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 June 30, 1998 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 and six months ended June 30, 1998, and for the
corresponding periods of the preceding year; a consolidated
balance sheet as of June 30, 1998, and as of December 31,
1997, 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 June 30, 1998, 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 June 30, 1998 and
December 31, 1997, and the results of their operations for the
three and six months ended June 30, 1998 and their cash flows
for the six months ended June 30, 1998, and for the
corresponding periods of the preceding year.
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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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Operating Revenues $13,243 $12,339 $28,840 $27,707
Operating Expenses
Purchased Power 7,389 7,311 15,114 17,661
Other Operation & Maintenance 3,235 3,114 7,020 6,295
Depreciation 658 627 1,317 1,254
Amortization 401 411 803 820
Taxes Other Than Income 379 436 814 882
Provision (Benefit) for
Income Taxes 290 (28) 1,023 (194)
Total Operating Expenses 12,352 11,871 26,091 26,718
Operating Income 891 468 2,749 989
Other Income (Deductions)
Equity in Income of
Associated Companies 127 137 253 247
Allowance for Equity Funds
Used During Construction 8 5 15 9
Other Income Taxes (27) (38) (43) (82)
Other - Net 40 (37) 112 (34)
Total 148 67 337 140
Income Before Interest Charges 1,039 535 3,086 1,129
Interest Charges
Long-Term Debt & Notes Payable 1,021 890 1,966 1,740
Less Allowance for Borrowed
Funds Used During
Construction (4) (2) (8) (4)
Total 1,017 888 1,958 1,736
Net Income (Loss) Available
for Common Stock $22 ($353) $1,128 ($607)
Average Shares Outstanding(000's) 1,617 1,617 1,617 1,617
Basic Earnings (Loss) Per Share
of Common Stock $0.01 ($0.22) $0.70 ($0.38)
Dividends Declared per
Common Share $0.25 $0.25 $0.50 $0.50
The accompanying notes are an integral part of these financial statements.
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MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
June 30, December 31,
ASSETS 1998 1997
Utility Plant
Electric Plant in Service $96,192 $96,396
Less Accumulated Depreciation 48,306 47,230
Net Electric Plant in Service 47,886 49,166
Construction Work-in-Progress 1,873 699
Total 49,759 49,865
Investment in Associated Companies
Maine Yankee Atomic Power Company 4,166 3,952
Maine Electric Power Company, Inc. 213 177
Total 4,379 4,129
Net Utility Plant and Investments 54,138 53,994
Current Assets
Cash and Cash Equivalents 2,001 2,071
Deposits for Interest and Dividends 470 64
Accounts Receivable - Net 5,068 5,788
Unbilled Base Revenue 1,238 1,686
Deferred Fuel and Purchased Energy 671 687
Inventory 1,280 1,231
Prepayments 442 2,189
Total 11,170 13,716
Other Assets
Restricted Investments 4,099 2,263
Uncollected Maine Yankee Decommissioning Costs 40,080 43,429
Recoverable Seabrook Costs 25,587 26,299
Regulatory Asset - SFAS 109 & 106 12,509 13,607
Deferred Fuel and Purchased Energy 8,846 7,135
Regulatory Asset - Power Purchase Restructuring 8,706 0
Other 3,723 3,038
Total 103,550 95,771
Total Assets $168,858 $163,481
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 27,222 26,903
Treasury Stock, at cost (5,714) (5,714)
Total 34,617 34,298
Long-Term Debt (less current maturities) 47,165 35,650
Current Liabilities
Long-Term Debt Due Within One Year 1,275 4,155
Notes Payable 7,600 7,200
Accounts Payable 4,169 5,871
Current Deferred Income Taxes 73 6
Dividends Declared 404 404
Customer Deposits 33 43
Interest and Taxes Accrued 1,620 880
Total 15,174 18,559
Deferred Credits
Uncollected Maine Yankee Decommissioning Costs 40,080 43,429
Deferred Income Tax 25,196 25,722
Investment Tax Credits 613 648
Deferred Revenues 1,036 902
Miscellaneous 4,977 4,273
Total 71,902 74,974
Total Capitalization and Liabilities $168,858 $163,481
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)
Six Months Ended
June 30,
1998 1997
Cash Flow Used For Operating Activities
Net Income (Loss) $1,128 ($607)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used For Operations
Depreciation 1,317 1,254
Amortization 113 129
Amortization of Seabrook Costs 709 709
Income on Tax Exempt Bonds-Restricted Funds (51) (90)
Deferred Income Taxes 542 925
AFUDC (23) (13)
Change in Deferred Fuel & Purchased Energy (1,711) (884)
Change in Deferred Regulatory and Debt
Issuance Costs 258 (1,410)
Change in Deferred Regulatory Asset - Power
Purchase Restructuring (8,706) 0
Change in Deferred Revenues 133 128
Change in Benefit Obligation 422 393
Change in Current Assets and Liabilities 1,911 (742)
Other (233) 26
Net Cash Flow Used For Operating Activities (4,191) (182)
Cash Flow From Financing Activities
Dividend Payments (1,213) (809)
FAME Financing Costs (529) 0
Deposit - FAME Capital Reserve Fund (2,378) 0
Issuance of Long Term Debt 11,540 0
Drawdown of Tax Exempt Bonds Proceeds 593 907
Retirements of Long-Term Debt (2,905) (65)
Short-Term Borrowings, Net 400 800
Net Cash Flow From Financing Activities 5,508 833
Cash Flow Used For Investing Activities
Investment in Electric Plant (1,387) (1,326)
Net Cash Used For Investment Activities (1,387) (1,326)
Decrease in Cash and Cash Equivalents (70) (675)
Cash and Cash Equivalents at Beginning of Year 2,071 1,291
Cash and Cash Equivalents at End of Period $2,001 $616
Change in Current Assets and Liabilities Providing
(Utilizing) Cash From Operating Activities
Accounts Receivable $720 $345
Unbilled Revenue 448 482
Deferred Maine Yankee Replacement Power Costs 16 0
Inventory (49) (143)
Prepayments 1,748 (823)
Accounts Payable & Accrued Expenses (963) (593)
Other Current Liabilities (9) (10)
Total Change $1,911 ($742)
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period For:
Interest $1,799 $1,609
Income Taxes (1998 and 1997 are net of refunds
of $2,052,451 and $500,000, respectively) ($1,628) ($268)
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 1997 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 1997 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 reclassification have been made to the 1997 financial
statement amounts in order to conform to the 1998 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. On January 26, 1998, the MPUC approved a 3.9% rate
increase on February 1, 1998, according to terms of a stipulation agreed
to by the Company and the Public Advocate and with the support of the
MPUC staff. The Company has the right to receive an additional increase
in retail rates of a minimum of 3.1% on February 1, 1999.
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Current income taxes $ 231 $ (676) $ 524 $(1,037)
Deferred income taxes 103 704 577 961
Investment credits (17) (18) (35) (36)
Total income taxes $ 317 $ 10 $1,066 $ (112)
Allocated to:
Operating Income $ 290 $ (28) 1,023 (194)
Other income 27 38 43 82
Total $ 317 $ 10 $1,066 $ (112)
For the six months ended June 30, 1998 and 1997, the effective income
tax rates were 48.6% and (15.6%), 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 June 30, 1998 and
December 31, 1997.
(Dollars in Thousands)
June 30, December 31,
1998 1997
Seabrook $14,370 $14,489
Property 8,562 9,565
Regulatory expenses 1,808 1,540
Deferred fuel 2,033 1,631
Pension and postretirement benefits (865) (847)
Other (712) (656)
Net accumulated deferred income taxes $25,196 $25,722
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 on August 6, 1997, the Board
of Directors of Maine Yankee voted to permanently cease power operations.
For additional information regarding Maine Yankee, reference is made to the
Company's 1997 Annual Report.
With the closing of Maine Yankee, a provision of the Company's rate plan
allowing the deferral of 50% of the excess Maine Yankee replacement
power costs went into effect on June 6, 1997. For the second quarter of
1998, the Company recovered $140,000 of these deferred expenses in
accordance with the January, 1998 rate stipulation which provided for
recovery of $562,000 in rates effective February 1, 1998. An additional
$877,000 was deferred in the second quarter of 1998, which was offset
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by net savings of $774,000 from the restructured Power Purchase
Agreement with Wheelabrator-Sherman, also in accordance with the rate
plan stipulations. As of June 30, 1998, the Company has deferred
replacement power costs of approximately $3,208,000, subject to recovery
in accordance with the rate plan.
On September 1, 1997, Maine Yankee estimated the sum of the future
payments for the closing, decommissioning and recovery of the remaining
investment in Maine Yankee to be approximately $930 million, of which
the Company's 5% share would be approximately $46.5 million.
Legislation enacted in Maine in 1997 calling for restructuring the
electric utility industry provides for recovery of decommissioning
costs, to the extent allowed by federal regulation, through the rates
charged by the transmission and distribution companies. Based on the
Maine legislation and regulatory precedent established by the FERC in
its opinion relating to the decommissioning of the Yankee Atomic nuclear
plant, the Company believes that it is entitled to recover substantially
all of its share of such costs from its customers and, as of June 30,
1998, is carrying on its consolidated balance sheet a regulatory asset
and a corresponding liability in the amount of $40.1 million, which is
the $46.5 million discussed above net of the Company's post-September 1,
1997 cost-of-service payments to Maine Yankee.
On September 2, 1997, the MPUC released the report of a consultant it
had retained to perform a management audit of Maine Yankee for the
period January 1, 1994, to June 30, 1997. The report contained both
positive and negative conclusions, the latter including: that Maine
Yankee's decision in December 1996 to proceed with the steps necessary
to restart the Plant was "imprudent", that Maine Yankee's May 27, 1997
decision to reduce restart expenses while exploring a possible sale of
the Plant was "inappropriate", based on the consultant's finding that a
more objective and comprehensive competitive analysis at that time
"might have indicated a benefit for restarting" the Plant; and that
those decisions resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. The Company has expensed its share of these
costs. On October 24, 1997, the MPUC issued a Notice of Investigation
initiating an investigation of the shutdown decision and of the
operation of the Plant prior to shutdown, and announced that it had
directed its consultant to extend its review to include those areas.
The Company does not know how the MPUC plans to use the consultant's
report, but believes the report's negative conclusions concerning the
pre-shutdown operations of the plant are unfounded and may be
contradictory. The same consultant is also investigating the prudency
of the shutdown decision itself and a report on this matter will be
forthcoming. 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, Maine Yankee and Central Maine Power
initiated a legal challenge 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
investigation is therefore barred on constitutional grounds. The
Company joined in this appeal. The MPUC subsequently stayed its
investigation pending the outcome of Maine Yankee's FERC rate case,
while indicating that its consultant would continue its extended review.
The Maine Supreme Court, on motions of the parties, stayed the appeal
pending resolution of the FERC proceeding.
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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. At December 31, 1997,
the Company was not in compliance with these covenants . On March 12,
1998, the Company and the Banks executed a waiver of the interest
coverage tests for the fourth quarter of 1997, avoiding a default. On
March 31, 1998, the Company and the Banks executed amendments to the
revolving credit agreement and letter of credit and reimbursement
agreement which further adjusts the interest coverage tests for the
first three quarters of 1998. With these amendments, the Company has
achieved its amended interest coverage tests for the first two quarters of
1998 and expects to meet the interest coverage tests for the remainder of
1998 based on projected 1998 earnings. In addition, the Revolving Credit
Agreement and Letter of Credit supporting the Tax Exempt Bonds due 2021 are
extended by one year to October, 1999 and June, 2000, respectively.
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. See Footnote
8, "Generating Asset Divestiture" for additional information.
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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.
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.
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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.
7. RESTRUCTURED POWER PURCHASE AGREEMENT WITH WHEELABRATOR-SHERMAN
The Company has restructured its 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 original term of the PPA ran through December 31, 2000 and could 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 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 agreed to renew the PPA for an
additional six years at agreed-upon prices. The Company made an
upfront payment to W-S of $8.7 million on May 29, 1998, with the
financing provided by the Finance Authority of Maine (FAME). This
payment has been reflected as a regulatory asset, and based on an MPUC
order, will be included in stranded costs and will be recovered in the
rates of the transmission and distribution utility. 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.
On May 29, 1998, FAME issued $11,540,000 of its Taxable Electric Rate
Stabilization Revenue Notes, Series 1998A (Maine Public Service Company)
(the Notes) on behalf of the Company. The Notes were issued pursuant
to, and are secured under, a Trust Indenture by and between FAME and
Peoples Heritage Bank, Portland, Maine, as Trustee (the Trustee), for
the purpose of: (i) financing the buydown payment to W-S of
approximately $8.7 million, as required under the amended purchase power
agreement described above; (ii) for the Capital Reserve Fund, as
required by FAME under their Electric Rate Stabilization Program; and
(iii) for issuance costs. The Notes are limited obligations of FAME,
payable solely out of the trust estate available under the Indenture,
principally the Loan Note and Loan Agreement with the Company and the
Capital Reserve Fund held by the Trustee. The Company has issued $4
million of its First Mortgage Bonds and $7.54 million of its Second
Mortgage Bonds as collateral for its performance under the Loan Note
issued pursuant to the Loan Agreement.
The Notes will bear interest at a Floating Interest Rate, initially at
5.7% per annum, and will be adjusted weekly. On June 1, 1998, the
Company purchased an interest rate cap of 7% at a cost of $172,000, to
expire June, 2008, to limit its interest rate exposure to quarterly U.S.
LIBOR rates.
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8. GENERATING ASSET DIVESTITURE
In August, 1997, as required by the electric utility industry
restructuring legislation, the Company offered for sale all of its
generating capacity, including its Canadian subsidiary, with a total net
book value of $11.4 million as of June 30, 1998. This plan was approved by
the Maine Public Utilities Commission, which has given the proceeding the
Docket No. 97-670. Any final sale of the Company's generation assets must
be approved by the MPUC. In its Order approving the divestiture plan, the
MPUC noted a number of concerns that it would address when the final sale
was brought before it for approval. These concerns included whether the
sale of the assets of the Canadian subsidiary should be delayed pending the
development of a retail market for electricity in Canada or until the MPUC
completes its final study on the efficiency of competitive markets in
northern Maine and whether any sale would create, or exacerbate, a
concentration of generation market power to the detriment of MPS's
customers.
On July 7, 1998, the Company announced that it has agreed to sell its
electric generating assets to WPS Power Development, Inc. (WPS-PDI)
located in Green Bay, Wisconsin, a wholly-owned subsidiary of WPS
Resources Corporation. On August 7, 1998, the Company submitted its
filing to the MPUC seeking approval of the sale.
Both parties signed a purchase and sale agreement providing a sales
price of $37.4 million for the Company's 91.8 megawatts of generating
capacity, which is 3.2 times higher than the net book value of the
assets. If the MPUC approves the sale by the first quarter of 1999, the
Company would agree not to increase customer rates by 3.1% on February
1, 1999, now scheduled under its Rate Stability Plan. In addition, the
Company is proposing that the net gain on the sale will be used to
reduce stranded costs by approximately $20.8 million. In addition to the
MPUC's approval, approval must be obtained from the New Brunswick Lt.
Governor in Council before the sale can be consummated.
Facilities being sold total 91.8 megawatts of generating capacity and
include: 34.5 MW of hydroelectric and diesel generating units at the
Canadian subsidiary, Maine & New Brunswick Electrical Power Co., Ltd.,
(Tinker Plant), as well as its transmission system and interconnection
with NB Power; 31 MW of hydroelectric, oil-fired steam, and diesel
generating facilities at the Caribou Generating Station; 1.4 MW at Squa
Pan Hydroelectric generating station and storage dam; 4.2 MW at Flo's
Inn diesel generating station; a dismantled diesel unit at Houlton; the
Millinocket Lake Storage Dam; and the Company's joint ownership share
equivalent to 20.7 MW of Wyman Unit No. 4, an oil-fired plant in
Yarmouth, Maine.
The Company's 5% ownership share in Maine Yankee was not part of the
sale because the plant was permanently shut down last August and is now
undergoing decommissioning. The rights to the 18.1 MW output being
purchased under a power purchase agreement with Wheelabrator-Sherman
were offered in the initial request for proposal, but were not included
in the final sale. When retail access begins, the Company will auction
the Wheelabrator-Sherman entitlement to a third party until 2006, when
the agreement with W-S expires. The Company has agreed to buy back
electricity from WPS-PDI at a set price to cover the period between the
closing date and February 29, 2000, when retail access begins.
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Nineteen employees who operate and maintain the plants located in Maine
and in New Brunswick will be affected by the sale. It is expected that
some employees will be hired by WPS-PDI, while other positions will be
eliminated. Those individuals not offered employment by the buyer will
be eligible for an enhanced severance and extended benefits transition
package consistent with Maine's restructuring statute.
9. ACCOUNTING PRONOUNCEMENTS
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. In the first quarter of 1998, the FASB issued SFAS No. 132
"Employers' Disclosure about Pension and Other Postretirement Benefits",
which revises existing disclosure requirements about pension and
postretirement benefits. These Statements are effective for financial
statements beginning 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.
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Form 10-Q
Item 2. Management's Analysis of Quarterly Income Statements
Forward-Looking Statements
The discussion below 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.
Results of Operations
Earnings (loss) per share and net income (loss) available for
common stock for the three months ended June 30, 1998 along with
the corresponding information for the previous year are as
follows:
Three Months Ended
June 30,
1998 1997
Earnings (loss) per share $ .01 $(.22)
Net income (loss) in Thousands $ 22 $(353)
For the second quarter of 1998 compared to the same quarter last
year, the increase in consolidated earnings per share (EPS) of
$.23 is attributable to the following:
-14-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
EPS
Increase
(Decrease)
Decrease in operating expenses resulting
from the closure of Maine Yankee and
changes in net replacement power costs:
Capacity Expenses $ .46
Replacement Power Costs (.32)
.14
Increase in retail rates of 3.9% effective
2/1/98 and a 1.4% sales increase, partially
offset by load retention discounts .20
Decrease in wheeling expense due to termination
of transmission agreement with NB Power for
Maine Yankee and Wyman wheeling .10
Increase in power marketing earnings .09
Increase in legal, consulting and advertising
expenses due to industry restructuring,
image promotion and lower expenses in 1997
reflecting an insurance reimbursement (.09)
Increase in interest expense due to increased
long-term and short-term borrowings (.05)
Decrease in other operating revenues (.05)
Other fuel expense - decreased hydro generation (.04)
Other ( .07)
Total $ .23
As compared to the second quarter of 1997, the net increase in
Maine Yankee replacement power costs under the rate plan, as
further discussed in item 3(g) of the Legal Proceedings section,
decreased earnings by $.32 per share in the second quarter of
1998. Additional capacity expenses to address restart and
closing issues during the second quarter of 1997 were eliminated
by the closure of Maine Yankee, increasing earnings by $.46 per
share. The rate increase under the Company's rate plan
effective February 1, 1998, and a 1.4% increase in retail sales,
partially offset by load retention contract discounts to several
large customers, resulted in a net $.20 increase in earnings per
share. A reduction in wheeling expenses due to the termination
of the transmission agreement with NB Power for Maine Yankee and
-15-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Wyman wheeling resulted in an increase in earnings of $.10 per
share. Power marketing earnings increased by $.09 per share,
reflecting a new agreement for the sale of Wyman. Legal,
consulting and advertising expenses increased in 1998 which
resulted in a decrease in earnings of $.09 per share due to
increased consulting on restructuring and asset sale issues,
image promotion, and lower expenses in 1997 after reflecting an
insurance settlement received following the successful defense
against a lawsuit. Interest expense decreased earnings by $.05
per share due to an increase in short-term borrowings and the
issuance of the FAME note on May 29, 1998. A decrease in
wheeling revenue due to the termination of the AEI contract in
1997, and a decrease in sales for resale, partially offset by an
increase in other operating revenues, decreased earnings by $.05
per share. An increase in other fuel expenses, due to a
reduction in hydro generation, reduced earnings by $.04 per
share. Increases in other operating expenses not described
above decreased earnings by $.07 per share.
Consolidated operating revenues for the quarters ended June
30, 1998 and 1997, are as follows:
1998 1997
(Dollars in Thousands) $ MWH $ MWH
Retail 11,589 119,180 11,055 117,553
Sales for Resale 436 11,941 508 12,520
Total Primary Sales 12,025 131,121 11,563 130,073
Secondary Sales 965 32,859 377 8,856
Other Revenues/Rev. Adjust. 253 399 -
Total Operating Revenues 13,243 163,980 12,339 138,929
Primary sales in the second quarter of 1998 were 131,121 MWH,
an increase of 1,048 MWH from sales in the second quarter of
1997. Secondary sales increased by 24,003 MWH, reflecting an
increase in power marketing activities, principally due to a
new agreement for the sale of Wyman output.
Retail revenues for the second quarter of 1998 were
$11,589,000 compared to $11,055,000 for the same period of
1997. These revenues reflect the 3.9% increase in retail
rates effective February 1, 1998 allowed under the Company's
rate plan and the 1.4% increase in retail sales, partially
offset by load retention discounts to certain large industrial
customers that were approved by the Maine Public Utilities
Commission.
-16-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
For the second quarter ended June 30, 1998 and 1997, total
operating expenses were $12,352,000 and $11,871,000, respectively.
The changes in operating expenses and energy sources are as follows:
Increase/(Decrease)
(Dollars in Thousands) $ MWH
Purchased Power Expenses
Maine Yankee (1,318) -
Wheelabrator-Sherman (61) 4,450
NB Power (772) (39,713)
Northeast Empire 1,653 48,997
Other Purchases 342 16,502
Deferred Fuel 234 -
78 30,236
Generating Expenses 112 (3,770)
Other Operation & Maint. Expenses 9
Depreciation 31
Amortization (10)
Income Taxes 318
Taxes Other than Income (57)
Total 481 26,466
To meet the Company's energy requirements with the closing of
Maine Yankee, the Company in late 1997 solicited bids for its
energy requirements. Purchases from Northeast Empire, the
successful bidder, increased 48,997 MWH, replacing energy
previously purchased from NB Power in 1997 to replace Maine
Yankee. With the closing of Maine Yankee, the Company's share
of Maine Yankee capacity expenses to address restart and
closing issues during the second quarter of 1997 were
eliminated, resulting in a net decrease in purchased power
expenses of $1,318,000. Wheelabrator-Sherman purchased power
expenses decreased by $61,000, despite increased production of
4,450 MWH, due to the reduced price under the amended Power
Purchase Agreement (PPA), as discussed in Note 7 of the Notes
to Consolidated Financial Statements, "Restructured Power
Purchase Agreement with Wheelabrator-Sherman". The Company,
in accordance with the multi-year rate plan stipulations, deferred
$877,000, 50% of excess Maine Yankee replacement power costs incurred
during the second quarter of 1998. Purchase power costs from
Wheelabrator-Sherman were decreased by $774,000 in the second quarter
because of the restructured PPA. These savings were used to reduce
the $877,000 replacement power costs deferred. The Company also
amortized $140,000 of previously deferred Maine Yankee replacement
power costs. Hydro production was 80.5% and 95.2% of normal in the
second quarters of 1998 and 1997, respectively, reflecting a
-17-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
decrease of 9,001 MWH. Generating expenses increased by
$112,000 because of increased operation at Wyman No. 4.
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 on
August 6, 1997, the Board of Directors of Maine Yankee voted
to permanently cease power operations. For additional
information regarding Maine Yankee, reference is made to the
Company's 1997 Annual Report.
The Plant provided reliable and low-cost power from the time
it commenced operations in late 1972 to 1995. Beginning in
early 1995, however, Maine Yankee encountered various
operational and regulatory difficulties with the Plant. In
1995, the Plant was shut down for almost the entire year to
repair a large number of steam generator tubes that were
exhibiting defects. Shortly before the Plant was to go back
on-line in December 1995, a group with a history of opposing
nuclear power released an undated, unsigned, anonymous letter
alleging that in 1988 Yankee Atomic (then an affiliated
consultant of Maine Yankee) and Maine Yankee had used the
results of a faulty computer code as a basis to apply to the
Nuclear Regulatory Commission (NRC) for an increase in the
Plant's power output. In response to the allegation, on
January 3, 1996, the NRC issued a Confirmatory Order that
restricted the Plant to 90 percent of its licensed thermal
operation level, which restriction was still in effect when
the Plant was permanently shut down.
As a result of the controversy associated with the
allegations, the NRC, at the request of the Governor of Maine,
conducted an intensive Independent Safety Assessment (ISA) of
the Plant in the Summer and Fall of 1996. On October 7, 1996,
the NRC issued its ISA report, which found that while the
Plant had been operated safely, there were weaknesses that
needed to be addressed, which would require substantial
additional spending by Maine Yankee. On December 10, 1996,
Maine Yankee responded to the ISA report, acknowledged many of
the weaknesses, and committed to revising its operations and
procedures to address the NRC's criticisms.
Another result of the controversy associated with the
-18-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
allegations was an investigation of Maine Yankee initiated by
the NRC's Office of Investigations (OI), which, in turn,
referred certain issues to the United States Department of
Justice (DOJ) for possible criminal prosecution. Subsequently,
on September 27, 1997, the DOJ, through the United States
Attorney for Maine, announced that its review had revealed
insufficient grounds for criminal prosecution. On April 23,
1998, the Maine Yankee officials met with the NRC to address
alleged procedural violations announced by the OI. The
Company believes that the OI investigation, however, could
ultimately result in the imposition of civil penalties,
including fines, on Maine Yankee, but cannot predict the
extent of these fines nor when they will be assessed.
With the closing of Maine Yankee, a provision of the Company's
rate plan allowing the deferral of 50% of the Maine Yankee
replacement power costs went into effect on June 6, 1997. For
the second quarter of 1998, the Company recovered $140,000 of
these deferred expenses in accordance with the January, 1998
rate stipulation. An additional $877,000 was deferred in the
second quarter of 1998. Purchase power costs from
Wheelabrator-Sherman were decreased by $774,000 in the second
quarter because of the restructured PPA. These savings were
used to reduce the $877,000 replacement power costs deferred.
As of June 30, 1998, the Company has deferred replacement
power costs of approximately $3,208,000, subject to recovery
in accordance with the rate plan.
On September 1, 1997, Maine Yankee estimated the sum of the
future payments for the closing, decommissioning and recovery
of the remaining investment in Maine Yankee to be
approximately $930 million, of which the Company's 5% share
would be approximately $46.5 million. Legislation enacted in
Maine in 1997 calling for restructuring the electric utility
industry provides for recovery of decommissioning costs, to
the extent allowed by federal regulation, through the rates
charged by the transmission and distribution companies. Based
on the Maine legislation and regulatory precedent established
by the FERC in its opinion relating to the decommissioning of
the Yankee Atomic nuclear plant, the Company believes that it
is entitled to recover substantially all of its share of such
costs from its customers and, as of June 30, 1998, is carrying
on its consolidated balance sheet a regulatory asset and a
corresponding liability in the amount of $40.1 million, which
is the $46.5 million discussed above net of the Company's
post-September 1, 1997 cost-of-service payments to Maine Yankee.
-19-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
On September 2, 1997, the MPUC released the report of a
consultant it had retained to perform a management audit of
Maine Yankee for the period January 1, 1994, to June 30, 1997.
The report contained both positive and negative conclusions,
the latter including: that Maine Yankee's decision in
December 1996 to proceed with the steps necessary to restart
the Plant was "imprudent", that Maine Yankee's May 27, 1997
decision to reduce restart expenses while exploring a possible
sale of the Plant was "inappropriate", based on the
consultant's finding that a more objective and comprehensive
competitive analysis at that time "might have indicated a
benefit for restarting" the Plant; and that those decisions
resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. The Company has expensed its share of
these costs. On October 24, 1997, the MPUC issued a Notice of
Investigation initiating an investigation of the shutdown
decision and of the operation of the Plant prior to shutdown,
and announced that it had directed its consultant to extend
its review to include those areas. The Company does not know
how the MPUC plans to use the consultant's report, but
believes the report's negative conclusions concerning the pre-
shutdown operations of the plant are unfounded and may be
contradictory. The same consultant is also investigating the
prudency of the shutdown decision itself and a report on this
matter will be forthcoming. 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, Maine Yankee and Central Maine Power initiated a legal
challenge 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 investigation is therefore barred on constitutional
grounds. The Company joined in this appeal. The MPUC
subsequently stayed its investigation pending the outcome of
Maine Yankee's FERC rate case, while indicating that its
consultant would continue its extended review. The Maine
Supreme Court, on motions of the parties, stayed the appeal
pending resolution of the FERC proceeding.
On January 15, 1998, Maine Yankee, its bondholders and lender
banks revised the Standstill agreements and extended their
term to April 15, 1998. On April 7, 1998, Maine Yankee
refunded all of its mortgage bonds and bank debt by means of
a three-year revolving credit facility with two major banks,
-20-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
which may be extended by agreement of the parties, and a
$48,000,000 term loan due in 2006 from a major institutional
investor, and discharged its First Mortgage Indenture. The
banks' revolving credit commitments are scheduled to be
reduced through planned prepayments, structured to conform to
Maine Yankee's projected cash flows, in two decrements from
their initial level of $80,000,000 to a working-capital level
of $20,000,000 on March 31, 2000. The new debt obligations
are secured by a security interest in Maine Yankee's rights in
its Power Contracts, Additional Power Contracts and Capital
Funds Agreements with its Sponsors and its rights to certain
expected third-party payments. The new debt facilities also
contain restrictions on the payment of common-stock dividends
based on Maine Yankee's cash position and a debt service
coverage test. See Item 3(g) of the "Legal Proceedings and
regulatory Matters" section of this Form 10-Q for further
discussion.
Financial Condition
Net cash flows from operating activities were negative
$4,191,000 for the first six months of 1998, reflecting the
$8,706,000 up-front payment to W-S for the amended PPA. The
Company received $11,540,000 from the issuance of FAME's
Taxable Electric Rate Stabilization Revenue Notes. The
proceeds were used for the W-S payment discussed above, a
$2,378,000 deposit to a Capital Reserve Fund and bond issuance
costs. For 1998, the receipt of $2,052,000 of tax refunds
associated with the 1997 net operating loss carryback improved
operating cash flows. For the period, $1,387,000 was invested
in electric plant, $1,213,000 was paid in dividends and
$2,905,000 was used to reduce long-term debt including the
May 1, 1998 final sinking fund payment of $2,880,000 on the
7-1/8% First Mortgage and Collateral Trust Bonds. Short-term
borrowings increased by $400,000 for the additional Maine
Yankee replacement power costs.
For the first six months of 1997, net cash flows from
operating activities were negative $182,000. The Company drew
down $907,000 from the trustee of the tax-exempt revenue bond
proceeds based on qualifying property, which partially offset
construction requirements. For the period, $1,326,000 was
invested in electric plant, $809,000 was paid in dividends and
$65,000 was used to reduce other long-term debt. Short-term
borrowings were increased by $800,000 for working capital and
construction requirements.
-21-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
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.
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 these
amendments, the Company would have been in violation of its
interest coverage tests through September 30, 1997 and would
have been in default on these instruments. At December 31,
1997, the Company was not in compliance with these covenants.
On March 12, 1998, the Company and the Banks executed a waiver
of the interest coverage tests for the fourth quarter of 1997,
avoiding a default. On March 31, 1998, the Company and the
Banks executed amendments to the revolving credit agreement
and letter of credit and reimbursement agreement which further
adjusts the interest coverage tests for the first three
quarters of 1998. With these amendments, the Company has
achieved its interest coverage tests for the first two
quarters of 1998 and expects to meet the interest coverage
tests for the remainder of 1998 based on projected earnings.
In addition, the Revolving Credit Agreement and Letter of
Credit supporting the Tax Exempt Bonds due 2021 are extended
by one year to October, 1999 and June, 2000, respectively.
-22-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters
(a) Restructuring of Maine's Electric Utility Industry.
In the Company's Form 10-K for December 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. See item (b) below
regarding the divestiture of the Company's generating assets.
-23-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. 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 Company estimates
its stranded costs to be approximately $85 million, based on
-24-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
the completion of the W-S contract restructuring, market power
estimates beyond 2000 and regulatory treatment of the
Company's remaining Seabrook investment, but does not include
any benefits from the Company's sale of generating assets.
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 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;
-25-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
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
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.
(b) Maine Public Service Company, Divestiture of Generation
Assets, MPUC Docket No. 97-670
As reported in item (a) above, the Company is required to
obtain the MPUC's approval of a plan to divest itself of all
its generation assets by January 1, 1999. On September 9,
1997, the Company, pursuant to this Legislation, submitted to
the MPUC its plan for divesting itself of all its power
entitlements and generation assets, including its Canadian
subsidiary. A hearing was held on this plan on December 18,
1997. By Order issued February 20, 1998, the MPUC approved
-26-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
the Company's plan and ordered it to proceed to divest itself
of its generation assets in accordance with the plan.
Any final sale of the Company's generation assets must be
approved by the MPUC. In its Order approving the divestiture
plan, the MPUC noted a number of concerns that it would
address when the final sale was brought before it for
approval. These concerns included whether the sale of the
assets of the Canadian subsidiary should be delayed pending
the development of a retail market for electricity in Canada
or until the MPUC completes its final study on the efficiency
of competitive markets in northern Maine (see item (c) below)
and whether any sale would create, or exacerbate, a
concentration of generation market power to the detriment of
MPS's customers.
As reported by the Company in its Form 8-K dated July 7, 1998,
the Company has agreed to sell 92 MW of generating capacity to
WPS Power Development, Inc. for $37.4 million. On August 7,
1998, the Company submitted its filing to the MPUC for
approval of the sale.
(c) Interim Report by the Maine Public Utilities Commission and
the Maine Attorney General Regarding Market Power Issues
Raised by the Prospect of Retail Competition in the Electric
Industry, MPUC Docket No. 97-877
The Legislation described in item (a) above required the Maine
Department of the Attorney General and the MPUC to jointly
conduct a study of the various market power issues presented
by the introduction of retail competition into Maine's
electric utility industry. A final report in this matter is
due by December 31, 1998. On February 2, 1998, the MPUC and
the Attorney General issued its interim report in this matter.
This interim report did not reach any final conclusion or make
any recommendations, but did note certain areas of concern.
Among the principal areas of concern are:
- whether the proposed regulation of transactions between
a utility and its marketing affiliate will be sufficient
to prevent market dominance by the affiliate or whether
an outright ban on affiliate marketing is preferable.
- that "special circumstances" in the Company's service
territory (such as its direct physical isolation from the
-27-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
New England power grid) indicates that it may be subject
to a high degree of market power. Accordingly, the
interim report noted, without further elaboration, that
the Final Report would "evaluate several possible
legislative adjustments".
In a related matter, and again as required by the Legislation
described in item (a), the MPUC, on January 26, 1998, opened
an investigation into the feasibility of a direct physical
interconnection between the Company's service territory and
the New England power grid (MPUC Docket No. 97-586). The MPUC
expects to issue a draft report on this matter by December 1,
1998. The Company will be directly involved in this
investigation.
The Company cannot at this time predict either the ultimate
conclusions of the studies described above or the effect of
these studies upon the proposed sale of the Company's
generation assets or the prospect of retail competition in the
Company's service territory.
(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. 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
1998. The Company cannot predict the FERC's ultimate decision
in this matter.
-28-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
(e) 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 in exchange for up-
front payments of $8.7 million. The Company and W-S have also
agreed to renew the PPA for an additional six years at agreed-
upon prices. 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.
In order to finance the upfront payment to W-S, the Company
concluded that it must obtain funds from the Finance Authority
of Maine (FAME); absent FAME financing the Company does not
believe it can 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. The
Company's request for this approval was given the MPUC Docket
No. 97-727. The Company also asked the MPUC for a
determination that any so-called stranded costs created by the
amended PPA will be recoverable from customers to the extent
permitted by Maine law.
On December 22, 1997, the MPUC approved the amended PPA and
determined that the upfront payment created by the amended PPA
will be treated as stranded cost. On February 19, 1998, the
FAME Board of Directors voted to provide the Company with the
financing necessary to support the amended PPA. The Company
completed its financing with FAME on May 29, 1998 and the
amended PPA became effective June 1, 1998.
-29-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
(f) 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 Maine Yankee Power
Plant (see Item 1. "Subsidiaries and Affiliated Companies",
above). The MPUC stated that the "permanent shutdown of the
plant presents significant ratemaking issues" such as
replacement power costs and stranded cost 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 joined that appeal on
November 13, 1997.
On December 2, 1997, the MPUC issued an Order staying the
investigation. The MPUC noted that Maine Yankee had begun a
rate proceeding before the FERC on November 6, 1997, which
could address the prudence issues raised in the MPUC's own
investigation. The MPUC therefore stayed its investigation in
order "to avoid unnecessary duplicative efforts by all parties
-30-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
involved". The MPUC reserved the right to reopen the
investigation particularly if FERC declines to address the
prudence issues of concern to the MPUC "if we feel it
necessary to investigate those matters after the FERC
proceeding ends." The Company cannot therefore predict
whether the MPUC will reopen its investigation once the FERC
proceeding is concluded.
As a result, the Maine Supreme Judicial Court, on December 15,
1997, upon motion by Maine Yankee and its Maine owners, stayed
all proceedings in the appeal until the first to occur of
either December 31, 1998 or the 30th day after the conclusion
of the FERC's investigation.
(g) Maine Public Utilities Commission Approves Rate Increase
Pursuant to Previously Approved Rate Plan, MPUC Docket
No. 97-830.
Reference is made to the Company's Form 10-K for December 31,
1997 where the Company's rate stabilization plan approved by
the Maine Public Utilities Commission (MPUC) (Docket No. 95-
052) in November, 1995 is described.
On November 13, 1997, the Company filed with the MPUC its
annual rate increase pursuant to the Company's rate plan. The
filing supported an annual increase in retail rates of 7.6%
effective February 1, 1998 consisting of the following:
- 2.75% specified annual increase provided in the rate
plan;
- 2.22% increase for 50% of the Maine Yankee replacement
power costs in accordance with the Maine Yankee plant
outage provisions of the rate plan; and
- 2.63% increase in accordance with the profit-sharing
mechanism of the rate plan since earnings for the review
period, i.e. the twelve months ended September 30, 1997,
were more than 300 basis points below the target return
on equity.
Additional capacity payments to restart Maine Yankee and
incremental replacement power costs have adversely impacted
the Company's 1997 earnings and triggered the rate plan
profit-sharing mechanism noted above. The Company's ability
to increase its rates for the profit-sharing and for 50% of
Maine Yankee replacement power costs is subject to the MPUC's
pending review of the prudency of the decision to close Maine
Yankee (see item (f) above).
-31-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
In addition, the Company had amended its November, 1997 filing
requesting that the savings from the restructured
Wheelabrator-Sherman (W-S) Contract, as approved by the MPUC
on December 22, 1997 (see item (e) above) be used to offset
future Maine Yankee replacement power costs. However, this
treatment was again subject to the results of the MPUC's
review of the prudency of closing Maine Yankee. The
restructuring of the W-S Contract required an up-front payment
of approximately $8.7 million, which the Company financed from
funds obtained from the Finance Authority of Maine (FAME),
under its rate stabilization program.
On January 15, 1998, the Public Advocate and the Company, with
the support of the MPUC Staff, reached an agreement on the
rate increase for February 1, 1998. The principal elements of
the stipulation are as follows:
- the rate increase effective February 1, 1998 was 3.9%,
consisting of the specified increase of 2.75% and
approximately $562,000 of the 1997 recoverable Maine
Yankee replacement power costs (1.15%);
- the minimum rate increase effective February 1, 1999 will
be 3.1%, consisting of a specified increase of 2% and the
remaining recoverable 1997 Maine Yankee replacement power
costs of $523,000;
- Maine Yankee replacement power costs for the period
October 1, 1997 through September 30, 1998 will be offset
by the 1998 savings under the restructured W-S contract,
with the recovery of any incremental Maine Yankee
replacement power costs subject to a final order by the
MPUC in its previously mentioned review of the prudency
of closing Maine Yankee;
- the Company wrote off in 1997 unamortized Maine Yankee
refueling outage costs of approximately $1,458,000;
- the Company waives its right to collect additional
revenues for the profit-sharing review period, i.e. the
twelve months ended September 30, 1997, since the
earnings deficiency was the result of the closing of
Maine Yankee and, based on the 3.9% increase granted by
the MPUC, the Company expects to earn a reasonable rate
of return in 1998 without these additional revenues;
-32-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
- a customer service and reliability standards penalty will
be suspended pending review of these standards during the
rate plan's mid-term review in September of 1998.
This agreement was approved by the MPUC on January 26, 1998.
The Company was not able to attain its interest coverage tests
for the fourth quarter of 1997. On March 12, 1998, the Company
and the Banks executed a waiver of the interest coverage tests
for the fourth quarter of 1997, avoiding a default. On March
31, 1998, the Company and the Banks executed amendments to the
revolving credit agreement and letter of credit and
reimbursement agreement, which further adjusts the interest
coverage tests for the first three quarters of 1998. The
Company met the new interest coverage tests for the first two
quarters of 1998. Based on the Company's current projections,
the Company believes that it can also attain these amended
interest coverage tests for the third quarter of 1998. The
Company believes that its rate plan deals effectively with the
closing of Maine Yankee, with customers and shareholders
sharing the burden equally. However, the Company cannot
predict what the MPUC's decisions will be concerning the
prudency of closing Maine Yankee. If the Company is adversely
impacted by the MPUC prudency decision, the Company may be
required to seek an emergency rate increase and will review
all cash expenditures, including the level of dividends.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on May
12, 1998, the only matter voted upon was the uncontested
election of the following Directors to serve until the 2001
Annual Meeting of Stockholders, each of whom received the
votes shown:
Non-votes
and
Nominee For Against Abstention
Paul R. Cariani 1,406,045 21,708 189,497
Donald F. Collins 1,405,812 21,941 189,497
Richard G. Daigle 1,406,597 21,156 189,497
J. Gregory Freeman 1,406,595 21,158 189,497
Item 5. Other Information
None
-33-
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: June 3, 1998 under Item 5,
Other Material Events; and July 7, 1998 under Item 5,
Other Material Events.
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: August 12, 1998 /s/ Larry E. LaPlante
Larry E. LaPlante, Vice President
Finance, Administration and Treasurer
-34-
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