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 September 30, 1997 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 three
and nine months ended September 30, 1997, and for the
corresponding period of the preceding year; a consolidated
balance sheet as of September 30, 1997, and as of December 31,
1996, 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 September 30, 1997, 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 September 30, 1997 and
December 31, 1996, and the results of their operations for the
three and nine months ended September 30, 1997 and their cash
flows for the nine months ended September 30, 1997.
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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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Operating Revenues $12,385 $12,584 $40,092 $43,168
Operating Expenses
Purchased Power 8,912 7,906 26,573 23,166
Other Operation and Maintenance 3,185 3,542 9,480 10,604
Depreciation 626 563 1,880 1,824
Amortization 411 396 1,231 1,194
Taxes Other Than Income 386 386 1,268 1,247
Provision (Benefit) for Income Taxes (747) (345) (941) 1,319
Total Operating Expenses 12,773 12,448 39,491 39,354
Operating Income (Loss) (388) 136 601 3,814
Other Income (Deductions)
Equity in Income of Associated Cos. 130 81 377 263
Allowance for Equity Funds Used
During Construction 5 1 14 6
Other Income Taxes (38) (64) (120) (85)
Other - Net 56 67 22 56
Total 153 85 293 240
Income Before Interest Charges (235) 221 894 4,054
Interest Charges
Long-Term Debt and Notes Payable 897 877 2,637 2,652
Less Allowance for Borrowed Funds
Used During Construction (3) (1) (7) (3)
Total 894 876 2,630 2,649
Net Inc (Loss) Avail for Common Stock ($1,129) ($655) ($1,736) $1,405
Average Shares Outstanding (000's) 1,617 1,617 1,617 1,617
Earnings (Loss) Per Share of Common ($0.70) ($0.40) ($1.07) $0.87
Dividends Declared per Common Share $0.25 $0.46 $0.75 $1.38
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)
September 30 December 31,
ASSETS 1997 1996
Utility Plant
Electric Plant in Service $90,608 $91,224
Less Accumulated Depreciation 42,864 41,670
Net Electric Plant in Service 47,744 49,554
Construction Work-in-Progress 2,046 461
Total 49,790 50,015
Investment in Associated Companies
Maine Yankee Atomic Power Company 3,857 3,585
Maine Electric Power Company, Inc. 173 74
Total 4,030 3,659
Net Utility Plant and Investments 53,820 53,674
Current Assets
Cash and Temporary Investments 529 1,291
Deposits for Interest and Dividends 468 805
Accounts Receivable - Net 4,410 5,021
Unbilled Base Revenue 1,220 1,653
Deferred Fuel and Purchased Energy 1,224 125
Current Deferred Income Taxes 0 222
Inventory 1,254 1,194
Prepayments 2,901 959
Total 12,006 11,270
Other Assets
Restricted Investment 2,952 4,055
Regulatory Asset - ME Yankee Decom. Liability 45,405 0
Recoverable Seabrook Costs 26,655 27,722
Regulatory Asset - SFAS 109 & 106 12,615 12,713
Deferred Fuel and Purchased Energy 4,982 3,951
Other 4,448 3,329
Total 97,057 51,770
Total Assets $162,883 $116,714
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 27,748 30,697
Treasury Stock, at cost (5,714) (5,714)
Total 35,143 38,092
Long-Term Debt (less current maturities) 35,650 39,805
Current Liabilities
Long-Term Debt Due Within One Year 4,155 1,315
Notes Payable 6,200 1,400
Accounts Payable 4,515 5,475
Current Deferred Income Taxes 280 0
Dividends Declared 404 744
Customer Deposits 52 62
Interest and Taxes Accrued 562 962
Total 16,168 9,958
Deferred Credits
Maine Yankee Decommissioning Liability 45,405 0
Deferred Income Tax 24,447 23,694
Investment Tax Credits 666 720
Deferred Revenues 834 630
Miscellaneous 4,570 3,815
Total 75,922 28,859
Total Capitalization and Liabilities $162,883 $116,714
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)
Nine Months Ended
September 30,
1997 1996
Cash Flow From (Used For) Operating Activities
Net Income (Loss) ($1,736) $1,405
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operations
Depreciation 1,880 1,824
Amortization 194 131
Amortization of Seabrook Costs 1,064 1,064
Income on Tax Exempt Bonds-Restricted Funds (136) (68)
Deferred Income Taxes 1,210 (317)
AFUDC (21) (9)
Change in Wheelabrator-Sherman Rate Plan Deferral (1,031) (1,031)
Change in Deferred Regulatory & Debt Issuance Costs (1,098) 850
Change in Deferred Revenues 204 202
Change in Benefit Obligation 590 1,038
Change in Current Assets and Liabilities (3,428) (346)
Other (24) 457
Net Cash Flow From (Used For) Operating Activities (2,332) 5,200
Cash Flow Provided By Financing Activities
Dividend Payments (1,213) (2,232)
Tax Exempt Bond Issuance Costs 0 (399)
Issuance of Tax-Exempt Bonds 0 15,000
Drawdown of Tax Exempt Bonds Proceeds 1,239 250
Retirements on Long-Term Debt (1,315) (11,315)
Short-Term Borrowings, Net 4,800 1,600
Net Cash Flow Provided By Financing Activities 3,511 2,904
Cash Flow Used For Investing Activities
Investment in Electric Plant (1,941) (2,539)
Investment in Restricted Funds 0 (5,000)
Net Cash Used For Investment Activities (1,941) (7,539)
Increase (Decrease) in Cash and Cash Equivalents (762) 565
Cash and Cash Equivalents at Beginning of Year 1,291 976
Cash and Cash Equivalents at End of Period $529 $1,541
Change in Current Assets and Liabilities Providing
Cash From Operating Activities
Accounts Receivable $610 $1,782
Unbilled Revenue 433 277
Deferred Maine Yankee Replacement Power Costs (1,099) 0
Inventory (60) (11)
Prepayments (1,941) (777)
Accounts Payable & Accrued Expenses (1,361) (1,604)
Other Current Liabilities (10) (13)
Total Change ($3,428) ($346)
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period For:
Interest $2,950 $3,219
Income Taxes (1997 is net of a $500,000 refund) ($130) $2,371
The accompanying notes are an integral part of these financial
statements.
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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 1996 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 1996 Form 10-K. These
statements reflect all adjustments that are, in the opinion of
management, necessary to a fair statement of results for interim periods
presented. All such adjustments are of a normal recurring nature. 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 with a maturity, when purchased,
of three months or less to be cash equivalents.
Certain reclassifications have been made to the 1996 financial
statement amounts in order to conform to the 1997 presentation.
2. IMPLEMENTATION OF MULTI-YEAR RATE PLAN
A four-year rate plan, approved by the MPUC on November 13, 1995,
provided retail rate increases of 4.4% on January 1, 1996 and 2.9% on
February 1, 1997. The Company has the right to receive additional
annual increases in retail rates of 2.75% on February 1, 1998 and
February 1, 1999. Several significant accounting orders that became
effective January 1, 1996 included 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 1995 sleeving repair costs, and the $638,000, net of
income taxes, amortization over ten years of deferred post-retirement
benefits other than pensions (SFAS 106). In addition, the plan allows
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.
With higher winter rates for our commercial and industrial customers and
the elimination of the fuel clause, revenues will be higher during the
winter months than during the summer months when rates charged to those
customers are approximately 25% lower.
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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 (benefits) 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Current income taxes $ (994) $ (211) $(2,031) $ 1,721
Deferred income taxes 303 (51) 1,264 (261)
Investment credits (18) (19) (54) (56)
Total income taxes $ (709) $ (281) $ (821) $ 1,404
Allocated to:
Operating Income $ (747) $ (345) $ (941) $ 1,319
Other income 38 64 120 85
Total $ (709) $ (281) $ (821) $ 1,404
For 1997, the Company anticipates a tax net operating loss that will be
carried back to earlier years to recover previously paid federal and
state income taxes. For the nine months ended September 30, 1997 and
1996, the effective income tax rates were (32.1)% and 50%, respectively.
The principal reason for the effective tax rates differing from the US
federal income tax rate are the contribution to net income of the
Company's Canadian subsidiary, flow through items required by regulation
and state income taxes.
The following summarizes accumulated deferred income taxes established
on temporary differences under SFAS 109 as of September 30, 1997 and
December 31, 1996.
(Dollars in Thousands)
September 30, December 31,
1997 1996
Seabrook $15,095 $15,273
Property 8,178 8,104
Regulatory expenses 2,154 1,201
Investment tax credits (478) (478)
Pension and postretirement
benefits (762) (670)
Other 260 264
Net accumulated deferred income taxes $24,447 $23,694
4. MAINE YANKEE
The Company owns 5% of the Common Stock of Maine Yankee Atomic Power
Company (Maine Yankee). As previously reported, Maine Yankee has been
out of service since December 6, 1996 and was not expected to return to
service until August, 1997. On May 27, 1997, the Board of Directors of
Maine Yankee announced that it was considering permanent closure of
Maine Yankee based on the economics of the facility as well as
uncertainty regarding the operation of the plant.
No final decision was made but spending levels were reduced immediately
to a level that preserved the option of restarting the 810-megawatt
facility or closing it. The Maine Yankee Board of Directors also had
preliminary discussions with PECO Energy Company (PECO) regarding the
sale of Maine Yankee but no agreement had been reached.
-7-
For additional information regarding Maine Yankee, reference is made to
the Company's 1996 Annual Report, "Analysis of Financial Condition and
Review of Operations-1996, Maine Yankee", for discussion of the Nuclear
Regulatory Commission's Independent Safety Assessment results issued
October 7, 1996, and the current shutdown that began on December 6,
1996, to review and resolve cable separation and cable routing issues.
The Company's rate plan contains a provision for additional rate
increases in the event of a Maine Yankee plant outage exceeding six
consecutive months. After the six month period, 50% of the replacement
power costs can be deferred and recovered in rates with the annual rate
increase. This provision went into effect on June 6, 1997, with
approximately $890,000 deferred in the third quarter of 1997. In
addition, the profit-sharing mechanism allows additional rate increases
if earnings are more than 300 basis points below the target return on
equity, currently 11%, with 50% of the earnings deficiency recoverable
from customers with the annual rate increase.
For the first nine months of 1997, while Maine Yankee was out of
service, the Company incurred additional replacement power costs of
approximately $4,824,000 of which $1,086,000 has been deferred under the
Company's rate plan, along with additional operating costs of
approximately $1.9 million associated with the efforts to restart Maine
Yankee, which have adversely impacted the Company's earnings. The
Company's rate plan contains a provision for additional rate increases
in the event of a Maine Yankee plant outage exceeding six consecutive
months.
On August 6, 1997, the Board of Directors of Maine Yankee voted to
permanently cease power operations at the plant and begin the process of
decommissioning the plant. The formal vote followed an announcement by
the Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO,
after two months of intensive negotiations, had been unable to arrive
at "a mutually beneficial framework for agreement" on a sale of the
plant to PECO. The decision to shut down the plant was based on an
economic analysis of the costs, risks and uncertainties associated with
operating the plant compared to those associated with closing and
decommissioning the plant. The Maine Yankee Board's decision to close
the plant should mitigate the costs the Company would otherwise incur in
1997 through a phasing down of Maine Yankee's operations and maintenance
costs, but will not reduce the need to buy replacement energy and
capacity.
The Company is responsible for 5 percent of the costs of decommissioning
the plant. Maine Yankee has been collecting decommissioning costs in
advance pursuant to a 1994 Federal Energy Regulatory Commission (FERC)
rate order. Maine Yankee's most recent estimate of the total costs of
decommissioning is $508 million (in 1997 dollars), based on a 1997 study
by an independent engineering consultant. The previous estimate by the
same consultant was $316.6 million (in 1993 dollars). In early November,
1997, Maine Yankee released a cost estimate of $930 million (nominal
amount) for decommissioning and other operating expenditures from
September 1, 1997 through October 2008.
The Company has recorded its 5% share, $46.5 million, less $1.1 million
of its share of Maine Yankee's expenditures since September 1, 1997 as
a decommissioning liability. Maine legislation provides recovery in
rates for decommissioning costs through the regulated transmission and
distribution affiliate that will be created by March 1, 2000, therefore
an offsetting regulatory asset has also been recognized.
-8-
In a related matter, in early September, 1997, the Maine Public
Utilities Commission (MPUC) released the report of a consultant it had
retained to perform a management audit of Maine Yankee for the period
January 1, 1994 to June 30, 1997. The report contained both positive
and negative conclusions, the latter explaining that: Maine Yankee's
decision in December, 1996 to proceed with the steps necessary to
restart its nuclear generating plant at Wiscasset, Maine, was
"imprudent"; that Maine Yankee's May 27, 1997, decision to reduce
restart-expenses while exploring a possible sale of the plant was
"inappropriate," based on the consultant's finding that a more objective
and comprehensive competitive analysis at the time "might have indicated
a benefit for restarting" the plant; and that those decisions resulted
in Maine Yankee incurring $95.9 million in "unreasonable" costs. On
October 24, 1997, the MPUC issued a Notice of Investigation initiating
an investigation of the prudence of the Maine Yankee shutdown decision
and of the operation of Maine Yankee prior to the shutdown, and
announced that it had directed its consultant to extend its review to
include those areas. The Company does not know how the MPUC plans to use
the consultant's report or any negative conclusions of its
investigation, but believes the report's negative conclusions are
unfounded and may be contradictory. The Company has objected to this
investigation. The Company also plans to vigorously contest the
negative conclusions of the report if they are introduced in Maine
Yankee's anticipated rate proceeding before the Federal Energy
Regulatory Commission. In addition, the Company believes it would have
substantial constitutional and jurisdictional grounds to challenge any
effort in an MPUC proceeding to alter wholesale Maine Yankee rates made
effective by the FERC. On November 7, 1997, Central Maine Power and
Maine Yankee initiated legal challenges to the MPUC investigation in the
Maine Supreme Judicial Court alleging that such an investigation falls
exclusively within the jurisdiction of the FERC, and that the MPUC's
investigation is therefore barred on constitutional grounds. The
Company intends to join the appeals but cannot predict the timing or
outcome of the proceedings.
5. COMPLIANCE WITH FINANCIAL COVENANTS
The Company's short-term revolving credit agreement and a letter of
credit supporting its 1996 revenue bonds contain interest coverage tests
that the Company must satisfy to avoid default. On March 28, 1997, the
Company and the Banks agreed on amendments to the revolving credit
agreement and letter of credit and reimbursement agreement which adjust
the interest coverage tests to exclude Maine Yankee incremental
replacement power costs through September 30, 1997. Under the amendment
to the revolving credit agreement, the Company was obligated to issue a
first mortgage bond of $11 million as collateral for the maximum amount
of the Company's obligations under the revolving credit agreement. Both
amendments required the issuance of the first mortgage bonds on or
before May 15, 1997. On April 28, 1997 the Maine Public Utilities
Commission approved the issuance of the first mortgage bonds, and the
Company issued the bonds on May 5, 1997. Without the amendments, the
Company would have been in violation of the interest coverage tests for
the twelve months ended September 30, 1997 and would have been in
default on these instruments.
On August 6, 1997, as more fully described in Note 4, the Board of
Directors of Maine Yankee voted to permanently close the plant.
Based on projected 1997 financial results, it is likely that the Company
will be in violation of its interest coverage tests at the end of 1997.
-9-
The Company and the Banks have discussed additional amendments to the
afore-mentioned interest coverage tests, but await the MPUC's decisions
on the restructured Wheelabrator-Sherman's agreement, as described in
Note 7, and the Company's February 1, 1998 rate increase. The Company
cannot predict the terms of these additional amendments to the interest
coverage tests but is working with the Banks to reach a resolution. If
the Company's earnings provided under the rate plan are not sufficient
to satisfy its interest coverage tests and other obligations, the
Company will likely seek an emergency rate increase.
6. RESTRUCTURING OF MAINE'S ELECTRIC UTILITY INDUSTRY
On May 29, 1997, legislation titled "An Act to Restructure the State's
Electric Industry" was signed into law by the Governor of Maine. The
principal provisions with accounting impact on the Company are as
follows:
1) Beginning on March 1, 2000, all consumers of electricity have
the right to purchase generation services directly from
competitive electricity suppliers who will not be subject to
rate regulation.
2) By March 1, 2000, the Company, Central Maine Power Company
(CMP) and Bangor Hydro-Electric Company (BHE) must divest of
all generation related assets and business functions except
for:
a) contracts with qualifying facilities, such as the
Company's power contract with Wheelabrator-Sherman
(W/S), and conservation providers;
b) nuclear assets, namely, the Company's investment in
the Maine Yankee Atomic Power Company;
c) facilities located outside the United States, i.e.,
the Company's hydro facility in New Brunswick,
Canada; and
d) assets that the MPUC determines necessary for the
operation of the transmission and distribution
services.
The MPUC can grant an extension of the divestiture deadline
if the extension will improve the selling price. For assets
not divested, the utilities are required to sell the rights
to the energy and capacity from these assets. The Company
shall submit to the MPUC its divestiture plan no later than
January 1, 1999.
3) The Company, through a regulated affiliate, will continue to
provide transmission and distribution services which will be
subject to continued rate regulation by the MPUC.
4) Maine electric utilities will be permitted a reasonable
opportunity to recover legitimate, verifiable and unmitigable
costs that are otherwise unrecoverable as a result of retail
competition in the electric utility industry.
-10-
The MPUC shall determine these stranded costs by considering:
a) the utility's regulatory assets related to
generation, i.e., the Company's unrecovered
Seabrook investment;
b) the difference between net plant investment in
generation assets compared to the market value for
those assets; and
c) the difference between future contract payments and
the market value of the purchased power contracts,
i.e., the W/S contract.
By July 1, 1999, the MPUC will have estimated the stranded
costs for the Company and the manner for the collection of
these costs by the transmission and distribution company.
Customers reducing or eliminating their consumption of
electricity by switching to self-generation, conversion to
alternative fuels or utilizing demand-side management
measures cannot be assessed exit or entry fees.
5) The MPUC shall include in the rates charged by the
transmission and distribution utility decommissioning
expenses for Maine Yankee. In 2003 and every three years
thereafter until the stranded costs are recovered, the MPUC
shall review and adjust the stranded cost recovery amounts
and related transition charges. However, the MPUC may adjust
the amounts at any point in time that they deem appropriate.
Since the legislation provides for our recovery of stranded
costs by the transmission and distribution company, the
Company will continue to recognize existing regulatory assets
and plant costs as required by Emerging Issues Task Force
97-4.
6) Employees, other than officers, displaced as a result of
retail competition will be entitled to certain severance
benefits and retraining programs. These costs will be
recovered through charges collected by the regulated
transmission and distribution company.
The MPUC will conduct several rulemaking proceedings
associated with the new restructuring law. The Company is
presently reviewing its business operations and the
opportunities that the new restructuring law presents.
In accordance with EITF 97-4 "Deregulation of the Pricing of
Electricity", when the details of the restructuring plan are
determined by the MPUC rulemaking, the Company will
discontinue application of the Statement of Financial
Accounting Standards No. 71 (SFAS 71), "Accounting for the
Effects of Certain Types of Regulations", for the retail
segment of its business jurisdiction. As a result, the
Company continues to defer certain costs as regulatory assets
in instances where recovery through future regulatory cash
flows is anticipated. The Company cannot predict the value of
the Company's stranded investment that the MPUC will
determine.
-11-
7. RESTRUCTURED PURCHASE POWER AGREEMENT WITH WHEELABRATOR-SHERMAN
The Company has a Power Purchase Agreement (PPA) with the Wheelabrator-
Sherman Energy Company (W/S) under which the Company is obligated to
purchase the entire output (up to 126,582 MWH) of a 17.6 MW biomass
plant owned by W/S.
The current term of the PPA runs through December 31, 2000 and may be
renewed by either party for an additional fifteen years at prices to be
determined by mutual agreement or, absent mutual agreement, by the MPUC.
On October 15, 1997, the Company and W/S agreed to amend the PPA. Under
the terms of this amendment, W/S has agreed to reductions in the price
of purchased power of approximately $10 million over the PPA's current
term. The Company and W/S have also agreed to renew the PPA for an
additional six years at agreed-upon prices. The Company will also make
an up front payment to W/S of between $8.6 and $8.7 million, depending
upon the exact date of the transaction. The Company believes the amended
PPA will help relieve the financial pressure caused by the recent
closure of Maine Yankee as well as the need for substantial increases in
its retail rates, and is therefore in the best interests of the Company,
its customers and shareholders.
The Company intends to finance the up front payment to W/S from funds
obtained from the Finance Authority of Maine (FAME). Absent FAME
financing, the Company does not believe it will be able to obtain the
funds on terms sufficiently economic to justify the arrangement with
W/S. The amended PPA must be approved by the MPUC if FAME financing is
to be obtained, which approval is currently being sought. The Company
has also asked the MPUC to allow it to flow through immediately the
agreed-to reduction in power purchase costs under the current term of
the PPA, instead of deferring the reduction until the year 2000 as
required by the Company's Rate Stabilization Plan approved by the MPUC
in November, 1995. The Company has further asked the MPUC for a
determination that any so-called stranded investment created by the
amended PPA will be recoverable from customers to the extent permitted
by Maine law. On November 4, 1997, after a short hearing on the
Company's application, the MPUC determined that it lacked sufficient
information to make an informed decision and will not have the
opportunity to obtain this information within the statutory deadline
provided for the approval of the application. The MPUC, therefore,
denied the application, but invited the Company to resubmit it with the
understanding that a decision would be following within 30 days after an
opportunity for additional review. The Company consequently resubmitted
its application on November 6, 1997. The MPUC's and FAME's favorable
action on these matters is a prerequisite to amending the PPA. The
Company cannot predict either the MPUC's or FAME's ultimate decisions.
8. GENERATING ASSET DIVESTITURE
As required by the electric utility industry restructuring legislation,
the Company has offered for sale all of its generating capacity,
including its Canadian subsidiary, with a total net book value of $11.0
million as of September 30, 1997. This plan must be approved by the
Maine Public Utilities Commission, which has given the proceeding the
Docket No. 97-670. The Company believes it will take at least a full
year to complete this divestiture process, which began in late August,
1997. The Company cannot predict the final outcome of the proposed
divestiture.
-12-
9. ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share". This Statement is effective for financial statements issued for
periods ending after December 15, 1997 with earlier application not
permitted. The Statement requires dual presentation of basic and
diluted earnings per share on the income statement.
The Company's basic earnings per share for fiscal 1997 will be
calculated similar to its currently disclosed earnings per share.
Diluted earnings per share will not be materially different from basic
earnings per share.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income", which requires the separate reporting of all changes to
shareholders' equity, and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information", which revises existing
guidelines about the level of financial disclosure of a Company's
operations. Both Statements are effective for financial statements
issued after December 15, 1997. The Company has not determined the
impact of the new standards, but does not expect them to have a material
impact to existing financial reporting.
-13-
Item 2. Management's Analysis of Quarterly Income Form 10-Q
Statements
Results of Operations
Earnings (loss) per share and net income (loss) available for
common stock for the three months ended September 30, 1997 along
with the corresponding information for the previous year are as
follows:
Three Months Ended
September 30,
1997 1996
Loss per share $(.70) $(.40)
Net loss in Thousands $(1,129) $(655)
For the third quarter of 1997 compared to the same quarter last
year, the decrease in consolidated earnings per share (EPS) of
$.30 is attributable to the following:
EPS
Increase
(Decrease)
Increase in operating expenses resulting
from extended Maine Yankee outage in 1997:
Replacement Power Costs $(.32)
Capacity Expenses (.18)
Total ( .50)
Increase in retail revenues:
2.9% rate increase effective 2/1/97 $ .12
.7% volume decrease (.03)
Load retention discounts ( .05)
Unbilled revenue adjustment .02 .06
Increase in Power Marketing earnings
due to sale of Wyman Unit No. 4's capacity
because of the outage of several nuclear
units in New England .04
Insurance reimbursement in 1997 for legal
expenses incurred in 1996 defending lawsuit .02
Reduction in generation operation and
maintenance expenses .02
Other .06
Total $( .30)
-14-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
Additional replacement power and capacity expenses associated
with the unscheduled Maine Yankee outage that began on December
6, 1996 and the August 6, 1997 decision to close had a material
impact on the Company's earnings and cash flows for the third
quarter of 1997. For the third quarter of 1997, Maine Yankee
replacement power costs reduced earnings by $.32 per share,
while additional capacity expenses to address restart and
closing issues further reduced earnings by $.18 per share. The
rate increases under the Company's rate plan effective February
1, 1997 were partially offset by load retention contract
discounts to several large customers and a .7% decrease in
retail sales resulting in a net $.06 increase in earnings per
share. Power marketing earnings increased $.04 per share
because of demand for the Company's Wyman Unit No. 4 capacity
entitlement due to the outage of several nuclear units in New
England. Legal expenses were reduced in 1997 by $.02 per share
due to an insurance settlement received following the successful
defense against a lawsuit adjudicated in 1996. Generation
related operating and maintenance expenses were also decreased
by $.02 per share.
Consolidated operating revenues for the quarter ended
September 30, 1997 and 1996, are as follows:
1997 1996
(Dollars in Thousands) $ MWH $ MWH
Retail 10,536 112,557 10,425 113,381
Sales for Resale 474 10,859 460 10,664
Total Primary Sales 11,010 123,416 10,885 124,045
Secondary Sales 774 19,799 1,118 49,699
Other Revenues/Rev. Adjust. 601 581
Total Operating Revenues 12,385 143,215 12,584 173,744
Primary sales in the third quarter of 1997 were 123,416 MWH,
a decrease of 629 MWH from sales in the third quarter of 1996.
Secondary sales decreased by 29,900 MWH, reflecting a decrease
in power marketing activities. During the third quarter of
1996, secondary sales of the Company's Wyman Unit No. 4 and
Maine Yankee entitlements for varying lengths of time (Maine
Yankee operated at a 90-percent level for approximately half
of the third quarter in 1996) were made at prevailing market
rates. As previously mentioned, since Maine Yankee was not
-15-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
available for the same period in 1997, secondary sales for the
quarter were limited to Wyman No. 4 entitlements. However, as
noted above, because of the increased demand for Wyman Unit
No. 4's capacity, profit from power marketing activity was
actually higher in 1997.
Retail revenues for the third quarter of 1997 were $10,536,000
compared to $10,425,000 for the same period of 1996,
reflecting the 2.9% increase in retail rates effective
February 1, 1997 allowed under the Company's rate plan,
partially offset by load retention discounts to certain large
industrial customers that were approved by the Maine Public
Utilities Commission and a .7% decrease in retail sales.
For the third quarters ended September 30, 1997 and 1996,
total operating expenses were $12,773,000 and $12,448,000,
respectively. The changes in operating expenses and energy
sources are as follows:
Increase/(Decrease)
(Dollars in Thousands) $ MWH
Purchased Power Expenses
Maine Yankee 354 (42,646)
Wheelabrator-Sherman 390 1,473
NB Power 1,120 26,094
LG&E 392 9,632
Bangor Hydro-Electric (289) (12,750)
Other Purchases (71) ( 2,760)
Deferred Fuel (890)
1,006 (20,957)
Generating Expenses 123 (8,531)
Other Operation & Maint. Expenses (480)
Depreciation 63
Amortization 15
Income Taxes (402)
Total 325 (29,488)
-16-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
As previously mentioned, Maine Yankee was out of service for
all of the third quarter of 1997, while it operated at a 90-
percent level of operation for approximately half of the third
quarter of 1996, resulting in a decrease in production of
42,646 MWH. Hydro production was 65.1% and 144.0% of normal
in the third quarters of 1997 and 1996, respectively, as
reflected in the 15,260 MWH decrease. Because of the
previously mentioned decrease in power marketing activities,
purchases from Bangor Hydro-Electric were eliminated in the
third quarter of 1997. To meet the remainder of the Company's
energy requirements, purchases from NB Power and LG&E
increased 26,094 MWH and 9,632 MWH, respectively. Although
Maine Yankee did not operate in the third quarter of 1997
creating a reduction in fuel costs of $144,000, the Company's
share of Maine Yankee capacity expenses to address restart and
closing issues increased by $498,000 resulting in a net
increase in purchased power expenses of $354,000.
Wheelabrator-Sherman purchased power expenses increased by
$390,000, because of an increased production of 1,473 MWH and
a 5% contractual price increase. The Company, in accordance
with the multi-year rate plan, deferred $890,000, or 50%, of
Maine Yankee replacement power costs once the current outage
exceeded six months in early June, 1997. See the "Effects on
the Company's Rate Plan Resulting from the Maine Yankee
Closure" Section of this Form 10-Q for additional information.
Generating expenses increased by $123,000 because of increased
operation at Wyman No. 4, partially offset by decreases due to
reduced activity at the Caribou Steam Plant following Steam
Units 1 and 2 placement on inactive status effective January
1, 1996. Other operation and maintenance expenses decreased
by $480,000 primarily due to decreased wheeling expenses due
to AEI and decreased power marketing activity in 1997 and
decreased medical expenses in 1997.
Maine Yankee Closure
The Company owns 5% of the Common Stock of Maine Yankee Atomic
Power Company (Maine Yankee). As previously reported, Maine
Yankee has been out of service since December 6, 1996 and was
not expected to return to service until August, 1997. On May
27, 1997, the Board of Directors of Maine Yankee announced
that it was considering permanent closure of Maine Yankee
-17-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
based on the economics of the facility as well as uncertainty
regarding the operation of the plant. No final decision was
made but spending levels were reduced immediately to a level
that preserved the option of restarting the 810-megawatt
facility or closing it. The Maine Yankee Board of Directors
also had preliminary discussions with PECO Energy Company
(PECO) regarding the sale of Maine Yankee but no agreement had
been reached. For additional information regarding Maine
Yankee, reference is made to the Company's Form 8-K filed
June 4, 1997 under Item 5, "Other Material Events - Maine
Yankee Owners Cut Spending and Consider Closure of Maine
Yankee" and it's 1996 Annual Report, "Analysis of Financial
Condition and Review of Operations-1996, Maine Yankee", for
discussion of the Nuclear Regulatory Commission's Independent
Safety Assessment results issued October 7, 1996, and the
current shutdown that began on December 6, 1996, to review and
resolve cable separation and cable routing issues.
The Company's rate plan contains a provision for additional
rate increases in the event of a Maine Yankee plant outage
exceeding six consecutive months. After the six month period,
50% of the replacement power costs can be deferred and
recovered in rates with the annual rate increase. This
provision went into effect on June 6, 1997, with approximately
$890,000 deferred in the third quarter of 1997. In addition,
the profit-sharing mechanism allows additional rate increases
if earnings are more than 300 basis points below the target
return on equity, currently 11%, with 50% of the earnings
deficiency recoverable from customers with the annual rate
increase. As more fully explained in Note 4, on October 24,
1997, the MPUC issued a "Notice of Investigation" (NOI) to
formally commence an investigation into the report of a
consultant who performed a management audit at Maine Yankee.
The findings of the investigation will be used in future
ratemaking proceedings. The Company cannot predict the effect
of this investigation on the MPUC's review of the Company's
rate plan filing for its February 1, 1998 increase.
For the first nine months of 1997, while Maine Yankee was out
of service, the Company incurred additional replacement power
costs of approximately $4,824,000, of which $1,086,000 have
been deferred, along with additional operating costs of
-18-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
approximately $1.9 million associated with the efforts to
restart Maine Yankee, which have adversely impacted the
Company's earnings. See the "Effects on the Company's Rate
Plan Resulting from the Maine Yankee Closure" section of this
Form 10-Q for additional information.
On August 6, 1997, the Board of Directors of Maine Yankee
voted to permanently cease power operations at the plant and
begin the process of decommissioning the plant. The formal
vote followed an announcement by the Maine Yankee Board on
August 1, 1997, that Maine Yankee and PECO, after two months
of intensive negotiations, had been unable to arrive at "a
mutually beneficial framework for agreement" on a sale of the
plant to PECO. The decision to shut down the plant was based
on an economic analysis of the costs, risks and uncertainties
associated with operating the plant compared to those
associated with closing and decommissioning the plant. The
Maine Yankee Board's decision to close the plant should
mitigate the costs the Company would otherwise incur in 1997
through a phasing down of Maine Yankee's operations and
maintenance costs, but will not reduce the need to buy
replacement energy and capacity.
The Company is responsible for 5 percent of the costs of
decommissioning the plant. Maine Yankee has been collecting
decommissioning costs in advance pursuant to a 1994 Federal
Energy Regulatory Commission (FERC) rate order. Maine
Yankee's most recent estimate of the total costs of
decommissioning was $508 million (in 1997 dollars), based on
a 1997 study by an independent engineering consultant. The
previous estimate by the same consultant was $316.6 million
(in 1993 dollars). In early November, 1997, Maine Yankee
released a cost estimate of $930 million (nominal amount) for
decommissioning and other expenditures from September 1, 1997
through October, 2008. The Company has recorded its 5% share,
$46.5 million, less $1.1 million of its share of Maine
Yankee's expenditures since September 1, 1997 as a
decommissioning liability. Maine legislation provides
recovery in rates for decommissioning costs through the
regulated transmission and distribution affiliate that will be
created by March 1, 2000, therefore an offsetting regulatory
asset has also been recognized.
-19-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
In a related matter, in early September, 1997, the Maine
Public Utilities Commission (MPUC) released the report of a
consultant it had retained to perform a management audit of
Maine Yankee for the period January 1, 1994 to June 30, 1997.
The report contained both positive and negative conclusions,
the latter explaining that: Maine Yankee's decision in
December, 1996 to proceed with the steps necessary to restart
its nuclear generating plant at Wiscasset, Maine, was
"imprudent"; that Maine Yankee's May 27, 1997, decision to
reduce restart-expenses while exploring a possible sale of the
plant was "inappropriate," based on the consultant's finding
that a more objective and comprehensive competitive analysis
at the time "might have indicated a benefit for restarting"
the plant; and that those decisions resulted in Maine Yankee
incurring $95.9 million in "unreasonable" costs. On October
24, 1997, the MPUC issued a Notice of Investigation initiating
an investigation of the prudence of the Maine Yankee shutdown
decision and of the operation of Maine Yankee prior to the
shutdown, and announced that it had directed its consultant to
extend its review to include those areas. The Company does not
know how the MPUC plans to use the consultant's report or any
negative conclusions of its investigation, but believes the
report's negative conclusions are unfounded and may be
contradictory. The Company has objected to this
investigation. The Company also plans to vigorously contest
the negative conclusions of the report if they are introduced
in Maine Yankee's anticipated rate proceeding before the
Federal Energy Regulatory Commission. In addition, the
Company believes it would have substantial constitutional and
jurisdictional grounds to challenge any effort in an MPUC
proceeding to alter wholesale Maine Yankee rates made
effective by the FERC. On November 7, 1997, Central Maine
Power and Maine Yankee initiated legal challenges to the MPUC
investigation in the Maine Supreme Judicial Court alleging
that such an investigation falls exclusively within the
jurisdiction of the FERC, and that the MPUC's investigation is
therefore barred on constitutional grounds. The Company
intends to join the appeals but cannot predict the timing or
outcome of the proceedings. See Item 1. (d) of the "Legal
Proceedings and Regulatory Matters section of this Form 10-Q
for further discussion.
-20-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
Financial Condition
Net cash flows from operating activities were negative
$2,332,000 for the first nine months of 1997. The $7,532,000
decrease in net cash flow from operating activities reflects
the additional replacement power costs and capacity expenses
required in 1997 due to the Maine Yankee outage and closing.
For the period, $1,941,000 was invested in electric plant,
$1,213,000 was paid in dividends and $1,315,000 was used to
reduce long-term debt. Short-term borrowings increased by
$4,800,000 for the additional Maine Yankee replacement power
costs and capacity expenses. The Company drew down $1,239,000
in 1997 from the 1996 tax-exempt revenue bond proceeds based
on qualifying property, which partially offset construction
requirements.
For the first nine months of 1996, net cash flows from
operating activities were $5,200,000. $10,000,000 of tax-
exempt bonds were issued in 1991 and were refinanced with a
new $15,000,000 issue, with the remaining $5,000,000 deposited
with the trustee to be withdrawn based on qualified property
additions. $250,000 was drawn from the trustee of the tax-
exempt bonds for issuance expenses incurred. For the period,
$2,539,000 was invested in electric plant, $2,232,000 was paid
in dividends and $1,315,000 was used to reduce other long-term
debt. Short-term borrowings were increased by $1,600,000 for
working capital and construction requirements.
Amendments of Interest Coverage Tests in Financial Instruments
The Company's short-term revolving credit agreement and a
letter of credit supporting its 1996 tax-exempt revenue bonds
contain interest coverage tests that the Company must satisfy
to avoid default. As previously mentioned, the extended
outage at Maine Yankee and the closing of the plant has
adversely impacted the financial results for the third quarter
of 1997.
On March 28, 1997, the Company and the Banks agreed on
amendments to the revolving credit agreement and letter of
credit and reimbursement agreement which adjust the interest
coverage tests to exclude Maine Yankee incremental replacement
-21-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
power costs through September 30, 1997. Under the amendment
to the revolving credit agreement, the Company was obligated
to issue a first mortgage bond of $11 million as collateral
for the maximum amount of the Company's obligations under the
revolving credit agreement. Both amendments required the
issuance of the first mortgage bonds on or before May 15,
1997. On April 28, 1997 the Maine Public Utilities Commission
approved the issuance of the first mortgage bonds, and the
Company issued the bonds on May 5, 1997. Without these
amendments, the Company would have been in violation of its
interest coverage tests for the twelve months ended September
30, 1997 and would have been in default on these instruments.
Effects on the Company's Rate Plan Resulting from the Maine
Yankee Closure
As mentioned above, the amendments to the Company's revolving
credit agreement and letter of credit and reimbursement
agreement only exclude Maine Yankee incremental replacement
power costs through September 30, 1997. Interest coverage
tests for periods after September 30, 1997 will reflect Maine
Yankee replacement power costs, as a result of the recent
decision to close Maine Yankee. The Company's rate plan
contains a provision for additional rate increases in the
event of a Maine Yankee plant outage exceeding six consecutive
months. After the six month period, 50% of the replacement
power costs can be deferred and recovered in rates with the
annual rate increase. This provision went into effect on June
6, 1997, with approximately $890,000 deferred in the third
quarter of 1997. In addition, the profit-sharing mechanism
allows additional rate increases if earnings are more than 300
basis points below the target return on equity, currently 11%,
with 50% of the earnings deficiency recoverable from customers
with the annual rate increase. As more fully explained in
Note 4, on October 24, 1997, the MPUC issued a "Notice of
Investigation" (NOI) to formally commence an investigation
into the report of a consultant who performed a management
audit at Maine Yankee. The Company cannot predict the effect
of this investigation on the MPUC's review of the Company's
rate plan filing for its February 1, 1998 increase. Based on
projected 1997 financial results, it is likely that the
Company will be in violation of its interest coverage tests at
-22-
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements Form 10-Q
Results of Operations (Continued)
the end of 1997. The Company and the Banks have discussed
additional amendments to the aforementioned interest coverage
tests, but await the MPUC's decisions on the restructured
Wheelabrator-Sherman agreement, as described on Note 7, and
the Company's February 1, 1998 rate increase. The Company
cannot predict the terms of these additional amendments to the
interest coverage tests but is working with the Banks to reach
a resolution. If the Company's earnings provided under the
rate plan are not sufficient to satisfy its interest coverage
tests and other obligations, the Company will likely seek an
emergency rate increase in advance of any possible violation
of the previously mentioned interest coverage tests.
Forward-Looking Statements
The above discussion may contain "forward-looking statements",
as defined in the Private Securities Litigation Reform Act of
1995, related to expected future performance or our plans and
objectives. Actual results could potentially differ
materially from these statements. Therefore, there can be no
assurance that actual results will not materially differ from
expectations.
Factors that could cause actual results to differ materially
from our projections include, among other matters, electric
utility restructuring; future economic conditions; changes in
tax rates, interest rates or rates of inflation; developments
in our legislative, regulatory, and competitive environment;
and the results of safety investigations or the
decommissioning cost of Maine Yankee.
-23-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters
(a) Restructuring of Maine's Electric Utility Industry.
In the Company's Form 10-K for December 31, 1996 as well
as the form 10-Q for the quarter ended March 31, 1997,
the Company described electric utility restructuring
efforts in Maine, including the Maine Public Utilities
Commission's (MPUC) recommendation to the legislature.
After months of hearings and deliberations, the Maine
legislature passed L.D. 1804, "An Act to Restructure the
State's Electric Industry", which the Governor signed
into law on May 29, 1997.
The principal provisions of the new law are as follows:
1) Beginning on March 1, 2000, all consumers of electricity
have the right to purchase generation services directly from
competitive electricity suppliers who will not be subject to
rate regulation.
2) By March 1, 2000, the Company, Central Maine Power
Company (CMP) and Bangor Hydro-Electric Company (BHE) must
divest of all generation related assets and business functions
except for:
(a) contracts with qualifying facilities, such as the
Company's power contract with Wheelabrator-Sherman (W/S),
and conservation providers;
(b) nuclear assets, namely, the Company's investment in
the Maine Yankee Atomic Power Company, however, the MPUC
may require divestiture on or after January 1, 2009;
(c) facilities located outside the United States, i.e.,
the Company's hydro facility in New Brunswick, Canada;
and
(d) assets that the MPUC determines necessary for the
operation of the transmission and distribution services.
The MPUC can grant an extension of the divestiture deadline if
the extension will improve the selling price. For assets not
divested, the utilities are required to sell the rights to the
energy and capacity from these assets. The Company shall
submit to the MPUC its divestiture plan no later than January
1, 1999.
-24-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
3) Billing and metering services will be subject to
competition beginning March 1, 2002, but permits the MPUC to
establish an earlier date, no sooner than March 1, 2000.
4) The Company, through an unregulated affiliate, may market
and sell electricity both within and outside its current
service territory, without limitation. Both CMP and BHE are
limited to 33% of the load within their respective service
territories, but may sell an unlimited amount outside their
service territories. Consumer-owned utilities are allowed to
market and sell within their service territories, but the MPUC
can limit or prohibit competition in their service territory,
if the tax-exempt status of the consumer-owned utility is
threatened.
5) The Company, through a regulated affiliate, will continue
to provide transmission and distribution services which will
be subject to continued regulation by the MPUC.
6) Maine electric utilities will be permitted a reasonable
opportunity to recover legitimate, verifiable and unmitigable
costs that are otherwise unrecoverable as a result of retail
competition in the electric utility industry. The MPUC shall
determine these stranded costs by considering:
a) the utility's regulatory assets related to
generation, i.e., the Company's unrecovered Seabrook
investment;
b) the difference between net plant investment in
generation assets compared to the market value for those
assets; and
c) the difference between future contract payments and
the market value of the purchased power contracts, i.e.,
the W/S contract.
By July 1, 1999, the MPUC will have estimated the stranded
costs for the Company and the manner for the collection of
these costs by the transmission and distribution company.
Customers reducing or eliminating their consumption of
electricity by switching to self-generation, conversion to
alternative fuels or utilizing demand-side management measures
cannot be assessed exit or entry fees. The MPUC shall include
in the rates charged by the transmission and distribution
-25-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
utility decommissioning expenses for Maine Yankee. In 2003
and every three years thereafter until the stranded costs are
recovered, the MPUC shall review and revaluate the stranded
cost recovery.
7) All competitive providers of retail electricity must be
licensed and registered with the MPUC and meet certain
financial standards, comply with customer notification
requirements, adhere to customer solicitation requirements and
are subject to unfair trade practice laws. Competitive
electricity providers must have at least 30% renewable
resources in their energy portfolios, including hydro-electric
generation.
8) A standard-offer service will be available, ensuring
access for all customers to reasonably priced electric power.
Unregulated affiliates of CMP and BHE providing retail
electric power are prohibited from providing more than 20% of
the load within their respective service territories under the
standard offer service, while any unregulated affiliate of the
Company does not have a similar restriction.
9) Unregulated affiliates of CMP and BHE marketing and
selling retail electric power must adhere to specific codes of
conduct, including, among others:
a) employees of the unregulated affiliate providing
retail electric power must be physically separated from
the regulated distribution affiliate and cannot be
shared;
b) the regulated distribution affiliate must provide
equal access to customer information;
c) the regulated distribution company cannot
participate in joint advertising or marketing programs
with the unregulated affiliate providing retail electric
power;
d) the distribution company and its unregulated
affiliated provider of retail electric power must keep
separate books of accounts and records; and
(e) the distribution company cannot condition or tie the
provision of any regulated service to the provision of
-26-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
any service provided by the unregulated affiliated
provider of electricity.
The MPUC shall determine the extent of separation
required in the case of the Company to avoid cross-
subsidization and shall consider all similar relevant
issues as well as the Company's small size.
10) Employees, other than officers, displaced as a result of
retail competition will be entitled to certain severance
benefits and retraining programs. These costs will be
recovered through charges collected by the regulated
distribution company.
11) Other provisions of the new law include provisions for:
a) consumer education;
b) continuation of low-income programs and demand side
management activities;
c) consumer protection provisions;
d) new enforcement authority for the MPUC to protect
consumers.
The MPUC will conduct several rulemaking proceedings
associated with the new restructuring law. The Company is
presently reviewing its business operations and the
opportunities that the new restructuring law presents. The
Company cannot predict the value of the Company's stranded
investment that the MPUC will determine, but anticipates that
all stranded costs will be recovered.
As reported in its Form 8-K dated September 4, 1997, the
Company, pursuant to this legislation, has offered for sale
all of its generating capacity, including its Canadian
Subsidiary, with a net book value of $11.0 million as of
September 30, 1997. This plan must be approved by the Maine
Public Utilities Commission, which has given the proceeding
the Docket No. 97-670. The Company believes it will take at
least a full year to complete this divestiture process, which
began in late August, 1997. The Company cannot predict the
final outcome of the proposed divestiture.
-27-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
(b) 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. On May 31, 1996, the FERC
issued Order 888, a final rule on open transmission
access and stranded cost recovery. As a result the
Company has refiled its tariff to comply with the Order.
A decision by the FERC regarding the fees under the
Company's tariff is not expected until later in 1997.
The Company cannot predict the FERC's ultimate decision
in this matter.
(c) Restructured Purchase Power Agreement with Wheelabrator-
Sherman
The Company has a Power Purchase Agreement (PPA) with the
Wheelabrator-Sherman Energy Company (W/S) under which the
Company is obligated to purchase the entire output (up to
126,582 MWH) of a 17.6 MW biomass plant owned by W/S.
The current term of the PPA runs through December 31,
2000 and may be renewed by either party for an additional
fifteen years at prices to be determined by mutual
agreement or, absent mutual agreement, by the MPUC.
On October 15, 1997, the Company and W/S agreed to amend
the PPA. Under the terms of this amendment, W/S has
agreed to reductions in the price of purchased power of
approximately $10 million over the PPA's current term.
The Company and W/S have also agreed to renew the PPA for
an additional six years at agreed-upon prices. The
Company will also make an upfront payment to W/S of
between $8.6 and $8.7 million, depending upon the exact
date of the transaction. The Company believes the
amended PPA will help relieve its financial pressure
caused by the recent closure of Maine Yankee (see the
-28-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
Company's Form 10-Q for the period ended June 30, 1997)
as well as the need for substantial increases in its
retail rates, and is therefore in the best interests of
the Company, its customers and shareholders.
The Company intends to finance the upfront payment to W/S
from funds obtained from the Finance Authority of Maine
(FAME). Absent FAME financing, the Company does not
believe it will be able to obtain the funds on terms
sufficiently economic to justify the arrangement with
W/S. The amended PPA must be approved by the MPUC if
FAME financing is to be obtained, which approval is
currently being sought and has been given the Docket No.
97-727. The Company has also asked the MPUC to allow it
to flow through immediately the agreed-to reduction in
power purchase costs under the current term of the PPA,
instead of deferring the reduction until the year 2000 as
required by the Company's Rate Stabilization Plan
approved by the MPUC in November, 1995. The Company has
further asked the MPUC for a determination that any so-
called stranded investment created by the amended PPA
will be recoverable from customers to the extent
permitted by Maine law. On November 4, 1997, after a
short hearing on the Company's application, the MPUC
determined that it lacked sufficient information to make
an informed decision and will not have the opportunity to
obtain this information within the statutory deadline
provided for the approval of the application. The MPUC,
therefore, denied the application, but invited the
Company to resubmit it with the understanding that a
decision would be following within 30 days after an
opportunity for additional review. The Company
consequently resubmitted its application on November 6,
1997. The MPUC's and FAME's favorable action on these
matters is a prerequisite to amending the PPA. The
Company cannot predict either the MPUC's or FAME's
ultimate decisions.
(d) Maine Public Utilities Commission Investigation of the
Operation and Shutdown of Maine Yankee Atomic Power
Company Generating Facility in Wiscasset, Maine, MPUC
Docket No. 97-781
On October 24, 1997, the MPUC issued a Notice of
Investigation regarding the August, 1997 shutdown of the
-29-
Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Regulatory Matters - Continued
Maine Yankee Power Plant (see "Maine Yankee Closure" in
section Management's Analysis above). The MPUC stated
that the "permanent shutdown of the plant presents
significant ratemaking issues" such as replacement power
costs and stranded investment issues, for all three of
Maine Yankee's Maine owners. The announced scope of the
investigation is therefore intended to focus on "two
separate generic prudence questions .... presented in
determining the reasonableness of increased purchased
power costs and reasonableness of the recovery of the
unamortized Maine Yankee investment:
1. Was the decision to shut down the Maine Yankee
Plant prudent?
2. Was the plant prematurely shut down because the
plant had been operated or was operating
imprudently?"
As an owner of Maine Yankee, the Company was made a party
to this investigation.
The Company believes the MPUC's jurisdiction over Maine
Yankee costs and prudence issues is preempted by the
Federal Power Act and FERC jurisdiction. If, however,
the MPUC should successfully assert jurisdiction over
these issues and, if it disallowed substantial amounts of
the Maine Yankee-related expenses in retail rates, the
effect on the Company's financial condition would be
material and adverse. On November 7, 1997, Central Maine
Power and Maine Yankee initiated legal challenges to the
MPUC investigation in the Maine Supreme Judicial Court
alleging that such an investigation falls exclusively
within the jurisdiction of the FERC, and that the MPUC's
investigation is therefore barred on constitutional
grounds. The Company intends to join the appeals but
cannot predict the timing or outcome of the proceedings.
Item 5. Other Information
None
-30-
Form 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K
(a) Exhibits - none
(b) A Form 8-K was filed on: October 15, 1997 under Item 5,
Other Events; September 4, 1997 under Item 5, Other
Events.
-31-
Form 10-Q
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: November 13, 1997 /s/ Larry E. LaPlante
Larry E. LaPlante, Vice President
Finance, Administration and Treasurer
-32-
\TEXT>
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