SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended March 31, 1996 Commission File Number 1-3429
MAINE PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
MAINE 01-0113635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 State Street, Presque Isle, Maine 04769
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 207-768-5811
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___.
(APPLICABLE ONLY TO CORPORATE ISSUERS:)
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report.
Common Stock, $7.00 par value - 1,617,250 shares
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
See the following exhibits - Maine Public Service Company and
Subsidiary Condensed Consolidated Financial Statements,
including a statement of consolidated operations for the
quarter ended March 31, 1996 and for the corresponding period
of the preceding year; a consolidated balance sheet as of
March 31, 1996, and as of December 31, 1995, the end of the
Company's preceding fiscal year; and a statement of
consolidated cash flows for the period January 1 (beginning of
the fiscal year) through March 31, 1996, and for the
corresponding period of the preceding year.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements present fairly the
financial position of the companies at March 31, 1996 and
December 31, 1995, and the results of their operations and
their cash flows for the three months ended March 31, 1996.
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MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended
March 31,
1996 1995
Operating Revenues $15,625 $15,556
Operating Expenses
Purchased Power 7,504 8,967
Other Operation and Maintenance 3,254 2,592
Depreciation and Amortization 1,030 1,070
Taxes Other Than Income 443 435
Provision for Income Taxes 1,099 737
Total Operating Expenses 13,330 13,801
Operating Income 2,295 1,755
Other Income (Deductions)
Equity in Income of Associated Companies 92 88
Allowance for Equity Funds Used During
Construction 2 0
Other Income Taxes (10) (21)
Other - Net (6) (5)
Total 78 62
Income Before Interest Charges 2,373 1,817
Interest Charges
Long-Term Debt and Notes Payable 923 943
Less Allowance for Borrowed Funds
Used During Construction (1) 0
Total 922 943
Net Income Available for Common Stock 1,451 874
Average Shares Outstanding (000's) 1,617 1,617
Earnings Per Share of Common Stock $0.90 $0.54
Dividends Declared per Common Share $0.46 $0.46
The accompanying notes are an integral part of these financial statements.
-3-
MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
March 31, December 31,
ASSETS 1996 1995
Utility Plant
Electric Plant in Service $88,555 $88,648
Less Accumulated Depreciation 40,356 39,674
Net Electric Plant in Service 48,199 48,974
Construction Work-in-Progress 1,038 427
Total 49,237 49,401
Investment in Associated Companies
Maine Yankee Atomic Power Company 3,578 3,576
Maine Electric Power Company, Inc. 65 65
Total 3,643 3,641
Net Utility Plant and Investments 52,880 53,042
Current Assets
Cash and Temporary Investments 1,680 976
Deposits for Interest and Dividends 804 744
Accounts Receivable - Net 5,537 6,226
Unbilled Base Revenue 1,383 1,472
Deferred Fuel and Purchased Energy 125 125
Current Deferred Income Taxes 180 232
Inventory 1,319 1,244
Prepayments 506 543
Total 11,534 11,562
Other Assets
Recoverable Seabrook Costs 28,790 29,146
Regulatory Asset - SFAS 109 & 106 13,722 13,746
Deferred Fuel and Purchased Energy 2,919 2,575
Other 3,594 4,003
Total 49,025 49,470
Total Assets $113,439 $114,074
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 32,269 31,562
Treasury Stock, at cost (5,714) (5,714)
Total 39,664 38,957
Long-Term Debt (less current maturities) 26,095 36,120
Current Liabilities
Long-Term Debt Due Within One Year 1,315 1,315
Notes Payable 10,000 1,400
Tax Exempt Bond Refunding Note 4,046 0
Accounts Payable 0 5,231
Dividends Declared 744 744
Customer Deposits 68 79
Interest and Taxes Accrued 1,876 1,124
Total 18,049 9,893
Deferred Credits
Deferred Income Tax 24,716 24,997
Investment Tax Credits 776 795
Deferred Revenues 446 354
Miscellaneous 3,693 2,958
Total 29,631 29,104
Total Capitalization and Liabilities $113,439 $114,074
The accompanying notes are an integral part of these financial statements.
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MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY
Statements of Consolidated Cash Flows
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31,
1996 1995
Cash Flow From Operating Activities
Net Income $1,451 $874
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations
Depreciation and Amortization 675 643
Amortization of Seabrook Costs 355 427
Deferred Income Taxes (252) 561
AFUDC (2) 0
Change in Deferred Fuel & Purchased Energy (344) 0
Change in Deferred Regulatory & Debt Issuance Costs 391 (755)
Change in Deferred Revenues 92 0
Change in Benefit Obligation 606 29
Change in Current Assets and Liabilities 295 306
Other 158 140
Net Cash Flow from Operating Activities 3,425 2,225
Cash Flow From Financing Activities
Dividend Payments (744) (744)
Retirements on Long-Term Debt (25) (25)
Short-Term Borrowings, Net (1,400) 0
Net Cash Flow Used For Financing Activities (2,169) (769)
Cash Flow Used For Investing Activities
Investment in Electric Plant (552) (603)
Net Cash Used For Investment Activities (552) (603)
Increase (Decrease) in Cash and Temporary Investments 704 853
Cash and Temporary Investments at Beginning of Year 976 2,618
Cash and Temporary Investments at End of Period $1,680 $3,471
Change in Current Assets and Liabilities Providing
Cash From Operating Activities
Accounts Receivable $689 ($65)
Unbilled Revenue 89 483
Inventory (76) 1
Deferred Fuel and Purchased Energy Costs 0 (733)
Other Current Assets 37 141
Accounts Payable & Accrued Expenses (434) 484
Other Current Liabilities (10) (5)
Total Change $295 $306
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Year For:
Interest $1,601 $1,611
Income Taxes $127 $149
The accompanying notes are an integral part of these financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned Canadian subsidiary, Maine
and New Brunswick Electrical Power Company, Limited (the Subsidiary).
The Company is subject to the regulatory authority of the Maine Public
Utilities Commission (MPUC) and, with respect to wholesale rates, the
Federal Energy Regulatory Commission (FERC).
The accompanying unaudited consolidated financial statements should be
read in conjunction with the 1995 Annual Report, an integral part of Form
10-K. Certain financial statement disclosures have been condensed or
omitted but are an integral part of the 1995 Form 10-K. The Company's
significant accounting policies are described in the Notes to
Consolidated Financial Statements of the Company's Annual Report filed
with the Form 10-K. For interim reporting purposes, these same
accounting policies are followed.
For purposes of the statements of consolidated cash flows,the Company
considers all highly liquid securities to be cash equivalents.
2. IMPLEMENTATION OF MULTI-YEAR RATE PLAN
As explained in the legal proceedings section of the Form 10-Q, item
1(b), the MPUC approved a four-year rate plan on November 13, 1995. The
Company wrote off approximately $8,340,000, net of income taxes, in 1995.
The write-offs consisted of $4,846,000, net of income taxes, of the
Company's investment in the Seabrook nuclear power project previously
allocated to the wholesale customers and $1,390,000, net of income taxes,
of other wholesale plant and regulatory assets, classified as
extraordinary items. In addition, $2,104,000, net of income taxes, of
deferred retail fuel representing replacement power costs incurred during
the 1995 Maine Yankee outage, were also charged to operations. Item 1(b)
also details the significant accounting orders that became effective
January 1, 1996 concerning the deferral of $902,000, net of income taxes,
annually of Wheelabrator-Sherman purchases, the five year amortization of
the Company's $1.3 million, net of income taxes, share of the Maine
Yankee sleeving repair costs, the $638,000, net of income taxes,
amortization over ten years of deferred post-retirement benefits other
than pensions (SFAS 106). In addition, Item 1(b) discusses the five year
amortization of the $139,000 deferral of pension expenses and $92,000
deferral of early retirement expenses, both net of income taxes, related
to the lay-up of the Caribou Steam Units and the four year amortization
of $300,000, net of tax, of deferred fuel from the December 31, 1995
balance.
The elimination of the fuel clause reconciliation with the associated
fuel revenue accounting mechanism will complicate quarter-to-quarter
earnings comparisons for 1996 to 1995. The prior fuel revenue accounting
mechanism smoothed the recognition of fuel expenses over the annual fuel
reconciliation period.
-6-
The recoverable Seabrook costs represent costs to be charged to retail
customers, in accordance with previous rate orders. They are as follows:
Retail $ 43,136
Accumulated Amortization 14,346
Retail, Net 28,790
Wholesale 10,051
Accumulated Amortization (3,826)
Write-0ff (6,225)
Wholesale, Net -
Total $ 28,790
3. INCOME TAXES
A summary of Federal and State income taxes charged (credited) to income
is presented below. For accounting and ratemaking purposes, income tax
provisions included in "Operating Expenses" reflect taxes applicable to
revenues and expenses allowable for ratemaking purposes. The tax effect
of items not included in rate base is allocated as "Other Income
(Deductions)".
(Dollars in Thousands) Three Months Ended
March 31,
1996 1995
Current income taxes $ 1,361 $ 197
Deferred income taxes (233) 580
Investment credits (19) (19)
Total income taxes $ 1,109 $ 758
Allocated to:
Operating Income $ 1,099 $ 737
Other income 10 21
Total $ 1,109 $ 758
The following summarizes accumulated deferred income taxes established on
temporary differences under SFAS 109 as of March 31, 1996 and December
31, 1995.
(Dollars in Thousands)
March 31, December31,
1996 1995
Seabrook $16,011 $16,071
Property 8,448 8,396
Regulatory expenses 949 915
Deferred fuel and purchased energy 1,015 1,027
Investment tax credits (528) (528)
Pension and postretirement
benefits (492) (262)
Other (687) (622)
Net accumulated deferred income
taxes $24,716 $24,997
-7-
4. REFINANCING
On April 4, 1991, the Maine Public Utilities Financing Bank (MPUFB)
issued $10 million of tax-exempt bonds on behalf of the Company. Pursuant
to the long-term note issued under a loan agreement between the Company
and the MPUFB, the Company agreed to make payments to the MPUFB for the
principal and interest on the bonds. Concurrently, pursuant to a letter
of credit and reimbursement agreement, the Company caused a Direct Pay
Letter of Credit for a term of five years to be issued by Barclays Bank
PLC, New York Branch (Barclays Bank) for the benefit of the holders of
such bonds. To secure the Company's obligations under the reimbursement
agreement, the Company issued a second mortgage bond to Barclays Bank in
the amount of $10,426,563, as collateral for the Company's obligation to
repay Barclays Bank the $10 million principal amount of the bonds plus
195 days of interest on the bonds. The bonds had a coupon rate of 7.875%
and, after considering the enhancement fees and other costs, the annual
cost to the Company was approximately 8.725%.
Barclays Bank notified the Company that it would not renew the Direct Pay
Letter of Credit for this issue. With the expiration of the Direct Pay
Letter of Credit on April 4, 1996, the entire $10 million principal
amount of the bonds was redeemed at par on April 1, 1996 in accordance
with the indenture. To meet its reimbursement obligation that resulted
from the draw on the Barclays Direct Pay Letter of Credit prior to its
expiration, the Company borrowed $10,000,000 under a refunding note from
Fleet Bank of Maine. The note expires on June 30, 1996 with interest at
LIBOR plus .75% and a facility fee of $25,000 for the term of the loan.
For the first month, the effective interest rate was 7.1875%.
The MPUFB has approved the Company's request to issue a new series of the
tax exempt bonds on behalf of the Company in an amount not to exceed
$16,000,000. The proceeds of the new series will be used for the
refinancing of the 1991 series through the payment of the refunding note
and for the acquisition of qualifying electric property.
5. DISCONTINUANCE OF SFAS 71 FOR WHOLESALE BUSINESS SEGMENT
The wholesale market for electric power is now competitive, as evidenced
by the Company's loss of a major wholesale customer, Houlton Water
Company. The rates that the Company is now charging its remaining
wholesale customers are based on market pricing and not rate base/rate of
return regulatory formulas. For this reason, the Company has
discontinued the application of Statement of Financial Accounting
Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types
of Regulation," for its wholesale business jurisdiction. These write-
offs were classified as extraordinary items associated with the
discontinuance.
6. EARLY RETIREMENT PROGRAM
In March 1996, the Company offered an early retirement program to
selected employees. All eligible employees will participate in the
program. As a result, in accordance with Statement of Financial
Accounting Standards No. 88 (SFAS 88), "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the Company recognized a first quarter charge of
$258,000, net of taxes.
-8-
Item 2. Management's Analysis of Quarterly Income Form 10-Q
Statements
Results of Operations
Earnings per share and net income available for common stock for
the three months ended March 31, 1996 along with the
corresponding information for the previous year are as follows:
Three Months Ended
March 31
1996 1995
Earnings per share $ .90 $ .54
Net income
available for Common
Stock - in Thousands $1,451 $ 874
For the first quarter of 1996 compared to the same quarter last
year, the increase in consolidated earnings per share of $.36 is
attributable to the following:
Increase
(Decrease)
Increase in retail revenues due to rate
increases effective April 1, 1995 and
January 1, 1996 and increase in sales $ .39
Increases in secondary sales and other
revenues .10
Decrease in fuel expenses .18
Decrease due to loss of Houlton Water Company (.17)
1996 early retirement program (.16)
Other .02
Total $ .36
Earnings per share for the first quarter of 1996 were $.36 per
share more than for the same period in 1995. The elimination of
the fuel clause reconciliation with the associated fuel revenue
accounting mechanism will complicate quarter-to-quarter earnings
comparisons for 1996 to 1995. The prior fuel accounting
mechanism smoothed the recognition of fuel expenses over the
annual fuel reconciliation period. Rate increases effective on
April 1, 1995 and January 1, 1996 as well as a 1% increase in
retail sales resulted in an increase of $.39 per share. The
-9-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
January 1, 1996 increase in retail rates was approved by the
Maine Public Utilities Commission (MPUC) under the terms of a
four-year rate plan. The rate plan also eliminated the fuel
clause during the rate plan period with the exception of the
annual deferral of $902,000, net of income taxes, of the costs
of its purchases from Wheelabrator-Sherman, an independent power
producer. Retail fuel expenses for the first quarter of 1996
were $.18 per share less than for the same quarter in 1995.
Increases in secondary sales and wheeling revenues also resulted
in an increase of $.10 per share. Partially offsetting these
increases were a $.17 per share decrease due to the loss of
Houlton Water Company as a wholesale customer due to competitive
bidding, and a one-time charge of $.16 per share, due to several
employees accepting an early retirement program in March 1996.
Consolidated operating revenues for the quarter ended March
31, 1996 and 1995, are as follows:
1996 1995
(Dollars in Thousands) $ MWH $ MWH
Retail 14,360 131,690 13,596 130,515
Sales for Resale 611 18,101 1,898 36,234
Total Primary Sales 14,971 149,791 15,494 166,749
Secondary Sales 396 22,051 130 4,426
Other Revenues/Rev. Adjust. 258 (68)
Total Operating Revenues 15,625 171,842 15,556 171,175
-10-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Primary sales in the first quarter of 1996 were 149,791 MWH,
a decrease of 16,958 MWH from the same period last year.
Sales for resale decreased 18,133 MWH due to the loss of the
Company's largest wholesale customer, Houlton Water Company
(HWC). HWC began purchasing their energy from Central Maine
Power on January 1, 1996, resulting from HWC's solicitation
for competitive prices in late 1994. In 1995, HWC represented
11.1% of the Company's consolidated MWH sales and 8.4% of
consolidated operating revenues. Sales to public authorities
decreased 1,007 MWH because of the closure of Loring Air Force
Base. Partially offsetting these decreases were increased
residential sales of 1,236 MWH and commercial and industrial
sales of 947 MWH. Secondary sales increased by 17,625 MWH,
reflecting on the availability of Maine Yankee during the
first quarter of 1996 while the Plant was out of service
during the same quarter in 1995.
Retail revenues for the first quarter of 1996 were $14,360,000
compared to $13,596,000 for the same period of 1995,
reflecting the new retail rates effective April 1, 1995 and
January 1, 1996, and a 1,175 MWH increase in retail sales.
For 1995, an element of revenues were determined using
seasonal fuel revenue accounting associated with the prior
fuel clause, eliminated with the rate plan, which smoothed the
recognition of fuel expenses and the element of revenues over
the reconciliation period. Sales for resale revenues
decreased in 1996 due to the loss of HWC as discussed above.
During the first quarter of 1996, secondary sales of the
Company's Wyman Unit No. 4 and Maine Yankee entitlements for
varying lengths of time were made at prevailing market rates.
Since Maine Yankee was not available for the same period in
1995, secondary sales for the quarter were limited to Wyman
No. 4 entitlements.
-11-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
For the first quarters ended March 31, 1996 and 1995, total
operating expenses were $13,330,000 and $13,801,000,
respectively. The changes in operating expenses and energy
sources are as follows:
Increase/(Decrease)
(Dollars in Thousands) $ MWH
Purchased Power Expenses
Maine Yankee 152 54,668
Wheelabrator-Sherman (56) (2,238)
NB Power (1,598) (64,401)
System Purchases 39 335
(1,463) (11,636)
Deferred Fuel 253
Generating Expenses (158) 11,558
Other Operation & Maint. Expenses 567
Depreciation and Amortization
Expenses (40)
Income Taxes 362
Taxes Other than Income 8
Total (471) ( 78)
Maine Yankee was out of service for most of the first quarter
of 1995, while it returned to 90-percent level of operation on
January 22, 1996. Reference is made to the Company's 1995
Annual Report, "Analysis of Financial Condition and Review of
Operations - 1995, Maine Yankee", for further discussion of
the 12-month outage for sleeving repairs to the plant's steam
generator tubes. The 54,668 MWH increase in Maine Yankee
production and an 11,151 MWH increase in hydro generation in
1996 allowed the Company to reduce purchases from NB Power by
64,401 MWH. The change in deferred fuel expenses reflects the
elimination for 1996 of the fuel revenue accounting associated
with the prior fuel clause, as discussed in the "Legal
Proceedings" section of this Form 10-Q, item 1(b). Under the
same rate plan, the Company has deferred $375,000 ($1.5
million annually) of its Wheelabrator-Sherman purchased power
costs. Generating expenses decreased by $158,000, primarily
due to the Steam Units at Caribou being placed on inactive
status on January 1, 1996. See "Caribou Units Inactivated"
-12-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
below for further discussion. Other operation and maintenance
expenses increased by $567,000 due to the recognition of
$429,000 for an early retirement program offered to selected
employees in March, 1996 and a $91,000 increase in
distribution expenses due to increased overhead line
maintenance in 1996.
Caribou Units Inactivated
Reference is made to the Company's Form 8-K dated July 13,
1995 in which the Company reported that, at a regular meeting
on July 7, 1995, the Board of Directors authorized placing on
inactive status Steam Units 1 and 2 of the Company's Caribou
Generating Facility in Caribou, Maine. The Company
inactivated the Units on January 1, 1996 and expects that they
will remain inactive for five years or longer. These two
units, which represent 23 MW of capacity, have become surplus
to the Company's needs due to the closure of Loring Air Force
Base and the loss in 1996 of the Company's largest customer,
the Houlton Water Company. During the Units' inactive period,
the plant equipment will be protected and maintained by the
installation of a dehumidification system that will permit the
Plant to return to service in approximately six months.
Placing Steam Units 1 and 2 on inactive status will save the
Company approximately $3.5 million over the next five years.
These savings result primarily from a savings in operation and
maintenance expense. The Company eliminated 12 positions at
the plant and conducted a voluntary early retirement program
that avoided involuntary termination of employees whose
positions at the units have been eliminated. The expenses of
the voluntary early retirement plan of approximately $231,000,
net of income taxes, as well as the expenses to lay-up the
Steam Units will be amortized over five years in accordance
with the rate plan. The rate plan allows the Company to
continue rate base treatment for unrecovered plant costs and
depreciation on the Caribou Steam Units, which had a net book
value of approximately $718,000 as of January 1, 1996.
Steam Unit No. 1 went into operation in the early 1950s and
Unit No. 2, in the mid 1950s. The Company still has a diesel
generation station of approximately 7 MW and a hydro facility
-13-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
of approximately 1 MW and will continue to employ 11 employees
at the Caribou facility.
Financial Condition
The accompanying Statements of Consolidated Cash Flows reflect
the Company's liquidity and the net cash flows generated by or
required for operating, financing and investing activities.
For purposes of the Statements of Consolidated Cash Flows, the
Company considers all highly liquid securities to be cash
equivalents.
Net cash flows from operating activities were $3,425,000 for
the first three months of 1996. For the period, $552,000 was
invested in electric plant, $744,000 was paid in dividends and
$25,000 was used to reduce long-term debt. $1,400,000 was
used to pay off short-term borrowings.
For the three months ended March 31, 1995, net cash flows from
operating activities were $2,225,000. For the first three
months of 1995, the Company invested $603,000 in electric
plant, paid $744,000 in dividends, and reduced long term debt
by $25,000. Cash flows for 1995 were impacted by the
reduction in earnings and the previously mentioned replacement
power purchases during the Maine Yankee outage.
See "Legal Proceedings", paragraph 1(b) of this Form 10-Q for
a description of the multi-year rate plan approved by the
Maine Public Utilities Commission in November, 1995, effective
January 1, 1996. The rate plan will assist the Company in
dealing with the economic uncertainties that lay ahead with
the loss of Loring and Houlton. The Plan provides stable,
predictable rates for our customers, economic development
rates to encourage investment in our service territory, and
competitive returns for our shareholders.
On April 4, 1991, the Maine Public Utilities Financing Bank
(MPUFB) issued $10 million of tax-exempt bonds on behalf of
the Company. Pursuant to the long-term note issued under a
loan agreement between the Company and the MPUFB, the Company
agreed to make payments to the MPUFB for the principal and
-14-
Form 10-Q
Part 1. Financial Statements
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
interest on the bonds. Concurrently, pursuant to a letter of
credit and reimbursement agreement, the Company caused a
Direct Pay Letter of Credit for a term of five years to be
issued by Barclays Bank PLC, New York Branch (Barclays Bank)
for the benefit of the holders of such bonds. To secure the
Company's obligations under the reimbursement agreement, the
Company issued a second mortgage bond to Barclays Bank in the
amount of $10,426,563, as collateral for the Company's
obligation to repay Barclays Bank the $10 million principal
amount of the bonds plus 195 days of interest on the bonds.
The bonds had a coupon rate of 7.875% and, after considering
the enhancement fees and other costs, the annual cost to the
Company was approximately 8.725%.
Barclays Bank notified the Company that it would not renew the
Direct Pay Letter of Credit for this issue. With the
expiration of the Direct Pay Letter of Credit on April 4,
1996, the entire $10 million principal amount of the bonds was
redeemed at par on April 1, 1996 in accordance with the
indenture. To meet its reimbursement obligation that resulted
from the draw on the Barclays Direct Pay Letter of Credit
prior to its expiration, the Company borrowed $10,000,000
under a refunding note from Fleet Bank of Maine. The note
expires on June 30, 1996 with interest at LIBOR plus .75% and
a facility fee of $25,000 for the term of the loan. For the
first month, the effective interest rate was 7.1875%.
The MPUFB has approved the Company's request to issue a new
series of the tax exempt bonds on behalf of the Company in an
amount not to exceed $16,000,000. The proceeds of the new
series will be used for the refinancing of the 1991 series
through the payment of the refunding note and for the
acquisition of qualifying electric property.
-15-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) Maine Public Utilities Commission, Re: Electric Utility
Industry Restructuring Study, Docket No. 95-462.
In 1995, the Maine Legislature passed Resolve 89 "To
Require a Study of Retail Competition in the Electric
Utility Industry" (the "Resolve"), to begin a process for
developing recommendations on the future structure of the
electric utility industry in Maine. The process included
the appointment of a Work Group on Electric Utility
Restructuring to develop a plan for the orderly
transition to a competitive market for retail purchases
and sales of electricity. The Company participated in
this Work Group, which was unable to reach a consensus on
a recommended plan by its reporting deadline.
The Resolve also directed the MPUC to conduct a study to
develop at least two plans for the orderly transition to
retail competition in the electric utility industry in
Maine and to submit a report of its findings by January
1, 1997. One plan would be designed to achieve "... full
retail market competition for purchases and sales of
electric energy by the year 2000" and the other to
achieve a more limited form of competition. The Resolve
also stated that the MPUC's findings would have no legal
effect, but would "... provide the Legislature with
information in order to allow the Legislature to make
informal decisions when it evaluates these plans."
On December 12, 1995, the MPUC issued a Notice of Inquiry
(the "Notice") initiating its study. In the Notice, the
MPUC solicited detailed proposals and plans for achieving
retail competition in Maine by the year 2000 and
requested the proposals include specific plans for an
orderly transition to a more competitive market. The
Notice required that plans and proposals be filed with
the MPUC by interested parties no later than January 31,
1996, and outlined a schedule calling for submittal of a
final report to the Legislature in December, 1996.
On January 30, 1996, the Company filed its restructuring
proposal with the MPUC. The major elements of this
proposal are:
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FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
(a) The separation of the Company's generation assets
(including contracts and entitlements) from its
transmission and distribution assets. The Company
suggested this separation could be accomplished by either
a functional separation of generation from distribution
and transmission within the Company's existing corporate
structure or by separating generation, on the one hand,
and distribution and transmission, on the other, into two
wholly-owned subsidiaries. The Company strongly opposes
any recommendation that it be required to divest itself
of its generation assets.
(b) The economic and resource planning regulation of
generation would cease. The FERC would continue to
regulate transmission, and distribution would remain a
franchised monopoly subject to continued regulation by
the MPUC. The owner of the distribution system would be
obligated to connect all willing customers.
(c) If certain necessary changes in the operation and
management of the regional transmission grid are in
place, all retail customers in Maine would, by the year
2000, be entitled to purchase electric energy directly
from any entity that wished to supply it to them.
(d) The Company would be entitled to full recovery of
all its stranded costs. This recovery would be
accomplished by a charge on the distribution system that
would apply to all retail customers. In its filing, the
Company estimates that its stranded costs could be as
high as $68 million. This amount consists primarily of
the above-market costs of the Company's contract with
Wheelabrator-Sherman, a non-utility generator, estimated
at $44 million and deferred regulatory assets, such as
its Seabrook investment of $24 million.
The Company's proposal, however, was only one of over a
dozen received by the MPUC in response to its Notice,
some of which take positions on these matters that vary
substantially from the Company's. The Company cannot
predict the results of its filing with the MPUC, what
form of restructuring, if any, the electric utility
industry in Maine will take, or what effect that
restructuring will have on the Company's business
operations or financial results.
-17-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
(b) Multi-year Rate Plan is Approved for the Company by the
MPUC in Maine Public Service Company Re: Proposed
Increase in Retail Rates, MPUC Docket No. 95-052
On May 1, 1995, Maine Public Service Company filed with
the Maine Public Utilities Commission a proposed increase
in the rates it charges its retail customers. The
Company at the same time filed a five-year rate plan
requesting new rates beginning in January, 1996 as
detailed below. Reference is made to the Company's Form
10-Q for the quarter ended June 30, 1995 for a complete
description of the Company's filed rate plan.
In general, the Company's five-year rate plan provided
for total annual average increases in retail rates,
including fuel, in accordance with the following
schedule:
1996 - 4.5% $2.2 million
1997 - 4.5% 2.3 million
1998 - 3.5% 1.9 million
1999 - 3.0% 1.7 million
2000 - 3.0% 1.7 million
As part of its plan, the Company proposed to eliminate
the annual fuel adjustment clause except for the cost of
power purchased from the Wheelabrator-Sherman Energy
Company (W/S). The Company's plan included deferrals of
up to $3 million annually of its W/S power costs and the
deferral of any uncollected fuel costs under the present
fuel clause as approved in Docket 95-001 estimated to be
approximately $6 million. The Company proposed to begin
collecting the deferred costs, in an amount of up to $21
million, in 2001.
The Company also proposed to write off and not recover in
rates approximately $4.9 million, net of income taxes, of
its remaining investment in the Seabrook project
previously supported by rates to its wholesale customers,
principally the Houlton Water Company, which began
purchasing its full requirements from another supplier in
January 1, 1996.
In its rebuttal filing on September 22, 1995, the Company
further proposed a sharing mechanism based on an allowed
-18-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
return on equity (ROE) of 11.75%. Under this profit-
sharing mechanism, earnings in excess of the proposed ROE
were to be shared equally by stockholders and customers
via rate reductions or reductions in the W/S deferral.
If earnings were less than 300 basis points below the
proposed ROE, that loss was to be borne by shareholders;
if earnings were less than 300 basis points above the
ROE, the excess would be retained by shareholders and
half would be used to reduce the W/S deferral. If
earnings were more than 300 basis points below the
proposed ROE, shareholders and customers would bear the
loss equally; similarly, earnings of more than 300 basis
points in excess of the ROE would be shared equally.
The Company's rate plan was vigorously opposed by both
the MPUC Staff and the Maine Public Advocate. Both these
parties took the position that no expenses or investment
previously associated with any of the Company's sales to
its wholesale customers should be borne by its retail
customers. As a result, the MPUC Staff, for example,
proposed an increase of 4.4% in 1996, but only 2.2% for
each year of the plan thereafter. Moreover, neither the
MPUC Staff nor the Public Advocate proposed allowing any
deferral of the W/S expenses or deferred fuel.
After extensive negotiations, the Company, the MPUC Staff
and the Public Advocate filed a Stipulation with the
Commission on November 6, 1995, which established a four-
year rate plan for the Company. The one remaining party
to this proceeding, McCain Foods, Inc., opposed this
Stipulation. After a hearing on November 13, 1995, the
MPUC approved this Stipulation over the objection of
McCain Foods, Inc.
Under the terms of the Stipulation, the Company has the
right to receive the following increases:
January 1, 1996 4.4% $2.1 million
February 1, 1997 2.9% 1.4 million
February 1, 1998 2.75% 1.4 million
February 1, 1999 2.75% 1.4 million
These increases will be subject to increases or decreases
resulting from the operation of the profit-sharing
mechanism, as well as the mandated costs and plant outage
-19-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
provisions described below. The Company agreed that it
will seek no other increases, for either base or fuel
rates, except as provided under the terms of the rate
plan. There will be no fuel clause adjustments during
the term of the plan.
The Company also agreed to write off, in 1995, and not
collect in retail rates the following amounts:
(a) $4,845,812, net of income taxes, of its
investment in Seabrook previously allocated to wholesale
sales.
(b) $1,390,000, net of income taxes, in other plant
investment, i.e. rate base, except transmission plant,
previously associated with the wholesale customers.
(c) $3,500,000 ($2,104,000, net of income taxes) in
deferred fuel.
The total amount of the write-offs, net of income taxes,
in 1995 are approximately $8,340,000, or approximately
$5.16 per share of common stock.
As a condition of the Stipulation, the Company requested
waivers for interest coverage tests under its revolving
credit arrangement and the Letter of Credit supporting
the public utility revenue bonds, 1991 series. Unless
these write-offs were considered extraordinary for
purposes of the interest coverage tests, the Company
would have been in violation of these interest coverage
tests. The waivers were received from the various
lenders prior to the MPUC's issuance of its order in this
proceeding.
The Company will also be permitted to defer an amount of
$1.5 million annually of the costs of the W/S purchases
over the term of the rate plan. The approved rate plan
provides that the Company can seek recovery of this
deferred amount (up to a total of $6 million) in rates
beginning in the year 2001, after the current term of the
W/S contract has expired. The Company will further
amortize over the four years of the rate plan, $300,000,
net of income taxes, in deferred fuel with the remainder,
-20-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
approximately $1.3 million, net of income taxes, being
deferred until the year 2000.
The approved rate plan further provides for the following
treatment of the Maine Yankee steam generator sleeving
costs: the Company will amortize its share of these
costs in equal amounts over a five-year period beginning
on January 1, 1996. At the expiration of the rate plan,
the remaining one-fifth of the costs will be amortized in
2000 subject to rate treatment at that time.
The approved rate plan contains a profit-sharing
mechanism based upon a target return of equity (ROE) of
11%, calculated according to retail ratemaking
mechanisms. This profit-sharing mechanism will apply
only to the last two rate increases scheduled to occur on
February 1, 1998 and February 1, 1999. As part of this
review process, the target ROE will be subject to
adjustment based on an index by averaging over a twelve-
month period the dividend yields on Moody's group of 24
electric utilities and Moody's utility bond yields. The
profit-sharing mechanism works as follows:
If the Company's ROE exceeds the target ROE by less than
300 basis points, this gain accrues entirely to
shareholders. Similarly, any deficiency of up to 300
basis points below the target ROE is borne entirely by
the shareholders.
All deficiencies of 300 or more basis points below the
target ROE will be shared equally by shareholders and
customers. All earnings of 300 or more basis points
above the target ROE must first be applied to reduce any
of deferred W/S costs described above. Any remaining
excess earnings will be shared equally by customers and
shareholders.
The plan also allows the Company to terminate the rate
plan and file for rate increases under traditional rate
application procedures if its earnings fall 500 or more
basis points below the target ROE during any twelve-month
period during the term of the plan.
The method agreed to by the parties for measuring earned
ROE for the purpose of the profit-sharing mechanism and
-21-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
rate termination provision described above, allocates
various revenues and expenses between the wholesale and
retail jurisdictions using allocators that, in part,
reflect the Company's 1994 allocations. With the loss of
sales to Houlton Water Company in 1996, the Company
estimates that the use of the agreed-upon allocators will
produce a calculation of earnings for the profit-sharing
and termination mechanisms that could be as much as 400
basis points above the Company's actual financial ROE.
Because of this disparity, the Stipulation provides that
the agreed-upon allocation methodology will not apply if
the use of those allocators will require the Company to
write off any additional assets in accordance with
Generally Accepted Accounting Principles (GAAP). In that
event, the parties have agreed to develop a different
method for calculating profit-sharing and termination
that will not require the Company to write off any
additional assets.
The plan also provides that if either Maine Yankee or
Wheelabrator-Sherman cease operation for more than six
months, the Company shall be allowed to adjust its
allowed rate increases by 50% of the net costs or net
savings resulting from the outage, together with any
carrying costs on the balance deferred. Any net costs or
net savings during the first six months of the outage
would accrue entirely to shareholders.
The plan further contains a mechanism for allocating the
savings resulting from any restructuring of the W/S
contract during the term of the plan. Any savings would
be allocated first to the W/S deferred costs accumulating
at $1.5 million annually, then to the deferred fuel
balance as of December 31, 1995 being deferred until
2000, next to eliminate any on-going W/S deferrals and
finally, any savings that remain will be allocated 95% to
customers and 5% to shareholders.
The plan provides that the Company can flow through to
customers at the time of the scheduled rate increases,
increases or decreases resulting from certain mandated
costs, such as tax or accounting changes, but not costs
resulting from natural disasters. To qualify, a mandated
cost must receive MPUC approval, must be beyond the
control of the Company's management, must effect the
-22-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
Company specifically or the electric utility generally
and must exceed $300,000 in annual revenue requirements.
The Stipulation also provides for a number of accounting
orders. Among these are orders: permitting the Company
to amortize deferred post-retirement benefits other than
pension (SFAS 106) expenses in equal amounts over a ten-
year period beginning January 1, 1996, along with the
recovery of current year SFAS 106 costs; permitting the
Company to continue rate base treatment for unrecovered
plant costs and depreciation on the Caribou Steam Units
as well as the deferral and amortization over five years
of the reduction in force expenses (including pension
expenses under SFAS 88) resulting from the closing of
those units; and continued deferral and amortization of
replacement power and capacity costs associated with
Maine Yankee scheduled outages. Finally, the Stipulation
clarifies that the rate plan is not deregulation for
accounting purposes and provides for the continuing
recovery in rates of certain "regulatory assets", such as
the retail portion of the Company's Seabrook investment,
previously allowed by the MPUC.
On January 2, 1996, McCain Foods, Inc., which had
objected to the Stipulation, appealed the MPUC's approval
of the rate plan to the Maine Supreme Judicial Court.
This action was docketed as PUC 96-13. The Company does
not believe this appeal has any merit and intends to
oppose it vigorously, but cannot predict its ultimate
outcome. On March 20, 1996, the Company and McCain Foods
filed with the Commission a Power Purchase Agreement
under which McCain agrees to purchase all its electrical
requirements from the Company through 2000. If the
Agreement is approved by the MPUC, McCain has agreed to
dismiss its appeal. The Company cannot predict whether
the MPUC will approve the Agreement.
In addition to the four-year rate plan, the MPUC, under
this docket, also approved the Company's proposal to
develop flexible rates to retain or attract new
customers. On October 23, 1995, the Company implemented
a reduced Rate AH for residential electric space heat.
Customers who have a permanent electric space heat system
that supplies at least 50% of their heating requirements
-23-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
have been offered a discount up to 40% from October to
April.
On November 27, 1995, the MPUC approved two new rates
that became effective December 1, 1995. The first, Rate
F, provides farmers with a discounted price for
electricity used in storage facilities, reducing their
winter electric rate ten percent from November through
March. The second, Rate EDR, an economic development
rate, provides a multi-year discount in the cost of
electric service for large commercial and industrial
customers who create new electrical load. This reduced
rate should encourage development in our electrical
service territory by providing an incentive rate while a
new business gets established or an existing business,
meeting certain criteria, completes expansion. Depending
on eligibility, the discount offered will range from 20%
the first year to 5% in the fourth year. After the four-
year period, EDR customers will be billed under the
Company's standard electric rates.
(c) Peoples Heritage Bank v. Maine Public Service Company
U.S. District Court (D. ME) Civil Action No. 95-0180-B
On September 18, 1995, Peoples Heritage Bank filed
against the Company a civil action for declaratory and
monetary relief seeking recovery for response costs,
damages and attorneys fees incurred because of the
release of hazardous substance at a site in Presque Isle,
Maine. In 1992, Peoples Heritage purchased the property
and shortly thereafter discovered that the soil at the
site was contaminated with polychlorinated biphenyls
(PCBs) which it now alleges originated with two
electrical transformers placed on the site by the
Company. Peoples Heritage claims to have spent in excess
of $250,000 to remove the PCB contaminated soil and seeks
reimbursement of this amount.
The suit is brought pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of
1980 (CERCLA), the Federal Declaratory Judgment Act and
under common law grounds of strict liability for
abnormally dangerous activities, negligence and trespass.
-24-
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (Continued)
The Company has denied liability in this matter but
cannot predict the outcome of this action.
(d) Maine Public Service Company, Request For Open Access
Transmission Tariff, FERC Docket No. ER 95-836-000.
On March 31, 1995, the Company filed an open access
transmission tariff with the Federal Energy Regulatory
Commission (FERC). This tariff provides fees for various
types and levels of transmission and transmission-related
services that are required by transmission customers.
The tariff, as filed, substantially increases some of the
fees for transmission services and provides separate fees
for various transmission-related services. On May 31,
1995, the FERC approved the filed tariff, subject to
refund. The filing has been vigorously contested by the
Company's wholesale customers and a decision by the FERC
is not expected until later in 1996. The Company cannot
predict FERC's ultimate decision in this matter.
(e) Maine Public Service Company, Proposed Increase in Rates
(Rate Design), MPUC Docket No. 95-052.
On June 15, 1995, the MPUC issued an order bifurcating
the Company's request for rate design from the revenue
requirement portion of this docket (see item (b) above).
Based upon marginal cost of service principles, the
Company has proposed a substantial redesign of its
current rates. For example, under the Company's proposed
rates for transmission customers would decrease from
their current level by nearly 8%, while rates for
residential customers would increase by over 8%. The
Company's proposals have been vigorously contested by the
MPUC Staff and the Public Advocate, who propose only a
small decline for large industrial customers and a very
minor increase for residential. Hearings were held on
this matter before the MPUC on March 14 and 15, 1996.
The Commission's decision on the Company's proposal is
expected by late May, 1996. The Company cannot predict
the outcome of this proceeding.
-25-
FORM 10-Q
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K.
A Form 8-K was filed on January 23, 1996, under Item 5,
Other Material Events, and on March 8, 1996, under Item
4, Change in the Company's Certifying Accountant, and
Item 5, Other Material Events. A Form 8-K/A was filed on
March 14, 1996 under Item 4, Change in the Company's
Certifying Accountant.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MAINE PUBLIC SERVICE COMPANY
(Registrant)
Date: May 13, 1996 Larry E. LaPlante
Larry E. LaPlante, Vice President
Finance and Treasurer
-26-
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