides utility consulting (domestic
and international) and research. The wholly-owned Union Water Power Company
provides locating of underground utility facilities and infrared photography,
real estate brokerage and management, modular housing, engineering and
environmental services, integrated energy solutions, and utility construction
services. Union Water's operating divisions include On Target Utility Services,
UnionLand Services, Maine HomeCrafters, E/PRO, and Combined Energies(TM). These
subsidiaries often utilize skills of former Central Maine employees and
regularly compete for business with other companies.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to pursue opportunities to distribute
natural gas at retail in many Maine communities 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 which 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.", of which a subsidiary of CMP Group owns
approximately 40 percent and a subsidiary of Energy East owns approximately 60
percent) could face competition from new or existing gas utilities in some of
the areas it has targeted. 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.
Fiber Optic Network. CMP Group, through its wholly-owned subsidiary MaineCom
Services, owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), which is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. NEON is currently expanding
its fiber optic network to encompass over 1,000 fiber optic cable route miles,
or more than 65,000 fiber strand 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 March 31, 1999, NEON had completed construction of
approximately 600 route miles, or 49,000 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 the shares in NEON it then owned for
proceeds of approximately $3.1 million. In addition, with some of the proceeds
of the offering NEON repaid approximately $18 million Central Maine had advanced
under an earlier construction loan agreement. CMP Group believes there is a
growing need for such a fiber optic network in the Northeast and that NEON's
outside financing will provide substantial assistance in completing construction
of the network, but cannot predict the results of this venture.
Environmental Matters
CMP Group and its subsidiaries assess compliance with laws and regulations
related to hazardous substance remediation on an ongoing basis. At March 31,
1999, Central Maine had an accrued liability of $2.9 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. As of March 31,
1999, Central Maine had $327 million of medium-term notes outstanding, $227
million of which bear floating, LIBOR-based rates, increasing its exposure to
changes in interest rates.
Variable Long Term Fixed Long Term
(dollars in thousands)
Weighted Average Rates 7.14% 6.87%
Balance at March 31, 1999 $262,011 $365,290
Maturity Period 1999 - 2019 1999 - 2021
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 contained 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 did not seek damages against Central
Maine, but requested that the defendants disgorge the compensation they had
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. On December 18, 1998, after
investigation of the plaintiff's allegations, the board rejected the demand.
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", "MPUC Proceeding on
Stranded Costs, Revenue Requirements and Rate Design," and "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 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None.
(b)Reports on Form 8-K. CMP Group and Central Maine filed the following
reports on Form 8-K during the first quarter of 1999 an thereafter to
date:
Date of Report Items Reported
January 19, 1999 ......... Item 5
a) The registrants reported on the status of the FPL Group declaratory judgment
action.
b) The registrants reported on an Offer of Settlement filed with the FERC in
Maine Yankee's decommissioning rate case.
c) The registrants reported on the status of the MPUC proceeding on Central
Maine's stranded costs, revenue requirements, and rate design.
d) CMP Group reported on a bylaw provision dealing with shareholder proposals
and nominations of directors by shareholders.
Date of Report Items Reported
April 7, 1999 ......... Item 5
The registrants reported on the completion of the sale of its non-nuclear
generating assets to FPL Group, Inc., entities, and its improved securities
ratings.
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: May 14, 1999 By _____________________________________
---------------
David E. Marsh, Chief Financial Officer
(Principal Financial Officer and duly
authorized officer)
CENTRAL MAINE POWER COMPANY
Date: May 14, 1999 By _____________________________________
---------------
Michael W. Caron, Comptroller (Chief Accounting
Officer and duly authorized officer)
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This schedule contains summary financial information extracted from Central
Maine Power Company's Consolidated Statement of Earnings, Consolidated Balance
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<BOOK-VALUE> Per-Book
<TOTAL-NET-UTILITY-PLANT> $1,073,575
<OTHER-PROPERTY-AND-INVEST> $48,174
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<CAPITAL-LEASE-OBLIGATIONS> $32,344
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<TOT-CAPITALIZATION-AND-LIAB> $2,198,950
<GROSS-OPERATING-REVENUE> $271,049
<INCOME-TAX-EXPENSE> $25,868
<OTHER-OPERATING-EXPENSES> $203,916
<TOTAL-OPERATING-EXPENSES> $203,916
<OPERATING-INCOME-LOSS> $67,133
<OTHER-INCOME-NET> $8,122
<INCOME-BEFORE-INTEREST-EXPEN> $49,387
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<EARNINGS-AVAILABLE-FOR-COMM> $36,728
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