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, 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 nine months ended September 30, 1998, and for the
corresponding periods of the preceding year; a consolidated
balance sheet as of September 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 September 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 September 30, 1998 and
December 31, 1997, and the results of their operations for the
three and nine months ended September 30, 1998 and their cash
flows for the nine months ended September 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Operating Revenues $12,832 $12,385 $41,672 $40,092
Operating Expenses
Purchased Power 7,444 8,912 22,558 26,573
Other Operation and Maintenance 3,206 3,185 10,226 9,480
Depreciation 659 626 1,976 1,880
Amortization 402 411 1,205 1,231
Taxes Other Than Income 368 386 1,182 1,268
Provision (Benefit) for Income Taxes (20) (747) 1,003 (941)
Total Operating Expenses 12,059 12,773 38,150 39,491
Operating Income 773 (388) 3,522 601
Other Income (Deductions)
Equity in Income of Associated
Companies 132 130 385 377
Allowance for Equity Funds Used
During Construction 10 5 25 14
Other Income Taxes (4) (38) (47) (120)
MY Replacement Power Carrying Charges 61 13 185 13
Other - Net (31) 43 (43) 9
Total 168 153 505 293
Income Before Interest Charges 941 (235) 4,027 894
Interest Charges
Long-Term Debt and Notes Payable 1,098 897 3,064 2,637
Less Allowance for Borrowed Funds
Used During Construction (6) (3) (14) (7)
Total 1,092 894 3,050 2,630
Net Income (Loss) Available for
Common Stock ($151) ($1,129) $977 ($1,736)
Average Shares Outstanding (000's) 1,617 1,617 1,617 1,617
Basic Earnings (Loss) Per Share of
Common Stock ($0.09) ($0.70) $0.60 ($1.07)
Dividends Declared per Common Share $0.25 $0.25 $0.75 $0.75
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)
September 30, December 31,
ASSETS 1998 1997
Utility Plant
Electric Plant in Service $98,642 $96,396
Less Accumulated Depreciation 51,177 47,230
Net Electric Plant in Service 47,465 49,166
Construction Work-in-Progress 2,840 699
Total 50,305 49,865
Investment in Associated Companies
Maine Yankee Atomic Power Company 4,167 3,952
Maine Electric Power Company, Inc. 233 177
Total 4,400 4,129
Net Utility Plant and Investments 54,705 53,994
Current Assets
Cash and Cash Equivalents 1,665 2,071
Deposits for Interest and Dividends 472 64
Accounts Receivable - Net 4,206 5,788
Unbilled Base Revenue 1,365 1,686
Deferred Fuel and Purchased Energy 661 687
Inventory 1,211 1,231
Prepayments 825 2,189
Total 10,405 13,716
Other Assets
Restricted Investments 3,702 2,263
Uncollected Maine Yankee Decommissioning Costs 38,776 43,429
Recoverable Seabrook Costs 25,231 26,299
Regulatory Asset - SFAS 109 & 106 12,436 13,607
Deferred Fuel and Purchased Energy 9,119 7,135
Regulatory Asset - Power Purchase Restructuring 8,706
Other 3,735 3,038
Total 101,705 95,771
Total Assets $166,815 $163,481
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 26,667 26,903
Treasury Stock, at cost (5,714) (5,714)
Total 34,062 34,298
Long-Term Debt (less current maturities) 45,915 35,650
Current Liabilities
Long-Term Debt Due Within One Year 1,275 4,155
Notes Payable 10,000 7,200
Accounts Payable 3,637 5,871
Current Deferred Income Taxes 47 6
Dividends Declared 404 404
Customer Deposits 27 43
Interest and Taxes Accrued 489 880
Total 15,879 18,559
Deferred Credits
Uncollected Maine Yankee Decommissioning Costs 38,776 43,429
Deferred Income Tax 25,519 25,722
Investment Tax Credits 596 648
Deferred Revenues 1,102 902
Miscellaneous 4,966 4,273
Total 70,959 74,974
Total Capitalization and Liabilities $166,815 $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)
Nine Months Ended
September 30,
1998 1997
Cash Flow Used For Operating Activities
Net Income (Loss) $977 ($1,736)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Used For Operations
Depreciation 1,976 1,880
Amortization 169 194
Amortization of Seabrook Costs 1,064 1,064
Income on Tax Exempt Bonds-Restricted Funds (78) (136)
Deferred Income Taxes 863 1,210
AFUDC (39) (21)
Change in Deferred Fuel & Purchased Energy (1,984) (2,130)
Change in Deferred Regulatory and Debt Issuance Costs 410 (1,098)
Change in Deferred Regulatory Asset - Payment for
Power Purchase Restructuring (8,706)
Change in Deferred Revenues 200 204
Change in Benefit Obligation 640 590
Change in Current Assets and Liabilities 673 (2,329)
Other (592) (24)
Net Cash Flow Used For Operating Activities (4,427) (2,332)
Cash Flow From Financing Activities
Dividend Payments (1,617) (1,213)
FAME Financing Costs (534)
Deposit - FAME Capital Reserve Fund (2,378)
Issuance of Long Term Debt 11,540
Drawdown of Tax Exempt Bonds Proceeds 1,038 1,239
Retirements of Long-Term Debt (4,155) (1,315)
Short-Term Borrowings, Net 2,800 4,800
Net Cash Flow From Financing Activities 6,694 3,511
Cash Flow Used For Investing Activities
Investment in Electric Plant (2,673) (1,941)
Net Cash Used For Investment Activities (2,673) (1,941)
Decrease in Cash and Cash Equivalents (406) (762)
Cash and Cash Equivalents at Beginning of Year 2,071 1,291
Cash and Cash Equivalents at End of Period $1,665 $529
Change in Current Assets and Liabilities Providing (Utilizing)
Cash From Operating Activities
Accounts Receivable $1,582 $610
Unbilled Revenue 321 433
Deferred Maine Yankee Replacement Power Costs 26
Inventory 20 (60)
Prepayments 1,364 (1,941)
Accounts Payable & Accrued Expenses (2,624) (1,361)
Other Current Liabilities (16) (10)
Total Change $673 ($2,329)
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period For:
Interest $3,331 $2,950
Income Taxes (1998 & 1997 are net of refunds of
$2,052,451 and $500,000, respectively) ($1,387) ($130)
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 effective 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Current income taxes $ (337) $ (994) $ 187 $(2,031)
Deferred income taxes 339 303 916 1,264
Investment credits (18) (18) (53) (54)
Total income taxes $ (16) $ (709) $1,050 $ (821)
Allocated to:
Operating Income $ (20) $ (747) 1,003 (941)
Other income 4 38 47 120
Total $ (16) $ (709) $1,050 $ (821)
For the nine months ended September 30, 1998 and 1997, the effective
income tax rates were 51.8% and (32.1%), 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, 1998 and
December 31, 1997.
(Dollars in Thousands)
September 30, December 31,
1998 1997
Seabrook $14,311 $14,489
Property 8,537 9,565
Regulatory expenses 1,906 1,540
Deferred fuel 1,993 1,631
Pension and postretirement benefits (936) (847)
Other (292) (656)
Net accumulated deferred income taxes $25,519 $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 third 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.
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An additional $1,105,000 would have been deferred in the third quarter
of 1998, however these costs were offset by net savings of $1,106,000
from the restructured Purchase Power Agreement with Wheelabrator-
Sherman, also in accordance with the rate plan stipulations. As of
September 30, 1998, the Company has a net deferred replacement power
cost balance of approximately $3,066,000, 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. Maine
Yankee has indicated that it plans to further update its decommissioning
cost estimate before final consideration by the Federal Energy
Regulatory Commission (FERC). 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 September 30, 1998, is carrying on
its consolidated balance sheet a regulatory asset and a corresponding
liability in the amount of $38.8 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 believes the report's negative
conclusions are unfounded and may be contradictory. In any event, 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 believes it would have substantial
constitutional and jurisdictional grounds to challenge any effort in an
MPUC proceeding to alter wholesale Maine Yankee rates made effective by
the FERC. The MPUC subsequently stayed its investigation pending the
outcome of Maine Yankee's FERC rate case, in which the MPUC and the
Maine Office of the Public Advocate (OPA) are actively participating
while indicating that its consultant would continue its extended review.
Based on preliminary indications, the Company expects the consultant's
recommendations resulting from its extended review would call for
additional disallowances. However, Maine Yankee, the Company, as well as
other Maine Yankee owners have discussed proposals to resolve these rate
case issues with several intervenors, including the MPUC and the OPA.
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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 three
quarters of 1998 and expects to meet the interest coverage tests for the
fourth quarter 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. The Company
shall submit to the MPUC its divestiture plan no later than
January 1, 1999.
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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 generation 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.
In a related matter, and again as required by the Legislation described
above, 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). On October 13, 1998, the MPUC issued a draft report in Docket No.
97-586, which was prepared by an independent consultant and purports not
to be the product of either the MPUC or its Staff. In addition to the
issue of the direct physical connection, the draft report also addresses
many of the issues concerning the development of a competitive market
for electricity in northern Maine. The draft report concludes that "the
electricity market in northern Maine is likely to be subject to market
power problems" and recommends further study into methods of resolving
those problems. While the Company disagrees with the reports
conclusion, it cannot predict the outcome of this proceeding.
7. INVESTIGATION OF STRANDED COSTS, TRANSMISSION AND DISTRIBUTION UTILITY
REVENUE REQUIREMENTS AND RATE DESIGN
On October 14, 1998, the Company filed its determination of stranded
costs, transmission and distribution costs and rate design with the
MPUC. The Company's testimony supports its $96.6 million estimate of
stranded costs when deregulation occurs on March 1, 2000. The major
components include the remaining investment in Seabrook, the above
market costs of the amended power purchase agreement and recovery of
fuel expense deferrals related to Wheelabrator-Sherman, the obligation
for remaining operating expenses and recovery of the Company's remaining
investment in Maine Yankee, and the recovery of several other regulatory
assets. These stranded costs will be reduced by an estimated $19.6
million should the sale of the Company's generating assets be approved
by the MPUC, discussed further in Note 9, "GENERATING ASSET DIVESTITURE,
below. The Company's proposed annual revenue requirements supported in
the filing would be approximately $32.6 millon; $19.3 million for
transmission and distribution and $13.3 million for stranded investment.
Decisions by the MPUC regarding stranded costs and the generating asset
sale approval are not expected until 1999. The Company cannot predict
the MPUC's ultimate decision in these matters.
8. 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.
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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.
9. 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 $11.2 million as of September 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.
-12-
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 $19.6 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.
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.
10. 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.
-13-
Form 10-Q
PART 1. FINANCIAL INFORMATION
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
Loss per share and the net loss available for common stock for
the three months ended September 30, 1998 along with the
corresponding information for the previous year are as follows:
Three Months Ended
September 30,
1998 1997
Loss per share $(.09) $(.70)
Net loss (in thousands) $(151) $(1,129)
For the third quarter of 1998 compared to the same quarter last
year, the increase in consolidated earnings per share (EPS) of
$.61 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 $ .53
Replacement Power Costs (.09)
.44
Increase in retail rates of 3.9% effective
2/1/98 and a 4.5% sales increase, partially
offset by load retention discounts .29
Other fuel expense - increased prices (.08)
Increase in interest expense due to increased
long-term and short-term borrowings (.07)
Change in other operation & maintenance expenses .04
Other ( .01)
Total $ .61
The net increase in Maine Yankee replacement power costs under
the rate plan, compared to the third quarter of 1997, decreased
earnings by $.09 per share in the third quarter of 1998. The
rate plan is discussed in detail in item 3(f) of the Legal
Proceedings section. 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 $.53 per share. The rate increase under the
Company's rate plan effective February 1, 1998, and a 4.5%
increase in retail sales, partially offset by load retention
contract discounts to several large customers, resulted in a net
$.29 increase in earnings per share.
-15-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
An increase in other fuel expenses due to price increases
reduced earnings by $.08 per share. Interest expense decreased
earnings by $.07 per share due to an increase in short-term
borrowings and the issuance of the FAME note on May 29, 1998.
A reduction in wheeling expenses due to the termination of the
transmission agreement with NB Power for Maine Yankee and Wyman
wheeling, offset by increases in other operation and maintenance
expenses, resulted in a net increase in earnings of $.04 per
share. Changes in other operating revenues not described above
decreased earnings by $.01 per share.
Consolidated operating revenues for the quarters ended
September 30, 1998 and 1997, are as follows:
1998 1997
(Dollars in Thousands) $ MWH $ MWH
Retail 11,314 117,635 10,536 112,557
Sales for Resale 420 11,058 474 10,859
Total Primary Sales 11,734 128,693 11,010 123,416
Secondary Sales 521 14,706 774 19,799
Other Revenues/Rev. Adjust. 577 - 601 -
Total Operating Revenues 12,832 143,399 12,385 143,215
Primary sales in the third quarter of 1998 were 128,693 MWH,
an increase of 5,277 MWH (4.3%) from sales in the third
quarter of 1997. Secondary sales decreased by 5,093 MWH,
reflecting a decrease in power marketing sales.
Retail revenues for the third quarter of 1998 were $11,314,000
compared to $10,536,000 for the same period of 1997. The
increase in revenues reflects the 3.9% increase in retail
rates effective February 1, 1998 allowed under the Company's
rate plan and the 4.5% increase in retail sales, partially
offset by load retention discounts to certain large industrial
customers that were approved by the Maine Public Utilities
Commission (MPUC).
-16-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
For the third quarters ended September 30, 1998 and 1997,
total operating expenses were $12,059,000 and $12,773,000,
respectively. The changes in operating expenses and energy
sources are as follows:
Increase/(Decrease)
(Dollars in Thousands) $ MWH
Purchased Power Expenses
Maine Yankee (1,512) -
Wheelabrator-Sherman (1,332) (2,277)
NB Power (1,585) (62,060)
Northeast Empire 2,294 67,968
Other Purchases (365) ( 9,078)
Deferred Fuel - MY Replacement 1,031 -
(1,469) ( 5,447)
Generating Expenses 35 7,638
Other Operation & Maint. Expenses (13)
Depreciation 33
Amortization ( 9)
Income Taxes 727
Taxes Other than Income (18)
Total (714) 2,191
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 67,968 MWH, substituting energy
previously purchased from NB Power in 1997 to replace Maine
Yankee energy. With the closing of Maine Yankee, the
Company's share of Maine Yankee capacity expenses to address
restart and closing issues during the third quarter of 1997
were eliminated resulting in a net decrease in purchased power
expenses of $1,512,000. Wheelabrator-Sherman purchased power
expenses decreased by $1,332,000, due to decreased production
of 2,277 MWH and to the reduced price under the amended Power
Purchase Agreement (PPA), as discussed in Note 8 of the Notes
to Consolidated Financial Statements, "Restructured Power
Purchase Agreement with Wheelabrator-Sherman". Deferred fuel
expense increased $1,031,000 as a result of the deferral of
Maine Yankee replacement power costs in the third quarter of
1997. There was no net deferral of Maine Yankee replacement
power in the third quarter of 1998, as a result of the
application of the Wheelabrator-Sherman savings mentioned
above, in accordance with the January, 1998 rate stipulation
discussed further in Note 4 of the Notes to Consolidated
Financial Statements, "Maine Yankee".
-17-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Hydro production was 96.7% and 65.1% of normal in the third
quarters of 1998 and 1997, respectively, reflecting an
increase of 6,116 MWH. Generating expenses increased by
$35,000 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 and could continue to operate,
there were weaknesses that needed to be addressed, which would
require substantial additional spending by Maine Yankee. On
December 10, 1996, Maine Yankee responded to the ISA report,
acknowledged many of the weaknesses, and committed to revising
its operations and procedures to address the NRC's criticisms.
-18-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Another result of the controversy associated with the
allegations was an investigation of Maine Yankee initiated by
the NRC's Office of Investigations (OI), which, in turn,
referred certain issues to the United States Department of
Justice (DOJ) for possible criminal prosecution.
Subsequently, on September 24, 1997, the DOJ, through the
United States Attorney for Maine, announced that its review
had revealed insufficient grounds for criminal prosecution.
On October 8, 1998, the NRC issued a notice of violation for
the pre-shutdown violations, but announced that it was not
imposing civil penalties for those violations.
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 third 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 $1,105,000
would have been deferred in the third quarter of 1998, however
these costs were offset by net savings of $1,106,000 from the
restructured Purchase Power Agreement with Wheelabrator-
Sherman, also in accordance with the rate plan stipulation.
As of September 30, 1998, the Company has a net deferred
replacement power cost balance of approximately $3,066,000,
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. Maine Yankee has
indicated that it plans to further update its decommissioning
cost estimate before final consideration by the Federal Energy
Regulatory Commission (FERC). 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
-19-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
costs from its customers and, as of September 30, 1998, is
carrying on its consolidated balance sheet a regulatory asset
and a corresponding liability in the amount of $38.8 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 believes the report's
negative conclusions are unfounded and may be contradictory.
In any event, 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 believes it
would have substantial constitutional and jurisdictional
grounds to challenge any effort in an MPUC proceeding to alter
wholesale Maine Yankee rates made effective by the FERC. The
MPUC subsequently stayed its investigation pending the outcome
of Maine Yankee's FERC rate case, in which the MPUC and the
Maine Office of the Public Advocate (OPA) are actively
participating, while indicating that its consultant would
continue its extended review. Based on preliminary
indications, the Company expects the consultant's
recommendations resulting from its extended review would call
for additional disallowances. However, Maine Yankee,
the Company, as well as other Maine Yankee owners, have
discussed proposals to resolve these rate case issues with
several intervenors, including the MPUC and the OPA.
-20-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
On January 15, 1998, Maine Yankee, its former bondholders and
lender banks revised the Standstill agreements and extended
their term to April 15, 1998. On April 7, 1998, Maine Yankee
refunded all of its mortgage bonds and bank debt by means of
a three-year revolving credit facility with two major banks,
which may be extended by agreement of the parties, and a
$48 million term loan due in 2006 from a major institutional
investor, and discharged its First Mortgage Indenture. The
banks' revolving credit commitments are scheduled to be
reduced through planned prepayments, structured to conform to
Maine Yankee's projected cash flows, in two decrements from
their initial level of $80 million to a working-capital level
of $20 million on March 31, 2000 and were reduced to $50
million in June, 1998. The new debt obligations are secured
by a security interest in Maine Yankee's rights in its Power
Contracts, Additional Power Contracts and Capital Funds
Agreements with its Sponsors 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(f) 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
$4,427,000 for the first nine 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. The Company drew down $1,038,000 from
the trustee of the tax-exempt revenue board proceeds based on
qualifying property, which partially offset construction
requirements. For the period, $2,673,000 was invested in
electric plant, $1,617,000 was paid in dividends and
$4,155,000 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 $2,800,000 for the additional Maine
Yankee replacement power costs.
-21-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
For the first nine months of 1997, net cash flows from
operating activities were negative $2,332,000. The Company
drew down $1,239,000 from the trustee of the tax-exempt
revenue bond proceeds. 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 other long-term debt.
Short-term borrowings were increased by $4,800,000 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.
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 three
quarters of 1998 and expects to meet the interest coverage
tests for the fourth quarter 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 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Year 2000 Issues
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Computer programs that have date-sensitive
software using two digits would recognize a date using "00" as
the year 1900 rather than the year 2000, resulting in system
failure or miscalculations. The Company has been conducting
an on-going assessment of its computer systems, including
embedded chip technology, to determine the potential technical
and economic impact which the Year 2000 issues might have on
the Company, its systems and its business operations. As part
of this process, the Company has reviewed the computer
application systems responsible for its billing, customer
information system and accounting transactions and has
identified modifications necessary for those systems. These
modifications are principally being made to comply with the
electric industry restructuring requirements but have
incorporated changes that achieve Year 2000 compliance. The
Company is also reviewing its other mission critical systems
in order to identify Year 2000 remediation or renovation
measures needed for those systems and intends to complete
necessary modifications, renovations and testing of all
mission critical systems by July 1, 1999. The compliance
plans and implementation and testing milestones are based on
the Company's best estimates, which were derived from
numerous assumptions of future events, including the continued
availability of certain resources, third party modification
plans and other known factors. In addition to the review of
internal systems, the Company is requesting assurances of Year
2000 compliance from third parties upon whom the Company
relies. The responses are being reviewed and concerns of non-
compliance are being pursued. The Company is attempting to
obtain responses and prepare contingency plans, where
necessary, no later than July 1, 1999.
To date, the Company's review and testing has not revealed
material system modifications necessary to obtain Year 2000
compliance for mission critical systems, other than the
changes necessary for electric industry restructuring
discussed above. However, $50,000 has been budgeted in 1999
for external expenditures for unforeseen modifications to
achieve Year 2000 compliance for mission critical technology.
-23-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
The Company expects to finish the assessment phase of the Year
2000 compliance project by December 31, 1998, and will then
identify risks and most reasonable likely worse case scenarios
specific to Year 2000 noncompliance by the Company and third
party sources. The Company will develop appropriate
contingency plans for these risks no later than July 1, 1999.
Although all reasonable and available efforts will be made,
the Company cannot predict the ultimate achievement of Year
2000 compliance due to its reliance on systems and third
parties outside of the Company's control.
-24-
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.
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.
-25-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
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 estimated
its stranded costs to be approximately $96.6 million, based on
its October 14, 1998 filing, which included the remaining
investment in Seabrook, the above market costs of the amended
power purchase agreement and recovery of fuel expense
deferrals related to Wheelabrator-Sherman, the obligation for
remaining operating expenses and recovery of the Company's
remaining investment in Maine Yankee, and the recovery of
-26-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
several other regulatory assets, 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;
d) the distribution company and its unregulated
affiliated provider of retail electric power must keep
separate books of accounts and records; and
-27-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
(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, Request for Approval of Sale of
Generating Assets, Docket No. 98-584
Reference is made to the Company's Form 8-K for July 7, 1998
in which the Company reported that it had agreed to sell all
of its generating assets to WPS Power Development, Inc. (WPD-
PDI) for $37.4 million.
On August 7, 1998, the Company filed with the MPUC for
approval of this sale. This proceeding was assigned the MPUC
Docket No. 98-584. The Public Advocate and Houlton Water
Company have intervened in the proceeding. As reported in the
Company's Form 10-Q for the quarter ended June 30, 1998, the
MPUC, in its Order approving the Company's divestiture plan on
MPUC Docket No. 97-670, noted a number of concerns that it
would address in Docket No. 98-584. These concerns include
-28-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
whether the sale 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). The Company addressed this concern in its August
7th filing and believes the market for electricity in northern
Maine is sufficiently competitive to justify the sale of the
Company's Canadian assets. The Company cannot at this time
predict the MPUC's ultimate conclusions on this issue or
whether it will approve the sale of the Company's generation
assets.
(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
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). On
-29-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
October 13, 1998, the MPUC issued a draft report in Docket No.
97-586, which was prepared by an independent consultant and
purports not to be the product of either the MPUC or its
Staff. In addition to the issue of the direct physical
connection, the draft report also addresses many of the issues
concerning the development of a competitive market for
electricity in northern Maine. The draft report concludes
that "the electricity market in northern Maine is likely to be
subject to market power problems" and recommends further study
into methods of resolving those problems. The draft report
does not flatly conclude that northern Maine should not be
opened up to retail competition in electricity, but states its
belief that customers in northern Maine "are likely to pay
higher prices that are significantly higher than those
available from a competitive electricity market".
On October 26, 1998, the Company submitted to the MPUC
comments in which it stated its very substantial disagreement
with this report's conclusions. Moreover, the Commission has
stated that this report, when final, will be allowed into the
record in Docket No. 98-584 (see (b) above) and the report's
authors will be subject to discovery and questioning during
the hearing in that Docket. The Company expects to vigorously
challenge the analysis of this report.
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 in Docket No. 98-584 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
-30-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
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.
(e) 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.
-31-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
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
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.
(f) 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
-32-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings and Regulatory Matters - Continued
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 (e) above).
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;
-33-
PART II. OTHER INFORMATION Form 10-Q
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 three quarters 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.
(g) Maine Public Service Company Investigation of Stranded Costs,
Transmission and Distribution Utility Revenue Requirements and
Rate Design, Docket No. 98-577
On October 14, 1998, the Company filed its determination of
stranded costs, transmission and distribution costs and rate
design with the MPUC. The Company's testimony supports its
$96.6 million estimate of stranded costs when deregulation
occurs on March 1, 2000. The major components include the
remaining investment in Seabrook, the above market costs of
the amended power purchase agreement and recovery of fuel
expense deferrals related to Wheelabrator-Sherman, the
obligation for remaining operating expenses and recovery of
the Company's remaining investment in Maine Yankee, and the
recovery of several other regulatory assets. These stranded
costs will be reduced by an estimated $19.6 million should the
sale of the Company's generating assets be approved by the
MPUC, discussed further in item (b) above. The Company's
proposed annual revenue requirements supported in the filing
would be approximately $32.6 million; $19.3 million for
transmission and distribution and $13.3 million for stranded
investment. Decisions by the MPUC regarding stranded costs
and the generating asset sale approval are not expected until
1999. The Company cannot predict the MPUC's ultimate decision
in these matters.
-34-
PART II. OTHER INFORMATION Form 10-Q
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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 12, 1998 /s/ Larry E. LaPlante
Larry E. LaPlante, Vice President
Finance, Administration and Treasurer
-35-
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