SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended March 31, 1999 Commission File No. 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
Subsidiaries Condensed Consolidated Financial Statements,
including a statement of consolidated operations for the
quarter ended March 31, 1999, and for the corresponding period
of the preceding year; a consolidated balance sheet as of
March 31, 1999, and as of December 31, 1998, the end of the
Company's preceding fiscal year; and a statement of
consolidated cash flows for the period January 1 (beginning of
the fiscal year) through March 31, 1999, and for the
corresponding period of the preceding year.
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements present fairly the
financial position of the Companies at March 31, 1999 and
December 31, 1998, and the results of their operations for the
three months ended March 31, 1999 and their cash flows for the
three months ended March 31, 1999, and for the corresponding
period of the preceding year.
-2-
MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Three Months Ended
March 31,
1999 1998
Operating Revenues $17,469 $15,597
Operating Expenses
Purchased Power 9,098 7,725
Other Operation and Maintenance 3,305 3,785
Depreciation 601 659
Amortization 385 402
Taxes Other Than Income 447 435
Provision for Income Taxes 1,144 733
Total Operating Expenses 14,980 13,739
Operating Income 2,489 1,858
Other Income (Deductions)
Equity in Income of Associated Companies 277 126
Allowance for Equity Funds Used During
Construction 10 7
Provision for Income Taxes (34) (16)
MY Replacement Power Carrying Charges 69 56
Other - Net (80) 16
Total 242 189
Income Before Interest Charges 2,731 2,047
Interest Charges
Long-Term Debt and Notes Payable 979 945
Less Allowance for Borrowed Funds
Used During Construction (7) (4)
Total 972 941
Net Income Available for Common Stock $1,759 $1,106
Average Shares Outstanding (000's) 1,617 1,617
Basic Earnings Per Share of Common Stock $1.09 $0.68
Dividends Declared per Common Share $0.25 $0.25
The accompanying notes are an integral part of these financial statements.
-3-
MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands)
March 31, December 31,
ASSETS 1999 1998
Utility Plant
Electric Plant in Service $101,002 $101,211
Less Accumulated Depreciation 51,999 51,585
Net Electric Plant in Service 49,003 49,626
Construction Work-in-Progress 1,589 1,014
Total 50,592 50,640
Investment in Associated Companies
Maine Yankee Atomic Power Company 3,933 3,979
Maine Electric Power Company, Inc. 453 241
Total 4,386 4,220
Net Utility Plant and Investments 54,978 54,860
Current Assets
Cash and Cash Equivalents 1,314 1,454
Deposits for Interest and Dividends 477 477
Accounts Receivable - Net 7,137 5,856
Unbilled Base Revenue 1,510 1,892
Deferred Fuel and Purchased Energy 687 687
Current Deferred Income Taxes 0 31
Inventory 1,232 1,037
Prepayments 437 521
Total 12,794 11,955
Other Assets
Restricted Investment 2,820 2,817
Uncollected Maine Yankee Decommissioning Costs 35,185 36,037
Recoverable Seabrook Costs 24,519 24,875
Regulatory Asset - SFAS 109 & 106 11,872 11,886
Deferred Fuel and Purchased Energy 10,264 9,618
Regulatory Asset - Power Purchase Agmt Restructuring 8,706 8,706
Other 3,089 3,541
Total 96,455 97,480
Total Assets $164,227 $164,295
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 28,893 27,539
Treasury Stock, at cost (5,714) (5,714)
Total 36,288 34,934
Long-Term Debt (less current maturities) 45,890 45,915
Current Liabilities
Long-Term Debt Due Within One Year 1,275 1,275
Notes Payable 6,800 8,100
Accounts Payable 4,149 4,671
Current Deferred Income Taxes 45 0
Dividends Declared 404 404
Customer Deposits 22 24
Interest and Taxes Accrued 1,368 1,029
Total 14,063 15,503
Deferred Credits
Uncollected Maine Yankee Decommissioning Costs 35,185 36,037
Deferred Income Tax 26,353 25,812
Investment Tax Credits 562 578
Deferred Revenues 1,206 1,170
Miscellaneous 4,680 4,346
Total 67,986 67,943
Total Capitalization and Liabilities 164,227 164,295
The accompanying notes are an integral part of these financial statements.
-4-
MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES
Statements of Consolidated Cash Flows
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31,
1999 1998
Cash Flow From Operating Activities
Net Income $1,759 $1,106
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations
Depreciation 601 659
Amortization 394 412
Income on Tax Exempt Bonds-Restricted Funds (4) (27)
Deferred Income Taxes - Net 585 456
AFUDC (17) (11)
Change in Deferred Fuel & Purchased Energy (647) (1,327)
Change in Deferred Regulatory and Debt Issuance Costs 235 235
Change in Deferred Revenues 36 65
Change in Benefit Obligation 168 206
Change in Current Assets and Liabilities (1,194) (929)
Other 311 (28)
Net Cash Flow Provided By Operating Activities 2,227 817
Cash Flow From Financing Activities
Dividend Payments (404) (809)
FAME Financing Costs (6) 0
Retirements on Long-Term Debt (25) (25)
Short-Term Borrowings (Repayments), Net (1,300) 500
Net Cash Flow Used In Financing Activities (1,735) (334)
Cash Flow From Investing Activities
Investment in Electric Plant (632) (482)
Net Cash Used For Investment Activities (632) (482)
Increase in Cash and Cash Equivalents (140) 1
Cash and Cash Equivalents at Beginning of Year 1,454 2,071
Cash and Cash Equivalents at End of Period $1,314 $2,072
Change in Current Assets and Liabilities Providing (Utilizing)
Cash From Operating Activities
Accounts Receivable ($1,280) $270
Unbilled Revenue 382 218
Deferred Maine Yankee Replacement Power Costs 0 7
Inventory (195) (44)
Prepayments 84 128
Accounts Payable & Accrued Expenses (183) (1,504)
Other Current Liabilities (2) (4)
Total Change ($1,194) ($929)
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period For:
Interest $1,366 $1,347
Income Taxes $40 $33
The accompanying notes are an integral part of these financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of the Company, its wholly-owned Canadian subsidiary, Maine and
New Brunswick Electrical Power Company, Limited and its unregulated
marketing subsidiary, Energy Atlantic, LLC (EA).
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 1998 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 1998 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 1998 financial
statement amounts in order to conform to the 1999 presentation.
2. ENERGY ATLANTIC
In January, 1999, Energy Atlantic, the Company's wholly-owned
unregulated marketing subsidiary, formally began operations. This
marketing segment is currently involved in wholesale energy transactions
and intends to enter the retail market in March 1, 2000, the
commencement of retail competition in the State of Maine.
During the quarter ended March 31, 1999, the Company adopted Statement of
Financial Accounting Standards (FAS) No. 131, "Disclosure about Segments of
an Enterprise and Related Information", which became applicable as a result
of the start-up of Energy Atlantic. Segment reporting has been presented
below for the current period only since historically there had not been
separate reportable segments. The accounting policies of the segments are
the same as those described in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES". The Company provides certain administrative support services to
Energy Atlantic, which are billed to that entity at cost based on a
combination of direct charges and allocations. The Company is organized on
the basis of products and services. The Company's reportable segments
include the electric utility portion of the business, consisting of Maine
Public Service Company and Maine and New Brunswick Electrical Power
Company, Limited, and the energy marketing portion of the business,
consisting of Energy Atlantic. -6-
First Quarter of 1999 (Dollars in Thousands)
Energy Maine Public Total
Atlantic Service Co. Company
Operating Revenues $ 1,461 $ 16,008 $ 17,469
Operations & Maintenance
Expense 1,547 12,289 13,836
Taxes (34) 1,178 1,144
Total Operating Expenses 1,513 13,467 14,980
Operating Income (Loss) (52) 2,541 2,489
Other Income & Deductions - 242 242
Income (Loss) Before
Interest Charges (52) 2,783 2,731
Interest Charges 2 970 972
Net Income (Loss) $ (54) $ 1,813 $ 1,759
Total Assets as of
March 31, 1999 $ 1,158 $163,069 $164,227
3. 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, 2.9% on
February 1, 1997, and 3.9% on February 1, 1998. On April 6, 1999,
the MPUC approved a Stipulation between the Office of the Public
Advocate (OPA) and the Company. Under this stipulation and with
the April 5, 1999 MPUC approval of the sale of the Company's generating
assets, customer rates did not increase on April 1, 1999.
Principal provisions of the Stipulation are as follows:
a) The Company is entitled to a 3.66% specified rate increase as
of April 1, 1999. Rather than increasing customer rates, the
Company will recognize the revenues related to this rate increase,
and recognize a corresponding deferred asset. The parties to the
Stipulation agreed to recommend that available value from the asset
sale be used in an amount corresponding to the specified rate
increase which will be addressed by the MPUC's determination of
allowed stranded cost recovery.
b) The Company agreed to begin amortizing on April 1, 1999, an additional
$150,000 per month of Maine Yankee replacement power costs or a total
of $1,650,000 for the remaining eleven months of the rate plan.
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.
4. INCOME TAXES
A summary of Federal and State income taxes charged to income is presented
below. For accounting and ratemaking purposes, income tax provisions
included in "Operating Expenses" reflect taxes applicable to revenues and
expenses allowable for ratemaking purposes. The tax effect of items not
included in rate base is allocated as "Other Income (Deductions)".
-7-
(Dollars In Thousands)
Three Months Ended
March 31,
1999 1998
Current income taxes $ 593 $ 293
Deferred income taxes 601 474
Investment credits (16) (18)
Total income taxes $ 1,178 $ 749
Allocated to:
Operating Income $ 1,144 $ 733
Other income 34 16
Total $ 1,178 $ 749
For the three months ended March 31, 1999 and 1998, the effective income tax
rates were 40.1% and 40.4%, 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 March 31, 1999 and December 31,
1998.
(Dollars in Thousands)
March 31, December 31,
1999 1998
Seabrook $13,646 $13,706
Property 8,578 8,532
Regulatory expenses 2,101 2,002
Deferred fuel 2,150 2,056
Pension and postretirement benefits (877) (952)
Other 755 468
Net accumulated deferred income taxes $26,353 $25,812
5. MAINE YANKEE
The Company owns 5% of the Common Stock of Maine Yankee, which operated an
860 MW nuclear power plant (the "Plant") in Wiscasset, Maine. On August 6,
1997, the Board of Directors of Maine Yankee voted to permanently cease
power operations and to begin decommissioning the Plant. The Plant
experienced a number of operational and regulatory problems and did not
operate after December 6, 1996. The decision to close the Plant permanently
was based on an economic analysis of the costs, risks and uncertainties
associated with operating the Plant compared to those associated with
closing and decommissioning it. The Plant's operating license from the
Nuclear Regulatory Commission (NRC) was due to expire on October 21, 2008.
The Maine Public Utilities Commission (MPUC) stayed an investigation of the
prudency of the shutdown decision and the operation of Maine Yankee prior to
the shutdown decision, pending the outcome of Maine Yankee's rate case
before the Federal Energy Regulatory Commission (FERC). The MPUC and the
Maine Office of the Public Advocate (OPA) are actively participating in the
FERC proceeding, as well as 28 municipal and cooperative utilities in New
England who received -8-
approximately 6.2% of the output from Maine Yankee (the "Secondary
Purchasers").
In support of its request for an increase in decommissioning
collections, Maine Yankee submitted with its initial FERC rate case
filing a 1997 decommissioning cost study performed by TLG Services,
Inc. ("TLG"). During 1998, Maine Yankee engaged in an extensive
competitive bid process to engage a Decommissioning Operations
Contractor ("DOC") to perform certain major decontamination and
dismantlement activities at the Plant on a fixed-price, turnkey
basis. As a result of that process, a consortium headed by Stone &
Webster Engineering Corporation ("Stone & Webster") was selected to
perform such activities under a fixed-price contract. The contract
provides for, among other undertakings, construction of an
independent spent fuel storage installation ("ISFSI") and
completion of major decommissioning activities and site restoration
by the end of 2004. The DOC process resulted in fixing certain
costs that had been estimated in the earlier decommissioning cost
estimate performed by TLG.
Since the filing of the FERC rate request, Maine Yankee and the
active intervenors, including among others the MPUC Staff, the OPA,
the Company and other owners, the Secondary Purchasers, and a Maine
environmental group (the "Settling Parties"), engaged in extensive
discovery and negotiations. Those parties participated in
settlement discussions that resulted in an Offer of Settlement filed
by those parties with the FERC on January 19, 1999. On February 8,
1999, the FERC Trial Staff recommended that the presiding judge
certify the settlement to the FERC and that the FERC approve it.
Upon approval by the FERC, the settlement would constitute a full
settlement of all issues raised in the consolidated FERC proceeding,
including decommissioning-cost issues and issues pertaining to the
prudence of the management, operation, and decision to permanently
cease operation of the Plant. A separately negotiated settlement
filed with the FERC on February 5, 1999 would resolve the issues
raised by the Secondary Purchasers by limiting the amounts they will
pay for decommissioning the Plant and by settling other points of
contention affecting individual Secondary Purchasers. On February 24,
1999, the FERC Trial Staff recommended certification and approval of the
settlement with the Secondary Purchasers. On March 10,1999, the
presiding judge certified to the FERC that both Offers of Settlement were
uncontested and joined in the Trial Staff's comments that both were
"fair, reasonable and in the public interest".
The Offer of Settlement provides for Maine Yankee to collect $33.6
million in the aggregate annually, effective January 15, 1998
consisting of: (1) $26.8 million for estimated decommissioning
costs, and (2) $6.8 million for ISFSI-related costs. The original
filing with FERC on November 6, 1997, called for an aggregate
annual collection rate of $36.4 million for decommissioning and the
ISFSI, based on the TLG estimate. Under the settlement the amount
collected annually could be reduced to approximately $26 million if
Maine Yankee is able to (1) use for construction the ISFSI funds
-9-
held in trust under Maine law for spent-fuel disposal, and (2)
access approximately $6.8 million held by the State of Maine for
eventual payment to the State of Texas pursuant to a compact for
low-level nuclear waste disposal, the future of which is now in
question after rejection of the selected disposal site in west
Texas by a Texas regulatory agency. Both would require
authorizing legislation in Maine, which Maine Yankee is committed
to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all
unamortized investment (including fuel) in the Plant, together with
a return on equity of 6.50 percent, effective January 15, 1998, on
equity balances up to certain maximum allowed equity amounts. The
Settling Parties also agreed in the proposed settlement not to
contest the effectiveness of the Amendatory Agreements submitted to
FERC as part of the original filing, subject to certain limitations
including the right to challenge any accelerated recovery of
unamortized investment under the terms of the Amendatory Agreements
after a required informational filing with the FERC by Maine
Yankee. In addition, the settlement contains incentives
for Maine Yankee to achieve further savings in its decommissioning
and ISFI-related costs and resolves issues concerning restoration
and future use of the Plant site and environmental matters of
concern to certain of the intervenors in the proceeding.
As a separate part of the Offer of Settlement, the Company, Central
Maine Power Company, and Bangor Hydro-Electric Company (the other
two Maine owners of Maine Yankee), the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and
other issues specific to the Maine parties, including those that had
been raised concerning the prudence of the operation and shutdown of
the Plant (the "Maine Agreement"). Under the Maine Agreement, the
Company would continue to recover its Maine Yankee costs in
accordance with its most recent Rate Stabilization Plan ("RSP")
order from the MPUC without any adjustment reflecting the outcome of
the FERC proceeding. To the extent that the Company has collected
from its retail customers a return on equity in excess of the 6.50
percent contemplated by the Offer of Settlement, no refunds would be
required, but such excess amounts would be credited to the customers
to the extent required by the RSP.
The final major provision of the Maine Agreement requires the Maine
owners, for the period from March 1, 2000 through December 1, 2004,
to hold their Maine retail ratepayers harmless from the amounts by
which the replacement power costs for Maine Yankee exceed the
replacement power costs assumed in the report to the Maine Yankee
Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. The
Company's share of that maximum amount would be $4.1 million for the
period. The Maine Agreement, which was approved by the MPUC on
December 22, 1998, also sets forth the methodology for calculating
such replacement power costs.
-10-
The Company believes the Offer of Settlement, including the Maine
Agreement, reasonably resolves the issues presented by the parties
in the Maine Yankee FERC proceeding. If the Offer of Settlement is
approved by the FERC, several significant uncertainties regarding
the recovery of Maine Yankee-related costs are eliminated. Although
all of the active parties to the proceeding, including the FERC
Trial Staff, support or, with respect to certain individual
provisions, do not oppose, the Offer of Settlement, the Company
cannot predict with certainty whether or in what form the Offer of
Settlement will be approved by the FERC.
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. Beginning in May,
1998, Maine Yankee replacement power costs have been offset by net
savings from the restructured Purchase Power Agreement with
Wheelabrator-Sherman, in accordance with the rate plan stipulation,
resulting in a deferral of $303,000 during the first quarter of
1999. As of March 31, 1999, the Company has a deferred Maine Yankee
replacement power cost balance of approximately $3.8 million,
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. In December, 1998, Maine Yankee updated its estimate
of decommissioning costs based on the Settlement, as discussed
above. Legislation enacted in Maine in 1997 calls for restructuring
the electric utility industry and 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 March 31, 1999, is
carrying on its consolidated balance sheet a regulatory asset and a
corresponding liability in the amount of $35.2 million, which is the
September, 1997 cost estimate of $46.5 million discussed above
reduced by the Company's post-September 1, 1997 cost-of-service
payments to Maine Yankee and reflects the cost adjustments agreed to
in the Settlement.
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:
-11-
1) Beginning on March 1, 2000, all consumers of electricity
have the right to purchase generation services directly from
competitive electricity suppliers who will not be subject to
rate regulation.
2) By March 1, 2000, the Company, Central Maine Power Company
(CMP) and Bangor Hydro-Electric Company (BHE) must divest of
all generation related assets and business functions except
for:
a) contracts with qualifying facilities, such as
the Company's power contract with Wheelabrator-
Sherman (W-S) and conservation providers;
b) nuclear assets, namely, the Company's
investment in the Maine Yankee Atomic Power
Company;
c) facilities located outside the United States,
i.e., the Company's hydro facility in New
Brunswick, Canada; and
d) assets that the MPUC determines necessary for
the operation of the transmission and
distribution services.
The MPUC can grant an extension of the divestiture
deadline if the extension will improve the selling
price. For assets not divested, the utilities are
required to sell the rights to the energy and capacity
from these assets. The Company shall submit to the MPUC
its divestiture plan no later than January 1, 1999.
3) The Company, through a regulated affiliate, will continue
to provide transmission and distribution services which
will be subject to continued rate regulation by the MPUC.
4) Maine electric utilities will be permitted a reasonable
opportunity to recover legitimate, verifiable and
unmitigable costs that are otherwise unrecoverable as a
result of retail competition in the electric utility
industry (so-called "Stranded Costs").
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
-12-
c) the difference between future contract payments
and the market value of the purchased power
contracts, i.e., the W-S contract.
By the end of 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
provided by Emerging Issues Task Force 97-4.
6) Employees, other than officers, displaced as a result of
retail competition will be entitled to certain severance
benefits and retraining programs. These costs will be
recovered through charges collected by the regulated
transmission and distribution company.
The MPUC will conduct several rulemaking proceedings associated with
the new restructuring law. The Company is presently reviewing its
business operations and the opportunities that the new restructuring
law presents.
In accordance with EITF 97-4 "Deregulation of the Pricing of
Electricity", when the details of the restructuring plan are
determined by the MPUC rulemaking, the Company will discontinue
application of the Statement of Financial Accounting Standards No.
71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulations", for the retail generation segment of its business.
As a result, the Company continues to defer certain costs as
regulatory assets in instances where recovery through future
regulatory cash flows is anticipated.
In a February 9, 1999 filing with the MPUC, the Company amended its
October 14, 1998 determination of stranded costs, transmission and
distribution costs and rate design with the MPUC. The Company's
testimony supports its $99.3 million estimate of stranded costs when
deregulation occurs on March 1, 2000. The major components include
-13-
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, but does not include any benefits from the
Company's sale of generating assets. These stranded costs
revenue requirements will be reduced by an estimated $19.9 million
upon the sale of the Company's generating assets, as discussed
further in Note 7, "GENERATING ASSET DIVESTITURE", below.
7. GENERATING ASSET DIVESTITURE
On July 7, 1998, the Company and WPS Power Development, Inc. (WPS-
PDI) signed a purchase and sale agreement for the Company's electric
generating assets. WPS-PDI agreed to purchase 91.8 megawatts of
generating capacity for $37.4 million, which is 3.2 times higher
than the net book value of the assets. This sale of assets is
required by the State's electric industry restructuring law and
requires the approvals of the MPUC and the FERC. The gain from the
asset sale would reduce stranded costs revenue requirements by $19.9
million.
On August 7, 1998, the Company filed with the MPUC for approval of
this sale. The proceeding was given the Docket No. 98-584. The
Public Advocate and the Houlton Water Company (HWC) have intervened
in this proceeding. As reported in the Company's Form 10-Q for the
quarter ended September 30, 1998, the MPUC, in its order approving
the Company's divestiture plan in MPUC Docket No. 97-670, noted a
number of concerns that it would address in Docket No. 98-584.
Principal among these concerns is whether the Company's lack of any
connection to New England electrical markets, except through the
Province of New Brunswick, Canada (NB) and the transmission system
owned by the Maine Electric Power Company (the MEPCO line) presented
unique issues concerning development of an adequate competitive
retail market for electricity in northern Maine and directed the
Company to address these concerns when it filed for approval in
Docket No. 98-584.
On January 29, 1999, the Company filed a Partial Stipulation in this
Docket. Under the terms of this Stipulation, the parties agreed
that access to northern Maine's electrical markets exclusively
through the transmission of the New Brunswick Power Corporation (NB
Power) and the MEPCO line "is no longer a substantial barrier to the
development of an adequate retail market for electricity in northern
Maine" and that any market power issues in northern Maine should not
prevent the MPUC from approving the sale of the Company's generation
assets to WPS-PDI.
The basis for this Stipulation is a Products and Service Agreement
reached in principal between NB Power, on the one hand, and the
Company, HWC, Eastern Maine Electric Cooperative, Inc. and the Van
Buren Light and Power District (collectively, "the northern Maine
-14-
utilities"), on the other (the "P&SA"). Under this Agreement, NB
Power agrees to supply: (i) tie-line interruption service, on a firm
or non-firm basis, to any northern Maine utility requiring it; (ii)
ancillary services to any northern Maine utility; (iii) transmission
services through NB to any northern Maine utility at a fixed rate
that can be increased only by authorization of the proper NB
regulatory authority; and (iv) bona fide offers of energy and
capacity and other electric products and service to any customer of
any northern Maine utility. It is understood that northern Maine
utilities will transfer these services at cost to competitive
electricity providers. On April 27,1999, the P&SA was executed by
all of the parties.
In its April 5, 1999 Order, the MPUC approved the Company's sale of
its generation assets to WPS-PDI. The MPUC noted that the P&SA
"mitigates market power to a significant extent and, as a result, it
is reasonable to allow the sale of MPS assets."
In an April 14, 1999 Order, the Federal Energy Regulatory Commission
(FERC) authorized the sale of the Company's generating assets
concluding that "the proposed transaction is consistent with the
public interest." The Company has therefore received all of the
major regulatory approvals necessary to permit the transfer of its
generating assets to WPS-PDI.
8. OPEN ACCESS TRANSMISSION TARIFF
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.
On December 22, 1998, the FERC issued its order in this proceeding.
Although many of the major issues were not decided in the Company's
favor, the Company does not expect the order to have any adverse
impact on the Company's financial condition. Based on the FERC
order, the Company expects to refund approximately $1.2 million to
the customers and has reflected these refunds as liabilities.
9. ACCOUNTING PRONOUNCEMENTS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Based on current business
activities, the Company does not expect this pronouncement to have
a material impact to the Company's financial reporting.
-15-
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 decommissioning cost of Maine Yankee.
Results of Operations
Earnings per share and the net income available for
common stock for the three months ended March 31, 1999
along with the corresponding information for the
previous year are as follows:
Three Months Ended
March 31,
1999 1998
Earnings per share $ 1.09 $ .68
Net income in thousands $1,759 $ 1,106
For the first quarter of 1999 compared to the same
quarter last year, the increase in consolidated
earnings per share (EPS) of $.41 is attributable to
the following:
-16-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Change in EPS - First Quarter of 1999
Compared to First Quarter of 1998
EPS
Increase
(Decrease)
Decrease in operating expenses resulting
from the closure of Maine Yankee and
changes in net replacement power costs:
Capacity Expenses $ .35
Replacement Power Costs (.03)
.32
Increase in retail rates of 3.9% effective
2/1/98 and a 2.7% sales increase .25
Decreased wheeling expenses due to termination
of contract with NB Power .26
Other fuel expense - increased W-S production
and increased prices (.40)
Change in other operation & maintenance expenses (.06)
Other .04
Total $ .41
The reduction of Maine Yankee capacity expenses increased
earnings by $.35 per share. During the first quarter of
1998, Maine Yankee expenses reflected termination
benefits to displaced employees and other curtailment
costs prior to the beginning of decommissioning. Maine
Yankee expenses for the first quarter of 1999 were
significantly less than the first quarter of 1998,
reflecting decommissioning activities and an insurance
refund due to the curtailment of operations. The net
increase in Maine Yankee replacement power costs
decreased earnings by $.03 per share and reflects the
treatment of their expense under the Company's rate plan.
The rate plan is discussed in detail in item 3(f) of the
Legal Proceedings section. The 3.9% rate increase under
the Company's rate plan effective February 1, 1998, and
a 2.7% increase in retail sales, resulted in a $.25
increase in earnings per share. A decrease in wheeling
expenses due to the termination of the transmission
agreement with NB Power for Maine Yankee and Wyman
wheeling increased earnings by $.26 per share.
-17-
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
and an increase in purchases from the independent power
producer, Wheelabrator-Sherman (W/S), reduced earnings by
$.40 per share. Under contract, the Company's purchases
from W/S are limited to a specific amount over a twelve-
month period. Once this limit is obtained, the Company
does not purchase any additional output from the
facility. Therefore, timing of W/S production can effect
earnings comparisons from quarter to quarter. Increases
in other operation and maintenance expenses resulted in
a net decrease in earnings of $.06 per share.
Consolidated operating revenues for the quarters ended
March 31, 1999 and 1998, are as follows:
1999 1998
(Dollars in Thousands) $ MWH $ MWH
Retail 15,141 134,155 14,472 130,634
Sales for Resale 558 18,008 540 17,334
Total Primary Sales 15,699 152,163 15,012 147,968
Secondary Sales 1,875 66,265 457 9,600
Other Revenues/Rev. Adjust. (105) - 128 -
Total Operating Revenues 17,469 218,428 15,597 157,568
Primary sales in the first quarter of 1999 were 152,163
MWH, an increase of 4,195 MWH (2.8%) from sales in the
first quarter of 1998. Secondary sales increased by
56,665 MWH, reflecting the return of Houlton Water
Company in February, 1999 as a customer to be served by
the Company's wholly-owned unregulated marketing
subsidiary, Energy Atlantic (EA).
Retail revenues for the first quarter of 1999 were
$15,141,000 compared to $14,472,000 for the same period
of 1998, reflecting the 3.9% increase in retail rates
effective February 1, 1998 allowed under the Company's
rate plan and the 2.7% increase in retail sales noted
above. The $1,418,000 increase in secondary sales to
$1,875,000 for the first quarter of 1999 is a result of
the increase in sales noted above.
-18-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
For the quarters ended March 31, 1999 and 1998,
total operating expenses were $14,980,000 and
$13,739,000, respectively. The changes in operating
expenses and energy sources are as follows:
Increase/(Decrease)
(Dollars in Thousands) $ MWH
Purchased Power Expenses
Maine Yankee (1,019) -
Wheelabrator-Sherman (118) 3,759
NB Power 172 (16,596)
Northeast Empire 1,031 30,551
Other Purchases 620 32,882
Deferred Fuel - MY Replacement 687 -
1,373 50,596
Generating Expenses 126 12,069
Other Operation & Maint. Expenses (606)
Depreciation (58)
Amortization (17)
Income Taxes 411
Taxes Other than Income 12
Total 1,241 62,665
Purchases from Northeast Empire increased by 30,551
MWH, while other purchases increased by 32,882 MWH.
Since February, 1998 and continuing until March 1,
2000, Northeast Empire has provided Maine Yankee
replacement power. The total increase of 62,665 MWH
reflect the additional retail and secondary sales. The
Company's share of Maine Yankee capacity expenses
decreased by $1,019,000 as previously discussed.
Wheelabrator-Sherman purchased power expenses
decreased by $118,000, due to the reduced price under
the amended Power Purchase Agreement (PPA), partially
offset by the 3,759 MWH increase in production.
Deferred fuel expense increased $687,000 as a result
of the application of the Wheelabrator-Sherman savings
in the first quarter of 1999, as mentioned above, in
accordance with the January, 1998 rate stipulation
discussed further in Note 5 of the Notes to
Consolidated Financial Statements, "Maine Yankee".
-19-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Hydro production was 200.9% and 182.4% of normal in the
first quarters of 1999 and 1998, respectively,
reflecting an increase of 3,445 MWH. Generating
expenses increased by $126,000 because of increased
operation at Wyman No. 4. Other operation and maintenance
expenses decreased by $606,000 because of the termination
of a wheeling contract with NB Power.
Financial Condition
Net cash flows from operating activities were $2,227,000
for the first quarter of 1999. For the period, the
Company invested $632,000 in electric plant, paid
$404,000 in dividends and used $25,000 to reduce long-
term debt. Final financing costs of $6,000 were paid
related to the issuance of Fame's $11,540,000 Taxable
Electric Rate Stabilization Revenue Notes on behalf of
the Company in 1998. Short-term borrowings decreased by
$1,300,000 because of the cash flows from operations.
For the first quarter of 1998, net cash flows from
operating activities were $817,000. For the period, the
Company invested $482,000 in electric plant, paid
$809,000 in dividends and used $25,000 to reduce long-
term debt. Short-term borrowings were increased by
$500,000 for working capital and construction
requirements.
-20-
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 conducted an 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. The Company is
currently rewriting the computer application systems
responsible for billing to meet the electric industry
restructuring requirements and is incorporating changes
that achieve Year 2000 compliance. If these new systems
are not functional by December 31, 1999, the current
systems will continue to be used with a minor alteration
to achieve Year 2000 compliance. The Company also
reviewed 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 these 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 noncompliance are being addressed. The
Company is attempting to obtain responses and prepare
contingency plans, where necessary, no later than July
1, 1999.
-21-
Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
As of March 31, 1999, the Company has incurred
approximately $24,000 of internal labor for review and
testing which 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.
The assessment phase of the Year 2000 compliance
project is essentially complete and the Company is
identifying risks and most reasonable likely worse
case scenarios specific to the Year 2000 non-
compliance by the Company and third-party sources.
For example, for every day of a Company-wide shutdown,
the Company would lose approximately $187,000 in
revenues. The Company will develop approximate plans
or these risks no later than July 1, 1999, as
mentioned above. 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 the Company's control.
-22-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
(a) Restructuring of Maine's Electric Utility Industry.
In the Company's Form 10-K's for December 31, 1996, 1997 and
1998 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.
-23-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - 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 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 the end of 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. In a February, 1999
MPUC filing, the Company estimated its stranded costs to be
approximately $99.3 million, based on market power estimates
beyond 2000 and regulatory treatment of
-24-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
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 to be 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 - 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.
(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
and Form 10-Q for the quarter ended June 30, 1998, in which
the Company reported that it had agreed to sell all of its
generating assets to WPS Power Development, Inc. (WPS-PDI) for
$37.4 million.
On August 7, 1998, the Company filed with the MPUC for
approval of this sale. The proceeding was given the Docket
No. 98-584. The Public Advocate and the Houlton Water Company
(HWC) have intervened in this proceeding. As reported in the
-26-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
Company's Form 10-Q for the quarter ended September 30, 1998,
the MPUC, in its order approving the Company's divestiture
plan in MPUC Docket No. 97-670, noted a number of concerns
that it would address in Docket No. 98-584. Principal among
these concerns is whether the Company's lack of any connection
to New England electrical markets, except through the Province
of New Brunswick, Canada (NB) and the transmission system
owned by the Maine Electric Power Company (the MEPCO line)
presented unique issues concerning development of an adequate
competitive retail market for electricity in northern Maine
and directed the Company to address these concerns when it
filed for approval in Docket No. 98-584.
On December 10, 1998, the MPUC issued a bench analysis concerning
certain aspects of the manner in which the Company structured the
proposed sale with WPS-PDI. Principal among these concerns were
whether the Company should withdraw from the proposed sale its
interest in Wyman Unit No. 4 and attempt to sell this asset
independently in the New England markets and whether the Company
should retain title to approximately 12 MW of diesel capacity. The
Company addressed these concerns in rebuttal testimony filed on
January 19, 1999 and at a hearing on February 2, 1999.
On January 29, 1999, the Company filed a Partial Stipulation in this
Docket. Under the terms of this Stipulation, the parties agreed that
access to northern Maine's electrical markets exclusively through the
transmission of the New Brunswick Power Corporation (NB Power) and the
MEPCO line "is no longer a substantial barrier to the development of
an adequate retail market for electricity in northern Maine" and that
any market power issues in northern Maine should not prevent the MPUC
from approving the sale of the Company's generation assets to WPS-PDI.
The basis for this Stipulation is a Products and Service
Agreement reached in principal between NB Power, on the one
hand, and the Company, HWC, Eastern Maine Electric
Cooperative, Inc. and the Van Buren Light and Power District
(collectively, "the northern Maine utilities"), on the other
(the "P&SA"). Under this Agreement, NB Power agrees to
supply: (i) tie-line interruption service, on a firm or non-
firm basis, to any northern Maine utility requiring it; (ii)
ancillary services to any northern Maine utility; (iii)
transmission services through NB to any northern Maine utility
at a fixed rate that can be increased only by authorization of
the proper NB regulatory authority; and (iv) bona fide offers
of energy and capacity and other electric products and service
to any customer of any northern Maine utility. It is
understood that northern Maine utilities will transfer these
services at cost to competitive electricity providers.
-27-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
On April 27, 1999, the P&SA was executed by all of the
parties.
On April 5, 1999, the MPUC approved the Company's sale of its
generation assets to WPS-PDI. The MPUC based its approval on
a Products and Service Agreement (P&SA) reached in principal
between NB Power and the Company, Houlton Water Company,
Eastern Maine Electric Cooperative, Inc. and the Van Buren
Light and Power District. The MPUC noted that the P&SA
"mitigates market power to a significant extent and, as a
result, it is reasonable to allow the sale of MPS assets."
In the Company's April 9, 1999 Form 8-K announcing the MPUC's
approval, a misunderstanding was reported on some terms of the
P&SA. That misunderstanding has now been resolved and all of
the parties have executed to P&SA.
In an April 14, 1999 Order, the Federal Energy Regulatory
Commission (FERC) authorized the sale of the Company's
generating assets concluding that "the proposed transaction is
consistent with the public's interest." The Company has
therefore received all of the major regulatory approvals
necessary to permit the transfer of its generating assets to
WPS-PDI.
(c) Final Report by the Department of the Maine Attorney General
and the MPUC Regarding Market Power Issues Raised by the
Prospect of Retail Competition in Maine's Electric Industry,
Docket No. 97-877.
The Legislation described in item (a) above requires 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 industry. This Report was issued on December 1,
1998.
-28-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
With respect to market power in northern Maine, the Report
noted the potential for an unacceptably high level of market
power in northern Maine, arising from circumstances it
described as follows:
(i) "The northern Maine wholesale market is highly
concentrated, and subject to a corresponding degree of
market power. The market is dominated by NB Power, which
controls transmission access to northern Maine. NB Power
transmission is unsupervised by any regulatory authority,
and NB Power has set discriminatory rates, with the
result that it has preferential access to the market.
This transmission regime effectively excludes Hydro-
Quebec from the market as well as participants from New
England and Nova Scotia."
(ii) "In addition, there exists a transmission constraint
[over the MEPCO line] which prevents firm power from
flowing to northern Maine from New England. Moreover,
the problem of market power is probably aggravated by the
lack of access to a well-designed spot market."
Faced with these conclusions, the Report opined that "[t]he
question of whether retail choice in northern Maine should be
postponed must be confronted." The Report concluded, however,
that postponement should be a last resort and that other "less
drastic remedies" should be attempted first. The Report
specified certain of these remedies:
(i) regarding NB Power's dominance of the northern Maine
market, the Report proposed that NB Power contract with
northern Maine T&D companies to provide transmission
service at a fixed, non-discriminatory rate;
(ii) regarding the lack of firm energy over the MEPCO line,
the Report proposed that NB Power should contract with
the northern Maine utilities to provide ancillary and so-
called tie-line interruption service, which would
effectively remove the south-to-north constraint on the
MEPCO line; and
-29-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
(iii) finally, the Report concluded that if NB Power is
obligated to provide tie-line interruption service,
ancillary services and reasonably-priced transmission
to the northern Maine utilities, "the beneficial
influence of New England spot market pricing will be
felt in northern Maine."
As reported in item (b) above, the Products and Service
Agreement between NB Power and the northern Maine utilities
incorporates all of these proposals.
In a related matter, and again as required by the Legislature
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 (Docket No. 97-586). On November
24, 1998, the Commission issued its final report, which was
prepared by an independent consultant. Like the Attorney
General's Report described above, this Study concluded that,
without changes such as those suggested in the Report, the
northern Maine market for electricity is likely to be subject
to market power problems.
(d) Maine Public Utilities Commission, Inquiry Into Bulk
Power System Administration and Settlement System in
Northern Maine, MPUC Docket No. 98-929.
On December 1, 1998, the MPUC issued its Notice of
Inquiry into the structure and operation of a bulk power
system administrator and retail settlement system for
northern Maine. This Inquiry was assigned MPUC Docket
No. 98-529. The MPUC based the need for this proceeding
on the fact that northern Maine is not electrically
connected to the New England grid and therefore systems
in place in the rest of New England that are necessary to
support a marketable competitive environment do not yet
exist in northern Maine.
The MPUC Notice acknowledges that the four northern Maine
utilities - the Company, the Houlton Water Company, the
Eastern Maine Electric Cooperative, Inc. and the Van
Buren Light and Power District - have formed a working
group for the express purpose of developing these
-30-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
systems. The northern Maine utilities are to develop and
file a proposal for these systems by April 30, 1999. The
proposal will be developed with the participation of
various market participants, including marketers,
generators, customers and NB Power. The Company is
satisfied with the working groups' progress to date, but
cannot predict the success of any final outcome.
(e) 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.
On December 22, 1998, the FERC issued its order in this
proceeding. Although many of the major issues were not
decided in the Company's favor, the Company does not
expect the order to have any adverse impact on the
Company's financial condition. Based on the FERC order,
the Company expects to refund $1.2 million to the
customers and has reflected these refunds as liabilities.
(f) 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, and subsequently amended on February
9, 1999, the Company filed its determination of stranded
costs, transmission and distribution costs and rate
-31-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
design with the MPUC. The Company's testimony supports
its $99.3 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
revenue requirements will be reduced by an estimated
$19.9 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 filings would be
approximately $32.2 million: $19.8 million for
transmission and distribution and $12.4 million for
stranded investment.
Reference is made to the Company's Form 10-K for December
31, 1996 where the Company's rate stabilization plan
approved by the Maine Public Utilities Commission (MPUC)
(Docket No. 95-052) in November, 1995 is described. In
addition, the Company's Form 10-K for December 31, 1998,
describes a January, 1998 Stipulation approved by the
MPUC in Docket No.97-830, which established the rate
increase beginning February 1, 1998 and the minimum rate
increase effective February 1, 1999. The Stipulation
also prescribes that the savings from the restructured
Wheelabrator-Sherman (W-S) Power Contract would offset
Maine Yankee replacement power costs. For the final year
of the rate plan beginning February 1, 1999, the Company
filed on November 13, 1998, with the MPUC for a 6.4%
increase. The Company also stated that it would forego
part or all of this 1999 increase if the sale of its
generating assets was allowed to go forward. On December
15, 1998, the MPUC granted the Company's request to defer
the increase to April 1, 1999, as well as extend the rate
plan by one month to February 29, 2000, to coincide with
the start of retail competition in Maine.
-32-
Form 10-Q
PART II. OTHER INFORMATION
Item 3. Legal Proceedings - continued
In its April 6, 1999 Order, the MPUC approved a March 25,
1999 Stipulation between the Office of the Public
Advocate (OPA) and the Company. Under this Stipulation,
customer rates will not increase on April 1, 1999, if the
MPUC approved the sale of the Company's generation assets
as described in Item 5(c) above. The approval of the
Stipulation also resolved certain issues associated with
the treatment of capacity cost savings from the closure
of Maine Yankee under the Company's rate stabilization
plan.
The principal provisions are as follows:
1) The Company is entitled to a 3.66% specified rate
increase as of April 1, 1999. Rather than increase
customer rates, the Company will recognize the revenues
that this increase would have generated and,
correspondingly, record a deferred asset on the Company's
books of account. The parties to the Stipulation also
agreed to recommend the use in rates of available value
from the asset sale corresponding with the specified rate
increase once the MPUC determines the Company's allowed
stranded cost recovery in Docket No. 98-577, Public
Utilities Commission, Investigation of Stranded Costs,
Transmission and Distribution Utility, Revenue
Requirements and Rate Design of Maine Public Service
Company.
2) The Stipulation also resolves a dispute over the
determination of Maine Yankee replacement power costs.
The Stipulation allows the Company to continue to
recognize and defer Maine Yankee replacement power costs
on an energy-only basis, offset by Wheelabrator-Sherman
contract restructuring savings, through the end of the
rate plan. The Company agreed to begin amortizing on
April 1, 1999, Maine Yankee replacement power costs in
the amount of $150,000 per month or a total of $1,650,000
for the remaining eleven months of the rate plan.
3) With the Commission's approval of the generation
asset sale, the parties agreed that the Company would not
increase retail rates on April 1, 1999, to reflect any
increase under the Maine Yankee replacement power
provisions of the rate plan. Any Maine Yankee deferred
replacement costs will be deferred, and, beginning on
March 1, 2000, will be offset by a corresponding amount
of available value as allowed in Docket No. 98-577.
-33-
Form 10-Q
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) A Form 8-K was filed on: January 27, 1999, under item 5,
Other Events; April 9, 1999, under item 5, Other Events
and April 28, 1999, under item 5, Other 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: May 12, 1999 By: /s/ Larry E. LaPlante
Larry E. LaPlante
Vice President Finance,
Administration and Treasurer
-34-
\TEXT>
/DOCUMENT>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 50592
<OTHER-PROPERTY-AND-INVEST> 4386
<TOTAL-CURRENT-ASSETS> 12794
<TOTAL-DEFERRED-CHARGES> 96455
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 164227
<COMMON> 7357
<CAPITAL-SURPLUS-PAID-IN> 38
<RETAINED-EARNINGS> 28893
<TOTAL-COMMON-STOCKHOLDERS-EQ> 36288
0
0
<LONG-TERM-DEBT-NET> 45890
<SHORT-TERM-NOTES> 6800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1275
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 73974
<TOT-CAPITALIZATION-AND-LIAB> 164227
<GROSS-OPERATING-REVENUE> 17469
<INCOME-TAX-EXPENSE> 1144
<OTHER-OPERATING-EXPENSES> 13836
<TOTAL-OPERATING-EXPENSES> 14980
<OPERATING-INCOME-LOSS> 2489
<OTHER-INCOME-NET> 242
<INCOME-BEFORE-INTEREST-EXPEN> 2731
<TOTAL-INTEREST-EXPENSE> 972
<NET-INCOME> 1759
0
<EARNINGS-AVAILABLE-FOR-COMM> 1759
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 2227
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
